Question

Four teenagers live on your street. Each is willing to shovel snow from one driveway each day. Their “willingness to shovel” valuations (supply) are: Jean, $10; Kevin, $9; Liam, $7; Margaret, $5. Several households are interested in having their driveways shoveled, and their willingness to pay values (demand) are: Jones, $8; Kirpinsky, $4; Lafleur, $7.50; Murray, $6. (a) Draw the implied supply and demand curves as step functions. (b) How many driveways will be shoveled in equilibrium? (c) Compute the maximum possible sum for the consumer and supplier surpluses. (d) If a new (wealthy) family arrives on the block, that is willing to pay $12 to have their driveway cleared, recompute the answers to parts (a), (b), and (c).

Answer 1

Part (A)

Part (B) & (C)

Margaret and Liam will supply, while Jones and Lafleur will purchase. The third highest demander (Murray) is willing to pay $6, while the third supplier is willing to supply only if the price is $9. Hence there is no third unit supplied

The equilibrium price will lie in the range $7.0-$7.5. Suppose it is $7.

Part (D)

. The highest value buyers are now willing to pay $12 and $8. The third highest value buyer is willing to pay $7.0. But on the supply side the third supplier still supplies only if he gets $9. Therefore two units will be supplied.

The equilibrium price will be between $7 & $8 where demand and supply curve intersect

If the price remains at $7, the consumer surpluses are now $5 and $1, and the supplier surpluses remain the same.