: In this question we are going to return to the wonderful island of Alleybowlia where...

: In this question we are going to return to the wonderful island of Alleybowlia where the inhabitants absolutely love bowling. Remember, that the island boasts one of the best bowling alleys of its continent and all citizens go play in the alley all weekend long. An entrepreneur in a neighbouring island has figured out a new way of producing super-smooth bowling balls (SSBB), which are supposed to guarantee plenty of strikes (which is a good thing in bowling). As a shipment of SSBB is arriving on the island, the citizens are busy figuring out how much they are willing to pay for them. The following table lists the citizens’ willingness to pay for their first, second and possibly third SSBB.

Name	First SSBBs	Second SSBBs	Third SSBBs
A	$500	$340	$130
B	$350	$200	$0
C	$700	$500	$250
D	$750	$0	$0
E	$600	$400	$120
F	$300	$250	$200
G	$450	$100	$0

For instance, citizen A is willing to pay $500 for her first SSBB, $340 for the second and $130 for the third. In contrast, consumer B is not willing to pay anything for a third SSBB since she only needs or wants two.

A. Suppose the boat arrives and there are only seven SSBBs available for sale. Assume that it has cost $200 to produce and ship each of the seven SSBBs.

1. What is the range of prices compatible with market equilibrium?

2. Pick the highest market equilibrium price and calculate consumer surplus.

3. What is the producer surplus at the highest market equilibrium price?

4. What is total surplus at the highest market equilibrium price?

5. What is total surplus at the lowest market equilibrium price?

B. Now assume instead that the cost of shipping and producing each ball is $350, and any quantity can be produced.

6. What is the equilibrium price and quantity in this case?

7. Calculate consumer surplus, producer surplus and total surplus.

Solutions

Expert Solution

Rahul Sunny answered 1 year ago

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