Chapter 7, Problem 8PA

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

Chapter
Section

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

There are four consumers willing to pay the following amounts for haircuts:Gloria: $7 Jay:$2    Claire: $8 Phil:$5There are four haircutting businesses with the following costs:Firm A: $3 Firm B:$6    Firm C: $4 Firm D:$2Each firm has the capacity to produce only one haircut. For efficiency, how many haircuts should be given? Which businesses should cut hair and which consumers should have their hair cut? How large is the maximum possible total surplus?

To determine
The equilibrium price and the quantity of haircuts and total surplus.

Explanation

The equilibrium price is determined by the demand for haircut and the supply of haircut. The consumer surplus can be explained as the difference between the highest price that the consumer is willing to pay and the actual price that the consumer pays. The difference between these two prices is known as surplus to the consumer. The producer surplus is the difference between the minimum accepted price for the seller and the actual price that the seller receives for the commodity.

From the given cost data and the willingness to pay price of the consumers, the equilibrium price can be calculated. The equilibrium price can be calculated by illustrating the demand and supply on the graph as follows:

Figure 1

The supply and the demand curve equals at the point somewhere between the price of $4 to$5, which can be easily identified from the diagram from the intersection of the demand curve and the supply curve. The maximum willingness to pay price by J is only \$2, which is much lower than the equilibrium price, and thusJ will not get his haircut. Similarly, the cost of firm B in providing the service is much higher, which will keep away the firm from business...

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