Person |
A |
B |
C |
D |
E |
F |
G |
H |
I |
J |
Reservation price |
$1.00 |
$0.90 |
$0.80 |
$0.70 |
$0.60 |
$0.50 |
$0.40 |
$0.30 |
$0.20 |
$0.10 |
Quantity in cups |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
Total revenue |
$1.00 |
$1.80 |
$2.40 |
$2.80 |
$3.00 |
$3.00 |
$2.80 |
$2.40 |
$1.80 |
$1.00 |
Marginal revenue |
$1.00 |
$0.80 |
$0.60 |
$0.40 |
$0.20 |
$0 |
-$0.20 |
-$0.40 |
-$0.60 |
-$0.80 |
Answer: Profit = (P - MC) Q = (0.60 - 0.20) 5 = $2. Consumer surplus is reservation price minus actual price for each cup sold: ($1.00 - $0.60) + ($0.90 - $0.60) + ($0.80 - $0.60) + ($0.70 $0.60) = $1.
Answer: She should set P = MC = $0.20. Nine (or eight) cups of lemonade would be sold. Total economic surplus is reservation price minus marginal cost for each cup sold: ($1.00 - $0.20) + ($0.90 - $0.20) + ($0.80 - $0.20) + ($0.70 - $0.20) + ($0.60 - $0.20) + ($0.50 - $0.20) + ($0.40 $0.20) + ($0.30 - $0.20) = $3.60.
Answer: She would charge persons A through I (but not J) their respective reservation prices.
Doing so would earn a profit of $3.60, which is the same as the total economic surplus in part d.
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