Bob, Sue, and Katie go out every week and spend whatever money they have left fr
ID: 1207813 • Letter: B
Question
Bob, Sue, and Katie go out every week and spend whatever money they have left from the week on a dinner at Burger Bart's, the only restaurant in town. The amount of cash they have at the end of the week is the most they will pay, but if there's anything left over after dinner, then they will also play video games. Bob always has $7, Sue always has $8, Katie always has $15, and Burger Bart knows this. His marginal cost of providing a meal is constant at $5 no matter how many meals he makes. A. If Bart can only charge one price to the group, what price will he charge? How many meals will be sold? How much is the producer surplus? the consumer surplus? (10 points) B. If Bart can perfectly price discriminate, what prices will he charge? How many meals will he sell? How much will the producer and consumer surplus be now? (5 points) C.How would this be different if there were another restaurant in town? many restaurants in town? (5 points) D. What must be true for the results to hold for the competitive market? (5 points)
Explanation / Answer
A. If Bart can only charge one price to the group, what price will he charge?
He will $7 as it maximizes the Revenue = 7*3 = 21
How many meals will be sold?
3 Meals
At, Price of $7, All three will buy.
How much is the producer surplus?
producer surplus = 3*7 - 5 = $16
the consumer surplus? (10 points)
consumer surplus = (7-7) + (8-7) + (15-7) = 9
B. If Bart can perfectly price discriminate, what prices will he charge?
He will charge Bob = $7, Sue = $8, and Katie = $15
How many meals will he sell?
3 Meals
How much will the producer and consumer surplus be now?
Consumer surplus = 0
Producer Surplus = 7 + 8 + 15 - 5 = 25
C.How would this be different if there were another restaurant in town? many restaurants in town? (5 points)
If other resturents would be there , then there will be competition between them, he won't be able to charge these price.
D. What must be true for the results to hold for the competitive market? (5 points)
that there are n number of firms , each small relative to the entire market , such that production decision of one firm doesn't effect the entire market. and is a price taker which means he cann't set the price.