Question 1 Throughout the following questions, let's assume there are six consumers, and each consumer demands, at most, one unit of the product. The net consumer surplus for a consumer
when purchasing one unit is calculated by subtracting the cost of the product (per unit) from their Willingness-To-Pay (WTP). Here are the WTPs of the consumers: Consumer's Identity WTP (in JPY) A 300 B 500 с 100 D 200 E 400 NOTE: For the simplicity of arguments, assume that a consumer would buy when they are indifferent between buying and not buying. Q1-1. Carefully explain who demands the product when the price of the good is 350 JPY. When the price of the good is at 350 JPY, consumers B, E, and F would be in demand for the product. This occurs as the willingness to pay (WTP) of the consumers mentioned is greater than (or equal to) the price of the good which is 350 JPY. F 600 Q1-2. Graphically illustrate the demand curve. (Only figures with proper labeling are accepted.) Ра 600 500 (600 300 200 (00+ Price (JPY) 6 Price сорт) 500 + 1 Q1-3. Graphically illustrate the consumer surplus when the market price is $350. PA 600 CFOO 350 300 200 (00- + + 2 3 5 6 Quantity Demanded CS 4 D(P) --PM X D(P) + Q1-4. + Suppose there exists a firm with the following cost function. (The firm can only produce 1 unit, 2 units, 3 units, 4 units, or 5 units.) What is the marginal cost of increasing its production from 3 units to 4 units? Total Units Total Cost Marginal cost 300 250 Q1-5. Graphically illustrate the marginal cost function MC. 200 0 150 100 50 1 Since marginal cost is the change in costs divided by change in quantity, for the marginal cost of increasing the production from 3 to 4 units would be 250. + 50 150 2 300 3 500 4 750 4 Quantity Supplies MC (x) + 5 1050 Q1-6. Derive the change of the revenue from selling 2 units to 3 units. Looking back at the WTP of consumers, the revenue of selling 2 units would be the addition of the WTP of the two consumers with the highest WTP.-> Consumer B's WTP + Consumer F's WTP which is 600+500-1100. Revenue of selling 3 units would be the addition of the WTP of three consumers with the highest WTP.-> Consumer B + F + E which is 600+500+400-1500. Thus the change of revenue from selling 2 to 3 units is 400 JPY. Q1-7. Carefully illustrate the marginal revenue function, and highlight the difference with the graph of the demand function. As the demand function we have is a stepwise function, the marginal revenue function will mirror the points of the demand function in this case. However, the marginal revenue function on a graph would start from when the quantity supplied is 0. This doesn't mean that there is a marginal revenue when 0 amount of the good is sold, but rather a starting point to show the behavior of the marginal revenue and a possible price point at which the firm would start generating revenue. P Price (JPY) GOO 500 400 300- 200 (00 1 + 2 + + 4 3 MR 5 6 Quantity supplied x + ⠀⠀ Q1-8. Using the figure of the marginal cost function and the marginal revenue function, explain how the firm's profit would change if the firm chooses to increase its production from 2 to 3 units. You must explain this change without explicitly deriving the profit for producing 2 units and 3 units, respectively. When the firm is producing at 2 units, the profit will be the marginal revenue at 2 units subtracted by the marginal cost at 2 units-> 500-150. This leads to a marginal profit of 350 JPY. If the firm decides to raise their production to 3 units, the P Price (JPY) 669 500 400 300- 200 (80 MC + 1 + 2 + + 4 MR 3 5 6 Quantity supplied x Q1-9. Using the figure of the demand function, marginal revenue function, and the marginal cost function you have already derived, graphically illustrate the consumer and the producer surplus, respectively at the quantity that maximizes the profit maximizing quantity. YOU MUST ATTACH YOUR FIGURE HERE Q1-10. Using a copy of figure you've used to answer the previous question, highlight the efficiency loss at the firm's profit maximizing quantity. YOU MUST ATTACH YOUR FIGURE HERE
