Attempts I I Do No Harm / 7 2. The effect of transaction costs on decision making This Wendy’s commercial confuses the notions of appreciation
Attempts I I Do No Harm / 7 2. The effect of transaction costs on decision making This Wendy’s commercial confuses the notions of appreciation and consumer surplus. Recall that consumer surplus is the difference between what a
consumer is willing to pay for a good and what he or she actually pays for it. According to standard economic theory, consumer surplus must always be at least zero V . Economists often simplify economic models by ignoring the role that transaction costs play in decision making. Purchasing a good often involves
explicit transaction costs, such as the cost of the gasoline used to get to the store, but there are also implicit transaction costs such as the opportunity cost of the time spent shopping for and acquiring a product. The remaining questions will you understand the importance of transaction costs. Suppose Caroline values consuming her ﬁrst Double Stack burger at $2.00, and she places no value on any additional burgers. Based on Caroline’s
willingness to pay, her demand curve is plotted on the following graph. For simplicity, assume there is no time cost of waiting in line for her ﬁrst Double Stack burger. Using the green rectangle (triangle symbols), shade the area representing Caroline’s consumer surplus from purchasing a burger under these conditions on the following graph. Using the green rectangle (triangle symbols), shade the area representing Carolina’s consumer surplus from purchasing a burger under these
conditions on the following graph. (9 H Consumer Surplus Demand PRICE (Dollars per burger) Price QUANTITY (Double Stack burgers) Suppose Caroline just sat down to enjoy the Double Stack burger that she purchased for $1.00. Her friend, Antonio, would also like a Double Stack burger, but he strongly dislikes standing in line. Antonio offers to buy Caroline’s Double Stack rather than wait in line himself and pay $1.00. The following table shows some hypothetical offers Antonio might make for Carolina’s burger. First, compute the consumer surplus Caroline gets from buying the burger for $1.00, refusing Antonio’s offers, and eating the burger. Enter these
amounts in the second column of the following table. Next, compute the consumer surplus she gets from buying the first burger at $1.00, selling it to
Antonio at each price listed, purchasing another burger for $1.00, and consuming it. Enter these amounts in the third column of the table. Again, assume that Caroline’s cost of waiting in line for a burger is zero. Note: If Caroline is willing to sell her burger to Antonio while at the Wendy’s restaurant, she would purchase another burger immediately, since the
value of the burger ($2.00) remains higher than the price of the burger ($1.00). Carolina’s Consumer Surplus from . . . Purchasing and Consuming Immediately Purchasing, Selling, Purchasing Again, Then Consuming Offer Price from Friend (Dollars) (Dollars)
$1.75 |:] —
$2.75 |:| Assuming her cost of waiting in line is zero, what’s the lowest of the offers listed in the prior table that Caroline would accept in exchange for her burger? 0 $1.75
CD $2.25 0 $2.75 Assuming her cost of waiting in line is zero, what’s the lowest of the offers listed in the prior table that Caroline would accept in exchange for her burger? 0 $1.75
C) $2.25 0 $2.75 Now relax the assumption that Caroline’s cost of waiting for a Double Stack is zero. Specifically, Caroline values each minute of her time at $0.25. Suppose the wait for a Double Stack is three minutes. Including the value of her time, the cost of obtaining a burger for Caroline is , and her consumer surplus from purchasing and consuming a burger is . Of the following prices, what’s the lowest price she would accept from Antonio in exchange for her burger? 0 $1.50
0 $2.50 0 $3.00 From the previous analysis, you can conclude that the minimum price at which Caroline is willing to sell her Double Stack burger to Antonio v the shorter her wait in line.
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