Question

There are four consumers willing to paly the following amounts for haircuts:

Sam: $35

Carla: $10

Kaleigh: $40

John: $25

There are four haircutting buisnesses with the following costs:

Firm A: $15

Firm B: $30

Firm C: $20

Firm D: $10

Each firm has the capcity to produce only one haircut. To achieve 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?

Answer 1

Answer - According to the given data we have constructed demand and supply graph. Only 3 haircuts will be given. The consumers who will get haircut are Kaleigh, Sam and John. Carla will not get haircut because her willingness to pay is very low.

Since each firm can give only one one hair cut, thus firm D, firm A, and firm C will give hair cut. Firm B will not give any haircut.

Total possible surplus is the area below demand curve and above supply curve. Given in the diagram

Total possible surplus = (total WTP) - TC

Total possible surplus = (40 + 35 + 25) - (10 + 15 + 20)

Total possible surplus = 100 - 45

Total possible surplus = $55