The answer to this is 4 and 5 donuts, but how and why? The first column shows th

Question

The answer to this is 4 and 5 donuts, but how and why?

The first column shows the number of donuts purchased, while the second and third columns (respectively) show Shane’s marginal value and Miriam’s supply schedule. Assume that Miriam is a “price taker”: she accepts Shane’s price and supplies her optimal quantity given that price.

Assuming that Shane can set the price, compute the price-quantity combinations that maximize Shane’s Consumer Surplus. (Hint: there are actually two price-quantity combinations that yield the same highest surplus.)

Number of Donuts Shane's       Demand Schedule Miriam's       Supply Schedule 1 $1.70 $0.90 2 $1.60 $0.95 3 $1.50 $1.00 4 $1.40 $1.05 5 $1.30 $1.10 6 $1.20 $1.15 7 $1.10 $1.20 8 $1.00 $1.25 9 $0.90 $1.30 10 $0.80 $1.35 11 $0.70 $1.40 12 $0.60 $1.45 13 $0.50 $1.50

Explanation / Answer

The Equilibrium between demand and supply is derived by equating demand function against the supply function.

d=s

Its a point where quantity demanded is equal to quantity supplied.

In the given scenario Shane's demand schedule and Miriam's Supply schedule is nearing equality at $1.20 and $1.15. So the equalibrium must be between $1.20 and $1.15. The Equlibrium quantity which maximizes Shane Consumer Surplus is 6. So the answer is 6 Donuts and Price is between $1.20 and $1.15

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