The last blank is decrease or increase 2. The effect of transaction costs on dec

Question

The last blank is decrease or increase

2. The effect of transaction costs on decision-making Aa Aa 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 We often simplify economic models by ignoring the role that transaction costs play in our 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 help you understand the importance of transaction costs Suppose Winona values consuming her first Double Stack burger at $3, and she places no value on any additional burgers. Based on Winona's willingness to pay, her demand curve is plotted on the graph below. For simplicity, assume there is no time cost of waiting in line for her first Double Stack burger. Shade the area representing her consumer surplus from purchasing a burger under these conditions using the green rectangle (triangle symbols) PRICE (Dollars per burgerl Consumer Surplus Demand Price QUANTITY IDouble Stack burgers HpClear All QUANTITY (Double Stack burgers) Help Clear All

Explanation / Answer

$1.25 is the lowest offer she should accept with zero transaction cost.

Now cost of waiting time is $0.25. (3 minutes waiting) = total cost of waiting = 3*.25 = 0.75

Total cost of buying a burger = $1.75 = consumer surplus reduced to $3=$1.75 = $1.25

Therefore, the lowest [rice she should accept is $1.5

decrease , the shorter the line. increase if a long que.

P consumer surplus After exchange consumer surplus 1.25 2 2.25 1.75 2 2.75 2.25 2 3.25

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