Suppose Kate just sat down to enjoy the double stack burger that she purchased f

Question

Suppose Kate just sat down to enjoy the double stack burger that she purchased for $1. Her friend, Nick, would also like a Double stack burger, but he strongly dislikes standing in line. Nick offers to buy Kates Double stacker rather than wait in line himself and pay $1.

Nick makes some hypothetical offers for Kates burger.

1. $1.50

2. $2.00

3. $2.50

First compute the consumer surplus Kate gets from buying the burger for $1, refusing Nicks offer, and eating the burger.

a)

b)

c)

Next compute and enter the consumer surplus she gets from buying the first burger at $1, selling it to Nick at each price listed below, purchasing another burger for $1, and consuming it. Again assume that Kates cost of waiting in line for a burger is zero.

a)

b)

c)

(NOtice that if Kate is willing to sell her burger to Nick while at Wendys restuarant she would purchase another burger immediately, since the value of the burger($2) remains higher than the price of the burger ($1)

Explanation / Answer

a)

At P=$1.50

Consumer surplus = Purchase price – willingness to pay = $1 - $1 = 0

b)

When Nicks offers her $1.50

Producer surplus = $1.50 - $1 = $0.50

c)

When Nicks offers her $2

Producer surplus = $2 - $1 = $1

d)

When Nicks offers her $2.50

Producer surplus = $2.50 - $1 = $1.50

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