E202Solutions7.3

# E202Solutions7.3 - 10 Beth is a second-grader who sells...

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10. Beth is a second-grader who sells lemonade on a street corner in your neighborhood. Each cup of lemonade costs Beth 20 cents to produce; she has no fixed costs. The reservation prices for the 10 people who walk by Beth’s lemonade stand each hour are listed in the table below. Beth knows the distribution of reservation prices (that is, she knows one person is willing to pay \$1.00, another \$0.90, and so on), but does not know any specific individual’s reservation price. a. Calculate the marginal revenue of selling an additional cup of lemonade. (Start by figuring out the price Beth would charge if she produced only one cup of lemonade, and calculate the total revenue; then find the price she would charge if she sold two cups of lemonade; and so on.) P e r s o n ABCDEFGH I J Reservation price \$1.00 \$0.90 \$0.80 \$0.70 \$0.60 \$0.50 \$0.40 \$0.30 \$0.20 \$0.10 Quantity in cups 1 2 3 4 5 6 7 8 9 10 Total revenue \$1.00 \$1.80 \$2.40 \$2.80 \$3.00 \$3.00 \$2.80 \$2.40 \$1.80 \$1.00 Marginal revenue \$1.00 \$0.80 \$0.60 \$0.40 \$0.20 \$0 -\$0.20 -\$0.40 -\$0.60 -\$0.80 b. What is Beth’s profit maximizing price and quantity? Answer : MR = MC at a price of \$0.60 and quantity of 5 cups. c. At that price, what are Beth’s economic profit and total consumer surplus?
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