Question

Problems and Applications Q8 There are four consumers willing to pay the following amounts for haircuts, and there are four haircutting businesses with the following costs: Consumers' Willingness to Pay Musashi: $25 Jacques: $40 Kyoko: $35 Rina: $10 Firms' Costs Firm A: $15 Firm B: $30 Firm C: $20 Firm D: $10 Each firm has the capacity to produce only one haircut. For efficiency, should be given. Which businesses should cut hair

Answer 1

Answer:

For efficiency, 3 haircuts should be given.

Only three haircuts should be given because only 3 firms have costs that are lower than the customer whose hair they are to cut.

Firm A's cost is less than Kyoto's willingness to pay so Firm A can cut.

Firm B's cost is more than Rina's willingness to pay so Firm B should not cut.

Firm C's cost is less than Jacques's willingness to pay so Firm C can cut.

Firm D's cost is less than Musashi's willingness to pay so Firm D can cut.

That makes only 3 firms that can cut therefore 3 haircuts.

The business that should cut as shown above are:

• Firm A
• Firm C
• Firm D.