Answer to Question #287189 in Microeconomics for Gilberto Waluse

Question

There are four consumers willing to pay the following amounts for haircuts: Jerry: $7; Oprah: $2; Ellen: $8; and Phil: $5 There are four haircutting businesses with the following costs: Firm A: $3; Firm B: $6; Firm C: $4; and Firm D: $2 Each firm has the capacity to produce only one haircut. For efficiency, how many haircuts should be given? Which businesses should cut hair and which consumers should have their hair cut? How large is the maximum possible total surplus? 

Answer 1

Demand is equal to supply at a quantity of three haircuts and price between $4 and $5. Firms A,C, and D should cut the hair of Ellen, Jerry and Phil. Firm B's costs are too high. Oprah's willingness to pay is too low, so they do not participate.

The maximum total surplus is ($8 - $2)+($7-$3)+($5 -$4)=$11