2. The effect of transaction costs on decision making

This Wendys 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 beat least zero .

Economists often simplify economic models by ignoring the role that transaction costs play in 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 Sharon values consuming her first Double Stack burger at $2.00, and she places no value on any additional burgers. Based on Sharons willingness to pay, her demand curve is plotted on the following graph. For simplicity, assume there is no time cost of waiting in line for her first Double Stack burger.

Using the green rectangle (triangle symbols), shade the area representing Sharons consumer surplus from purchasing a burger under these conditions on the following graph.

Suppose Sharon just sat down to enjoy the Double Stack burger that she purchased for $1.00. Her friend, Paolo, would also like a Double Stack burger, but he strongly dislikes standing in line. Paolo offers to buy Sharons Double Stack rather than wait in line himself and pay $1.00.

The following table shows some hypothetical offers Paolo might make for Sharons burger.

First, compute the consumer surplus Sharon gets from buying the burger for $1.00, refusing Paolos offers, and eating the burger. Enter these amounts in the second column of the following table. Next, compute the consumer surplus she gets from buying the first burger at $1.00, selling it to Paolo at each price listed, purchasing another burger for $1.00, and consuming it. Enter these amounts in the third column of the table. Again, assume that Sharons cost of waiting in line for a burger is zero.

Note: If Sharon is willing to sell her burger to Paolo while at the Wendys restaurant, she would purchase another burger immediately, since the value of the burger ($2.00) remains higher than the price of the burger ($1.00).

From the previous analysis, you can conclude that the minimum price at which Sharon is willing to sell her Double Stack burger to Paolo ____decreases or increases____ the shorter her wait in line

(? Consumer Surplus PRICE (Dollars per burger) Demand Price 0 0 1 3 5 QUANTITY (Double Stack burgers) Sharon's Consumer Surplus from ... Purchasing and Consuming Immediately Purchasing, Selling, Purchasing Again, Then Consuming Offer Price from Friend (Dollars) (Dollars) $1.50 $2.00 I!! $2.50 Assuming her cost of waiting in line is zero, what's the lowest of the offers listed in the prior table that Sharon would accept in exchange for her burger? O $1.50 O $2.00 O $2.50 Now relax the assumption that Sharon's cost of waiting for a Double Stack is zero. Specifically, Sharon values each minute of her time at $0.25. Suppose the wait for a Double Stack is three minutes. Including the value of her time, the cost of obtaining a burger for Sharon is $ and her consumer surplus from purchasing and consuming a burger is $ Of the following prices, what's the lowest price she would accept from Paolo in exchange for her burger? O $1.50 O $2.00 O $2.50 O $3.00