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Economists often simplify economic models by ignoring the role that transaction costs play in decision making. Purchasing a good often involves explicit transaction costs,



 


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 Kyoko values consuming her first Double Stack burger at $2.00, and she places no value on any additional burgers. Based on Kyoko's 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 Kyoko's consumer surplus from purchasing a burger under these conditions on the following graph. PRICE (Dollars per burger) 5 2 1 Demand 0 0 1 2 3 QUANTITY (Double Stack burgers) Price 4 5 Consumer Surplus ? Suppose Kyoko just sat down to enjoy the Double Stack burger that she purchased for $1.00. Her friend, Jacques, would also like a Double Stack burger, but he strongly dislikes standing in line. Jacques offers to buy Kyoko's Double Stack rather than wait in line himself and pay $1.00. The following table shows some hypothetical offers Jacques might make for Kyoko's burger. First, compute the consumer surplus Kyoko gets from buying the burger for $1.00, refusing Jacques's 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 Jacques 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 Kyoko's cost of waiting in line for a burger is zero. Note: If Kyoko is willing to sell her burger to Jacques while at the Wendy's 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). Kyoko's Consumer Surplus from . . . Purchasing and Consuming Immediately Offer Price from Friend (Dollars) Purchasing, Selling, Purchasing Again, Then Consuming (Dollars) $1.75 $2.25 $2.75 Assuming her cost of waiting in line is zero, what's the lowest of the offers listed in the prior table that Kyoko would accept in exchange for her burger?

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