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Attempts -- Keep the Highest 5.5 / 7 2. The effect of transaction costs on decision making This Wendy's 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 they actually pay for it. According to standard economic theory, consumer surplus must always be - positive / at least zero / negative Economists often simplify econemic models by ignoring the role that transaction costs play in decision making. Purchasing a goed 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 Yvette values consuming her first Double Stack burger at $3.00, and she places no value on any additional burgers. Based on Yvette'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 Yvette's consumer surplus from purchasing a burger under these conditions on the following graph. @ Consumer Surplus Demand PRICE (Dollars per burger) Price a 1 2 3 4 5 QUANTITY (Double Stack burgers) Suppose Yvette just sat down to enjoy the Double Stack burger that she purchased for $1.00. Her friend, Sean, would also like a Double Stack burger, but he strongly dislikes standing in line. Sean offers to buy Yvette's Double Stack rather than wait in line himself and pay $1.00. The following table shows some hypothetical offers Sean might make for Yvette's burger. First, compute the consumer surplus Yvette gets from buying the burger for $1.00, refusing Sean'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 Sean 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 Yvette's cost of waiting in line for a burger is zero. Note: If Yvette is willing to sell her burger to Sean while at the Wendy's restaurant, she would purchase another burger immediately, since the value of the burger ($3.00) remains higher than the price of the burger ($1.00). Yvette's Consumer Surplus from . .. Purchasing and Consuming Immediately Purchasing, Selling, Purchasing Again, Then Consuming Offer Price from Friend (Dollars) (Dollars) 175 LW W 225 Cw C o 275 W W Assuming her cost of waiting in line is zero, what's the lowest of the offers listed in the prior table that Yvette would accept in exchange for her burger? ) $1.75 ) $2.25 O $2.75 Now relax the assumption that Yvette's cost of waiting for a Double Stack is zero. Specifically, Yvette values each minute of her time at $0.25. Suppose the wait for a Double Stack is one minute. Including the value of her time, the cost of obtaining a burger for Yvette 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 Sean in exchange for her burger? ) $1.00 ) $1.50 ) $2.00 ) $2.50 From the previous analysis, you can conclude that the minimum price at which Yvette is willing to sell her Double Stack burger to Sean n i - . - decrease / increasew the shorter her wait in line