2. The marginal cost of each of the first 6 air conditioners produced each day is less than $120, but the marginal cost of the 7^th air conditioner is $140. So the company should produce 6 air conditioners per day.

3.

a. As indicated by the entries in the last column of the table below, the profit-maximizing quantity of bats for Paducah is 20/day, which yields daily profit of $35.

b. Same quantity as in part a, but now profit is $64, or $30 more than before.

Chapter 7

2.

a. Consumer surplus is the triangular area between the demand curve and the price line. Its area is equal to .6bh where b is the base of the triangle and he is the height. The base is 6 units, the height is 1.5 units, measured in dollars. Therefore consumer surplus is $.5(1.5)(6) or $4.5 per week.

b. Producer surplus is the triangular area between the supply curve and the price line. Using the base height formula it is ($.5)(4.5)(6) or $13.50 per week.

c. The maximum weekly amount that consumers and producers together would be willing to pay to trade in wristwatches is the sum of gains from trading in wristwatches – namely, the total economic surplus generated per week, which is $18 per week.

3.

a. At a price of $7.50, the quantity supplied per week = 2. The quantity demanded at this price is 18 per week, which implies a weekly shortage of 16 watches.

b. The weekly economic surplus lost as a result of the price ceiling is the area of the triangle formed by the quantity supplied on the left and the intersection of supply and demand on the right. This amount is calculated as (.5)(4)(1) + (.5)(4)(3) = $8/week.

c. At a price of $7.50, only 2 watches are supplied. At that quantity, buyers will value a second wristwatch at $11.50, and sellers will provide an additional watch at the cost of only $7.50. Thus, if a third watch were traded at a price of say, $10, the buyer would be better off by $1.50, and the seller would be better off by $2.50