Question

Consumers' Willingness to Pay Musashi: $25 Jacques: $40 Kyoko: $35 Rina: $10 Firms' Costs Firm A: $15 Firm B: $30 Firm C: $20 Firm D: $10 Each firm has the capacity to produce only one haircut. For efficiency, should be given. Which businesses should cut hair

Answer 1

For efficiency, 4 haircuts should be given.

If a haircut is to be given, the cost of the haircut to a firm should be less than or equal to the willingness to pay of the customer going there.

• Firm A's cost is less than Musashi's willingness to pay so Firm A can cut.

• Firm B's cost is less than Jacques's willingness to pay so Firm B can cut.

• Firm C's cost is less than Kyoko's willingness to pay so Firm C can cut.

• Firm D's cost is equal to Rina's willingness to pay so Firm D can cut.

That makes 4 firms that can cut therefore 4 haircuts.

The business that should cut as shown above are:

• Firm A
• Firm B
• Firm C
• Firm D.