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Sam is willing to pay $12 per month for 1 green egg per month, $10 for the 2nd, $8 for the 3rd, etc
Sam is willing to pay $12 per month for 1 green egg per month, $10 for the 2nd, $8 for the 3rd, etc. The market price of green eggs is $8. He is willing to pay $20 per month for 1 slice of ham per month, $16 for a 2nd, $12 for a 3rd, etc. The market price of ham slices is $12. (Assume Sam can only buy green eggs and ham in whole units.)
A. How many green eggs and ham slices do Sam purchase per month, and how much does he spend in total on each?
B. Which good provides Sam with the greatest net benefits? Would your answer be the same if green eggs cost $6?
C. How much would Sam be willing to pay to be able to purchase ham slices at $8 rather than $12?
Expert Solution
A:
Sam would buy 3 of each good since the market price for both is equal to his willingness to pay for the 3rd good. Thus, he spends $8*3=$24 on eggs and $12*3=$36 on ham.
B:
Sam's net benefit for eggs is (12+10+8)-24=$6. His net benefit for ham is (20+16+12)-36=$12. Ham thus provided same with the greatest net benefit.
If the price of green eggs falls to $6, his new net benefit for eggs is (12+10+8)-6*3=$12 and thus both goods have the same net benefit.
C:
Sam would be willing to pay up to the difference in price which is $4*3=$12 to get the price lowered by $4. This is because he consumes 3 goods at any price at $12 or below.
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