The local CVS sells two brands of laundry detergent: MystTM and BreezTM. Myst and Breez use...

 

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The local CVS sells two brands of laundry detergent: MystTM and BreezTM. Myst and Breez use the exact same formula to make their detergent, and are sold in very similar packaging. The only difference between Myst and Breez is that Myst is sold in 16 oz packages, while Breez is sold in 32 oz packages. Dennis (a local CVS shopper) is indifferent between Myst and Breez, and cares only about how much detergent he gets. Thus, his preferences over Myst (M) and Breeze (B) can be represented by: u(M,B) = 16M + 32B Suppose that the price of a bottle of Breez is $10, and the price of Myst is Ps. Dennis has a budget of $30. Let's try to determine Dennis's demand curve for Myst as a function of its price, PM: a. Suppose PM = $2. How many containers of Myst will Dennis purchase? b. Now suppose PM = S6. How many containers of Myst will Dennis purchase now? c. What is the highest value of PM at which Dennis might purchase any Myst? At this price, give the full range of optimal quantities of Myst which Dennis could purchase. d. Using your answers to a, b, and c, determine and carefully sketch Dennis's demand curve (with price on the vertical axis and quantity of Myst on the horizontal axis). Label all intercepts and kinks. e. Suppose PM = S5. What is Dennis's consumer surplus? Explain. f. Suppose PM = S6. Would any Myst be sold if all consumers share Dennis's preferences? g. Now suppose that there are two kinds of shoppers. 100 shoppers are identical to Dennis, and choose detergent optimally given prices, income, and preferences. Determine the market demand for Myst from these 100 "Dennis-like" shoppers, and graph it with price h. Another 100 shoppers are "inattentive shoppers"-they choose a brand of detergent at random and spend all of their income on it, regardless of the price (i.e., 50 buy only Myst and 50 buy only Breez, regardless of price). Inattentive shoppers have the same income (S30 each) as do normal shoppers, and have preferences represented by the same indifference curves, but do not make choices based on their preferences. Determine the market demand of Myst from these 100 "Inattentive Shoppers" and graph it with price on the vertical axis and quantity of Myst on the horizontal axis. i. Graph the total market demand from the 100 "Dennis-like" shoppers and the 100 "Inattentive Shoppers". j. Suppose that the price of Myst is $6. Show the area on your graph that represents consumer surplus. Does this area actually represent the benefits to consumers of the market for Myst? Why or why not? (Hint: Do shoppers choices of detergent reflect their preferences?) The local CVS sells two brands of laundry detergent: MystTM and BreezTM. Myst and Breez use the exact same formula to make their detergent, and are sold in very similar packaging. The only difference between Myst and Breez is that Myst is sold in 16 oz packages, while Breez is sold in 32 oz packages. Dennis (a local CVS shopper) is indifferent between Myst and Breez, and cares only about how much detergent he gets. Thus, his preferences over Myst (M) and Breeze (B) can be represented by: u(M,B) = 16M + 32B Suppose that the price of a bottle of Breez is $10, and the price of Myst is Ps. Dennis has a budget of $30. Let's try to determine Dennis's demand curve for Myst as a function of its price, PM: a. Suppose PM = $2. How many containers of Myst will Dennis purchase? b. Now suppose PM = S6. How many containers of Myst will Dennis purchase now? c. What is the highest value of PM at which Dennis might purchase any Myst? At this price, give the full range of optimal quantities of Myst which Dennis could purchase. d. Using your answers to a, b, and c, determine and carefully sketch Dennis's demand curve (with price on the vertical axis and quantity of Myst on the horizontal axis). Label all intercepts and kinks. e. Suppose PM = S5. What is Dennis's consumer surplus? Explain. f. Suppose PM = S6. Would any Myst be sold if all consumers share Dennis's preferences? g. Now suppose that there are two kinds of shoppers. 100 shoppers are identical to Dennis, and choose detergent optimally given prices, income, and preferences. Determine the market demand for Myst from these 100 "Dennis-like" shoppers, and graph it with price h. Another 100 shoppers are "inattentive shoppers"-they choose a brand of detergent at random and spend all of their income on it, regardless of the price (i.e., 50 buy only Myst and 50 buy only Breez, regardless of price). Inattentive shoppers have the same income (S30 each) as do normal shoppers, and have preferences represented by the same indifference curves, but do not make choices based on their preferences. Determine the market demand of Myst from these 100 "Inattentive Shoppers" and graph it with price on the vertical axis and quantity of Myst on the horizontal axis. i. Graph the total market demand from the 100 "Dennis-like" shoppers and the 100 "Inattentive Shoppers". j. Suppose that the price of Myst is $6. Show the area on your graph that represents consumer surplus. Does this area actually represent the benefits to consumers of the market for Myst? Why or why not? (Hint: Do shoppers choices of detergent reflect their preferences?)