ECO 101H1: Principles of Microeconomics Prof. Freitas, University of Toronto
Problem Set 3: Demand, Supply and Competitive Markets
Questions and Solutions
1) Ann, Bill and John’s Willingness to Pay (WTP) for cups of coffee are given in table 1.
Q Ann’s WTP Bill’s WTP John’s WTP
1 2.7 2.5 4.3
2 5.1 4.5 7.9
3 7.2 6 10.8
4 9 7 13
5 10.5 7.5 14.5
6 11.7 7.5 15.3
Table 1: WTP for Ann, Bill and John
1a) If each cup of coffee costs $2, how many cups of coffee does each of them buy?
Solution: The first step is to calculate the marginal willingness to pay for each of them which is given in table 2
Q Ann’s MWTP Bill’s MWTP John’s MWTP
1 2.7 2.5 4.3
2 2.4 2 3.6
3 2.1 1.5 2.9
4 1.8 1 2.2
5 1.5 0.5 1.5
6 1.2 0 0.8
Table 2: MWTP for Ann, Bill and John
Assuming that they buy an extra cup of coffee as long as their MWTP≥ price of a cup, Ann will buy 3
cups, Bill will buy 2 cups and John will buy 4 cups.
Notice here that when we have a table, we can only work with integer units of the good. In that case MWTP
can be > price and the person will stop because going to the next integer value makes MWTP< price. If we
had equations, we could increase the quantity by tiny increments till MWTP= price.
Notice also that we always assume that when the consumer is indifferent, i.e. MWTP= price, they buy the
extra unit. I will not explicitly state this on a test, I will assume you know it.
1b) If the price of a cup of coffee is $2.4 what is the total demand from all three of them (i.e. market demand if
we had only 3 of them on the demand side of the market)?
Solution: Following the logic above, we first figure out how much each of them will buy at a price of $2.4 and
sum it up to get total (market) demand. We get 2 cups from Ann, 1 cup from Bill and 3 cups from
John, a total of 6 cups of coffee demanded.
Another way to see it is to order everyone’s MWTP from highest to lowest and then count the total number
of cups for which MWTP ≥$2.4.
Q 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
MWTP 4.3 3.6 2.9 2.7 2.5 2.4 2.2 2.1 2 1.8 1.5 1.5 1.5 1.2 1 0.8 0.5 0
202609 1 of 9 Problem Set 3 Questions and Solutions
, ECO 101H1: Principles of Microeconomics Prof. Freitas, University of Toronto
Q Deb’s TC Ebert’s TC Frank’s TC
1 0.8 1.4 2.2
2 2.4 3.2 4.6
3 4.8 5.4 7.2
4 8 8 10
5 12 11 13
6 16.8 14.4 16.2
Table 3: Deb, Ebert and Frank’s TCs of production
Q Deb’s MC Ebert’s MC Frank’s MC
1 0.8 1.4 2.2
2 1.6 1.8 2.4
3 2.4 2.2 2.6
4 3.2 2.6 2.8
5 4 3 3
6 4.8 3.4 3.2
Table 4: Deb, Ebert and Frank’s MCs of production
We can see that when market price is $2.4, 6 cups will be demanded in total. It is useful to think about it
this way because then you can clearly link individual demand to market demand.
Notice that from a market perspective we don’t care who buys the third cup. It is the person with the next
highest MWTP who will buy the extra cup when the price drops.
1c) If we want a total of 10 cups of coffee demanded, what is the highest price coffee can be?
Solution: Following the same logic as the question above and looking at the ordered MWTPs, if price is above $1.8
we will get fewer than 10 cups of coffee demanded. The highest price is therefore $1.8, the MWTP of
the 10th cup, at which we get exactly 10 cups (across the three people) for which MWTP ≥ 1.8.
Who will buy these cups? To determine that, look back at the individual MWTPs: Ann buys 4, Bill buys
2 and John buys the remaining 4 cups.
2) Deb, Ebert and Frank are producing coffee and their total costs of producing given quantities are listed in table
3
2a) If the price of a cup of coffee is $2, how many cups of coffee do each of them supply?
Solution: The first step is to calculate the marginal cost for each of them, which is given in table 4.
Assuming that they sell an extra cup of coffee as long as MC≤ price, Deb will sell 2 cups, Ebert will sell
2 cups and Frank will sell no cups.
Notice again that when we have a table, we can only work with integer units of the good. In that case MC
can be< price and the person will stop because going to the next integer value makes the MC> price. If we
had equations, we could increase the quantity by tiny increments till MC= price.
Notice also that we always assume that when the supplier is indifferent, i.e. MC= price, they sell the extra
unit. I will not explicitly state this on a test, I will assume you know it.
2b) If the price of a cup of coffee is $2.4 what is the total supply from all three of them (i.e. market supply if we
had only 3 of them on the supply side of the market)?
202609 2 of 9 Problem Set 3 Questions and Solutions
Problem Set 3: Demand, Supply and Competitive Markets
Questions and Solutions
1) Ann, Bill and John’s Willingness to Pay (WTP) for cups of coffee are given in table 1.
Q Ann’s WTP Bill’s WTP John’s WTP
1 2.7 2.5 4.3
2 5.1 4.5 7.9
3 7.2 6 10.8
4 9 7 13
5 10.5 7.5 14.5
6 11.7 7.5 15.3
Table 1: WTP for Ann, Bill and John
1a) If each cup of coffee costs $2, how many cups of coffee does each of them buy?
Solution: The first step is to calculate the marginal willingness to pay for each of them which is given in table 2
Q Ann’s MWTP Bill’s MWTP John’s MWTP
1 2.7 2.5 4.3
2 2.4 2 3.6
3 2.1 1.5 2.9
4 1.8 1 2.2
5 1.5 0.5 1.5
6 1.2 0 0.8
Table 2: MWTP for Ann, Bill and John
Assuming that they buy an extra cup of coffee as long as their MWTP≥ price of a cup, Ann will buy 3
cups, Bill will buy 2 cups and John will buy 4 cups.
Notice here that when we have a table, we can only work with integer units of the good. In that case MWTP
can be > price and the person will stop because going to the next integer value makes MWTP< price. If we
had equations, we could increase the quantity by tiny increments till MWTP= price.
Notice also that we always assume that when the consumer is indifferent, i.e. MWTP= price, they buy the
extra unit. I will not explicitly state this on a test, I will assume you know it.
1b) If the price of a cup of coffee is $2.4 what is the total demand from all three of them (i.e. market demand if
we had only 3 of them on the demand side of the market)?
Solution: Following the logic above, we first figure out how much each of them will buy at a price of $2.4 and
sum it up to get total (market) demand. We get 2 cups from Ann, 1 cup from Bill and 3 cups from
John, a total of 6 cups of coffee demanded.
Another way to see it is to order everyone’s MWTP from highest to lowest and then count the total number
of cups for which MWTP ≥$2.4.
Q 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
MWTP 4.3 3.6 2.9 2.7 2.5 2.4 2.2 2.1 2 1.8 1.5 1.5 1.5 1.2 1 0.8 0.5 0
202609 1 of 9 Problem Set 3 Questions and Solutions
, ECO 101H1: Principles of Microeconomics Prof. Freitas, University of Toronto
Q Deb’s TC Ebert’s TC Frank’s TC
1 0.8 1.4 2.2
2 2.4 3.2 4.6
3 4.8 5.4 7.2
4 8 8 10
5 12 11 13
6 16.8 14.4 16.2
Table 3: Deb, Ebert and Frank’s TCs of production
Q Deb’s MC Ebert’s MC Frank’s MC
1 0.8 1.4 2.2
2 1.6 1.8 2.4
3 2.4 2.2 2.6
4 3.2 2.6 2.8
5 4 3 3
6 4.8 3.4 3.2
Table 4: Deb, Ebert and Frank’s MCs of production
We can see that when market price is $2.4, 6 cups will be demanded in total. It is useful to think about it
this way because then you can clearly link individual demand to market demand.
Notice that from a market perspective we don’t care who buys the third cup. It is the person with the next
highest MWTP who will buy the extra cup when the price drops.
1c) If we want a total of 10 cups of coffee demanded, what is the highest price coffee can be?
Solution: Following the same logic as the question above and looking at the ordered MWTPs, if price is above $1.8
we will get fewer than 10 cups of coffee demanded. The highest price is therefore $1.8, the MWTP of
the 10th cup, at which we get exactly 10 cups (across the three people) for which MWTP ≥ 1.8.
Who will buy these cups? To determine that, look back at the individual MWTPs: Ann buys 4, Bill buys
2 and John buys the remaining 4 cups.
2) Deb, Ebert and Frank are producing coffee and their total costs of producing given quantities are listed in table
3
2a) If the price of a cup of coffee is $2, how many cups of coffee do each of them supply?
Solution: The first step is to calculate the marginal cost for each of them, which is given in table 4.
Assuming that they sell an extra cup of coffee as long as MC≤ price, Deb will sell 2 cups, Ebert will sell
2 cups and Frank will sell no cups.
Notice again that when we have a table, we can only work with integer units of the good. In that case MC
can be< price and the person will stop because going to the next integer value makes the MC> price. If we
had equations, we could increase the quantity by tiny increments till MC= price.
Notice also that we always assume that when the supplier is indifferent, i.e. MC= price, they sell the extra
unit. I will not explicitly state this on a test, I will assume you know it.
2b) If the price of a cup of coffee is $2.4 what is the total supply from all three of them (i.e. market supply if we
had only 3 of them on the supply side of the market)?
202609 2 of 9 Problem Set 3 Questions and Solutions
