Consider two rain water tank producers who are rivals.
Firm 1
Cost of production: $30 per tank
Consumers maximum willingness to pay (i.e. the consumer's benefit): $110
Firm 2
Cost of production: $50 per tank
Consumers maximum willingness to pay: $150
[Note: Because price and profit for each firm are not known, use p1 and p2 to represent each firm's prices, and use p1 and p2 to represent profits.]
a. For each firm write a mathematical expression for the following quantities. If possible, calculate a numerical value.
i. Value-Added:
ii. Consumer Surplus:
iii. Profit (p1 and p2)
b. Assuming that each firm has the same consumer surplus, calculate the following.
iv. The price difference between the two firms (p2 - p1)
v. The profit difference between the two firms (p2 - p1)
c. Is the firm that creates the higher value-added more or less profitable than the firm that creates lower value-added?