Question

16. How prices allocate resources Suppose that there are three beachfront parcels of land available for sale in Huntington and six people who would each like to purchase one parcel. Assume that the parcels are essentially identical and that the minimum selling price of each is $335,000. The following table states each person's willingness and ability to purchase a parcel. Person Andrew Beth Willingness and Ability to Purchase (Dollars) 290,000 270,000 500,000 420,000 360,000 310,000 Lorenzo Neha Sam Teresa

Answer 1

Willingness to pay (WTP) is the maximum price at or below which a consumer will definitely buy one unit of a product. This corresponds to the standard economic view of a consumer reservation price. That is, if the price exceeds this value, the consumer will not buy anything.

1. If the minimum selling price of each parcel is $335,000 then only those people will buy it whose WTP is equal to or greater than $335,000.

People who will buy one of the three beachfront parcels:

(i) Lorenzo (500,000 > $335,000)

(ii) Neha (420,000 > $335,000)

(iii) Sam (360,000 > $335,000)

The reservation price of Andrew, Beth and Teresa is less than $335,000 and they will not buy the parcel.

2. If the parcel is available for sale at a minimum price of $300,000 the fourth parcel will be sold because Teresa will purchase it from the seller for at least the minimum price. Teresa' reservation price is 310,000 which exceeds 300,000.