Assume that F1 and F2 can produce an identical product at a cost of 50 cents per unit. Each firm can produce only one unit and there is no collusion. The market consists of two buyers that consume one unit each and are willing to pay $1 for the product. What is the total value created and price?

Question

Assume that F1 and F2 can produce an identical product at a cost of 50 cents per unit. Each firm can produce only one unit and there is no collusion. The market consists of two buyers that consume one unit each and are willing to pay $1 for the product.  What is the total value created and price?

BlackTom AI · Accepted Answer

Question restatement: Two firms (F1 and F2) can each produce one unit at cost 0.50 per unit. There are two buyers, each willing to pay 1.00 for the product. With no collusion, what is the total value created and the price?

Option analysis:
- Option A: 'Value Created = 50 cents, Price = $1' — This would imply a very small total value created, and the price is set at the full willingness-to-pay. Since two units can be produced, the total value created (sum of buyers’ valuations minus production costs) should reflect the two units sold. If price were $1, only buyers who value it at $1 would buy; since there are two buyers and costs total $1, the market could support a price much closer to the marginal cost, making this option inconsistent with the competitive outcome.
- Option B: 'Value Created = $1, Price = 50 cents' — This aligns with the idea that two units are produced at cost 0.50 each (total cost 1.00) and two buyers each value the product at 1.00. Total value created (sum of valuations) is 2.00, but subtracting costs gives a net value created of 1.00. The price being 0.50 matches a competitive outcome where price equates to marginal cost in a scenario with two producers and no collusion, enabling both units to be sold.
- Option C: 'Value Created = $1, Price = $1' — If price is $1, both buyers would be willing to pay, but the producers would collect revenue of 2.00, while total production cost is 1.00. The net value created would be 1.00, but the price specified as $1 does not reflect the marginal-cost pricing in a competitive setup with identical costs and no collusion; prices would typically gravitate toward marginal cost (0.50), not the full willingness to pay.
- Option D: 'Value Created = 50 cents, Price = 50 cents' — This would imply an extremely small total value created and a price equal to the marginal cost, but it ignores that there are two units sold and the corresponding valuations. The total value created should account for both units being valued at 1.00 each, leading to a higher total surplus than 0.50.

Synthesis of reasoning: To find the total value created, sum the buyers’ valuations for the two units and subtract the total production costs. Valuations: 1.00 + 1.00 = 2.00. Costs: 0.50 + 0.50 = 1.00. Total value created (net surplus) equals 2.00 − 1.00 = 1.00. In a competitive, non-collusive setting with these costs and two units sold, a plausible price that clears the market is 0.50 per unit (marginal cost pricing). Therefore, the scenario corresponds to Value Created = 1.00 and Price = 0.50. The other options misstate either the net surplus or the appropriate price given the competitive setup, or misalign with the two-unit, two-buyer context.

Assume that F1 and F2 can produce an identical product at a cost of 50 cents per unit. Each firm can produce only one unit and there is no collusion. The market consists of two buyers that consume one unit each and are willing to pay $1 for the product. What is the total value created and price?

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