Firm A sells a product with a willingness to pay (WTP) of $120 at a price of $100. Firm B sells a similar product with a WTP of $110. Under surplus parity, what price should Firm B set for their Product?

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BlackTom AI · Accepted Answer

Let's break down the scenario and each option carefully. 
First, recall what WTP means: the maximum price a consumer is willing to pay for a product. Firm A has WTP = 120 and sets price P_A = 100, giving Consumer Surplus (CS) for Firm A of 120 − 100 = 20. 
Now consider Firm B, whose WTP is 110. If we want surplus parity with Firm A, we equate Firm B's CS to 20 as well. Firm B's CS would be 110 − P_B. Setting 110 − P_B = 20 gives P_B = 90. 
Option by option:
- $80: This would give Firm B a CS of 110 − 80 = 30, which is higher than Firm A’s 20, violating surplus parity. 
- $120: This exceeds Firm B’s WTP (110), meaning no sale would occur; also CS would be negative, which is not meaningful in this context.
- $100: This would yield CS of 10 for Firm B (110 − 100 = 10), which is not equal to Firm A’s 20, so parity is not achieved.
- $90: This produces CS of 20 for Firm B, matching Firm A’s CS, thus satisfying surplus parity between the two firms.
In summary, among the given choices, $90 is the price that equalizes consumer surplus between Firm A and Firm B under the surplus parity concept, whereas the other options fail to maintain parity or violate WTP constraints.

Firm A sells a product with a willingness to pay (WTP) of $120 at a price of $100. Firm B sells a similar product with a WTP of $110. Under surplus parity, what price should Firm B set for their Product?

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