The Varsity, located in downtown Atlanta, is the world’s largest drive-in restau

Question

The Varsity, located in downtown Atlanta, is the world’s largest drive-in restaurant. Located near the Georgia Tech campus, the drive-in attracts two distinct types of customers: college students and visitors to Atlanta. The owners are considering offering a student discount of $1 off their combo meal, which is regularly priced at $9. There are 5,000 students interested in purchasing a combo meal, with a maximum willingness to pay of $8. There are 5,000 visiting customers interested in purchasing the combo meal, with a maximum willingness to pay of $9. Assume that each customer, at most, will purchase a single meal and the marginal cost is $5. What is the amount of total consumer surplus if the Varsity offers the combo meal at the single price of $9 per meal?

Explanation / Answer

Consumer surplus= Price consumer is willing to pay - Price he/she actually pays

Total Consumer surplus= sum of surplus for each type

= Surplus for students+ Surplus for visitors

=(8-9)+(9-9)

Total Consumer surplus= $0

Here consumer surplus is -1 means students will not buy the meal at $9 as their maximum willingness to pay is $8 while visitors will buy at the max WTP leaving consumer surplus to 0.

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