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[Requires calculus] Again our seller starts with demand Q = 12 − P and marginal production costs of $4 per unit. The seller’s transaction cost is $1 per unit, and buyers’ are $2 per unit. a. Show that profit-maximizing output is 2.5 units per year and that buyers incur costs of $9.50 per unit, of which the seller receives $7.50. Then show that profit is $6.25. b. Now assume that the seller can reduce the buyers’ transaction costs to zero by incurring an added marginal cost of $1 per unit. Show that the new profitmaximizing output is 3 units, price is $9, and profit is $9. c. Calculate the annual consumer and producer benefits before and after.
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