Neighborhood can set up stalls to sell homemade lemonade

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Question

Suppose your neighborhood is organizing a lemonade day where children from the neighborhood can set up stalls to sell their homemade lemonade. Assume there are two main recipes that children follow to make lemonade. The first one uses half a lemon for each glass of lemonade, and the second recipe uses one full lemon per glass of lemonade. It costs $1 to make one glass of lemonade with the first recipe, and costs $2 per glass with the second recipe. Adults in the neighborhood are willing to pay $1.4 for a glass of lemonade with low lemon content and $2.3 for a glass with high lemon content and both sellers and buyers are aware of this information. Suppose, ex-ante children are equally likely to pick one of the two recipes and everyone is aware of this information. Potential buyers of lemonade cannot differentiate between the two recipes until they purchase a glass. Assume that buyers are risk neutral and sellers have full bargaining power. What will the equilibrium price of lemonade set by the sellers be?

Reference no: EM133636774

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