Question

6. John has a car he wants to sell. His goal is to get as much as he can for the car (profit-maximizer). He lists the car in the local paper with no price – just “highest bidder” and announces a time to come by if interested. 3 potential buyers show up. Paul is willing to pay $1,000 for the car. George is willing to pay $2,000 for the car. Ringo is willing to pay $8,000 for the car. George makes an offer of $2,000 first and Paul leaves. Answer the following questions:

a. Who will get the car and at what price?

i. Paul will come back and get the car for $1,000

ii. George will get the car for $2,000

iii. Ringo will get the car for $8,000

iv. Ringo will get the car for just over $2,000

b. What will the consumer surplus be?

i. 0 because the buyer is paying exactly his willingness to pay price

ii. Ringo will leave with a consumer surplus of just under $6,000

iii. Ringo will leave with a consumer surplus of just over $6,000

iv. Ringo will leave with a consumer surplus of $8,000

c. Suppose John was willing to sell the car for $1,500 but no less. What is the producer surplus in this case?

i. 0 because John did not get his expected price

ii. 0 because John got more than his expected price

iii. 0 because John got less than his expected price

iv. Just over $500 give the price he was able to sell it for that much more than his willingness to sell price

Answer 1

We are given with information that john jas a car and he is willing to sell it at highest possible price.

There are 3 persons with different prices to offer. As per given information, George makes an offer of $2000 and paul leaves as there is higher bidder than him. Robin can still bid little higher than george and could get the car.

a) As george just had made the bid but didn't get the car so there are chances for robin to bid higher. John wants to sell it to highest-paid bidder. Robin is willing to pay $8000 for the same car. Robin can make bid of just higher than george and according to advertisment made in local paper, he can claim for the john's john's car. So, Robin will get the car for just over $2000.

b) Consumer surplus is the difference between what amount comsumer is willing to pay for particular quantity and what he actually pays at moment of purchasing that particular quantity or good. In this case, paul, george and robin are consumers. Robin pay highest bid and get the car. His willingness to pay is $8000 and his actually pays just more than $2000. Difference between both will be just under $6000.

So, consumer surplus will be just under $6000.

c) Producer surplus is difference between the amount on which producer is willing to sell the particular good and the amount he actually get while selling that particular good. In this case, john is willing to sell his car at $1500 but no less. As we know in our case, bid is just higher than $2000 by robin. Willingness to sell is $1500 and he actually gets more than $2000. Difference is 500+. So, john is maximizing his surplus by selling it off at price greater than $2000.