Consider a market with a perfectly elastic demand curve at p∗ = 1, 763 and a...

Consider a market with a perfectly elastic demand curve at p∗ = 1, 763 and a

perfectly inelastic supply curve at q∗ = 452. What is the Consumer Surplus? What is

the Producer Surplus?

Solutions

Expert Solution

Q) Ans:-

Step1)

Introduction

Consumer surplus is the difference between the price that the consumer is willing to pay and the price that consumer actually pays.

Producer surplus is the difference between the price that the Producer is willing to receive and the price that the Producer actually receives.

Consumer surplus

Consumer surplus is zero, because when demand curve is perfectly elastic in nature. Consumers are paying the price equal to their willingness to pay. When Price actually paid = willingness to pay, there is no consumer surplus.

Consumer pay the price p∗ = 1, 763 and their willingness to pay is p∗ = 1, 763.

Consumer surplus = Consumer willingness to pay - Price that is actually paid
Consumer surplus = 1763 - 1763
Consumer surplus = 0

Producer surplus,

Producer surplus is Rectangle O P* E q*

Producer surplus = Base * Height
Producer surplus = 452 * 1763
Producer surplus = 796,876

Rahul Sunny answered 2 years ago

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