Question

I. Determine the amount of individual consumer surplus generated for each one of the following situations

1. Leon goes to the clothing store to buy a new T-shirt. He is willing to pay up to $10. He picks out one he likes with a price tag of exactly $10. When he is paying for it, he learns that the T-shirt has been discounted by 50%

2. Alberto goes to the music store hoping to find a used copy of an album for up to $30. The store has one copy of the record selling for $30, which he purchases at that price

3. After soccer practice, Stacey is willing to pay $2 for a bottle of mineral water. The 7-Eleven sells mineral water for $2.25 per bottle, so she declines to purchase it

II. Multiple Choice: Which of the following statements best describes the concept of consumer surplus?

A. "Safeway was having a sale on Dreyer's ice cream so I bought 3 quarts."

B. "I was all ready to pay $300 for a new leather jacket that I had seen in Macy's but I ended up paying only $180 for the same jacket."

C. "I paid $130 for a printer last week. This week the same store is selling the same printer for $110."

D. "I sold my Blu-ray copy of Ben-Hur for $18 at a garage sale even though I was willing to sell it for $10."

Answer 1

I

The consumer surplus is the difference between the maximum willingness to pay for a good and the actual price paid for the good.

(1)

The maximum willingness to pay for T-shirt by Leon is $10.

The price of T-shirt is $10 but Leon got 50% discount. So, the actual price paid by the Leon is $5.

Calculate the consumer surplus -

CS = Maximum willingness to pay for T-short by Leon - Actual price paid by Leon = $10 - $5 = $5

Thus,

The consumer surplus is $5.

(2)

Alberto was willing to pay $30 at most for the album.

He purchased the album for $30.

Calculate the consumer surplus -

CS = Maximum willingness to pay for album by Alberto - Actual price paid for the album

CS = $30 - $30 = $0

Thus,

The consumer surplus is $0.

(3)

The maximum willingness to pay of Stacey for a bottle of mineral water is $2.

However, the actual price of the bottle of mineral water is $2.25.

Since, price is greater than the maximum willingness to pay of Stacey, she will not purchase the bottle of mineral water.

Thus,

There will be no consumer surplus.

II

The consumer surplus is the difference between the maximum willingness to pay for a good and the actual price paid for the good.

So, for calculating consumer surplus, we need maximum willingness to pay as well as actual price paid.

A person is ready to pay a maximum of $300 for the leather jacket but actually pays only $180. In this case, we have both the maximum willingness to pay as well as the actual amount paid.

Thus, in this case, consumer surplus can be calculated and best describes the concept of consumer surplus.

Hence, the correct answer is the option (B).