Question

In the market for chairs, Aaron is a consumer. He values the first chair at MB = 85, the second at MB = 50, and the third at MB = 20. Sandra is a producer. The first chair costs her MC = 10 to make. The second costs her MC = 40, and the third MC = 80.
1. If the price of chairs is 55, how many chairs will Sandra sell to Aaron?
2. If the price of chairs is 45, what will be the Consumer Surplus? Producer Surplus? Total Surplus?
3. The government decides it wants a lot of chairs made and so wants a low chair price. So it charges Aaron a tax of 100, then gives that tax money to Sandra in exchange for her lowering the price of chairs to 10 and producing as many chairs as Aaron wants to buy.
With this tax in place, a price of 10, and Sandra selling as many chairs as Aaron wants to buy, what will be the Consumer Surplus? Producer Surplus? Total Surplus?

Answer 1

SOLUTION:

1) If the price of chairs is 55, then Sandra will sell 2 chairs to Aaron.

2) If the price of chairs is 45, then Consumer Surplus will be 45, Producer Surplus will be 40 and Total Surplus would be 95.

3) With tax of 100 being charged to Aaron and that same tax being given to Sandra, and price of chairs lowering down to 10, the consumer surplus will be 25 , producer surplus will be 0 and total surplus will be 25.