Question

In: Economics

Assume no externalities and the buyers and sellers interact in a market. Currently we have three...

Assume no externalities and the buyers and sellers interact in a market. Currently we have three buyers who value a good at $40. There are three possible sellers A, B, C whose marginal costs of production are $20, $30 and $50. Another seller, D, enters the market. D's marginal costs of production is $40. What is the change in Total Surplus caused by D's entry? Do not include the $ sign and remember to include a negative sign if you want to say that surplus has decreased.

Solutions

Expert Solution

Answer. THe buyers value the good at $40. This means that no buyer is willing to buy the good above $40.

Initially, there are three buyers and 3 sellers A,B,C whose marginl costs are $20, $30, $50.

The total surplus in the market = (40-20) + (40-30) = 30

The total surplus will be 30 as only seller A and seller B will be able to sell the good in the market.

When another seller D enters the market, we have 4 sellers A, B, C, D.

Total Surplus in the market = (40-20) + (40-30) + (40-40) = 30

This is so because now seller D will be able to sell to the third buyer who values the good at $40.

Therefore, the change in total surplus caused by D's entry will be 0 (as his marginal cost equals to the willingness of the buyer).

Rahul Sunny answered 2 years ago
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