Question

1. Explain consumer and producer surplus and provide an example of each.

2.What happens to the consumer surplus and producer surplus when price increases or decreases?

3. Anita values her time at $80 an hour. She spends 2 hours giving Colleen a message. Colleen was willing to pay as much as $250 for the message, but they negotiate a price of $225. What is the consumer surplus, producer surplus and total surplus in this case?

4.Refer to the graph below: An Equilibrium GraphIf the market is at the equilibrium, what would be the consumer surplus, producer surplus and total surplus in the market. Calculate the actual dollar amount.

Answer 1

1.

Consumer surplus is the area below demand curve and above market price. It is the difference between what consumers are willing to pay and what they actually pay. If Anna is willing to pay $150 for a phone, but the market price is $100, then Anna's consumer surplus is $150-$100= $50.

Producer surplus is the area above supply curve and below market price. It is the difference between what producers get and what is the minimum price at which they are willing to sell.

If George is willing to sell his bike for $40, but the market price is $90, then George's producer surplus is $90-$40=$50.

2.If equilibrium price decreases, then consumer surplus will increases and producer surplus will decrease.

If equilibrium price increases, then consumer surplus will decrease and producer surplus will increase.

3.

Colleen's consumer surplus is the difference between the price she is willing to pay and the actual price she pays ($250-$225)=$25.

Anita's producer surplus is the difference between the actual price and the minimum price she is willing to sell. ($80 x 2 hours)=$160 is the minimum price. The actual price is $225. Anita's producer surplus is $225-$160=$65.