Question

You buy some beads and string from a student on campus to make a bracelet for yourself. You valued the materials at $10 but were charged only $7. Unknown to you, the seller would have sold them for $5. After you make the bracelet, you like it more than the original materials used to make it. You value the bracelet at $15. One day, a random stranger (who values your bracelet at $26) compliments the bracelet and offers you $20 for it, and you decide to sell it to the stranger. What is the total surplus generated from the original purchase of beads and string combined with the sale of the bracelet to the stranger? Total surplus = $

Answer 1

When beads were purchased, the surplus generated:

First the seller gets the surplus from selling is at$7 when he could have sold at $5. So $2 is producer surplus.

I bought it at $7, when I valued it at $10 .so consumer surplus is $3

Total surplus generated from buying beads is$5.

Now when the bracelet is made and sold.

I valued the bracelet at $ 15 , and was offered $20. So my surplus(my producer surplus) is $5.

Also the stranger valued the bracelet at $ 26, but bought at$ 20. His consumer surplus is $ 6.

So total surplus from the sale is bracelet is$11.

The total surplus from whole process is $ 16.

(You can comment for doubts)