Question

1. Define both "consumer surplus" and "producer surplus". 2. Determine the amount of consumer surplus generated in the following situation: Robert goes to a Subway store to buy a "footlong tuna sandwich" for which he is willing to pay the usual $8. When he is paying for it, he learns that the "footlong tuna sandwich" is discounted by 25%. 3. Determine the amount of producer surplus generated in the following situation: Cynthia lists her acoustic guitar on eBay. She sets a minimum acceptable price, known as her reserve price, of $250. After 7 days of bidding, the final high bid is exactly $250. She accepts the bid.

Answer 1

1. Consumer surplus is the difference between the amount consumer is wlling to pay and the amount actually paid by the consumer. Whereas producer surplus is the difference between the amount recieved by the producer and the minimum amount at which producer is willing to sell the good.

2. Willingness to pay = $8
Amount paid = 8$ - 25% of $8 = 8 - 2 = 6
So, consumer surplus = $8 - $6 = $2

3. Minimum acceptable price = $250 : Price received = $250
So, Producer surplus = Price received - minimum acceptable price = 250 - 250 = 0