Question

Sydney is trying to sell seven handmade quilts on Etsy. Her economic costs are $100 per quilt, and she is selling them at cost. There are seven buyers interested in her quilts who are willing to pay $225, $200, $175, $150, $125, $100, and $75.

a. SEE QUESTION 8. It may help you to draw the accompanying graph before answering questions b. through f. below.

b. How many quilts will she sell at $100, and what is the buyer surplus, seller surplus, and total surplus?

c. Why aren’t all seven quilts sold? Doesn’t this represent an unfulfilled wealth-creating opportunity?

Now suppose a regulated price of $150 is imposed on this market, such that any quilts sold must be sold for this amount.  

d. Does this regulated price represent a price floor or a price ceiling?

e. How many quilts will she sell now?  

f. What is the new buyer surplus, seller surplus, and total surplus?

Answer 1

a

)

b)Since the price is $100, given the willingness to pay, the number of quilts sold would be 6.

The producer surplus would be 0 and the consumer surplus would be the area above the price line and below the Demand curve ie the area of all the rectangles which is ( 225-100+200-100+175-100+150-100+125-100+100-100)= 125+100+75+50+25= $375

So total surplus would be $375

c)The willingness to pay of the seventh consumer is less than the cost needed to produce the quilt. Hence it remains unsold. It represents an unfulfilled wealth creating opportunity because the good remains unsold and the material could have been used in for production of another good.

d)Since the price is above the equilibrium price and the good can only be sold only at this price, it is price floor . A Price floor would mean that the quilt can be sold at this price. In other words, instead of $100, the price would now be $150.

e) Now she would be able to sell 4 quilts.

f) The consumer surplus would be (225-150+200-150+175-150)= 75+50+25= 150$

The producer surplus would be the difference between the price and the cost.

(150)*3-3*(100)=450-300=$150

Total surplus would be $300 which is less than the earlier surplus.