Question

Jack is a salesman at Ahoy! Used Boats. It is already the last week of spring and Jack is yet to meet his sales target for the month. Suddenly, a new customer, Elle comes in looking for a new boat to buy. After looking at the boats for more than one hour, Elle picks the one she wants to buy. Jack’s willingness to sell is 110,000 €, however the price of the boat is set to 150,000 €. After some bargaining, Elle buys the boat for 120,000 €.

(a) What is the producer surplus in this case?

(b) Jack had paid 80,000 € for the boat, what is his profit?

(c) Are producer surplus and profit always equal? Explain your answer.

Answer 1

(a) What is the producer surplus in this case?
Ans 10,000 €

(b) Jack had paid 80,000 € for the boat, what is his profit?
Ans 70000 €

(c) Are producer surplus and profit always equal? Explain your answer

Ans Producer surplus and earnings are always same, considering they suggest the equal aspect. Suppose in preference to a minimum salary, the authorities instituted a maximum salary (set below the equilibrium) in the unskilled hard work marketplace. Producer surplus equals overall revenue minus the sum of all marginal fee.