Question

Smiley, a producer of the variety show 2 Days 1 Night, wants to cast Ravi for 3 hours in their show.

Suppose that Ravi values his time at 100 USD per hour. Smiley, on the other hand, is willing to pay 350 USD per hour for his time.

During the negotiation, they were able to settle the wage at 250 USD. Given this scenario, answer the following:

1. Compute for the consumer surplus

2. Compute for the producer surplus

Answer 1

Regarding the CS:

Maximum willingness to pay (M) = 350

Equilibrium price (P) = 250

Hours = 3

Hence, by the formula:

CS = 0.5 × (M – P) × Hours [0.5 is the part of formula]

     = 0.5 × (350 – 250) × 3

     = 0.5 × 100 × 3

     = $150 (Answer)

Regarding the PS:

Minimum acceptable price (Me) = 100

Equilibrium price (P) = 250

Hours = 3

Hence, by the formula:

CS = 0.5 × (P – Me) × Hours [0.5 is the part of formula]

     = 0.5 × (250 – 100) × 3

     = 0.5 × 150 × 3

     = $225 (Answer)