Question

Consider the market for Potatoes in Delhi NCR where the demand curve is given by: P = a − bQd and the supply curve is given by: P = c, where a > 0, b > 0, and c > 0 are positive constants. Calculate the consumer surplus generated in equilibrium of this market. Is the consumer surplus always positive?

Answer 1

At equilibrium, quantity demanded and supplied are equal

a - bQ = c

Q = (a - c)/b

Price P = c

Consumer surplus in case of linear demand is 0.5*(max price - price paid)*quantity purchased

= 0.5*(a - c)*(a - c)/b

Now CS is positive when a > c

This is true because a is maximum willingness to pay and c is market price

In case a < c, then there will be no exchange happen because consumer cannot pay more than her willingness

Also, when a = c, consumer surplus will be zero

Hence CS is positive only when a > c otherwise it is 0 when a = c.

answered by: anonymous