Question

Determine the amount of consumer surplus generated in each of the following situations:

A. Peter goes to the clothing store to buy a new T-shirt, for which he is willing to pay up to $20. He picks out one he likes with a price tag of exactly $20. When he is at the cashier, he learns that the T-shirt has been on a 50% discount.

B. Maria goes to a cd store to find a used copy of Nirvana's Greatest Hits for up to $10. The store has one copy selling for $10, which she purchases.

C. After baseball practice, on a very hot summer day, Ben needs to buy a bottle of mineral water. He is thirsty and is willing to pay $4 for a cold mineral water bottle. In 7-eleven he finds mineral water for $2.25.

D. Anna needs a new pair of earrings and she is thinking to pay $20 for it. She goes to a fashion jewelry store and finds one pair she likes for $35. She declines to purchase it.

Answer 1

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The consumer surplus is the difference between the price that a consumer is willing to pay and a consumer actually pays.

Situation A)

Peter is willing to pay up to $20 and actually pays after getting a discount of 50% is 20*0.5=$10. So,

Consumer surplus = 20-10 = $10.

Situation B)

Maria is willing to pay upto $10 and she is actually pays $10 for a copy of Nirvana's Greatest Hits. So, Consumer surplus will be zero.

Consumer surplus = 10-10 =$0

Situation C)

Ben is willing to pay $4 for a cold mineral water bottle and he finds mineral water for $2.25. So,

Consumer surplus = 4-2.25 = $1.75

Situation D)

Anna is willing to pay $20 for a new pair of earrings and finds the pair for $35. She is getting negative consumer surplus of $20 - $35 = - $15 if she purchase it. So, she will decline to purchase it.