Question

Consider the market for socks. The current price of a pair of plain white socks is $5.00. Two consumers, Jeff and Samir, are willing to pay $7.25 and $8.00, respectively, for a pair of plain white socks. Two sock manufacturers are willing to sell plain white socks for as little as $4.00 and $4.15 per pair. What is the total producer and consumer surplus (i.e., social welfare) in this m

Answer 1

Answer:

$7.1

Explanation:

If the current price of a pair of plain white socks is $5.00. and two consumers, Jeff and Samir, are willing to pay $7.25 and $8.00, respectively, for a pair of plain white socks.

Two sock manufacturers are willing to sell plain white socks for as little as $4.00 and $4.15 per pair.

Then the total producer and consumer surplus (i.e., social welfare) will be:

1. Consumer surplus = the difference between the highest price a consumer is willing to pay and the actual market price of the good.

Therefore (7.25 + 8) - ($5 x 2 pairs) = $5.25

2. Producer surplus = the difference between the market price and the lowest price a producer would be willing to accept.

Therefore (4+4.15) - ($5 x 2 pairs) = $1.85

3. The total producer and consumer surplus = (5.25 + 1.85) = $7.1