Question

You are thinking about renting a room in a house next year with three of your friends. For each month's rent, you are willing to pay $435, your first friend is willing to pay $400, your second friend is willing to pay $560, and your third friend is willing to pay $460. The landlord agrees to offer each of you separate leases but will charge you all the same price: $400. You decide this is a good deal, so you and your friends move in. A couple of months later, you learn from someone who knows the landlord that he would have been willing to rent each room for $350 per month. 1. What is the amount of producer surplus per month?$ 2. What is the amount of total consumer surplus per month? $ 3. What is the amount of total surplus each month? $

Answer 1

Answer:

1. $200

2. $255

3. $455

Explanation:

Producer surplus is the difference between the least price a producer is willing to sell his product and the price of the good.

Producer surplus = price - least price of the product

 $400 - $350 = $50

$50 × 4 = $200

Consumer surplus is the difference between the willingness to pay of a consumer and the price of the good.

Consumer surplus = highest amount a consumer would be willing to pay - price

Consumer surplus for me =  $435 -  $400 = $35

Consumer surplus for the first friend =  $400 -  $400 = 0

Consumer surplus for the second friend =  $560 - $400 = $160

Consumer surplus for the third friend = $460 - $400 = $60

Total surplus = consumer surplus + producer surplus

Total consumer surplus = $60 + $160 + 0 + $35 = $255

Total surplus = $255 + $200 = $455

I hope my answer helps you