Question

Jen values her time at $60 an hour. She spends 2 hours giving Colleen a massage. Colleen was willing to pay as much at $300 for the massage, but they negotiate a price of $200. In this transaction, a. consumer surplus is $20 larger than producer surplus. b. consumer surplus is $40 larger than producer surplus. c. producer surplus is $20 larger than consumer surplus. d. producer surplus is $40 larger than consumer surplus.

Answer 1

Answer:

A. consumer surplus is $20 larger than producer surplus.

Explanation:

Before getting to the little mathematics attached to this, there's a few terms we need to establish.

1. Consumer Surplus - This is simply the difference in price between what consumers are willing to pay and what they end up paying.

2. Producer surplus - This is simply the difference in price between what a producer is willing to accept for a given good or services and how much they actually end up selling the goods for.

Having established those terms,

In this situation,

Consumer surplus = amount consumer is willing to pay - amount consumer pays

CS = 300 - 200

CS = 100

Producer surplus = Amount received - minimum amount producer is willing to receive

PS = 200 - ( 60× 2)

PS = 200 - 120

PS = 80

The difference between consumer surplus and producer surplus

= 100 - 80

= 20

Therefore, consumer surplus is larger than producer surplus by $20.