Question

Jorge is willing and able to pay up to $25 for an authentic autograph of Michael Jordan that he buys for $20. Melissa requires a minimum price of $16 before she will sell the autograph to Jorge. In this situation, the consumer's surplus is _____ and the producer's surplus is ____.

Answer 1

Answer:

Consumer's surplus is $5 and the producer's surplus is $4.

Explanation:

1) Consumer surplus is the extra amount a consumer is willing to pay for a product above the price they actually do pay.

Consumer surplus = maximum price willing to pay – actual price

Maximum price willing to pay = $25

Actual price = $20

Consumer surplus = $25 – $20

Consumer surplus = $5

Therefore, the customer saved $5 as a consumer surplus which he/she can spend on some other goods or services.

2) Producer surplus is the difference between what price producers are willing and able to sell a good for and what price they actually receive from consumers (market price).

Producer surplus = Actual price – minimum price willing to accept

Actual price = $20

Minimum price willing to accept = $16

Producer surplus = $20 – $16

Producer surplus = $4.