Question

Suppose that Michelle buys a cappuccino from Paul's Cafe and Bakery for $4.25 . Michelle was willing to pay up to $7.75 for the cappuccino and Paul's Cafe and Bakery was willing to accept $0.75 for the cappuccino. Based on this information, answer the questions.
(a) Michelle's consumer surplus: $ ____
(b) Paul's Cafe and Bakery's producer surplus: $ ____

Answer 1

Answer:

a. Michelle's consumer surplus: $3.5

b. Paul's Cafe and Bakery producer surplus: $3.5

Explanation:

This one is simple I attached a graphic so you can understand me better:

The consumer surplus is just the difference between the price payed and the price willed to pay by the consumer, in this case the price payed was $4.25 but Michelle was willing to pay up to $7.75 so we just substract this numbers

7.75 - 4.25 = 3.5

Same for the producer surplus which is the difference between the price the consumer pay and the price that the producer was willing to accept.

4.25 - 0.75 = 3.5