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Homework answers / question archive / Consumer and Producer Surplus Suppose Brian is the only seller in the market for bottled water and Tim is the only buyer
Consumer and Producer Surplus
Suppose Brian is the only seller in the market for bottled water and Tim is the only buyer. The following lists show the value Tim places on a bottle of water and the cost Brian incurs to produce each bottle of water:
Tim's Value Value of first bottle: $10 Value of second bottle: $7 Value of third bottle: $3 Value of fourth bottle: $1
Brian's Costs Cost of first bottle: $1 Cost of second bottle: $3 Cost of third bottle: $7 Cost of fourth bottle: $10
The following table shows their respective supply and demand schedules:
Price Quantity Demanded Quantity Supplied
$1 or less
4 0
$1 to $3
3 1
$3 to $7
2 2
$7 to $10
1 3
More than $10
0 4
Use Brian's supply schedule and Tim's demand schedule to find the quantity supplied and quantity demanded at prices of $2, $6, and s9. Enter these values in the following table.
Price 2 6 9
Quantity Demanded Quantity Supplied
A price of ? brings supply and demand into equilibrium.
At the equilibrium price, consumer surplus is
s
, producer surplus is IS I, and total surplus is
If Brian produced and Tim consumed one less bottle of water, total surplus would ? .
If instead, Brian produced and Tim consumed one additional bottle of water, total surplus would ? .
|
Price |
Quantity Supplied |
Quantity Demanded |
|
2 |
1 |
3 |
|
6 |
2 |
2 |
|
9 |
3 |
1 |
The above table is filled with the help of the demand and supply schedules of Person Brain and Person DTim
The price at which the demand and supply intersect is the equilibrium price. The quantity at this level is the equilibrium quantity.
The point where the price intersects the demand curve, is the quantity demanded.
The point where the price intersects the supply curve, is the quantity supplied.
Therefore,
At the price of $6, the supply and demand bring the economy into equilibrium.
Consumer surplus is the willingness to pay minus the price paid for the product.
Calculate the consumer surplus as follows:
Consumer Surplus = (10 - 6) * 1 + (7-6)*1 = $5
Calculate the producer surplus as follows:
Producer Surplus = (6 - 1)*1 + (6-3)*1 = $8
Total surplus is the sum of the consumer and producer surplus.
Total Surplus = Consumer Surplus + Producer Surplus =$5+$8 = $13
Therefore, at the equilibrium price, consumer surplus is $5. producer surplus is $8, and total surplus is $13.
If Person Brain produced and Person Tim consumed one less bottle, then:
Consumer Surplus = $10-$6 = $4
Producer Surplus = $6 - $1 = $5
Total Surplus = Consumer Surplus + Producer Surplus =$4 + $5 = $9
Therefore, if Person Brain produced and Person Tim consumed one less bottle, then total surplus would be $9.
If Person Brain produced and Person Tim consumed one additional bottle, then:
Consumer Surplus = Surplus from the first 2 bottles + Surplus from the third bottle
=$5+($3-$6) = $2
Producer Surplus = Surplus from the first 2 bottles + Surplus from the third bottle
= $8 +($6-$7)= $7
Total Surplus = Consumer Surplus + Producer Surplus
=$2 + $7 =$9
Therefore, if Person Brain produced and Person Tim consumed one additional bottle, then total surplus would be $9.
Thus, if Person Brain produced and Person Tim consumed one less bottle, total surplus would fall
Thus, if Person Brain produced and Person Tim consumed one additional bottle, total surplus would fall
