Bundle: Essentials Of Economics, 8th + Mindtap Economics, 1 Term (6 Months) Printed Access Card
Bundle: Essentials Of Economics, 8th + Mindtap Economics, 1 Term (6 Months) Printed Access Card
8th Edition
ISBN: 9781337378833
Author: N. Gregory Mankiw
Publisher: Cengage Learning
Question
Book Icon
Chapter 7, Problem 1CQQ
To determine

The consumer surplus and the producer surplus.

Expert Solution & Answer
Check Mark

Answer to Problem 1CQQ

Option 'a' is correct.

Explanation of Solution

The equilibrium price is determined by the demand for the cost and the supply of cost, normally. The consumer surplus can be explained as the difference between the highest price that the consumer is willing to pay and the actual price that the consumer pays. The difference between these two prices is known as the surplus to the consumer. The producer surplus is the difference between the minimum willing to accept price by the seller and the actual price that the seller receives for the commodity.

The maximum willing to pay price by the consumer for the massage here is $300. The actual price that the consumer pays after the negotiation between the two is $200. Since the difference between the maximum willing to pay price and the actually paying price is the consumer surplus, it can be calculated as follows:

Consumer surplus=Maximum willing to pay priceActually paying price=300200=100

Thus, the consumer surplus is $100.

Similarly, the minimum willing to accept price by the massager is $60 per hour and she spends 2 hours for the service, which totally costs $120, minimum. But the actual amount received by her is $200; this difference between the actual price received by the seller and the minimum willing to accept price is the producer surplus, which can be calculated as follows:

Producer surplus=Actually received priceMinimum willing to accept price=200(60×2)=200120=80

Thus, the producer surplus is $80.

Option (a):

Here, the consumer surplus is $100 from receiving the massage from the producer and the producer surplus is $80 by providing the massage service to the consumer. The difference between the consumer surplus and the producer surplus is $20. This means that the consumer surplus is higher than the producer surplus by $20 and hence, option 'a' is correct.

Option (b):

Here, the consumer surplus is $100 from receiving the massage from the consumer and the producer surplus is $80 by providing the massage service to the consumer. This means that the consumer surplus is higher than the producer surplus by only $20. But the given value in option 'b' is $40, which is twice the actual value. Thus, option 'b' is incorrect.

Option (c):

The consumer surplus is $100 from receiving the massage from the consumer and the producer surplus is $80 by providing the massage service to the consumer. This means that the consumer surplus is higher than the producer surplus by $20. Option 'c' points that the producer surplus is higher than the consumer surplus by the value of $20, which is inverse to the actual situation. Thus, option 'c' is incorrect.

Option (d):

The consumer surplus is $100 from receiving the massage from the producer and the producer surplus is $80 by providing the massage service to the consumer. The difference between the consumer surplus and the producer surplus is $20. The consumer surplus is $20 more than the producer surplus. Since option 'd' argues that the producer surplus is $40 larger than the consumer surplus, option 'd' is incorrect.

Economics Concept Introduction

Concept introduction:

Consumer surplus: It is the difference between the highest willing to pay price of the consumer and the actual price that the consumer pays.

Producer surplus: It is the difference between the lowest willing to accept price by the producer and the actual price that is received by the producer.

Equilibrium price: It is the market price determined by equating the supply to the demand. At this equilibrium point, the supply will be equal to the demand and there will be no excess demand or excess supply in the economy. Thus, the economy will be at equilibrium.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
What are the answers for a,b,c,d? Are they supposed to be numerical answers or in terms of a variable?
Sue is a sole proprietor of her own sewing business. Revenues are $150,000 per year and raw material (cloth, thread) costs are $130,000 per year. Sue pays herself a salary of $60,000 per year but gave up a job with a salary of $80,000 to run the business. ○ A. Her accounting profits are $0. Her economic profits are - $60,000. ○ B. Her accounting profits are $0. Her economic profits are - $40,000. ○ C. Her accounting profits are - $40,000. Her economic profits are - $60,000. ○ D. Her accounting profits are - $60,000. Her economic profits are -$40,000.
Select a number that describes the type of firm organization indicated. Descriptions of Firm Organizations: 1. has one owner-manager who is personally responsible for all aspects of the business, including its debts 2. one type of partner takes part in managing the firm and is personally liable for the firm's actions and debts, and the other type of partner takes no part in the management of the firm and risks only the money that they have invested 3. owners are not personally responsible for anything that is done in the name of the firm 4. owned by the government but is usually under the direction of a more or less independent, state-appointed board 5. established with the explicit objective of providing goods or services but only in a manner that just covers its costs 6. has two or more joint owners, each of whom is personally responsible for all of the partnership's debts Type of Firm Organization a. limited partnership b. single proprietorship c. corporation Correct Number
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
Essentials of Economics (MindTap Course List)
Economics
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
MACROECONOMICS FOR TODAY
Economics
ISBN:9781337613057
Author:Tucker
Publisher:CENGAGE L
Text book image
Micro Economics For Today
Economics
ISBN:9781337613064
Author:Tucker, Irvin B.
Publisher:Cengage,
Text book image
Economics For Today
Economics
ISBN:9781337613040
Author:Tucker
Publisher:Cengage Learning
Text book image
Economics (MindTap Course List)
Economics
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Cengage Learning
Text book image
Macroeconomics
Economics
ISBN:9781337617390
Author:Roger A. Arnold
Publisher:Cengage Learning