Question

Andy purchased a new drone last year for $1,200. He no longer wants it and wishes to sell the drone. He now values the drone at $400. Jeff wants to purchase a drone, and his willingness to pay is $800. Assume that Andy and Jeff agree on a price of $700 for the drone.

a. What is the producer surplus? $
b. What is the consumer surplus? $
c. What is the combined consumer and producer surplus from this transaction? $

Answer 1

Answer:

a. $300

b. $100

c. $400

Explanation:

The computation of the producer and consumer surplus is shown below:

a. Producer surplus = Market price or agreed price - Actual amount to sell the goods

= $700 - $400

= $300

b. And, the consumer surplus = Willing to pay - Market price  or agreed price

= $800 - $700

= $100

c. The combined consumer and the producer surplus is

= $300 + $100

= $400