Suppose the market for watermelons can be described by the g

Suppose the market for watermelons can be described by the graph below.

a. If Jon is willing to pay as much as $8 for a watermelon, how much surplus would he receive if he pays the market price for a watermelon?

b. Suppose Figgy Farms requires at least $5 per watermelon to be willing to sell in this market. What is Figgy\'s producer surplus for one watermelon in this market?

c. How much total consumer surplus is received in this market?

d. How much total producer surplus is received in this market?

What is the total surplus (combined consumer and producer surplus) in the market?

Solution

a)

Consumer surplus is the difference between the

maximum Jon is willing to pay and the price he

actually pays. The equilibrium price in this market

is $6, so his consumer surplus is $2. $2 = $8 – $6

b)

Producer surplus is the difference between the

market price and the minimum a seller requires to

offer the product for sale. In this case, Figgy\'s

producer surplus is $6 – $5 = $1.

c)

Total consumer surplus is the area below the

demand curve but above the market price. The

area of this triangle on the graph is ½ x ($11 – $6)

x 200 = $500.

d)

Total producer surplus is the area above the

supply curve but below the market price. The area

of this triangle on the graph is ½ x ($6 – $4) x 200

= $200.

e)

The total surplus is the sum of consumer and

producer surplus, or $500 + $200 = $700