Melissa buys an iPhone for 240 and gets consumer surplus of

Melissa buys an iPhone for $240 and gets consumer surplus of $160. a. What is her willingness to pay? b. If she had bought the iPhone on sale for $180, what would her consumer surplus have been? c. If the price of an iPhone were $500, what would her consumer surplus have been?

Solution

Willingness to pay is the maximum amount a consumer can pay to acquire the ownership rights of a good, i.e., buying a good. The difference between what she is willing to pay and what she actually pays is the consumer surplus.

a) Now that Melissa buys an iPhone for $240, and gets consumer surplus of $160. This implies that her willingness to pay is 240 + 160 = $400.

b) Her willingness is still $400 but now she had bought the iPhone on sale for $180, therefore now her consumer surplus is $400 - $180 = $220.

c. If the price of an iPhone were $500, she would not have purchased it because the price is more than her maximum willgness to pay for it. Hence there is no consumer surplus in this case.