PERFORMANCE AND STRATEGY IN COMPETITIVE MARKETS
QUESTIONS AND ANSWERS
Your best income-earning opportunity appears to be an offer to work for a local
developer during the month of June and earn $2,000.
However, before taking the
job, you accept a surprise offer from a competitor.
If you actually earn $2,600
during the month, how much producer surplus have you earned?
Producer surplus is the amount a seller is paid minus the seller’s marginal cost
In this case, the opportunity cost of $2,000 is the relevant marginal
cost of deciding to work for the competitor, and producer surplus is the amount
received above and beyond that amount.
The amount received, $2,600, represents a
$600 premium over the amount that would have been received from your next-best
employment opportunity and represents the value of your producer surplus.
Assume that you are willing to pay $1,100 for a new personal computer that has all
the “bells and whistles.”
On the Internet, you buy one for the bargain price of
Unbeknownst to you, the Internet retailer’s marginal cost was only $750.
How much consumer surplus, producer surplus, and net addition to social welfare
stems from your purchase?
Consumer surplus is the amount that consumers are willing to pay for a good or
service minus the amount that they are required to pay.
Consumer surplus represents
value derived from consumption that consumers are able to enjoy at zero cost.
describes the net benefit derived by consumers from consumption, where net benefit
is measured in the eyes of the consumer.
If you are in the market for a new personal
computer and willing to pay up to $1,100, but you buy one for the bargain price of
$900, you realize consumer surplus of $200.
Consumer surplus represents the
difference between the price you were willing to pay and the price paid.
Whereas consumer surplus is closely related to the demand curve for a product,
producer surplus is closely related to the supply curve for a product.
surplus is the amount paid to sellers minus the cost of production.
It represents the
amount paid to sellers above and beyond the required minimum and is the net benefit
derived by producers from production.
If you paid $900 and the Internet retailer’s
marginal cost was $750, the amount of producer surplus is $150, or the difference