1. April, Barbara, and Cathy are considering whether or not to purchase tickets

Question

1. April, Barbara, and Cathy are considering whether or not to purchase tickets to see the musical Wicked. April would pay as much as $75, Barbara would pay as much as $55, and Cathy would pay as much as $40 for a ticket. If the actual price is $45, how much consumer surplus is created when all three women purchase their tickets? 2. If government takes no action in response to a negative externality, is it likely that this activity will take place more or less than the socially optimal amount? 3. Assume a seller would be willing to accept a price as low as $100 each for 5 machines, but the buyer offers a price of $150 each, which the seller accepts. Calculate producer surplus in this example: 4. Use the graph below to answer the question: Calculate consumer surplus in this market assuming the price of the product is $4:

Explanation / Answer

1. Consumer surplus is the difference between the maximum price we are willing to pay for a good or service and the price we actually pay for the same.

April's consumer surplus = $75 - $45 = $30.

Barbara's consumer surplus = $55 - $45 = $10

Cathy's consumer surplus = $40 - $45 = -$5

So, the total consumer surplus = $30 + $10 + (-$5) = $40 - $5 = $35.

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