Tailored Clothes Assume that you were ready to buy a custom tailored dress (or m
ID: 1197606 • Letter: T
Question
Tailored Clothes
Assume that you were ready to buy a custom tailored dress (or men’s suit) and you are prepared to pay up to $200 for it. Also assume that the tailor is prepared to sell that item of clothing for as little as $100.
When you arrive at the tailor shop, the posted price for the item is $150. Discuss how this scenario relates to producer and consumer surplus and how such surpluses, if any, affect buying and manufacturing decisions
Discuss any recent purchases you have made and for which you feel that a similar rationale seemed to be at work.
Explanation / Answer
Consumer is ready to pay more but the tailor is offering at a lower price. So, the tailor is losing an amount which is the consumer surplus 200-150 = 50. Tailor is selling at a price of $150. SO his surplus would be 150-100 = 50.
Consumer surplus is based on Law of diminishing marginal utility. A thirsty person can pay $10 dollars for a normal water bottle but a not-so thirsty person would pay nor more than $1.
It happens when there is no perfect information on market prices or when market prices tend to fluctuate in a high range. For eg, I see a vegetable, it's very fresh and healthy, I will be ready to pay $1 for that but the farmer says that it's available just for $0.5.
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