Joe tells of the following story: \"I bought a couple of rare compact discs for

Question

Joe tells of the following story:

"I bought a couple of rare compact discs for $5 each from a local flea market. The guy obviously didn't know what they were worth as it was priced the same as his other discs. I actually told him that they are worth a lot more than what he was asking. I don't know if he thought I was messing with him but he snarkily replied: 'Mate, you're welcome to pay me more if you want to.'"

What economic idea do you think Joe is getting at here, relating to how he ends up paying less than the compact disc is worth to him? If Joe actually ended up paying more for the compact discs, do you think his actions would be consistent with our principle of maximization? Explain.   

Explanation / Answer

The consumer surplus is the difference between the price the consumer wants to pay for the commodity and the market price of the good summing over the quantity consumers buys. The price that the consumer is wants to pay is the demand price and the price the consumer ended up paying is the equilibrium or market price. The ability of a buyer or producer to extract the consumer surplus is called the market power.

The theory of profit maximization implies if a firm has market power then it can extract the consumer surplus as much as it wants. Then if the seller is aware of the market power he has, he would have charged more for the CDs, as much as the buyers wants to pay. This is exactly what is done in auction. So if the consumer ended up paying more, it would have been consistent with the principle of maximization.

Related Questions

Navigate

• Browse (All)
• Browse J
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.