1) Determine the amount of producer surplus generated in each of the following s
ID: 1112251 • Letter: 1
Question
1) Determine the amount of producer surplus generated in each of the following situations.
a. Gordon lists his old Lionel electric trains on eBay. He sets a minimum acceptable price, known as his
reserve price, of $75. After five days of bidding, the final high bid is exactly $75. He accepts the bid.
b.So-Hee advertises her car for sale in the used - car section of the student newspaper for $2,000, but she is willing to sell the car for any price higher than $1,500. The best offer she gets is $1,200, which she declines.
c.Sanjay likes his job so much that he would be willing to do it for free. However, his annual salary is $80,000
Explanation / Answer
Producer surplus (PS) = what producer receives minus his minimum acceptable price (i.e. reserve price)
a. Gordon’s PS = $75 - $75 = 0
b. This part is not very clear so we will answer it using some assumptions –
1. Assumption: So-hee declines the offer of $1200. In this case, the PS = 0 -1500 = -$1500 since she receives nothing for his car. This is the most appropriate in this case.
2. Assumption: If we consider $1200 as price to calculate producer surplus, then PS = 1200 – 1500 = -$300
c. Sanjay’s PS = 80,000 – 0 = $80,000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.