You are thinking about renting a room in a house next year with three of your fr

Question

You are thinking about renting a room in a house next year with three of your friends. For each month’s rent, you are willing to pay $530, your first friend is willing to pay $500, your second friend is willing to pay $560, and your third friend is willing to pay $560. The landlord agrees to offer each of you separate leases but will charge you all the same price: $500.

You decide this is a good deal, so you and your friends move in. A couple of months later, you learn from someone who knows the landlord that he would have been willing to rent each room for $450 per month.

Explanation / Answer

ANSWER:

1) Producer surplus per month = no of persons renting the house * ( price charged by landord from each person - price of the room that landord was willing to rent for)

producer surplus per month = 4 * ( 500 - 450) = 4 * 50 = $200

2) Consumer surplus per monrth = (price that i am willing to pay - price at which room is leased) + (price 1st friend is willing to pay - price at which room is leased) + (price 2nd friend is willing to pay - price at which room is leased) + (price 3rd friend is willing to pay - price at which room is leased) = ( $530 - $500) + ( $500 - $500) + ($560 - $500) + ($560 - $500) = $30 + $0 + $60 + $60 = $150

3) total surplus per month =  Producer surplus per month + Consumer surplus per monrth = $200 + $150 = $350

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