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

Question

3. 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 concept of consumer surplus is being applied to Joe here. Consumer surplus is the difference of what the consumers are willing to pay for a commodity less what they actually end up paying.

In this case, Joe had a high willingness to pay for that particular disk, but what he actually pays is less than his willingness and thus he gains surplus of it.

However, if the disk was priced equal to his willingness, hw would buy it but would gain no surplus. If the disk was priced any above his willingness to pay, he would rather not buy it than to get dissatisfaction. Joe would pay only upto his highest willingness.

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