Exploring Surplus Value

11. The market for widgets has three potential buyers and three potential sellers. Once a person has a widget, there is no use for another. The willingness to pay and willingness to sell tables are as follows:

Potential Buyers

Highest price each will pay

Potential Sellers

Lowest price each will accept













a) If the price in this market is $55, will the market clear, or will there be potential transactions left that could make someone better off?
b) If the price of all transactions is known in the market, what will tend to happen to the price in this market if it begins at $55?
c) If the price in the market is $45, will the market clear? If knowledge of prices is known, what will happen to price?
d) If the price in the market is $50, will the market clear? What is the total surplus (producer plus consumer surplus) that exchange will generate?
e) If prices below $55 are illegal, how many will be exchanged? What is the largest the surplus can be with this price floor?
f) Could the three sellers get together and think of a way to make themselves better off by colluding? What would they do? What would happen to the surplus of the buyers? Of the sellers? To total surplus?
g) Suppose there are three hundred Jacks, Jims, Marks, etc. Will collusion be more or less likely than with there are only three buyers and three sellers? Explain.
h) Does the size of the surplus depend on whether the good being exchanged is socially acceptable or not? For example, if widgets are a form of pornography, do the answers change?

Ann is an artist who makes lovely pots from clay. Mike is a collector of fine pottery. Ann is not willing to make a pot unless she can sell it for at least $20. For anything less, she has more valuable things to do with her time. Mike would be willing to pay up to $120 for one of her pots. After some negotiation, they settle on a price of $75 and an exchange is made.

a) What is consumer surplus in this case? $

b) What is producer surplus? $

c) What is total surplus? $

Now let us see if we can translate these answers to areas on a graph. Below is a graph that illustrates the transaction above. If the answer combines more than one of the areas, enter all letters. For example, if the answer is area X and area Y, enter XY.

d) What area represents the total value that Mike receives?

e) What area represents the consumer surplus?

f) What area represents producer surplus?

g) What area represents total surplus?

h) What area represents cost of production?

i) What area represents the amount the buyer paid to the seller?

If we assume that there are many buyers like Mike, but each with a different maximum price he or she will pay, and that there are many sellers like Ann, but each with a different minimum that he or she will take, we will have a competitive market that can be represented with supply and demand curves. Suppose the graph below illustrates this market and that in equilibrium Q1 pots sell for price P1.
(Some of the answers have more than one area. In that case, enter the areas together--such as area ABD.)

j) In this market the amount buyers pay to sellers is area

k) In this market the producer surplus is area

l) In this market the consumer surplus is area

m) In this market the total value of Q1 units of output to consumers is area

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