Question

Suppose that Michelle buys a cappuccino from Paul's Cafe and Bakery for $ 6.25 . Michelle was willing to pay up to $ 8.25 for the cappuccino, and Paul's Cafe and Bakery was willing to accept $ 1.75 for the cappuccino. Based on this information, answer the questions..

a)Michelle\'s consumer surplus is equal to?
b) Paul\'s Bakery\'s producer surplus is equal to?

Answer 1

Answer:

a. $2

b. $4.5

Explanation:

The computation of the producer and consumer surplus is presented below:

a. The consumer surplus = Willing to pay - Market price  

                                          = $8.25 - $6.25

                                          = $2

b. Producer surplus = Market price -  willing to accept

                                  = $6.25 - $1.75

                                   = $4.5

Hence all the given information is to be considered.

Answer 2

a. The consumer surplus of Michelle is $2.

b. The producer surplus of Paul bakery is $4.5.

Consumer surplus is represented by determining the difference between consumers' willingness to pay for a product and the price paid for it actually by them. On the other hand, producer surplus shows the difference in market prices and actual prices received by the producers.

The consumer's willingness to pay is given as $ 8.25 producer's willingness is given $ 1.75. Finally, the price paid or market price is $ 6.25.

Now, the consumer surplus would be:

$8.25 - 6.25\\=2$

The producer surplus would be:

$6.25 - 1.75\\=4$

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