Question

Caroline sharpens knives in her spare time for extra income. Buyers of her service are willing to pay $2.95 per knife for as many knives as Caroline is willing to sharpen. On a particular day, she is willing to sharpen the first knife for $2.00, the second knife for $2.25, the third knife for $2.75, and the fourth knife for $3.50. Assume Caroline is rational in deciding how many knives to sharpen. Her producer surplus is:_______.
a. $1.85.
b. $0.95.
c. $1.15.
d. $1.30.

Answer 1

Answer:

A. $1.85

Explanation:

Producer surplus is the difference between how much an individual is willing to sell a good and how much they sell it at prevailing market prices.

Given that

Buyers are willing to pay = $2.95

Willing to sharpen 1st knife = $2.00

2nd knife = $2.25

3rd knife = $2.75

4th knife = $ 3.50

Therefore

Producer surplus = (2.95 - 2.00) + (2.95 - 2.25) + (2.95 - 2.75)

= 0.95 + 0.7 + 0.2

= $1.85

Note, the 4th knife is not included because what she's willing to collect is greater than what the buyer is willing to offer. So transaction doesnt take place.