Question

Andrew paid $30 to buy a potato cannon, a cylinder that shoots potatoes hundreds of feet. He was willing to pay $45. When Andrew's friend Nick learns that Andrew bought a potato cannon, he asks Andrew if he will sell it for $60, and Andrew agrees, since he would have sold it for $45. Nick is thrilled, since he would have paid Andrew up to $80 for the cannon. Andrew is also delighted. What is the total surplus generated from Andrew’s sale to Nick?

Answer 1

The total surplus from Andrew's sale to Nick is $35.

Step-by-step explanation:

The total surplus is the sum of producer surplus and consumer surplus.

The consumer surplus is the difference between the maximum price a consumer is willing to pay for a product and the price he/she actually has to pay.

While producer surplus is the difference between the minimum price a producer is willing to accept for a product and the price he/she actually gets.

Consumer surplus for Nick

= $80 - $60

= $20

Producer surplus for Andrew

= $60 - $45

= $15

Total surplus from generated from Andrew's sale to Nick

= $20 + $15

= $35