Question

Suppose Sam buys a good for 100 at a yard sale. If consumer surplus from the sale is75, Sam would have been willing to pay:

1) equal to the deadweight loss.
2) $175.
3) $25.
4) $100.

Answer 1

Sam was willing to pay a total of $175 for the good, as consumer surplus is the difference between the maximum price he was willing to pay and the actual market price he paid.

Step-by-step explanation:

If Sam buys a good for $100 and the consumer surplus from the sale is $75, then Sam would have been willing to pay $175 for that good. This is because consumer surplus represents the difference between what consumers are willing to pay for a good based on the utility they expect to receive from it and the market price they actually pay. Understanding the demand curve and consumer surplus can help to conceptualize this.

The demand curve indicates consumers' willingness to pay for different quantities of a good, and consumer surplus is the area above the market price and below the demand curve. Hence, Sam's maximum willingness to pay minus the actual price (consumer surplus) gives us the total value that Sam would consider fair for the purchase.