Question

Tom tunes pianos in his spare time for extra income. Buyers of his service are willing to pay $155 per tuning. One particular week, Tom is willing to tune the first piano for $120, the second piano for $125, the third piano for $140, and the fourth piano for $160. Assume Tom is rational in deciding how many pianos to tune. His producer surplus is

Answer 1

$80

Step-by-step explanation:

Tom will only tune pianos if the buyers' willingness to pay ($155) is higher than the amount he is willing to receive for each job.

Since Tom would require $160 to tune the fourth piano, which is higher than $155, he will only tune three pianos.

His total producer surplus is given by the sum of each piano's producer surplus, which are then defined as the difference between the amount paid for the service and the amount at which Tom values his service:

`S = S_1+S_2+S_3\\S = (155-120)+(155-125)+(155-140)\\S=\$80`

His producer surplus is $80.

Answer 2

Tom's producer surplus is $80.

Step-by-step explanation:

Producer surplus is difference between the amount a supplier is willing to supply a good or render a service and the amount the buyers in the market are willing to pay. This can be written as follows

Producer surplus = Market Price - Producer's reserved price .......... (1)

Equation (1) can now be used to calculate Tom's producer surplus for each of the piano he is willing to tune as follows:

First Piano's producer surplus = $155 - $120 = $35

Second Piano's producer surplus = $155 - $125 = $30

Third Piano's producer surplus = $155 - $140 = $15

Fourth Piano's producer surplus = $155 - $160 = -$5

Since the producer surplus for the four piano is negative and it is assumed that Tom is rational, he will tune the fourth piano. Tom will only tune the first three pianos and his total producer surplus will be the sum of his producer surplus from the first three pianos as follows:

Tom's Producer surplus = $35 + $30 + $15 = $80

Therefore, Tom's producer surplus is $80.