Question

Owen is looking to sell his guitar for nothing less than $60. Suppose Shannon offers him $100, although she was willing to pay up to $130 for it. How much total value is created if Owen accepts this trade?

Answer 1

The total value created from Owen selling his guitar to Shannon for $100 is $70, consisting of a $40 producer surplus for Owen and a $30 consumer surplus for Shannon.

Step-by-step explanation:

Owen is looking to sell his guitar for no less than $60. Shannon offered him $100 for it, even though she was willing to pay up to $130. Total value is created when both the buyer and seller derive a surplus from a transaction, also known as consumer surplus and producer surplus. In this case, Owen is willing to sell the guitar for at least $60, but he sells it for $100, creating a producer surplus of $40 ($100 - $60). Conversely, Shannon was willing to pay $130, but only has to pay $100, so she gains a consumer surplus of $30 ($130 - $100). The total value created from this trade is the sum of the surpluses: $40 (Owen's surplus) + $30 (Shannon's surplus) = $70 total value created.

Answer 2

The total value created is $70

Step-by-step explanation:

In this scenario, the total value created is the total monetary benefit of a consumer and a producer with respect to the sale of a product. It therefore, is the sum of the consumer surplus and producer surplus. It is calculated as follows:

Consumer surplus = consumer's willing price - market price = 130 - 100 = $30

Producer surplus = market price - producer's willing price = 100 - 60 = $40

Therefore, total value created = 40 + 30 = $70