Assume Felix is willing to par $8 for a Star Trek pizza cutter. Tim also wants one but would only be willing to pay $6 for it.
At a Star Trek convention,Felix manages to buy the last pizza cutter at the market price. In a strange twist of fate, however, the Star Trek fan club announces Tim to be the greatest fan of all time, takes the newly bought pizza cutter from Felix, refunds Felix, and lets Tim buy the cutter for $5. What happens as a result of this move?
a. consumer surplus decreases
b. producer surplus decreases
c. producer surplus increases
d. consumer surplus increases
d. consumer surplus increases
decrease cs
To determine what happens as a result of this move, let's first understand the concepts of consumer surplus and producer surplus.
Consumer surplus refers to the difference between the maximum price a consumer is willing to pay for a good and the actual price the consumer pays. It represents the additional benefit or value that the consumer receives from paying less than their maximum price.
Producer surplus, on the other hand, refers to the difference between the actual price a producer receives for a good and the minimum price they would be willing to accept. It represents the additional profit or benefit that the producer receives from selling the good at a higher price than their minimum acceptable price.
Now, let's analyze the given situation step by step:
1. Felix is willing to pay $8 for the pizza cutter but manages to buy it at the market price. Since Felix bought it at the market price, his consumer surplus would be $8 minus the actual price he paid, which is the market price.
2. However, the Star Trek fan club takes the newly bought pizza cutter from Felix and refunds him. This means Felix no longer owns the pizza cutter and consequently loses his consumer surplus.
3. The fan club then lets Tim buy the cutter for $5, which is $1 less than what he was initially willing to pay. Tim now owns the pizza cutter and gains a consumer surplus, which is the difference between his maximum price of $6 and the actual price he paid of $5.
Based on this analysis, we can conclude that the result of this move is:
a. Consumer surplus decreases
Because Felix loses his consumer surplus, while Tim gains a smaller consumer surplus than Felix's initial potential surplus.