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
I think b if surplus is to represent money and not how many pizza cutters they have because they lost $3 if Felix paid $8 for it
a. consumer surplus decreases
a. Consumer surplus decreases
To determine what happens as a result of this move, we need to 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 product and the actual price they paid. It represents the extra value or benefit that the consumer receives from the product at a price lower than what they were willing to pay.
Producer surplus, on the other hand, is the difference between the market price of a product and the minimum price at which the producer is willing to sell the product. It represents the extra profit or benefit that the producer receives from selling the product at a price higher than their minimum acceptable price.
Now let's analyze the given situation:
1. Before the Star Trek fan club announcement, Felix bought the pizza cutter for the market price of $8. Since Felix was willing to pay $8 for the cutter, he received no consumer surplus.
2. After the announcement, the fan club takes the cutter from Felix and refunds him. Then they let Tim buy the cutter for $5, which is lower than both Felix's and Tim's maximum acceptable price.
Here's what happens:
- The consumer surplus for Tim increases as he was willing to pay $6 but only has to pay $5. He receives a benefit of $1 (6 - 5 = 1).
- However, Felix, who initially paid $8 for the cutter, does not receive any consumer surplus in this situation as he had to give back the cutter and get a refund.
Based on this analysis, the correct answer is:
d. consumer surplus increases