Gehrig is willing to pay $90 for a cap made of pure Irish wool. Suppose he finds such a cap for $71 on eBay. If Gehrig buys the cap, he will have an individual consumer surplus of $71. True False
The correct answer and explanation is:
Correct Answer: False
Explanation:
The statement is False. Consumer surplus is the difference between the maximum price a consumer is willing to pay for a good or service and the actual price they pay. It represents the economic benefit a consumer receives because they were able to purchase something for less than its maximum perceived value to them.
In this specific scenario:
- Gehrig’s Willingness to Pay (maximum price he would pay) = $90
- Actual Price Paid = $71
To calculate Gehrig’s individual consumer surplus, we use the formula:
Consumer Surplus = Willingness to Pay – Actual Price Paid
Plugging in the numbers:
Consumer Surplus = $90 – $71 = $19
Therefore, if Gehrig buys the cap for $71, his individual consumer surplus is $19, not $71. The
71isthepricehepaidforthecap,whichissubtractedfromhismaximumwillingnesstopay(71 is the price he paid for the cap, which is subtracted from his maximum willingness to pay (71isthepricehepaidforthecap,whichissubtractedfromhismaximumwillingnesstopay(
90) to determine the surplus ($19). The surplus represents the $19 benefit or “saving” he received by purchasing the cap for less than he was willing to spend.