Question

6. Below is the market for milk. Use this graph to answer the following questions about welfare economics Price Supply $1 Quantity a. Calculate the Consumer Surplus and the Produce Surplus. What are they? b. What is the total surplus/welfare for this market?

Answer 1

Answer
a)
Consumer surplus is the difference between what maximum consumer want to pay and what it pays.
So it is the area below the demand curve and above price
the market is in equilibrium at Qd=Qs
where
P=2 and Q=20
CS=0.5*(Y-axis intercept fo the demand curve -P)*Q
=0.5*(6-2)*20
=$40

Producer surplus is the difference between what minimum producer want to accept and what it accepts.
The area is below the price and above the supply curve
PS=0.5*P*Q=0.5*2*20
=$20
the consumer surplus is $40 and the producer surplus is $20
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b)
total surplus is the sum of consumer and producer surplus
Total welfare =40+20=$60