Selling a Drone: Producer and Consumer Surplus Explained

a. What is the producer surplus?

$

b. What is the consumer surplus?

$

c. What is the combined consumer and producer surplus from this transaction?

$

Answer

a. $300

b. $100

c. $400

In this economic transaction, the producer surplus, or Andy's profit, is $300. The consumer surplus, or Jeff's savings, is $100. The combined surplus from this sale is $400.

Explanation

In the described transaction, the producer surplus and the consumer surplus can be calculated as follows:

Producer surplus is the difference between the minimum price a producer is willing to sell a good for and the actual price they get. In this case, Andy valued the drone at $400 but sold it for $700. So, his producer surplus is $700 - $400 = $300.

Consumer surplus is the difference between the maximum price a consumer is willing to pay for a good and the actual price they pay. Jeff was willing to pay $800 for the drone but bought it for $700. So, his consumer surplus is $800 - $700 = $100.

The combined consumer and producer surplus is the sum of these two figures. Therefore, the surplus from this transaction is $300 (producer surplus) + $100 (consumer surplus) = $400.