Question

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Step by step , I am confused

For the demand curve shown, find the total amount of consumer surplus that results in the gasoline market if gasoline sells for $60 per gallon.

60 30 40 50 60 10 Quantity (1,000s of gallons/year)

Instruction:  Enter your response as a whole number.

Consumer surplus $ Per Year

Answer 1

Consumer Surplus:

Consumer surplus is the difference between the price consumer is willing to pay and the price charged for the unit of the good. The consumer willingness to pay is determined through the demand curve. That is each point on the demand curve gives consumers' willingness to pay. The market price is the price consumer charged for the good. The consumer surplus is the difference between these two prices.

Calculations:

The consumer surplus for a good transacted is calculated as the total of all the difference between willingness to pay and market price up to equilibrium quantity. Suppose a consumer is willing to pay $70 for 5th unit consumed and the market price is $60. Then the surplus the consumer acquired by consuming the fifth unit is $10. The total consumer surplus is the sum of all such surpluses until equilibrium is reached.

In case of a linear demand curve, the consumer surplus is the area of the triangle formed by equilibrium price line, price axis and the demand curve up to equilibrium quantity. In this case, the price line is $60. The consumer surplus is the area of the gray triangle in the figure below

Consumer Surplus 30 40 50 60 10 Quantity (1,000s of gallons/year)

Now the area of a triangle is

$\bigtriangleup=\frac{1}{2}\times \textup{height}\times \textup{base}$

The height of the gray triangle is (80-60)=20 and the base is (10-0)=10. Then the area is

$\bigtriangleup=\frac{1}{2}\times20\times 10=100$

Now the quantity axis is given in 1000s of a gallon. Then the equilibrium quantity is 10,000 gallon. Hence, the consumer surplus is $100,000.