Question

Use the following graph of the lawn mower market to answer the next 12 questions. Lawn Mowers S400 320 220 160 80 40 - 400 900 1200 1600 1800 2000 2800 Q

What is the value of the maximum gains from trade?

Hint: enter a number only with no $ sign or comma

Example: if the answer is $300,000, enter 300000

Answer 1

The combined surplus is the gains from the trade that is both the consumer and the producer surplus. The producer surplus is the area above the supply curve and below the price line and consumer surplus is the area below the demand curve and above the price line. The total surplus is maximized at the equilibrium here the equilibrium would be at the price of 160, so we calculate both the consumer and the producer surplus and we add them.

Consumer surplus $=1/2\times 1200\times 240$

$=1/2\times 288000$

  $=144000$.

Producer surplus $=1/2\times 1200\times 120$ .

  $=1/2\times 144000$

$=72000$

Ans: Total surplus( gains from trade)

$=72000+144000$

  $=216000$

$216000$