Question

Given the following demand function: Q= 120-4P+0.01M, where M is income and stands at $400 and the prevailing market price is $10.
a) Calculate the consumer surplus in this market.
B) what is the market's willingness to pay.

Answer 1

a)

$Q=120-4P+0.01M\\ But\ P=10, M=400\\ \implies 120-4(10)+0.01(400)\\ =84\\ Now\ let's\ get\ the\ choke\ price;\\ let\ Q=0\\ \therefore\ 0=84-4P\\ P=21$

Then we now have a triangle with a height of $21-10=11\ and\ base is\ 84;\\$

Consumer surplus$=\frac{1}{2}*Height\ *Base\\$

$=\frac{1}{4}*11*84\\ =462$

The height shows the willingness to pay of 11.