Answer to Question #88473 in Microeconomics for Tinah

Question

There are five potential suppliers of a therapeutic massage. Sally, Simon, Sonia, Stewart and Sam are each willing to provide one therapeutic massage. Their respective opportunity costs are: $1, $3, $5, $7, and $9. There are five potential consumers of a therapeutic massage. Cath, Colin, Chloe, Chris and Cassie are each willing to purchase one massage. Their respective willingness to pay is: $16, $13, $10, $7 and $4. In a competitive equilibrium, what is the price of a massage? Who will buy a massage and who will sell a massage? What is the total surplus, consumer surplus and producer surplus? Illustrate your answer with a diagram.

Answer 1

In a competitive equilibrium the price of a massage is $7. Cath, Colin, Chloe, Chris will buy a massage and Sally, Simon, Sonia, Stewart will sell a massage.

The total surplus is:

TS = 0.5×(16 - 1)×4 = 30.

Consumer surplus is:

CS = 0.5×(16 - 7)×4 = 18.

Producer surplus is:

PS = TS - CS = 30 - 18 = 12.