Concert tickets sell for $50. Buyer A would have paid $120, Buyer B would have paid $70, and Buyer C would have paid $50. What is the total consumer surplus?
A$240 — the sum of all buyers' maximum willingness to pay
B$90 — the sum of the differences between each buyer's maximum willingness to pay and the actual price
C$70 — only buyers who would have paid more than the price earn surplus
D$50 — consumer surplus equals the market price
Consumer surplus is each buyer's maximum willingness to pay minus the actual price paid, summed across all buyers. Buyer A: $120 − $50 = $70. Buyer B: $70 − $50 = $20. Buyer C: $50 − $50 = $0 (pays exactly their willingness to pay). Total = $70 + $20 + $0 = $90. Buyer C earns no surplus because they valued the ticket at exactly the market price. The total reflects the aggregate benefit buyers receive above what they paid.
Question 2 Multiple Choice
A government imposes a price ceiling below the market equilibrium price, intending to help consumers. What happens to total surplus?
ATotal surplus increases because consumers pay less
BTotal surplus is unchanged — it is simply redistributed from producers to consumers
CTotal surplus decreases because some mutually beneficial trades no longer occur
DTotal surplus increases because more consumers can now afford the good
A price ceiling below equilibrium reduces quantity supplied below the equilibrium quantity. This means some buyers who would willingly pay the equilibrium price and some sellers who would willingly sell at that price never transact — these are mutually beneficial trades that don't happen. The surplus from those missing transactions (the deadweight loss triangle) is destroyed, reducing total surplus. While consumer surplus may increase for buyers who successfully purchase at the lower price, the shrinkage of total trades creates a net welfare loss.
Question 3 True / False
Producer surplus is equivalent to the profit that producers earn from selling in the market.
TTrue
FFalse
Answer: False
Producer surplus is the difference between the price received and the minimum price the seller would accept (their marginal cost). It does not account for fixed costs. A firm might earn high producer surplus but still run a loss if its fixed costs are large enough. Producer surplus is a measure of variable-cost gains from trade, not accounting profit. This distinction matters in welfare analysis — a firm could have zero profit but still generate positive producer surplus contributing to total social welfare.
Question 4 True / False
At competitive market equilibrium, total surplus — the sum of consumer and producer surplus — is maximized. Any price above or below equilibrium reduces total surplus.
TTrue
FFalse
Answer: True
Competitive equilibrium is the price where all mutually beneficial trades occur — every buyer whose willingness to pay exceeds the seller's minimum cost completes a transaction. Any deviation from this price eliminates some of those trades: a price floor above equilibrium discourages buyers, a price ceiling below equilibrium discourages sellers. The transactions that don't happen represent destroyed surplus — welfare gains that could have existed but don't. This is the deadweight loss, and it makes equilibrium the unique welfare-maximizing price.
Question 5 Short Answer
Why does a price floor above market equilibrium create deadweight loss? Explain using the concept of mutually beneficial trades.
Think about your answer, then reveal below.
Model answer: A price floor above equilibrium means sellers want to sell at the higher price, but some buyers — those whose willingness to pay is between the equilibrium price and the floor — are priced out and don't buy. These buyers and sellers could both benefit from transacting at the equilibrium price, but the floor prevents it. The surplus those trades would have generated is simply lost — it is neither captured by buyers nor sellers.
The welfare loss is not a redistribution — it is destruction. At equilibrium, every trade where buyer value exceeds seller cost occurs. The price floor preserves the high-surplus trades but eliminates the marginal ones where buyer value exceeds seller cost but falls below the floor. The value of those unmade trades is the deadweight loss triangle between the supply and demand curves, from the floor price down to the equilibrium. Understanding deadweight loss as 'surplus that would exist but doesn't' is the foundation for evaluating any market intervention.