Dan owns an autographed copy of a Brittany Spears CD that he values at $100. If he sells the CD at the garage sale he's planning to hold in a few weeks, it will be sold to a buyer with a reservation price of $175. If he sells it on eBay, it will be sold to a buyer with a reservation price of $500. eBay will charge Dan $50 to auction the CD, which just covers eBay's opportunity cost of running the auction. Relative to selling the CD at his garage sale, auctioning the CD on eBay will lead:
A)to no change in total economic surplus.
B)total economic surplus to increase by $500.
C)total economic surplus to increase by $275.
D)total economic surplus to increase by $100.

Question

Quizplus · Accepted Answer

If Dan sells the CD at his garage sale, then total economic surplus will be $75 (= $175 - $100). If Dan sells the CD on eBay, then total economic surplus will be $350 (= $500 - $100 - $50). Thus, if Dan sells the CD on eBay, total economic surplus will increase by $275 (= $350 - $75).

Dan Owns an Autographed Copy of a Brittany Spears CD