Bae is willing to pay up to $160 for a particular pair of boots. She is able to buy the boots for $120. The marginal cost of producing the boots is $70. How large is the economic surplus associated with her purchase of the boots?
A)$40
B)$50
C)$90
D)$120

Question

Quizplus · Accepted Answer

The economic surplus is the difference between the maximum amount a buyer is willing to pay for a good and the amount that the seller actually receives. To calculate the economic surplus, we first need to determine the value that Bae places on the boots:

Value to Bae = $160 (the most she's willing to pay)

Next, we subtract the price she actually pays from the value she places on the boots:

Value to Bae - Price Paid = Economic Surplus
$160 - $120 = $40

However, we also need to take into account the marginal cost of producing the boots. The marginal cost is the additional cost incurred by producing one more unit of the good. In this case, since Bae is buying the boots that have already been produced, the marginal cost is not directly relevant to her purchase decision. But we can use it to calculate the producer surplus, which is the difference between the price the producer receives and the marginal cost:

Price Paid - Marginal Cost = Producer Surplus
$120 - $70 = $50

The economic surplus is the sum of the consumer surplus and producer surplus:

Economic Surplus = Consumer Surplus + Producer Surplus
$40 + $50 = $90

Therefore, the economic surplus associated with Bae's purchase of the boots is $90. The best choice is (C).

Bae Is Willing to Pay Up to $160 for a Particular