Ivan has inherited his grandmother’s 1963 Chevrolet Corvette, which he values at $45,000. He decides that he might be willing to sell it so he posts it on Craigslist for $55,000. Samantha is interested and willing to pay up to $72,000. Would Ivan and Samantha want to voluntarily engage in trade? How much economic surplus is created for both of them as a result of this exchange? What is the total economic surplus?
The Correct Answer and Explanation is :
Yes, Ivan and Samantha would voluntarily engage in trade because there is a mutually beneficial opportunity. Ivan values the Corvette at $45,000, meaning that any price above this amount would make him better off. Samantha values the car at $72,000, so any price below this amount would make her better off. Since Ivan is selling it for $55,000, and Samantha is willing to pay up to $72,000, there is room for negotiation, and both parties can benefit.
Economic Surplus Calculation:
- Ivan’s Surplus (Producer Surplus): This is the difference between the selling price and Ivan’s valuation of the Corvette.
[
55,000 – 45,000 = 10,000
]
So, Ivan gains $10,000 in surplus. - Samantha’s Surplus (Consumer Surplus): This is the difference between Samantha’s valuation of the car and the price she actually pays.
[
72,000 – 55,000 = 17,000
]
So, Samantha gains $17,000 in surplus. - Total Economic Surplus: This is the sum of the producer surplus and consumer surplus.
[
10,000 + 17,000 = 27,000
]
Thus, the total economic surplus generated by this trade is $27,000.
Explanation:
Economic surplus represents the total benefit to society from an exchange. In this case, Ivan benefits by selling the car for more than he values it, while Samantha benefits by purchasing it for less than her maximum willingness to pay. Since both parties voluntarily agree to the transaction, it is an efficient outcome, maximizing total economic welfare. This concept is a fundamental principle in economics, demonstrating that trade creates value when there is a difference in willingness to pay and willingness to accept.
Now, I’ll generate an image representing the trade scenario between Ivan and Samantha.
Here is the generated image illustrating the trade scenario between Ivan and Samantha, featuring the 1963 Chevrolet Corvette and their transaction. Let me know if you need any modifications!