Consumer Surplus: Capturing Value Below the Surface

How can we calculate the consumer surplus when a binding price ceiling is imposed?

Calculate the consumer surplus if the government imposes a binding price ceiling at a price of $32.

Consumer Surplus Calculation with Binding Price Ceiling

The consumer surplus is $32.56 when a binding price ceiling of $32 is imposed.

Consumer surplus is a key concept in economics that measures the benefit consumers receive from purchasing a good at a price lower than their willingness to pay. When a binding price ceiling is imposed by the government, it creates a situation where the price of the good is capped at a certain level, leading to potential effects on consumer surplus.

In this case, the demand curve equation is given as MC=20+0.90 and the willingness to pay (WTP) equation is WTP=300-0.3. To calculate the consumer surplus with a binding price ceiling at $32, we need to find the area between the demand curve and the price ceiling.

At the price of $32, we can determine the quantity demanded by equating the price to the willingness to pay equation: 32 = 300 - 0.3Q. Solving for Q gives us Q = (300 - 32) / 0.3 = 890.

The consumer surplus is then calculated as the area between the demand curve and the price ceiling up to the quantity of 890. By subtracting the area under the demand curve up to Q = 890 from the total area under the demand curve up to Q = 890, we can find the consumer surplus. Using the formula for the area of a triangle, we get (1/2) * (32 - 20) * 890 = 4980.

Converting this to a decimal, the consumer surplus is $32.56. This indicates that consumers are able to capture additional value by purchasing the good at a lower price due to the binding price ceiling.