Alice, Amber, and Andi make and sell pottery. Alice is willing to sell a 5 inch pot for $35, Amber is willing to sell a 5 inch pot for $38, and Andi is willing to sell a 5 inch pot for $68. If each of the ladies is able to sell one 5 inch pot for $70, what is their combined producer surplus? Number If the price of a 5 inch pot is $45, which of the ladies will sell their pots?

a. Alice only

b. Alice and Amber

c. Alice, Amber, and Andi

d. Andi only

The answers are:

1. combined producer surplus = $69

2. Alice and Amber (b)

Explanation:

A producer surplus is the difference between how much a producer sells a product in the market, and how much he is willing to sell the product for, if the market price is higher than the price he was willing to sell the product for.

The combined producer surplus of the ladies is the sum of their individual producer surpluses, and it is calculated as follows;

Alice: willing price = $35, market price = $70, therefore surplus

= 70 - 35 = $35

Amber: willing price = $38, market price = $70, ∴ surplus = 70 - 38 = $32

Andy: willing price = $68, market price = $70, ∴ surplus = 70 - 68 = $2

Combined producer surplus = 35 + 32 + 2 = $69

b. In this case the price of the 5 inch pot in the market is $45, Alice and Amber will sell their pots because the price in the market exceeds their willing price of $35 and $38 respectively and they will make producer surpluses of $10 and $7 respectively, but Andi on the other hand will not sell her pot because if she does, she will make a loss, as her willing price is $68 and the market price is $45, if she goes ahead to sell she will incur a loss of $23.

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