You are thinking about renting a room in a house next year with three of your friends. For each month's rent, you are willing to pay $580, your first friend is willing to pay $550, your second friend is willing to pay $560, and your third friend is willing to pay $610. The landlord agrees to offer each of you separate leases but will charge you all the same price: $550. You decide this is a good deal, so you and your friends move in. A couple of months later, you learn from someone who knows the landlord that he would have been willing to rent each room for $500 per month. a. What is the amount of producer surplus per month? b. What is the amount of the total consumer surplus per month? c. What is the total amount of surplus each month?

Solution:

1) Producer surplus per month = no of persons renting the house multiply (price charged by landord from each person - price of the room that landlord was willing to rent for)

producer surplus per month = 4 multiply (550 - 500) = 4 multiply 50 = $200

2) Consumer surplus per month = (price that i am willing to pay - price at which room is leased) + (price 1st friend is willing to pay - price at which room is leased) + (price 2nd friend is willing to pay - price at which room is leased) + (price 3rd friend is willing to pay - price at which room is leased) = ($580 - $550) + ($550 - $550) + ($610 - $550) + ($610 - $550) = $30 + $0 + $60 + $60 = $150

3) total surplus per month = Producer surplus per month + Consumer surplus per monrth = $200 + $150 = $350