Question

A seller has two limited-edition wooden chairs, with the minimum price of $150 each. The table below shows the maximum price of four potential buyers, each of whom wants only one chair, Axe Bobby Carla Denzel $120 $220 $400 $100 If the two chairs are allocated efficiently, total economic surplus is equal to 5 Enter a numerical value. Do not enter the $ sign. Round to two decimal places if required

Answer 1

Answer: To allocate the two limited-edition wooden chairs efficiently and maximize total economic surplus, we should assign the chairs to the buyers who value them the most, up to the point where the price they are willing to pay equals or exceeds the minimum price of $150.

Given the maximum prices of the potential buyers, we can allocate the chairs as follows:

• Assign the chair to Carla for $150 (her maximum price).
  
  
• Assign the chair to Bobby for $150 (his maximum price).
  
  
• In this allocation, Axe and Denzel are not able to purchase a chair since their maximum prices are below the minimum price of $150.

To calculate the total economic surplus, we sum up the differences between the prices paid and the minimum price for each chair allocated:

Economic surplus = ($150 - $120) + ($150 - $220) = $30 + (-$70) = -$40

The total economic surplus in this allocation is -$40.