Chapter 4, Problem 4P

To determine

1. In an auction, potential buyers compete for a good by submitting bids. Adam Galinsky, a social psychologist at Northwestern University, compared eBay auctions in which the same good was sold. He found that, on average, the larger the number of bidders, the higher the sales price. For example, in two auctions of identical iPads, the one with the larger number of bidders brought higher selling price. According to Galinsky, this explains why seller on eBay set absurdly how opening prices (the lowest price that the seller will accept), such as 1 cent for a new ipad. Use the concept of consumer and producer surplus to explain Galinsky’s reasoning.
2. You are considering selling your first car. If the car is in good condition, it is worth a lot, if it is in poor condition, it is useful only as scrap. Assume that your car is in excellent condition but that it cost a potential buyer $40 for a CARFAX report to determine the car’s condition. Use what you learned in part a to explain whether or not you should pay for the CARFAX report and share the results with all interested buyers.

(a)

Use the concept of consumer and producer surplus to explain Galinsky’s reasoning.

(b)

Whether the consumer should pay $40 for CARFAX report and share the result?

Concept Introduction:

Consumer Surplus:

It is defined as the difference between consumer’s willingness to pay and how much does a consumer pay for the goods and services. It is the area above the price level and below the demand curve.

Producer Surplus:

It is defined as the difference between the amount a producer of a good receives and the minimum amount the producer is willing to accept for the good. It is the area below the price level and above the supply curve.