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IAI Actuarial Core Principles · Business Economics · How competitive markets operate

In a market for scooters, the inverse demand curve is P = 100 - Q and the inverse supply curve is P = 20 + Q, where P is in thousands of rupees and Q in thousands of units. What is the total surplus (consumer plus producer) at the competitive equilibrium?

Total surplus is 1,600 in the stated units. Equilibrium occurs at quantity 40 and price 60. Consumer surplus is a triangle of 800 and producer surplus is a triangle of 800, so together they equal 1,600.

  1. ARs 800 thousand thousand (800 in these units)
  2. BRs 1,200 thousand thousand (1,200 in these units)
  3. CRs 1,600 thousand thousand (1,600 in these units)Correct
  4. DRs 3,200 thousand thousand (3,200 in these units)
  5. Rs 2,400 thousand thousand (2,400 in these units)

Explanation

Equilibrium: 100 - Q = 20 + Q gives Q = 40, P = 60. Consumer surplus = 0.5 x 40 x (100-60) = 800. Producer surplus = 0.5 x 40 x (60-20) = 800. Total = 1,600. Option A counts only one side's surplus.

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