IAI Actuarial Core Principles · Business Economics · How competitive markets operate
The market demand for a policy-comparison service is P = 100 - Q and supply is P = 20 + Q, with P in rupees and Q in thousands of users. What is total surplus (consumer plus producer) at equilibrium?
Total surplus is Rs 1,600 thousand. Equilibrium is at quantity 40 and price 60. Consumer surplus is a triangle of 0.5 x 40 x 40 = 800, and producer surplus is also 0.5 x 40 x 40 = 800, so the sum is 1,600.
- ARs 800 thousand
- BRs 1,200 thousand
- CRs 1,600 thousandCorrect
- DRs 2,400 thousand
- Rs 3,200 thousand
Explanation
Equilibrium: 100 - Q = 20 + Q gives Q = 40 and 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 0 counts only one of the two surpluses.
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