Multiple Choice
If the market demand is given by p = 50 - 2q and the market supply is given by p = 20 + 3q, what is the value of the producer surplus at equilibrium?
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5. Consumer and Producer Surplus; Price Ceilings and Floors
Producer Surplus and Willingness to Sell
Multiple Choice
In a competitive market, which of the following events would increase producer surplus (holding other factors constant)?
A
An increase in the price of an important input (e.g., higher wages) that shifts the supply curve to the left
B
A binding price ceiling set below the equilibrium price
C
A decrease in market demand that shifts the demand curve to the left
D
A technological improvement that lowers firms’ marginal costs, shifting the supply curve to the right
Verified step by step guidance1
Step 1: Understand the concept of producer surplus. Producer surplus is the difference between what producers are willing to accept for a good or service and the actual price they receive. It is graphically represented as the area above the supply curve and below the market price.
Step 2: Analyze how changes in supply and demand affect producer surplus. An increase in input prices shifts the supply curve left, typically reducing producer surplus. A binding price ceiling below equilibrium lowers the price producers receive, reducing producer surplus. A decrease in demand shifts the demand curve left, lowering the equilibrium price and quantity, which also reduces producer surplus.
Step 3: Focus on the effect of a technological improvement that lowers marginal costs. This shifts the supply curve to the right, meaning producers can supply more at every price or supply the same quantity at a lower cost.
Step 4: Recognize that a rightward shift in supply due to lower marginal costs generally increases producer surplus because producers can produce at lower costs and potentially sell more at the market price, increasing the area above the supply curve and below the price.
Step 5: Conclude that among the given options, only the technological improvement that lowers marginal costs and shifts supply to the right increases producer surplus, holding other factors constant.
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