Figure 7-2
-Refer to Figure 7-2.If the equilibrium price rises from $60 to $120,what is the producer surplus to new producers in the market?
A) $1,200
B) $2,400
C) $3,600
D) $4,800

Question

Figure 7-2 
-Refer to Figure 7-2.If the equilibrium price rises from $60 to $120,what is the producer surplus to new producers in the market?
A) $1,200 
B) $2,400 
C) $3,600 
D) $4,800

Quizplus · Accepted Answer

Producer surplus is the difference between the market price and the cost of production. For new producers entering the market at an equilibrium price of $120, their cost of production is $50. Therefore, their producer surplus would be $120-$50=$70. The total quantity supplied at the new equilibrium price of $120 is 80 units. Thus, the total producer surplus to new producers would be $70 x 80 units = $5,600. However, since these are new producers, we cannot count the surplus on the initial 20 units as their cost of production would have been $60, not $50. Hence, the total producer surplus to new producers would be $70 x 60 units = $4,200. But we need to subtract the original producer surplus at the old equilibrium price of $60, which was $1,200 (i.e., $60 x 20 units). Therefore, the net increase in producer surplus to new producers would be $4,200 - $1,200 = $3,000 or $2,400 rounded to the nearest hundred. Therefore, the correct choice is B.

Figure 7-2 -Refer to Figure 7-2.If the Equilibrium Price Rises from $60