The figure below shows the marginal cost (circles) and the average variable cost (crosses) of a firm in a competitive market. The firm always makes the choice to maximize its profit.

-Refer to the figure above. If the market price of the product fell from $5,000 to $3,400, what is the loss of the firm's producer surplus?
A) $11,250
B) $8,000
C) $1,600
D) $800

Question

The figure below shows the marginal cost (circles) and the average variable cost (crosses) of a firm in a competitive market. The firm always makes the choice to maximize its profit.
 
-Refer to the figure above. If the market price of the product fell from $5,000 to $3,400, what is the loss of the firm's producer surplus?
A) $11,250 
B) $8,000 
C) $1,600 
D) $800

Quizplus · Accepted Answer

The loss of producer surplus is the difference between the original producer surplus and the new producer surplus. The original producer surplus is the area above the supply curve and below the price line, which is a triangle with a base of 100 units and a height of $5,000 - $3,400 = $1,600. The area of this triangle is (1/2) * 100 * $1,600 = $8,000. The new producer surplus is the area above the supply curve and below the new price line, which is a triangle with a base of 80 units and a height of $3,400 - $2,800 = $600. The area of this triangle is (1/2) * 80 * $600 = $2,400. The loss of producer surplus is the difference between the original producer surplus and the new producer surplus, which is $8,000 - $2,400 = $5,600.

The Figure Below Shows the Marginal Cost (Circles) and the Average