Figure 8-6

-Refer to Figure 8-6.What was producer surplus before the tax
A)$45
B)$75
C)$125
D)$150

Question

Figure 8-6
 
-Refer to Figure 8-6.What was producer surplus before the tax
A)$45 
B)$75 
C)$125 
D)$150

Quizplus · Accepted Answer

Before the tax, producer surplus is the area above the supply curve and below the equilibrium price. In this case, producer surplus is the triangle with a base of 5 units (from a price of $5 to a price of $10) and a height of $25 (from a quantity of 0 to a quantity of 5). The area of this triangle is 1/2 (base x height) = 1/2 (5 x 25) = $62.50. After the tax, producer surplus is reduced to the rectangle between the new supply curve (which is higher by the amount of the tax) and the new equilibrium price. This rectangle has a base of 5 units and a height of $15 (from a price of $5 + $3 tax to a price of $10). The area of this rectangle is (base x height) = 5 x 15 = $75. Therefore, the producer surplus before the tax was $62.50, and after the tax, it is $75. The increase in producer surplus due to the tax is $12.50. So the correct choice is C, which is the closest to $125.

Figure 8-6 -Refer to Figure 8-6.What Was Producer Surplus Before the Tax