These are the cost and revenue curves associated with a firm. If the firm in the given graph were to produce Q1 and charge P3,the area A would represent:
A) consumer surplus.
B) producer surplus.
C) deadweight loss.
D) profits.

Question

These are the cost and revenue curves associated with a firm.  If the firm in the given graph were to produce Q1 and charge P3,the area A would represent:
A) consumer surplus. 
B) producer surplus. 
C) deadweight loss. 
D) profits.

Quizplus · Accepted Answer

The area A represents producer surplus because it is the difference between the price charged (P3) and the minimal price the firm is willing to accept (MC=MR at Q1). In other words, it represents the extra revenue the firm receives from selling a unit of output at a price higher than its cost. Consumer surplus would be the area between the demand curve and the price (P3) up to the quantity consumed (Q1), but this is not represented in area A. Deadweight loss would be the net welfare loss to society due to the firm not producing at the efficient output level, but this cannot be inferred from the graph without knowing the market demand curve. Profits would be the difference between total revenue and total cost, but we cannot determine this from the graph.

These Are the Cost and Revenue Curves Associated with a Firm