Assume the market is in equilibrium in the graph shown at demand D and supply S1 (at a quantity of 5).If the supply curve shifts to S2,and a new equilibrium is reached (at a quantity of 7),which of the following is true?
A) Total surplus increases by $12.50.
B) Total surplus decreases by $12.50.
C) Total surplus increases by $15.50.
D) Total surplus decreases by $15.50.

Question

Assume the market is in equilibrium in the graph shown at demand D and supply S1 (at a quantity of 5).If the supply curve shifts to S2,and a new equilibrium is reached (at a quantity of 7),which of the following is true?
A) Total surplus increases by $12.50. 
B) Total surplus decreases by $12.50. 
C) Total surplus increases by $15.50. 
D) Total surplus decreases by $15.50.

Quizplus · Accepted Answer

When the supply curve shifts from S1 to S2, the equilibrium quantity increases from 5 to 7. At the new equilibrium, the new price is higher than before. Consumers pay a higher price than before, and producers receive a higher price. However, this increase in price is less than the increase in quantity, resulting in a net gain in total surplus. The gain in consumer surplus is less than the loss in producer surplus (area a), resulting in a net gain of $15.50 in total surplus (area b). Therefore, the correct choice is C.

Assume the Market Is in Equilibrium in the Graph Shown