Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Producer surplus increases as prices increase, allowing producers to earn more on each unit sold.
B
Producer surplus decreases because the quantity supplied decreases at higher prices.
C
Producer surplus remains unchanged regardless of price changes.
D
Producer surplus is irrelevant to the law of supply.
Understanding the Answer
Let's break down why this is correct
Answer
When the price of a good rises, producers can sell each unit for more than they paid to make it. The extra amount that each producer receives over the cost of producing that unit is added to their profit, which is called producer surplus. Because the price is higher, the whole area under the supply curve and above the cost curve but below the new price line expands, giving producers more surplus. For example, if a farmer sells tomatoes at $5 instead of $3, the two‑dollar gain on each tomato adds to the farmer’s total surplus. Thus, according to the law of supply, a price increase raises producer surplus.
Detailed Explanation
When the price of a good goes up, producers can sell each unit for more than the lowest price they would accept. Other options are incorrect because Some think a higher price makes producers supply less; It is not true that price changes do not affect surplus.
Key Concepts
law of supply
producer surplus
Topic
Demand and Supply Basics
Difficulty
medium level question
Cognitive Level
understand
Practice Similar Questions
Test your understanding with related questions
1
Question 1How does the law of supply interact with the price elasticity of demand to affect market equilibrium when a price increase occurs?
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2
Question 2How does an increase in the price of a good affect its market equilibrium when the demand for that good is inelastic?
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3
Question 3If an increase in the cost of production leads suppliers to offer less at every price level, how will this affect the market equilibrium price and quantity?
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