Question

The supply curve for brownies is upward-sloping. When the price of brownies is $3, the quantity supplied is 1,000. If the price falls to $1, what happens to producer surplus?

Group of answer choices

It falls by more than $2,000.

It falls by less than $2,000.

It rises by more than $2,000.

It rises by less than $2,000.

Answer 1

Producer surplus refers to the difference between what a producer is willing to supply and what he actually receives.

On a graph, it the area between equilibrium price and supply curve or we can say area below the price and above the supply curve.

So from the above question, the graph will look like this,

In this graph, the blue triangle represents the producer surplus so the area of this triangle will be the producer surplus.

Area = 1/2 x base x height

Area = 1/2 x 1000 x 3

Area = 1500

The producer surplus is $1500

Now according to the question price decreases from $3 to $1

In the above graph, the new producer surplus will be the above blue triangle but the problem is we cannot calculate the producer surplus at this price because the quantity is unknown at $1 but by looking at the graph it can be clearly said that the new producer surplus will be less than old producer surplus which is $1500.

Hence the new producer surplus will decrease and will be less than $1500 and according to this, option 2 is correct which is it will fall by less than $2000