Microeconomics: Principles, Problems, & Policies, 20th Edition

Published by McGraw-Hill Education
ISBN 10: 0077660811
ISBN 13: 978-0-07766-081-9

Chapter 4 - Market Failures: Public Goods and Externalities - Review Questions: 1

Answer

With reference to the graph, Consumer surplus is given by the area bounded by P3 E0 P0, as consumer surplus is defined as the difference between the maximum price that consumers are willing to pay (as laid out by the demand curve), and the price they actually pay (the equilibrium price P0) Producer surplus is given by the area bounded by P0 E0 P2, as producer surplus is defined as the difference between the price producers are actually paid to produce the good (the equilibrium price P0) and the minimum price that producers are willing to pay to produce the good(as laid out by the supply curve). When the supply curve shifts rightward as in the graph, the equilibrium price would be lowered to that of P1, and thus, consumer surplus would increase from P3 E0 P0 to P3 E1 P1.

Work Step by Step

NIL
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