Question

Sara purchased a doughnut for five dollars from Krispy Kreme Doughnuts. We know that

(A) Total surplus could have increased or decreased

(B) Demand was elastic

(C) Equity increased

(D) Producer surplus and consumer surplus were greater than zero

Answer 1

ANSWER : (A) Total surplus could have increased or decreased

Total surplus is the surplus generated by all the participants in the market, which means that producers and the consumers. It is the summation of producer surplus and the consumer surplus.

As Sara purchases a doughnut for 5 dollars from Krispy Kreme Doughnuts, it will generated surplus for both the consumer, i.e Sara and the producer, i.e Krispy Kreme Doughnuts. However, as we dont know whether the price of doughnut have been increased or decreased to $5, we cannot say whether the total surplus is increases or decreased.

If price of doughnut was lower than $5 earlier, say $4 and have now been increased, it will lead to decrease in consumer surplus and increase in producer surplus, however we cannot tell which surplus will be more or less and vice-versa if price of doughnut was higher than $5, say $6.