Question

1. When looking at a graph, the area below the demand curve and above market price is defined as

a.         producer surplus d.         tax revenue.

b.         consumer surplus e.         business profit.

c.         producer benefit.

2. LDT Products, Inc., designs and sells flannel jackets. The company is willing to sell a men’s flannel jacket for as little as $45. Its main competitor is MK Outriggers, which is willing to sell the same men’s flannel jacket for as little as $40. The current market price of that type of jacket is $42. What is the total producer surplus for the two firms?

a.         $3 d. - $1

b.         $5                                e. $7

c.         $2

3. Which of the following statements about deadweight loss is true?

a. Sales tax will always cause deadweight loss.

b. If supply is not perfectly inelastic, the more elastic the demand is, the larger the deadweight loss.

c. Deadweight loss is defined as the decrease in consumer surplus due to tax.

d. Deadweight loss is defined as the decrease in producer surplus due to tax.

e. Deadweight loss is the gain transferred to the government.

Answer 1

1.

In the graph above, P* is the market price after tax. The yellow line is a demand curve and Blue line is supply curve after tax.

The area in Red above market price and below demand curve is consumer surplus, the area in brown is tax revenue and are in purple is producer surplus.

Business profit is the area above Average cost and below the demand curve.

So the correct answer is an option (b), consumer surplus.

2. Producer surplus refers to the amount earned by the above its willingness to sell.

Here the market price is $42 which means each will get it irrespective of their willingness to accept.

LDT Products, Inc. willingness to sell is $45 so its surplus= $42-$45= $-3

MK Outriggers willingness to sell is $40 so its surplus= $42-$40= $2

Total producer surplus= $2-$3= -$1

So the correct option is (d).