Question

Which of the following statements are true for the consumer and producer surplus?

Select one or more:

a. When firms are able to sell a good at a price higher than the marginal cost of production, they are getting producer surplus.

b. When consumers are able to buy a product at a price lower than its marginal value of consumption, it is called consumer surplus.

c. Consumer surplus is the difference between the price of a product and consumers' valuation of the last unit of the product purchased.

d. Producer surplus is the difference between the price of a product and its average cost of production.

e. Producer surplus is the difference between the price of a product and marginal cost of producing the product.

f. Consumer surplus is the difference between the price of a product and what consumers were willing to pay for the product.

Answer 1

Correct options are: (a), (b), (e) and (f).

Consumer surplus (CS) = Maximum willingness to pay for a good - Actual price paid (market price), therefore,

When Actual price paid (market price) is lower than Maximum willingness to pay for a good, CS > 0.

Producer surplus = Actual price paid (market price) - Minimum acceptable price (Marginal cost), therefore,

When Actual price paid (market price) is higher than Minimum acceptable price (Marginal cost), PS > 0.