Question

Suppose a firm has market power and faces a​ downward-sloping demand curve for its​ product, and its marginal cost curve is upward sloping. If the firm reduces its​ price, then

A.

producer surplus increases due to new​ buyers, but the producer surplus from existing customers declines due to the lower price.

B.

the sum of producer and consumer surplus remains the​ same, but surplus value is transferred from the producer to consumers.

C.

the change in producer surplus is transferred to consumers.

D.

the increase in consumer surplus is only due to the increase in quantity demanded.

Answer 1

Answer

Option

A.

producer surplus increases due to new​ buyers, but the producer surplus from existing customers declines due to the lower price

Consumer surplus is the area below the demand curve and above price

producer surplus is the area above MC and below the price

the price decreases which increase consumer surplus and decreases producer surplus

the quantity increases which increases both

so producer surplus increases due to new​ buyers, but the producer surplus from existing customers declines due to the lower price

and the sum of producer and consumer surplus increases

the change in producer surplus is transferred to consumers because of the decrease in price and increases some because of an increase in quantity.