Other things held constant the higher the price of a good Se

Other things held constant, the higher the price of a good

Select one:

a. the lower the producer surplus.

b. the greater the producer surplus.

c. the higher the supply.

d. the lower the supply.

Solution

The correct answer is option (b).

Reason – Producer surplus refers to the difference between price of a good that producer receives and the minimum price of good that producer is willing to accept for the good.

For example, the minimum price at which producer is ready to supply good is $2 per unit but market price is $4 per unit then producer surplus would be ($4 - $2) $2 per unit.

As producer surplus is the difference between price of a good that producer receives and the minimum price of good that producer is willing to accept for the good, higher the price of the good, larger would be the difference between price of a good that producer receives and the minimum price of good that producer is willing to accept for the good and therefore greater would be the producer surplus.