Suppose were examining a perfectly competitive market what a

Suppose we\'re examining a perfectly competitive market. what affect will an increase in disposable income have on producer surplus?

a) increase

b) decrease

c) no effect

Solution

Correct option is (a).

Increase in disposable income will increase demand for the firm\'s product, shifting demand curve rightward and increasing both price and quantity. As a result, producer surplus (= market price - Minimum acceptable price) will increase.