Asked by Michael Williams on Jul 14, 2024
Verified
(Figure: The Gains from Trade) Look at the figure The Gains from Trade.What is the total surplus in this market when the demand curve is D1 and the market is in equilibrium?
A) $25.00
B) $31.25
C) $62.50
D) $90.00
Total Surplus
Total surplus is the sum of consumer surplus and producer surplus in a market, representing the total benefits to society, including both the gains from trade to buyers and sellers.
Gains from Trade
The benefits obtained by countries from engaging in international trade, often resulting from specializing in the production of goods for which they have a comparative advantage.
Equilibrium
The point at which the quantity of a good or service demanded equals the quantity supplied, determining the market price.
- Acquire an understanding of and scrutinize the linkage between supply, demand, and cumulative surplus.
Verified Answer
VV
Violet VetterJul 16, 2024
Final Answer :
C
Explanation :
To find the total surplus, we need to calculate the area of consumer surplus (CS) and producer surplus (PS). CS is the area above the price and below the demand curve, while PS is the area below the price and above the supply curve. At equilibrium, the price is $12.50 and the quantity traded is 5 units. The CS is (1/2) x (10-12.50) x 5 = $-6.25 (since the demand curve is below the price) and the PS is (1/2) x (12.50-5) x 5 = $31.25. Therefore, the total surplus is $-6.25 + $31.25 = $25.00. Since CS is negative, we should only consider the PS when answering the question, which is $31.25.
Learning Objectives
- Acquire an understanding of and scrutinize the linkage between supply, demand, and cumulative surplus.