Assume the market in the graph shown with demand D and supply S₁ is in equilibrium at a quantity of 5 units. Total surplus is: A) $5. B) $15. C) $12.50. D) $60.

Question

Quizplus · Accepted Answer

Total surplus is the sum of consumer surplus and producer surplus. At the equilibrium quantity of 5 units, the price is $12.50 (where the demand curve and supply curve intersect). Consumer surplus is the area below the demand curve and above the price, which is (1/2) x 5 x 2.50 = $6.25. Producer surplus is the area below the price and above the supply curve, which is (1/2) x 5 x 7.50 = $18.75. Therefore, total surplus is $6.25 + $18.75 = $25. However, since the market is in a state of overproduction (with supply exceeding demand), there is deadweight loss. The deadweight loss is the area between the demand curve and the supply curve, to the left of the equilibrium quantity, up to the point where the supply curve intersects the demand curve. This area is (1/2) x 5 x (12.50 - 5) = $31.25. Therefore, the total surplus is reduced by the deadweight loss, making it $25 - $31.25 = -$6.25. However, since we're only interested in positive surplus, we'll take the absolute value of the total surplus, which is $6.25.

Assume the Market in the Graph Shown with Demand D