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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

John has been working as a tutor for $300 a semester. When the university raises the price it pays tutors to $400, Jasmine enters the market and begins tutoring as well. How much does producer surplus rise as a result of this price increase?

a. by less than $100

b. between $100 and $200

c. between $200 and $300

d. by more than $300

To determine
The impact of the increased price on producer surplus.

Explanation

The equilibrium price is determined by the demand for the coat and the supply of coat normally. The producer surplus is the difference between the minimum willing to accept price by the seller and the actual price that the seller receives for the commodity.

Option (b):

When the university revises the pay scale from $300 and pays the tutors $400, it increases the producer surplus by $100. When jasmine also enters the market and works as tutor, she also gets $400 and thus, the producer surplus will become between $100 to $200. Thus, due to the increased price paid to the tutors, the producer surplus will increase by the amount between $100 and $200. Thus, option 'b' is correct.

Option (a):

When the university revises the pay scale from $300 and pays the tutors $400, it increases the producer surplus by $100. When jasmine also enters the market and works as tutor, she also gets $400 and thus, the producer surplus will become between $100 to $200. Thus, even though there is no service from jasmine, the producer surplus increases by $100 and thus, option 'a' which explains that the producer surplus increases by less than $100 is incorrect...

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