Question

14: Suppose that the cost function of a firm is C(q)=4q. Suppose that this is the only firm in the market, and demand is Q(p)=10-p. What is the Producer Surplus in a competitive equilibrium in this economy?

12

6

0

1

2

Answer 1

Demand :Q = 10-p

When p=0, Q= 10

When Q=0, p=10

MC = 4

Because in competitive equilibrium P=MC . This implies that profit maximization price is P=4.

Producer surplus is represented by the area under the price and above the supply curve. Because supply curve is horizontal i.e P=4 , so producer surplus= 0.

Hence, option (C) is correct.