Use the graph for Thingamabobs above. If the price were to decrease to \$1500 per Thingamabob, what is the change to producer surplus?

• A. Decreases by \$595,000
• B. Decreases by \$297,500
• C. Increases by \$595,000
• D. Increases by \$297,500

Answer: (A)

Verified step by step guidance

1. Step 1: Identify the initial and new prices and quantities from the graph. The initial price is \$2,900 with a quantity of 600 units, and the new price is \$1,500 with a quantity of 250 units.
2. Step 2: Recall that producer surplus is the area above the supply curve and below the price line. It can be calculated as the area of the triangle formed between the supply curve, the price line, and the vertical axis.
3. Step 3: Calculate the initial producer surplus using the formula for the area of a triangle: \(\text{Producer Surplus} = \frac{1}{2} \times \text{base} \times \text{height}\). Here, the base is the quantity (600 units) and the height is the difference between the price and the minimum supply price (which is \$500). So, initial producer surplus is \(\(\frac{1}{2}\) \(\times\) 600 \(\times\) (2900 - 500)\).
4. Step 4: Calculate the new producer surplus after the price decreases to \$1,500. The new quantity is 250 units, and the height is now \((1500 - 500)\). So, new producer surplus is \(\(\frac{1}{2}\) \(\times\) 250 \(\times\) (1500 - 500)\).
5. Step 5: Find the change in producer surplus by subtracting the new producer surplus from the initial producer surplus: \(\Delta PS = PS_{initial} - PS_{new}\). This will give the decrease in producer surplus due to the price drop.