Refer to Figure 7-4. Which area represents producer surplus when the price is P_1?

• A. The area below P_1 and above the supply curve, from 0 to Q_1
• B. The area above the supply curve and below the demand curve, from 0 to Q_2
• C. The area above P_1 and below the demand curve, from 0 to Q_1
• D. The area between the demand and supply curves, from Q_1 to Q_2

Answer: (A)

Verified step by step guidance

1. Recall that producer surplus is the difference between what producers are willing to accept for a good (represented by the supply curve) and the actual price they receive, summed over the quantity sold.
2. Identify the market price given in the problem, which is \(P_1\), and the corresponding quantity sold at this price, \(Q_1\).
3. Visualize or refer to the supply curve, which shows the minimum price producers are willing to accept for each quantity. Producer surplus is the area above this supply curve but below the market price line \(P_1\).
4. Determine the area that lies between the price line \(P_1\) and the supply curve, starting from quantity 0 up to \(Q_1\). This area represents the total producer surplus.
5. Exclude any areas above the demand curve or beyond \(Q_1\), as producer surplus only concerns the supply side and the quantity actually sold at price \(P_1\).