Which of the following best describes how producer surplus is related to the deeds and actions of a producer in a competitive market?

• A. Producer surplus is the cost incurred by a producer in the production of goods.
• B. Producer surplus is the total revenue earned by a producer from selling goods in the market.
• C. Producer surplus is the difference between the price a producer actually receives and the minimum price they are willing to accept for a good or service.
• D. Producer surplus is the amount a producer pays for raw materials and labor.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of producer surplus. Producer surplus measures the benefit producers receive when they sell a good at a market price higher than the minimum price they are willing to accept.
2. Step 2: Recognize that the minimum price a producer is willing to accept corresponds to their marginal cost of production, which includes costs like raw materials, labor, and other inputs.
3. Step 3: Define producer surplus mathematically as the difference between the actual market price (\(P\)) and the minimum acceptable price (marginal cost, \(MC\)), multiplied by the quantity sold (\(Q\)). This can be expressed as: \(\text{Producer Surplus} = (P - MC) \times Q\).
4. Step 4: Differentiate producer surplus from other concepts: it is not the total revenue (which is \(P \times Q\)), nor the total cost, nor just the cost of inputs. Instead, it captures the net gain producers receive above their costs.
5. Step 5: Conclude that the best description of producer surplus is that it represents the difference between the price a producer actually receives and the minimum price they are willing to accept for a good or service.