Refer to Figure 4-2. At a price of P2, which area represents producer surplus?

• A. The area above the supply curve and below the price axis
• B. The area between the demand and supply curves, from the origin to the equilibrium quantity
• C. The area above P2 and below the demand curve, up to the quantity sold
• D. The area below P2 and above the supply curve, up to the quantity sold

Answer: (D)

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 what they actually receive (the market price).
2. Identify the market price given in the problem, which is P2, and the quantity sold at this price, which corresponds to the point on the supply curve at P2.
3. Visualize the supply curve on the graph: it shows the minimum price producers are willing to accept for each quantity.
4. Producer surplus is the area between the market price line (P2) and the supply curve, from zero quantity up to the quantity sold at price P2.
5. Therefore, the producer surplus is the area below the price level P2 and above the supply curve, extending horizontally to the quantity sold at P2.