Use the graph for funky-fresh rhymes above. If a shift in demand causes equilibrium price to increase from \$3,000 to \$5,000 per funky-fresh rhyme, what is the change to producer surplus?

• A. \$2,250,000 increase
• B. \$2,250,000 decrease
• C. \$1,312,500 increase
• D. \$1,312,500 decrease

Answer: (C)

Verified step by step guidance

1. Identify the initial and new equilibrium points on the graph. The initial equilibrium price is \$3,000, and the new equilibrium price is \$5,000.
2. Determine the quantity supplied at both the initial and new equilibrium prices. From the graph, the initial quantity is 750 units, and the new quantity is 500 units.
3. Calculate the initial producer surplus. Producer surplus is the area above the supply curve and below the price level, up to the quantity sold. Use the formula for the area of a triangle: (1/2) * base * height. The base is the quantity (750 units), and the height is the price difference from the supply curve to the initial price (\$3,000 - \$500).
4. Calculate the new producer surplus using the same method. The base is now 500 units, and the height is the price difference from the supply curve to the new price (\$5,000 - \$500).
5. Find the change in producer surplus by subtracting the initial producer surplus from the new producer surplus. This will give you the increase in producer surplus due to the shift in demand.