In a competitive market, why does producer surplus exist?

• A. Because producer surplus is the same as total revenue earned by firms.
• B. Because the market price is always lower than every seller’s cost of production.
• C. Because government taxes create a gap between what buyers pay and what sellers receive.
• D. Because some sellers are willing to sell at prices below the market price, so they receive extra benefit when they sell at the market price.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of producer surplus. Producer surplus is the difference between the amount a seller is paid for a good and the minimum amount they are willing to accept to produce the good (their cost of production).
2. Step 2: Recognize that in a competitive market, the market price is determined by supply and demand and is the same for all sellers.
3. Step 3: Identify that some sellers have lower costs of production than the market price, meaning they are willing to sell at prices below the market price.
4. Step 4: Realize that these sellers receive extra benefit or surplus because they sell at the market price, which is higher than their minimum acceptable price (cost).
5. Step 5: Conclude that producer surplus exists because the market price exceeds the cost of production for some sellers, allowing them to gain additional benefit beyond their costs.