The following graph shows the supply curve for a group of students looking to sell used smartphones. Each student has only one used smartphone to sell. Each rectangular segment under the supply curve represents the "cost," or minimum acceptable price, for one student. Assume that anyone who has a cost just equal to the market price is willing to sell his or her used smartphone.

Question

Region A (the purple shaded area) represents the total producer surplus when the market price is $125, while Region B (the grey shaded area) represents the change in total producer surplus when the market price changes from $125 to $175

Answer 1

Answer: Producer surplus is the difference between a seller's cost (that is, his or her minimum acceptable price) and the price the seller actually receives. On the graph, it is the area above the supply curve and below the market price. The top edge of Region A (the purple shaded area) is at a price of $125. Note that, at this price, four students are willing to sell a used smartphone: Raphael, Susan, Alex, and Becky.

Region B (the grey shaded area) represents the increase in producer surplus when the market price increases from $125 to $175. Note that, at a price of $175, the same four students are willing to sell a used smartphone. Therefore, this increase in price does not increase the quantity of used smartphones supplied. However, this higher price does increase the total producer surplus by $200 (equal to the total area of Region B). Each of the four students willing to sell a used smartphone for $125 receives an additional $175?$125=$50$175?$125=$50 of producer surplus as a result of the price increase.