If Fiona provides engine tune-ups at the lowest price at which she is willing to sell them, her producer surplus is:
options:
a) $0.
b) less than the consumer surplus.
c) impossible to determine.
d) greater than the opportunity cost of providing tune-ups.
The correct answer and explanation is:
Correct Answer: a) $0
Explanation:
Producer surplus is the difference between the amount a seller is paid for a good or service and the minimum amount they are willing to accept (i.e., their cost of production or opportunity cost). In simple terms, it represents the seller’s economic gain from selling the product.
Let’s apply this to Fiona:
- If Fiona provides engine tune-ups at the lowest price she is willing to sell them, this means she is selling at her exact cost or opportunity cost.
- She is not charging anything above what it costs her in time, effort, or resources to provide the service.
- Because producer surplus = selling price – minimum acceptable price, and these two are equal in Fiona’s case, then:
Producer Surplus=P−C=C−C=0\text{Producer Surplus} = P – C = C – C = 0
Therefore, Fiona’s producer surplus is zero.
Clarifying the Other Options:
- b) less than the consumer surplus: This cannot be determined unless we know the consumer’s willingness to pay. It may be true, but it’s not a definitive answer without additional information.
- c) impossible to determine: Actually, we can determine it because the problem clearly states she charges the lowest price she’s willing to accept.
- d) greater than the opportunity cost of providing tune-ups: This would mean she charges more than her minimum acceptable price, which contradicts the given condition.
Summary:
When Fiona charges exactly her lowest acceptable price, she earns no surplus or extra gain—her producer surplus is $0. This is a key concept in microeconomics where selling at cost yields no economic profit.