Question

Portia produces and sells headbands. Her marginal cost for one headband is $6, and her average cost is $4. She gains producer surplus only when she sells headbands at a price above:

A $10.
B $4.
C $6.
D $5.

Answer 1

Portia will gain producer surplus when she sells headbands at a price above $6 since that is her marginal cost.

Step-by-step explanation:

In this scenario, Portia will gain producer surplus when she sells headbands at a price above $6.

Marginal cost is the additional cost incurred when one more unit is produced, and in this case, it is $6.

Therefore, in order for Portia to cover her costs and make a profit, she needs to sell the headbands at a price higher than the marginal cost which is $6.

Answer 2

Portia gains producer surplus only when she sells headbands at a price above $6.

Thus the correct option is (C).

Step-by-step explanation:

To determine the price at which Portia gains producer surplus, we need to understand the relationship between marginal cost (MC) and average cost (AC). The producer surplus is the difference between the market price and the marginal cost. In this case, the marginal cost for one headband is $6, and the average cost is $4. To ensure Portia covers her costs and gains producer surplus, the price must be higher than the average cost but can be equal to the marginal cost.

Mathematically, producer surplus (PS) is calculated as PS = Price - MC. Given that AC < MC, and in this scenario, AC = $4, Portia gains producer surplus only when the price is above $4. The minimum price to cover average cost is $4. Since the question asks about the point where Portia starts gaining surplus, the correct answer is when the price exceeds the marginal cost of $6. Therefore, Portia gains producer surplus when she sells headbands at a price above $6.

Understanding the cost structure and its relationship to pricing is essential for businesses to maximize profitability. In this case, Portia must set her prices strategically to cover both average and marginal costs while ensuring a surplus to contribute to her overall profit.

Thus the correct option is (C).