Question

Suppose 5 construction companies have the ability to build a new apartment building in Oxford. The marginal cost of building an apartment for each company is listed in the table. If the market price for an apartment building is $1,590,000 what is the total producer surplus?

Answer 1

The question deals with the concept of producer surplus in a free market and how it is affected by government-imposed price ceilings.

Step-by-step explanation:

The question revolves around the concept of producer surplus in the context of market dynamics and government intervention. In a competitive market without external intervention, the equilibrium price is established where the quantity supplied by producers equals the quantity demanded by consumers. Producer surplus is the difference between what producers are willing to accept to produce a good or service and the market price they actually receive.

In the scenario provided, the equilibrium price of a promising new drug for treating back pain is $600, with a quantity demanded of 20,000. The original producer surplus is indicated by areas V + W + X. When the government imposes a price ceiling of $400 to make the drug more affordable, the quantity supplied decreases to 15,000, altering the producer surplus to just area X.

A similar analysis can be undertaken for the case involving the construction companies and the market for apartment buildings. If the marginal costs for each company are known and the market price is set, one can calculate the total producer surplus by summing the differences between the market price and the marginal costs for each company that is able to produce at or below that market price.