Question

Firm A is a new producer in the market for good​ X, which is characterized by linear demand and supply curves.​ Initially, to attract​ customers, the firm prices its product low at​ $8 per unit. While the firm sells​ 1,000 units of the product at this​ price, there is a shortage in the market. This shortage can be cleared if price is increased to​ $10 per unit. The quantity demanded and supplied at this higher price will be​ 1,500 units. Rajiv​ Bose, a market analyst with firm​ A, claims that an increase in producer surplus would necessarily increase average profit for the firm. Which of the​ following, if​ true, would weaken​ Rajiv's claim? A. Costs increase significantly as production expands. B. Other firms in the industry are doing well. C. Good X has no substitutes. D. The supply curve is X shifts to the right. E. The demand for X increases substantially.

Answer 1

A. Costs increase significantly as production expands.

Step-by-step explanation:

Producer surplus is the difference between the price of a good and the least price a producer is willing to sell his product.

Profit = revenue - cost of production

As producer surplus increases, if the cost of production increases more than the revenue, average profits would fall.

If a good has no substitutes, as price increases and producer surplus increases, demand would be inelastic and average revenue would increase.

If the demand for X increases, average revenue would increase.

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