If suppliers produce Q1 units of this product instead of Q2, which of the following will be true?
options:
a) There will be a deadweight loss to society of area (b plus d) because marginal benefit will exceed marginal cost.
b) There will be a gain in producer surplus of area b because price will rise.
c) There will be a deadweight loss to society of area (b plus d) because marginal cost will exceed marginal benefit.
d) Demanders will not receive any consumer surplus.
The correct answer and explanation is:
The correct answer is c) There will be a deadweight loss to society of area (b plus d) because marginal cost will exceed marginal benefit.
Explanation:
In economics, when suppliers produce Q1 units instead of Q2 units, they may deviate from the optimal production level where marginal cost (MC) equals marginal benefit (MB). The optimal point of production is where the marginal cost of producing one more unit equals the marginal benefit of that unit to society, often represented by the intersection of the supply and demand curves.
- Marginal cost exceeds marginal benefit: If suppliers produce fewer units than the optimal amount (Q2), they are not producing enough to meet the demand at the point where marginal benefit equals marginal cost. At this point, consumers who are willing to pay more for additional units are not able to purchase them. The marginal benefit (which is represented by the demand curve) exceeds the marginal cost (represented by the supply curve) for these unproduced units, leading to inefficiency.
- Deadweight loss: This inefficiency results in a deadweight loss. The areas (b and d) represent the lost welfare or economic value to both producers and consumers. Area b represents the consumer surplus that would have been obtained if the optimal number of units were produced, while area d represents the producer surplus that would have been earned from selling these additional units. By producing fewer units than optimal, the market fails to reach its most efficient outcome.
- Producer and consumer surplus: When fewer units are produced, producers may gain surplus from the higher price they receive, but this gain is not enough to offset the overall societal loss due to the underproduction. Thus, the deadweight loss (areas b and d) represents the lost total welfare.
Therefore, the correct answer is that the deviation in production leads to a deadweight loss because marginal cost exceeds marginal benefit, and this loss is represented by areas (b plus d).