consumer surplus exceeds producer surplus by the greatest amount.
A the areas of consumer and producer surplus are equal.
B marginal benefit exceeds marginal cost by the greatest amount.
C the combined amounts of consumer surplus and producer surplus are maximized.
The correct answer and explanation is:
The correct answer is B: marginal benefit exceeds marginal cost by the greatest amount.
Explanation:
Consumer surplus and producer surplus represent the benefits that consumers and producers gain from participating in the market. Consumer surplus is the difference between what consumers are willing to pay for a good or service and what they actually pay. Producer surplus is the difference between the price producers are paid for a good or service and the minimum amount they are willing to accept to produce it.
The point at which consumer surplus exceeds producer surplus by the greatest amount is when marginal benefit exceeds marginal cost by the greatest amount. Here’s why:
- Marginal Benefit (MB) and Marginal Cost (MC): The marginal benefit is the additional benefit a consumer gets from consuming one more unit of a good or service. The marginal cost is the cost to the producer of producing one more unit. In a competitive market, the price adjusts to the point where the quantity supplied equals the quantity demanded.
- Surplus Maximization: At the equilibrium price and quantity, the total surplus (the sum of consumer and producer surplus) is maximized. However, the question focuses on the relative size of the consumer surplus compared to producer surplus. When marginal benefit (which reflects the consumer’s willingness to pay) is higher than marginal cost (which reflects the producer’s cost), consumer surplus is larger. This typically happens in markets where consumers value the good more than the cost of producing it, which leads to a greater difference between the consumer’s benefit and the price they pay.
- Efficiency: If marginal benefit exceeds marginal cost by a large margin, it suggests that consumers are getting more value from the good than it costs to produce it. This indicates that consumer surplus is likely to be higher than producer surplus, as consumers enjoy a significant benefit for a relatively lower price.
In summary, marginal benefit exceeding marginal cost leads to a scenario where consumer surplus is maximized relative to producer surplus, as consumers derive a greater benefit compared to the cost incurred by producers.