Question

Assume the world market for oil is competitive and that the marginal cost of producing​ (extracting and bringing to​ market) another barrel of oil is ​$81.80 and the marginal benefit is ​$80.00. If one more barrel of oil is produced and​ consumed, how will economic surplus​ change? Economic surplus will
a. Increase by ​$161.80.
b. Decrease by ​$81.80.
c. Decrease by ​$1.80.
d. Not change.
e. Increase by ​$1.80

Answer 1

Answer: c). decreases by $1.80

Explanation: Economic surplus is the sum of consumer surplus and producer surplus. When the marginal benefit is less than marginal cost, producing one more unit will lower the economic surplus by and amount equal to the difference between marginal benefit and marginal cost.

$Economic surplus = Marginal benefit - Marginal cost = 80.00 - 81.80 = - 1.80$

Therefore, economic surplus decreases by $1.80, which is option c.