Question

A T-shirt supplier is willing to sell her shirts for $5 each, but she is able to negotiate a distribution deal at $7 each. The extra $2 that she made beyond the $5 she was willing to sell her T-shirts for represents 
A. allocative efficiency.   
B. productive efficiency.   
C. consumer surplus.   
D. producer surplus.

Answer 1

The extra $2 that she made beyond the $5 she was willing to sell her T-shirts for represents producer surplus. Producer surplus is defined as the difference between the amount of money the producer is willing to supply versus the amount actually supplied. Because she was willing to sell for $5 but sold for $7 and had an increase in money supplied, this example is one of producer surplus.