Question

ABC Company incurs a cost of 50 cents to produce a dozen eggs, while XYZ Company incurs a cost of 70 cents to produce a dozen eggs. Which of the following price increases would cause both companies to experience an increase in producer surplus?
(A)The price of a dozen eggs increases from 40 cents to 55 cents.
(B)The price of a dozen eggs increases from 55 cents to 70 cents.
(C)The price of a dozen eggs increases from 55 cents to 75 cents.
(D)All of these price increases would cause both companies to experience a loss in producer surplus.

Answer 1

Answer:

Option (C) is correct.

Explanation:

Given that,

ABC company: cost of producing a dozen of eggs = 50 cents

XYZ company: cost of producing a dozen of eggs = 70 cents  

When the price of a dozen eggs increases from 55 cents to 75 cents,

Producers surplus for ABC company:

= Revenue - Cost

= 75 - 50

= 25 cents

Producers surplus for XYZ company:

= Revenue - Cost

= 75 cents - 70 cents

= 5 cents.

It is the only price level at which both the companies have greater revenues than costs. It means that they both have profits.

It will increase the producer surplus of both the companies.