Question

If the world price for good A is above the domestic price for good A without trade, then producer surplus will ________ and total economic surplus will _______ with trade.
a) increase; increase
b) increase; decrease
c) decrease; increase
d) decrease; decrease

Answer 1

Answer:

The correct answer is letter "B": increase; decrease.

Explanation:

Producer surplus is the difference between the price at which the manufacturer actually sells a product and the minimum price the manufacturer would have accepted. The surplus results from the producer being able to sell their goods at a market price higher than their minimum price.  

So, if producer A manufactures a product that is being sold at a higher price level abroad, its producer surplus will increase. However, the overall economic surplus with trade will decrease since the introduction to producer A to the market will allow consumers to purchase the goods at a lower price.