Question:
Suppose a new technology has been introduced in the production of good X which is sold in a competitive market. If the new technology reduces the production cost of good X, what is the likely impact on consumer and producer surpluses?
(1) Producer surplus will increase but consumer surplus will decrease.
(2) Consumer surplus will increase but producer surplus will decrease.
(3) Both consumer and producer surpluses will increase.
(4) Both consumer and producer surpluses will decrease.
(5) Producer surplus will remain unchanged but consumer surplus will increase.
Correct Answer:
(3)
Answer Explanation:
Lower costs shift supply to the right, lowering the market price and increasing quantity traded. Consumers gain from lower prices (higher CS). Producers gain from higher efficiency and sales volume (higher PS), increasing total economic welfare.
Topic: Consumer Surplus Year: 2024
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