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 surplus and producer surplus will increase.
(4) Both consumer surplus and producer surplus will decrease.
(5) Consumer surplus will increase and producer surplus will not be affected.
Correct Answer:
(3)
Answer Explanation:
Lower production costs shift the supply curve to the right. This lowers the market price and increases the quantity traded. Consumers benefit from the lower price (Consumer Surplus increases). Producers benefit from the expanded sales volume and lower costs, generally leading to an increase in Producer Surplus as well.
Topic: Welfare Economics Year: 2024
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