Suppose the market supply curve for wheat is shown in the above figure

Suppose the market supply curve for wheat is shown in the above figure. Calculate the producer surplus when price is $2 per bushel. If legislation mandates that the price be $1 per bushel, what is the resulting loss in producer surplus?

What will be an ideal response?

ANSWER

At a price of $2, producer surplus equals ($1.50 ∗ 1200)/2 = $900. At a price of $1, producer surplus equals (50¢ ∗ 500 )/2 = $125. The $1 decrease in prices results in a $775 decrease in producer surplus.