Producer SurplusAssume there are three hardware stores willing to sell one standard model hammer. House Depot is willing to sell the hammer for a minimum of $5. Lace Hardware can offer the hammer for a minimum of $7. Bob's Hardware store can offer the hammer at a minimum price of $12. a. If the market price of hammers is $12, how many hammers will be supplied? b. What will be the total Producer Surplus in this scenario? c. If the price of hammers decreases to $8, what happens to the number of hammers sold? What happens to producer surplus?

A. 3 hammers

B. $12

C. It decreases to 2 hammers

D. Total producer surplus reduces to $4

Explanation:

Producer surplus is the difference between the price of a good and the least price the seller is willing to sell his product.

Producer surplus = price - willingness to sell

If the market price of the hammer is $12, all stores will sell their hammers because the market price is greater or equal to their willingness to sell. Therefore, three hammers would be sold.

The producer surplus of each store :

House Depot = $12 - $5 = $7

Lace Hardware = $12 - $7 = $5

Bob's Hardware store = $12 - $12 = 0

Total producer surplus is $12

If prices decreases to $8, Bob's Hardware store would not sell its hammer because its willingness to sell is greater than the price of the hammer. So, only the two firms would sell.

Producer surplus when market price is $8

House Depot = $8 - $5 = $3

Lace Hardware = $8 - $7 = $1

Total producer surplus is $4.

Total producer surplus decreases from $12 to $4.

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