Author Question: What area on a supply and demand graph represents producer surplus? What will be an ideal ... (Read 202 times)

sheilaspns · **on:** Jun 29, 2018

What area on a supply and demand graph represents producer surplus?

What will be an ideal response?

Question 2

Explain the income effect and the substitution effect due to an increase in the wage rate.

What will be an ideal response?

Sarahjh · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

Producer surplus is the area above the supply curve and below the market price.

Answer to Question 2

An increase in income will lead to a higher demand for leisure. However, an increase in the wage rate will also make leisure more expensive. Since these two effects are moving in opposite directions of one another theory alone cannot tell us the net effect without knowing the absolute change of the income and substitution effects.