Suppose all firms in an industry have access to a technology that has a positive fixed cost and then a constant marginal cost of production thereafter. Explain why a price equal to marginal cost maximizes the sum of consumer and producer surplus. What would be producer surplus if price was equal to marginal cost? [3 marks]

This is my answer: Marginal Cost (MC): The cost of producing one additional unit of a good or service. Consumer Surplus (CS): The difference between the price consumers are willing to pay and the actual price they pay. Producer Surplus (PS): The difference between the price producers receive and their marginal cost of production. 2. Price Equal to Marginal Cost (P = MC):

When P = MC, the market is said to be allocatively efficient. This means resources are allocated in a way that maximizes the total benefits to society (CS + PS combined). 3. Why P = MC Maximizes Surplus:

At prices above MC: Some consumers who value the good more than its MC are excluded. This reduces CS and overall welfare. At prices below MC: Some units are produced that cost more to make than consumers value them. This reduces PS and overall welfare. Only at P = MC: All units valued by consumers more than their cost are produced. No resources are wasted on less-valued units. Total surplus is maximized. 4. Producer Surplus with P = MC:

PS = Price Received - Marginal Cost If P = MC, PS becomes zero. Producers are not making any additional profit per unit. They are just covering their production costs. 5. Negative Producer Surplus (P = MC and Fixed Costs):

If there are fixed costs (costs that don't vary with output, like rent or machinery), PS can be negative when P = MC. This is because: Producers still need to cover their fixed costs, even if they're not making a profit on each unit. PS becomes negative when the price doesn't cover all costs (fixed and variable). 6. Importance of P = MC:

Efficiency: It ensures resources are used in the most beneficial way, maximizing total surplus. Competition: In competitive markets, firms tend to naturally gravitate towards P = MC, as they try to undercut each other's prices. Policy: It's a benchmark for policymakers to evaluate market outcomes and consider interventions to promote efficiency when markets aren't competitive

Can you draw a diagram to support my answer and then relate the diagram to my answer and write it out like an essay style question. Thank you so much.