Figure 9.1.3
-Refer to Figure 9.1.3 above. If the government establishes a price ceiling of $1.00, producer surplus will:
A) fall by $150.
B) fall by $300.
C) remain the same.
D) rise by $150.
E) rise by $300.

Question

Figure 9.1.3
-Refer to Figure 9.1.3 above. If the government establishes a price ceiling of $1.00, producer surplus will:
A) fall by $150. 
B) fall by $300. 
C) remain the same. 
D) rise by $150. 
E) rise by $300.

Quizplus · Accepted Answer

At a price of $1.00, only 100 units will be supplied, which is equal to the quantity demanded. At this quantity, the supply curve intersects the marginal cost curve at point B. The producer surplus will be the area above the supply curve and below the price line up to point B. This is equal to the rectangle denoted by the letters C, D, E, and F, which has a height of $1.00 and a base of 100 units. The area of the rectangle is equal to $100. At the original equilibrium price of $2.00, the producer surplus was the area above the supply curve and below the price line up to point A, which is equal to the rectangle denoted by the letters A, B, G, and H. This rectangle has a height of $2.00 and a base of 200 units. The area of the rectangle is equal to $400. Therefore, if the government establishes a price ceiling of $1.00, the producer surplus will fall by $300 ($400 - $100).

Figure 9.1.3 -Refer to Figure 9.1.3 Above. If the Government Establishes a Establishes