Suppose an increasing-cost competitive industry is in equilibrium at a price of $100 and an output of 1,000 units.When a price ceiling of $80 is imposed the quantity traded in the market reduces to 800 units.Which of the following is true?
A)Consumer surplus will increase and producer surplus will fall,but total surplus stays the same.
B)Consumer surplus will fall and producer surplus will increase,keeping total surplus unchanged.
C)Consumer surplus may or may not fall but producer surplus will fall.
D)Consumer surplus will remain unchanged,but producer surplus and total surplus will fall.

Question

Quizplus · Accepted Answer

When the price ceiling of $80 is imposed, the market quantity reduces to 800 units which is less than the equilibrium quantity of 1,000 units. This means that the price ceiling causes a shortage in the market because the quantity demanded exceeds the quantity supplied. As a result, the consumer surplus may or may not fall depending on how much the consumers value the good relative to the price they pay. However, the producer surplus will fall because the price ceiling reduces their ability to charge higher prices for their goods. Therefore, Choice C is the correct answer.

Suppose an Increasing-Cost Competitive Industry Is in Equilibrium at a Price