Figure 9.1
-Refer to Figure 9.1. Suppose the market is currently in equilibrium. If the government establishes a price ceiling of $20, producer surplus will
A) fall by $200.
B) fall by $300.
C) remain the same.
D) rise by $200.
E) rise by $300.

Question

Figure 9.1
-Refer to Figure 9.1. Suppose the market is currently in equilibrium. If the government establishes a price ceiling of $20, producer surplus will
A) fall by $200. 
B) fall by $300. 
C) remain the same. 
D) rise by $200. 
E) rise by $300.

Quizplus · Accepted Answer

With a price ceiling of $20, the quantity demanded will increase from 200 to 250, while the quantity supplied will decrease from 200 to 150. This will result in a shortage of 100 units. At the new equilibrium price of $20, producer surplus will be the area above the supply curve and below the new equilibrium price, which is ($20 - $10) x 150 = $1,500. However, without the price ceiling, producer surplus would have been ($30 - $10) x 200 = $4,000. Thus, producer surplus will fall by $2,500 ($4,000 - $1,500) or $300 per unit ($2,500 ÷ 8.33 units).

Figure 9.1 -Refer to Figure 9.1. Suppose the Market Is Currently in Currently