Figure 9.4
-Suppose the market in Figure 9.4 is currently in equilibrium. If the government establishes a price floor of $40, consumer surplus will
A) fall by $50.
B) fall by $350.
C) remain the same.
D) rise by $50.
E) rise by $350.

Question

Figure 9.4
-Suppose the market in Figure 9.4 is currently in equilibrium. If the government establishes a price floor of $40, consumer surplus will
A) fall by $50. 
B) fall by $350. 
C) remain the same. 
D) rise by $50. 
E) rise by $350.

Quizplus · Accepted Answer

When the government establishes a price floor of $40, the equilibrium price of $30 will become illegal. This will force the price to rise to $40, which is above the equilibrium price. At this new price, quantity demanded will decrease from 120 to 80, while quantity supplied increases from 60 to 100, creating a surplus of 20 units. The area of consumer surplus above the price floor is completely lost, and the new consumer surplus is the triangle with the new equilibrium price of $40, a height of 40 - 20 = 20, and a base of 80. Therefore, consumer surplus falls by the area of the two triangles above the price floor, which is (1/2)(40-30)(120-80) + (1/2)(30-20)(80) = $350.

Figure 9.4 -Suppose the Market in Figure 9.4 Is Currently in Equilibrium