Figure 9.1.1
-Refer to Figure 9.1.1 above. 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 9.1.1
-Refer to Figure 9.1.1 above. 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

In the given graph, when the market is in equilibrium the price is $30 and the quantity exchanged is 400 units. At this point, producer surplus is the area above the supply curve and below the equilibrium price, which is equal to $300 ($30 - $10) x 400.

If the government establishes a price ceiling of $20, the quantity demanded will increase to 500 units and the quantity supplied will decrease to 300 units. At this new equilibrium, the price is $20, which is below the original equilibrium price of $30.

Producer surplus for each unit sold now is the area above the supply curve and below the price ceiling, which is now equal to $10 ($20 - $10) x 300.

Therefore, the total producer surplus at the new equilibrium is $3,000 ($10 x 300 units) which is $300 less than the original producer surplus of $3,300 ($300 x 400 units), resulting in a fall by $300.

Figure 9.1.1 -Refer to Figure 9.1.1 Above. Suppose the Market Is Currently