Suppose a price floor is set at $10 in the market shown in the graph. Which of the following statements is true?I. All consumers are worse off due to the higher price.II. All producers are better off, because producer surplus increases.III. The economy as a whole is worse off, because total surplus falls.

Question

Quizplus · Accepted Answer

If a price floor is set at $10, it is above the equilibrium price of $6, so the quantity supplied by producers will increase to QS2, while the quantity demanded by consumers will decrease to QD2.

I. All consumers are worse off due to the higher price. 
This statement is true because the price floor sets a price above equilibrium, which results in a decrease in consumer surplus as consumers are paying more than they were before for the same amount of the good.

II. All producers are better off, because producer surplus increases. 
This statement is true because the price floor results in an increase in the price of the good, which means that producers receive more for each unit that they sell. The shaded area labeled as producer surplus increases with a price floor.

III. The economy as a whole is worse off, because total surplus falls. 
This statement is true because the total surplus (consumer surplus + producer surplus) decreases with a price floor. The decrease in consumer surplus is larger than the increase in producer surplus, resulting in a net loss in total surplus. The shaded area labeled as the deadweight loss represents the loss in total surplus due to the price floor.

Therefore, choice B is the correct answer.

Suppose a Price Floor Is Set at $10 in the Market