According to the graph shown, if the market goes from equilibrium to having its price set at $4:
A) deadweight loss will be $90.
B) consumer surplus will be $160.
C) deadweight loss will be $60.
D) consumer surplus will rise by $30.

Question

According to the graph shown, if the market goes from equilibrium to having its price set at $4:
A) deadweight loss will be $90. 
B) consumer surplus will be $160. 
C) deadweight loss will be $60. 
D) consumer surplus will rise by $30.

Quizplus · Accepted Answer

When the market is at equilibrium (with price at $6), consumer surplus is the area above the market price and below the demand curve (triangle ABC), while producer surplus is the area below the market price and above the supply curve (triangle DEF). Deadweight loss is the loss of potential gains from trade that occurs when the market is not at equilibrium, and is represented by the shaded area between the supply and demand curves, below the price of $4 (rectangle DECB). If the market price were to decrease from $6 to $4, consumer surplus would increase to the area above the price of $4 and below the demand curve (triangle ABD), while producer surplus would decrease to the area below the price of $4 and above the supply curve (triangle CEF). Deadweight loss would also decrease, to the shaded area between the supply and demand curves, below the price of $4 (rectangle DEC). To compute the numerical values of these changes, we need to use the formulas for the area of a triangle (1/2 base times height) and a rectangle (base times height). Using these formulas with the given dimensions, we find that the decrease in consumer surplus is $40 (from $200 to $160), the decrease in producer surplus is $10 (from $50 to $40), and the decrease in deadweight loss is $30 (from $90 to $60). Therefore, the best answer is C, as it correctly identifies the change in deadweight loss that corresponds to the change in price. The other choices are incorrect because they either refer to the wrong magnitude or direction of changes, or they do not capture the relevant economic concept.

According to the Graph Shown, If the Market Goes from Equilibrium