Exhibit 3A-1 Comparison of Market Efficiency and Deadweight Loss

As shown in Exhibit 3A-1, if the market price falls from $2.00 to $1.00, then:
A) total surplus increases.
B) deadweight loss increases.
C) overproduction decreases.
D) underproduction decreases.

Question

Exhibit 3A-1 Comparison of Market Efficiency and Deadweight Loss

As shown in Exhibit 3A-1, if the market price falls from $2.00 to $1.00, then:
A) total surplus increases. 
B) deadweight loss increases. 
C) overproduction decreases. 
D) underproduction decreases.

Quizplus · Accepted Answer

When the market price falls from $2.00 to $1.00, there is excess supply in the market, which leads to deadweight loss. This deadweight loss results from the fact that some potential buyers are excluded from the market due to the high price, and some potential sellers are excluded from the market due to the low price. This reduces the total surplus in the market and leads to a loss of economic efficiency. Therefore, the correct answer is B- deadweight loss increases.