Suppose that the equilibrium price in the market for widgets is $8.If a law reduced the maximum legal price for widgets to $7,what would happen to consumer surplus
A)It would necessarily increase even if the lower price resulted in a shortage of widgets.
B)It would necessarily decrease because the lower price would create a shortage of widgets.
C)It might increase or decrease.
D)It would be unaffected.

Question

Quizplus · Accepted Answer

It is uncertain whether the consumer surplus would increase or decrease because we do not have information about the elasticity of demand for widgets. If the demand for widgets is inelastic, then the reduction in price would not significantly increase the quantity demanded and the consumer surplus could decrease. Conversely, if the demand for widgets is elastic, then the reduction in price may significantly increase the quantity demanded and the consumer surplus could increase. Therefore, the answer is (C) it might increase or decrease.

Suppose That the Equilibrium Price in the Market for Widgets