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 be the result
A)Any possible increase in consumer surplus would be larger than the loss of producer surplus.
B)Any possible increase in consumer surplus would be smaller than the loss of producer surplus.
C)The resulting increase in producer surplus would be larger than any possible loss of consumer surplus.
D)The resulting increase in producer surplus would be smaller than any possible loss of consumer surplus.

Question

Quizplus · Accepted Answer

If the maximum legal price for widgets is reduced to $7, it means that the price ceiling is below the market equilibrium price of $8. As a result, there will be excess demand or shortage of widgets in the market. This will lead to a situation where some consumers who are willing to pay a higher price for the product will not be able to buy it at the lower price of $7. This will result in a loss of consumer surplus for those consumers. On the other hand, the producers of widgets will suffer a loss of producer surplus as they will not be able to sell all of their supply at the lower price of $7. Thus, any possible increase in consumer surplus from the lower price will be smaller than the loss of producer surplus. Hence, option B is the best choice.

Suppose That the Equilibrium Price in the Market for Widgets