Suppose that the equilibrium price in the market for widgets is $5.If a law reduced the maximum legal price for widgets to $4,
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

Since the equilibrium price was $5, the new maximum legal price will act as a price ceiling. Therefore, the quantity demanded will be greater than the quantity supplied which leads to a shortage. As a result, some consumers will get the product at the lower legal price ($4) while others will be unable to buy it. The loss of producer surplus will be greater than any possible increase in consumer surplus due to the decrease in quantity. Thus, the possible increase in consumer surplus would be smaller than the loss of producer surplus.

Suppose That the Equilibrium Price in the Market for Widgets