Refer to the figure below. If a price ceiling were imposed at $4, consumer surplus would be:
A)$36.
B)$20.
C)$24.
D)$28.

Question

Refer to the figure below.  If a price ceiling were imposed at $4, consumer surplus would be:
A)$36. 
B)$20. 
C)$24. 
D)$28.

Quizplus · Accepted Answer

With a price ceiling at $4, the quantity demanded would be 8 units (the demand curve intersects the price ceiling at a quantity of 8). At this quantity, the maximum price consumers are willing to pay is $6 (where the demand curve intersects the price axis). Thus, each of the 8 units would be purchased at a price of $4, resulting in a consumer surplus of $2 per unit. The total consumer surplus would be (8 units) x ($2 surplus per unit) = $16. However, we must also add the consumer surplus from the units purchased at prices above $4, before the price ceiling was imposed. At a price of $5, the quantity demanded was 5 units, and at a price of $6, the quantity demanded was 3 units. Thus, the additional consumer surplus from these units would be (5 units x $1 surplus per unit) + (3 units x $0 surplus per unit) = $5. Adding this to the consumer surplus from the units purchased at $4, we get a total consumer surplus of $16 + $5 = $21. But we must also subtract the revenue received by producers, which is $4 x 8 units = $32. Therefore, total social welfare (consumer surplus plus producer surplus) would be $21 + $32 = $53.

Refer to the Figure Below