Which statement(s)is/are TRUE? I.Quantity controls set below the market equilibrium quantity drive a wedge between the demand price and the supply price of the good.
II.The difference between the demand price and the supply price at the quota limit is consumer surplus.
III.Quantity controls have no undesirable side effects.
A)I only
B)II only
C)II and III
D)I,II,and III

Question

Quizplus · Accepted Answer

Statement I is true because quantity controls, such as quotas, limit the amount of a good that can be produced or consumed, creating a shortage or surplus in the market. When the quantity control is set below the market equilibrium quantity, it creates a wedge between the demand price (the price consumers are willing to pay) and the supply price (the price producers are willing to accept), resulting in a higher price for the good.

Statement II is also true because the consumer surplus is the difference between what consumers are willing to pay for a good (represented by the demand price) and what they actually pay (the price they must pay due to the quota). At the quota limit, the price consumers pay is equal to the supply price, which is higher than the equilibrium price, resulting in a reduction in consumer surplus.

Statement III is false because quantity controls can have undesirable side effects such as black markets, reduced incentive for innovation and efficiency, and administrative costs to enforce the quota.

Which Statement(s)is/are TRUE? I