Homework Help: Econ MC

Posted by Shawn on Thursday, February 15, 2007 at 1:21am.

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. consumer surplus would necessarily increase even if the lower price resulted in a
shortage of widgets.
b. consumer surplus would necessarily decrease because the lower price would create a
shortage of widgets.
c. consumer surplus might increase or decrease.
d. consumer surplus would be unaffected

can you explain which answer is correct, thanks.

Draw initial supply and demand curves (hint: have the demand curve start at the y-axis). Consumer surplus is represented by the area above price but below the demand curve. Now impose a price ceiling. Your graph should show two changes to consumer surplus -- and INCREASE (in area) because price is lower, and a DECREASE (in area) because suppliers are supplying less. So..... the correct answer is.......

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