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.......
coc
b. consumer surplus would necessarily decrease because the lower price would create a shortage of widgets.
When the maximum legal price for widgets is reduced to $4, it creates a price ceiling. This means that the price cannot exceed $4, even if the equilibrium price is $5.
To understand the impact on consumer surplus, we can look at the graph of the supply and demand curves. Consumer surplus is represented by the area above the price but below the demand curve.
Initially, at the equilibrium price of $5, there is a certain level of consumer surplus. However, when the price is forced down to $4, it creates a shortage of widgets. Suppliers are no longer willing to supply as many widgets at the lower price.
This decrease in supply leads to a decrease in the quantity of widgets available in the market. As a result, consumers are not able to purchase as many widgets as they desire. This reduction in consumer demand leads to a decrease in consumer surplus, as some consumers are unable to find widgets at the reduced price.
Therefore, the correct answer is b. consumer surplus would necessarily decrease because the lower price would create a shortage of widgets.