Use Figure 5 to answer questions 5 through 10 concerning the effects of a price

Question

Use Figure 5 to answer questions 5 through 10 concerning the effects of a price ceiling on gains from exchange 5. At the equilibrium price (P*) and quantity Figure 5: Effects ofa price ceiling (Q*) consumer surplus is equal to: Price Supply B. v ty P* 6. At the equilibrium price (P*) and quantity (Q*) producer surplus is equal to: Demand Qc Q Quantity D. S t 7. With the price capped at the ceiling price (Pc) consumer surplus is now equal to: 8. With the price capped at the ceiling price (Pc) producer surplus is now equal to: A. X 9. The deadweight loss associated with imposition of the price ceiling (Pc) is: A. yt B. S C. S t 10. Will consumers as a whole always be better off if a price ceiling reduces the price of a good below the market price, or can consumers as a whole be worse off? Explain your answer completely and carefully by reference to Figure 5. (Not more than two sentences.)

Explanation / Answer

a) COnsumer surplus is the area below the demand curve and above the price level. It will be the sum of V+Y. The answer is "B".

b) "C", WZX, the producer surplus is the area above the supply curve and below the price level.

c) V+W The answer is "B".

d) The producer surplus will only be X.

e) Y+Z is the deadweight loss because of the ceiling.

10) No, the consumer will not be better off if a price ceiling is introduced because it will cause a shortage of the goods and lead to black marketing. This will reduce the overall consumer surplus and welfare.

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