Use Figure 5 to answer questions 5 through 10 concerning the effects of a price
ID: 1154437 • Letter: U
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 5x effects ofa price celing Price (Q*) consumer surplus is equal to: Supply 6. At the equilibrium price (P*) and quantity (Q*) producer surplus is equal to: Demand Quantity D. s+ 7. With the price capped at the ceiling price (Pc) consumer surplus is now equal to B. W 8. With the price capped at the ceiling price (Pc) producer surplus is now equal to: A.? 9. The deadweight loss associated with imposition of the price ceiling (Pc) is: A y+t B. S C. st 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
Answer : 5) B is the correct option number.
Because according to the given diagram at P* price level and Q* quantity level the consumer surplus area is (v + y).
6) C is the correct option number.
Because according to the daigram at P* price level and Q* quantity level the producer surplus area is (w + z + x) .
7) B is the correct option number.
Because of price ceiling consumers pays less than the market equilibrium price level P* . As a result consumer gets more surplus. In this case the consumer surplus area is (v + w).
8) A is the correct option number.
Because of price ceiling the price level fall and as a result the producers gets lower price than the market equilibrium price level P* and hence producer surplus decrease. In this case the producer surplus area is x.
9) D is the correct option number.
Because of price ceiling a small part of total surplus area goes to welfare loss or deadweight loss. In the diagram, the deadweight loss area is ( y + z ).
10) As a whole consumers face a worse off situation. Because of price ceiling consumer pays less than the market equilibrium price level P* in the given diagram but at the price ceiling price level Pc the market suplly level decrease from the market equilibrium quantity level Q* and becomes Qc. From the diagram it is clear that at price level Pc the market supply falls and hence the market supply does not meet the market demand level and as a result at lower price level Pc consumers can not attain their quantity demanded level fully. Now from this discussion it is clear that consumers pays less in price ceiling and becomes better off but as a whole consumers face the worse off situation.
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