Suppose that the equilibrium price in the market for widgets is $5. If a law red

Question

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. any possible increase in consumer surplus would be larger than the loss of producer surplus.

b. any possible increase in consumer surplus would be smaller than the loss of producer surplus.

c. the resulting increase in producer surplus would be larger than any possible loss of consumer surplus.

d. the resulting increase in producer surplus would be smaller than any possible loss of consumer surplus.

a. any possible increase in consumer surplus would be larger than the loss of producer surplus.

b. any possible increase in consumer surplus would be smaller than the loss of producer surplus.

c. the resulting increase in producer surplus would be larger than any possible loss of consumer surplus.

d. the resulting increase in producer surplus would be smaller than any possible loss of consumer surplus.

Explanation / Answer

answer is (a) any possible increase in consumer surplus would be larger than loss of producer surplus.. Reason is that other things equal, decrease in equilibrium price results in decrease in potential producer surplus and here the price has been decreased from $5 to $4.

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