Question

In Figure 8.9, the market equilibrium output and price of the bread market is shown to be at (Q, P) = (5,000, €2). Suppose that the mayor requires bakeries to sell as much bread as consumers want, at a price of €1.50.

Which of the following statements are correct? [Select all correct answers}.

A).The producer surplus increases but the consumer surplus decreases.

B).The consumer surplus increases but the producer surplus decreases.

C).The total surplus is lower than at the market equilibrium.

D).The consumer and producer surpluses both increase.

Answer 1

Supply (marginal cost) Consumer surplus Price, P (€) Producer surplus Demand 0.0 + 0 2,000 2,000 7,000 8,000 9,000 10,000 3,000 4,000 5,000 6,000 Quantity of loaves, Q

This is an example of price ceiling set by the government. shows that price ceiling has led to decline in the level of producer surplus in the market and increase in consumer surplus but overall or total surplus in the market has declined because price ceiling has led to deadweight loss in the economy.

Thus, Option B and option C are correct. The consumer surplus increases but the producer surplus decreases and the total surplus is lower than at the market equilibrium.