Question

QUESTION1 Supply Demand Quantity Using the diagram above, if a price ceiling was introduced at Pt then producer surplus would be O VFB O XUGE P*UX

Answer 1

The price control measures like price ceiling and price floor are often adopted by the government to regulate a market which is subjected to wide fluctuations in price which sometimes harm producers and sometimes the consumers. The price ceiling and price floor is adopted in order to minimize the harm and maximize the benefit by preventing unwanted fluctuation in price level.

Under price ceiling, the government fixes a maximum price above or below the market equilibrium price where the producers are not allowed to sell their products at a price higher than the legally fixed price. The government resorted to price ceiling during times of price hike and to prevent the over exploitation on consumers.

A price ceiling above the equilibrium price transfers a part of the consumers surplus to the producers while a price ceiling below the equilibrium price transfers a part of producer’s surplus to the consumers. A price ceiling above the equilibrium price cause excess supply and shortage of demand and a price ceiling below the equilibrium price cause shortage of supply and excess demand.

In the given figure, at the equilibrium of the market, the producer’s surplus was equal to VFB. When the price ceiling is introduced above the equilibrium price i.e at P* the producer’s surplus would be P*UFB. This is the case before considering the fall in demand. After the price ceiling, as it is above the equilibrium price the demand decrease from Q* to Qd. The fall in demand reduce the producer’s surplus from P* UFB to P*UGB. Since the question is before the market adjustment the answer is P*UFB.

Answer: P*UFB