Question

32: The following figure shows demand and supply in a certain market. (The following is a description of the figure: In a two-axis graph we measure q in the horizontal axis and dollars $ in the vertical axis. Two curves S and Q are shown. S is a line with positive slope whose vertical intercept is positive. Q is a decreasing line whose vertical intercept is above the vertical intercept of S. Denote by (q*,p*) the point at which S and Q intersect; this point is such that q* is positive and p* is in between the vertical intercepts of S and Q. A level of prices p1 is shown. This price is above the vertical intercept of S, and below p*. The level of q associated by S to p1 is labeled q1. This q1 is to the left of q*. Denote by p’ the level of price such that Q(p’)=q1. This p’ is greater than p*. Six labels for areas in the figure are shown. These labels represent the size of the respective area. They are: a is the triangle with vertices given by the vertical intercept of Q, (0,p’), and (q1,p’); b is the rectangle with extremes (0,p’) and (q1,p*); c is the rectangle with extremes (0,p*) and (q1,p1); d is the triangle with vertices given by the vertical intercept of S, (0,p1), and (q1,p1); e is the triangle with vertices (q1,p’), (q1,p*), and (q*,p*); and f is the triangle with vertices (q1,p1), (q1,p*), and (q*,p*).)

le C 41

If government imposes a price cap p₁ firms will produce their optimal production at price p₁, which is q₁, and consumers will be willing to buy this production at this price. What is the change in consumer surplus from this market intervention compared to the market equilibrium (that is, consumer surplus with government intervention minus consumer surplus in the competitive market without intervention)?

-e-f
		-b-e
		-e
		-f
		c-e

Answer 1

Option (2).

Consumer surplus (CS) = Area between demand curve and market price

CS in free market equilibrium = a + b + e

CS with government intervention = a

Change in CS = a - (a + b + e) = a - a - b - e = - b - e