Question

Name: 9. (10 Points) Consider the market for paper towels where the supply curve is upward sloping and the demand curve is downward slopine. (Hint: Draw the graphs to answer the questions below.) a. Suppose there is an effective price ceiling applied on this market. What happens to the Consumer surplus as a result? b. Suppose there is an effective price floor applied on this market. What happens to the consumer surplus as a result? be

Answer 1

Solution x-a Supply Price F Quantity a) Diagram showing Price ceiling at price c. On original Equilibrium Consumer Surplus - DABE After price celing. Total Quantity Supplied = Q₂ Total Consumer Surplus - Area C-FO-A. from Earlier surpley A GDE is lost due to Ceiling but area C-B-G-F is added to Consumer Swipley which is clearly showing that larger than a GIDE. How surpley Earlier C-GD-A > A-B-E So price ceiling increased Consumer Surplus

o O2 ar Earlier Consumer Surplus with price=e. = A ACB After price floor of price-D Consumer Surplus = CADE It is clear loss of consumer Supply due to flood price = Area E-DE-BB - Area C-D-E-B