Question

Econ 201 (01) Midterm Exam Fall 2016 Page 10 0 10 Page 10 of 10 Figure 1 -- - P1 01 00 39. Refer to Figure 1. If the government imposed a price ceiling at P1, the total economic surplus would be the area(s)? a. A, B, C, D and E. b. A, C and B. c. A. d. A, C and D. e. B and E. 40. Refer to Figure 1. Suppose the government imposed a price floor at P1, the producer surplus would be the area(s)? a. B, C, D and E. b. A, C and B. c. B, E and D. d. B and E. e. B and C.

Answer 1

39.

The price ceiling is a legal maximum price which can be charged by the sellers and it is set below the equilibrium price. The price ceiling imposed by the government leads shortage of goods.

If price ceiling is set below the equilibrium price, then it will be binding and if it is set above the equilibrium price, then it will be not binding.

As it can be seen in the diagram that at price P1 price ceiling is ineffective because it is above the equilibrium price P0. Equilibrium price and quantity in this market will be P0 and Q0 respectively.

Hence total economic surplus in this market will be sum of consumer and producer surplus.

Total surplus is area (A+B+C+D+E).

Hence option A is the correct answer.

40.

Since the price floor is the legal minimum price which can be charged and it is set above the equilibrium price. It leads surplus of outputs. It is imposed above the equilibrium price.

As it can be seen in the diagram that price floor is P1 which is above equilibrium price. Hence it is effective.

Since only Q1 quantity is sold at price P1, so producer surplus will be area between quantity less than Q1 and below price P1. Hence producer surplus represent area(B+C).

Hence option e is the correct answer/