Question

3. 101 PI $12 $10 $81B : C $6 $4 $2 10 According to the graph shown, if the market goes from equilibrium to having its price set at $10: A. deadweight loss will occur. B. seven fewer market transactions will occur. consumer surplus will decrease. D. All of these are true. 4. 102.

Answer 1

When the supply and demand curves intersect, the market is in equilibrium. This is where the quantity demanded and quantity supplied are equal. The corresponding price is the equilibrium price or market-clearing price, the quantity is the equilibrium quantity.

If the market price is above the equilibrium price, quantity supplied is greater than quantity demanded, creating a surplus. Here, at equilibrium, market demand=market supply = 10. But as price goes up, quantity traded decrease to 3. Thus there is a seven fewer market transaction.

If a surplus exists, the price must fall in order to entice additional quantity demanded and reduce quantity supplied until the surplus is eliminated.

At equlilibrium price, consumer surplus is A+B+C and producer surplus is D+E.

But, when prices go up to $10 from $6(equilibrium), consumer surplus will be A, and producer surplus will be B+D.

As a result, the deadweight loss will be C+E, whereas earlier it was 0.