Question

The diagrams to the right show the supply and demand curves in the market for widgets. In each diagram the free market equilibrium price and quantity are p* and Q*. a. In part (1), if the price of widgets is at its market-clearing equilibrium level,p*, identify the areas on the graph that sum to this market's total economic surplus. (Select all that apply.) A. 1 O c. 3 E. 5 G.7 B. 2 D. 4 OF 6 H. 8 b. In part (1), suppose the government imposes a price ceiling at price P1. Identify the areas on the graph that represent the reduction in economic surplus as a result of this price control. (Select all that apply.) A. 1 C. 3 E. 5 O G. 7 OB. 2 D. 4 OF 6 DH 8

Answer 1

(a) B, C, D, E, F

When price is p*, quantity is Q*.

Total economic surplus (TS) = Consumer surplus (CS) + producer surplus (PS) = 2 + 3 + 4 + 5 + 6

(b) E, F

When ceiling price is p1, Quantity is Q1.

Decrease in TS = 5 + 6

(c) B, C, D, E, F

When price is p*, quantity is Q*.

Total economic surplus (TS) = Consumer surplus (CS) + producer surplus (PS) = 2 + 3 + 4 + 5 + 6

(d) E, F

When ceiling price is p2, Quantity is Q2.

Decrease in TS = 5 + 6

(e) In part (i), society is not better off because market is not efficient and there exists a deadweight loss.

(f) In part (ii), society is not better off because market is not efficient and there exists a deadweight loss.