Suppose a market where demand is given by the equation Q = 30 - P, where Q is quantity and P is price in $. The offer is given at Q = 10 + 4P. Will the consumers, collectively considered, benefit from the authorities introducing a maximum price of $1 instead of having the price determined by a free market?
a) Yes, because consumers will pay a lower price than with a free market
b) Yes, because consumer surplus is increasing.
c) No, because state interference in the market always harms consumers.
d) No, because the consumer surplus is declining.
Demand curve is given by : Q= 30-P
Supply curve is given by : Q= 10+4P
Equilibrium price : Demand curve= Supply Curve
30-P=10+4P
20=5P ==> P=$4.
Since the maximum price(price ceiling) is $1, consumer will have to pay less amount than the equilibrium price($4) . So, the consumer will have to pay a lower price than with a free market so option 'A' is correct.
It must be noted that, price ceiling not necessarily always increase the consumer surplus.
Therefore , Option 'A' is correct.
Suppose a market where demand is given by the equation Q = 30 - P, where...