Question

Choose the correct answer and explain each answer why it is correct/incorrect

10/Total surplus in a market will increase when the government

imposes a tax on that market.   

imposes a binding price floor on that market.

removes a binding price ceiling from that market.

None of these statements is correct

9/Which of the following will cause an increase in producer surplus?

  the imposition of a binding price ceiling in the market   

buyers expect the price of the good to be lower next month  

the price of a substitute increases  

income increases and buyers consider the good to be inferior

Answer 1

1) Total surplus in a market will increase when the government

-removes a binding price ceiling from the market

Because a binding price ceiling causes a decrease in surplus so does a tax and binding price floor as quantity exchanged decreases from the equilibrium level so removing a binding price ceiling or a tax or a floor will result in the market going back to the equilibrium level and increasing the surplus.

2) An increase in PS is caused when-

-when the price of substitutes increases

an increase in price of substitute will cause the demand for the good to increase and the demand curve will shift right which will cause the price and quantity to increase and causes the PS to increase.