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Use several sentences to explain whether each of the following increases, decreases, or stays the same...

Use several sentences to explain whether each of the following increases, decreases, or stays the same after a price ceiling:
a. Consumer surplus
b. Producer surplus
c. Total welfare
Business   Economics   
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Homework Answers

Answer #1

A. Consumer surplus - A binding price ceiling (i.e. price is set below equilibrium ) causes an increase in consumer surplus (the area below demand curve and above price) because consumers buy more but pay less.

B. Producer surplus (the area above supply curve and below price) - producer surplus decreases because producers now receive lower price than they were getting in equilibrium.

C. Total welfare- A binding price ceiling decreases total welfare because it causes shortage and market inefficiency. At the price ceiling quantity supplied, Marginal benefit exceeds the marginal cost. This inefficiency is equal to the loss in welfare or, it is also known as deadweight loss.

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