Question

In the long run competitive equilibrium, a binding limit on the number of firms in a market will likely ____________ (increase/decrease) consumer surplus, and ____________ (increase/decrease) total welfare, relative to the competitive equilibrium.

Answer 1

Answer:

Decrease consumer surplus

Decrease total welfare

Explanation:

A competitive equilibrium occurs when demand equals supply in a competitive market. A point where demand curve intersects supply curve. If a binding limit is imposed on the number of firms in the market, supply curve will fall. This results in higher equilibrium price and lower equilibrium quantity compared to the efficient outcome without the binding limit. Thus, consumer surplus will decrease (because they pay higher prices for lower quantity) and total welfare will decrease (since consumer surplus decreases).

Consumer surplus is the difference in the amount a consumer is willing to pay and how much he actually pays. Total surplus is the sum of consumer surplus and producer surplus.