Question

Compare a market operating at a quantity lower than equilibrium (ie. a price floor) with the same market operating at the equilibrium quantity. Which of the following statements are true?
a. A price floor will increase the producer and total surplus.
b. It is unclear if the consumer surplus is greater or less at the market operating below equilibrium.
c. A market operating below equilibrium will transfer some producer surplus to consumers
d. A market operating below equilibrium will transfer some consumer surplus to producers.

Answer 1

Answer:

D

Explanation:

A price floor is when the government or an agency of the government sets the minimum price of a product. A price floor is binding if it is set above equilibrium price.

A price floor increases producer surplus and reduces consumer surplus

Consumer surplus is the difference between the willingness to pay of a consumer and the price of the good.

Consumer surplus = willingness to pay – price of the good

Producer surplus is the difference between the price of a good and the least price the seller is willing to sell the product

Producer surplus = price – least price the seller is willing to accept

The dead weight loss of tax can be determined by calculating the reduction in total surplus as a result of the tax