Chapter 1. eFigure 3.7

100

Correct! Based on the law of demand, we know that as price rises consumers will purchase less of a good. In this case, as price rises consumers purchase less pizza. Accordingly, the area representing consumer surplus (under the demand curve and above price, up to the quantity purchased) will become smaller. This results from both a higher price, and the reduced consumption.

Incorrect. Based on the law of demand, we know that as price rises consumers will purchase less of a good. In this case, as price rises consumers purchase less pizza. Accordingly, the area representing consumer surplus (under the demand curve and above price, up to the quantity purchased) will become smaller. This results from both a higher price, and the reduced consumption.

100

Correct! The areas C and E and the triangle ∆WXY would be considered part of consumer surplus if 12,000 pizzas were produced.These areas fall under the demand curve and above price, so they constitute surplus for consumers.However, since the 6,000 pizzas (between 6,000 and 12,000) are never produced, this surplus is never generated and does not exist.

Incorrect. The areas C and E and the triangle ∆WXY would be considered part of consumer surplus if 12,000 pizzas were produced.These areas fall under the demand curve and above price, so they constitute surplus for consumers.However, since the 6,000 pizzas (between 6,000 and 12,000) are never produced, this surplus is never generated and does not exist.

100

Correct! The first effect results in the loss of C for consumers. The area of C is equal to $8.The area of a triangle is (1/2)(base)(height) = (1/2)(4)(4) = 8. The second effect results in a gain of D through lower prices. The area of D is equal to $12, (base)(height) = (6)(2) = 12. Consumers gain $12 and lose $8, making them better off. It is important to note that this answer is specific to this problem and these supply and demand curves. It is possible that a price ceiling could make consumers worse off, or result in no change in surplus for them, depending on the specifics of the market.

Incorrect. The first effect results in the loss of C for consumers. The area of C is equal to $8.The area of a triangle is (1/2)(base)(height) = (1/2)(4)(4) = 8. The second effect results in a gain of D through lower prices. The area of D is equal to $12, (base)(height) = (6)(2) = 12. Consumers gain $12 and lose $8, making them better off. It is important to note that this answer is specific to this problem and these supply and demand curves. It is possible that a price ceiling could make consumers worse off, or result in no change in surplus for them, depending on the specifics of the market.

100

Correct! Area E was initially included in producer surplus but is lost to producers following the imposition of the price ceiling because producers are unable to sell pizza for a price greater than $8.Even though there are consumers willing to pay more than $8 for a pizza and producers willing to sell a pizza for more than $8, the price ceiling prevents these sales from ever taking place.The surplus of area E is never generated since these pizzas are never produced.

Incorrect. Area E was initially included in producer surplus but is lost to producers following the imposition of the price ceiling because producers are unable to sell pizza for a price greater than $8.Even though there are consumers willing to pay more than $8 for a pizza and producers willing to sell a pizza for more than $8, the price ceiling prevents these sales from ever taking place.The surplus of area E is never generated since these pizzas are never produced.