Chapter 4

Correct! When the price is below the equilibrium price, a shortage will result. The quantity demanded is 30 million gallons, while the quantity supplied is 10 million gallons. The difference between the quantity demanded and quantity supplied is the amount of the shortage.

Incorrect. When the price is below the equilibrium price, a shortage will result. The quantity demanded is 30 million gallons, while the quantity supplied is 10 million gallons. The difference between the quantity demanded and quantity supplied is the amount of the shortage.

Correct! First, consider the change in consumer surplus. The original consumer surplus is the area of the triangle bounded by the equilibrium price of $3, the vertical price axis, and the demand curve. This area is (1/2) × (20 million gallons) × ($2) = $20 million. When the price decreases, the quantity supplied decreases. The new consumer surplus is the area bounded by the new price of $2, the vertical price axis, the demand curve, and the new quantity of 10 million. In the figure below, look at the region bounded by $2, $5, f and h. To calculate the area, first look at the rectangle bounded by $2, $4, f and h. This area is $2 times 10 million, or $20 million. The area of the triangle at top is the area bounded by $4, $5 and f. This is (1/2) × (10 million) × $1, or $5 million. Thus, the new consumer surplus is $25 million. We conclude that consumer surplus increased by $5 million.Next, consider the change in producer surplus. The original producer surplus is the area of the triangle bounded by the equilibrium price of $3, the vertical price axis, and the supply curve. This area is (1/2) × (20 million gallons) × ($2) = $20 million. When the price decreases, the quantity supplied decreases. The new producer surplus is the area bounded by the new price of $2, the vertical price axis, the supply curve. In the figure below, look at the region bounded by $1, $2 and h. The area of this triangle is (1/2) × (10 million) × $1, or $5 million. Thus, the new producer surplus is $5 million. We conclude that producer surplus decreased by $15 million.

Incorrect. First, consider the change in consumer surplus. The original consumer surplus is the area of the triangle bounded by the equilibrium price of $3, the vertical price axis, and the demand curve. This area is (1/2) × (20 million gallons) × ($2) = $20 million. When the price decreases, the quantity supplied decreases. The new consumer surplus is the area bounded by the new price of $2, the vertical price axis, the demand curve, and the new quantity of 10 million. In the figure below, look at the region bounded by $2, $5, f and h. To calculate the area, first look at the rectangle bounded by $2, $4, f and h. This area is $2 times 10 million, or $20 million. The area of the triangle at top is the area bounded by $4, $5 and f. This is (1/2) × (10 million) × $1, or $5 million. Thus, the new consumer surplus is $25 million. We conclude that consumer surplus increased by $5 million. Next, consider the change in producer surplus. The original producer surplus is the area of the triangle bounded by the equilibrium price of $3, the vertical price axis, and the supply curve. This area is (1/2) × (20 million gallons) × ($2) = $20 million. When the price decreases, the quantity supplied decreases. The new producer surplus is the area bounded by the new price of $2, the vertical price axis, the supply curve. In the figure below, look at the region bounded by $1, $2 and h. The area of this triangle is (1/2) × (10 million) × $1, or $5 million. Thus, the new producer surplus is $5 million. We conclude that producer surplus decreased by $15 million.

Correct! For further review, see section “Consequences of Deviating from Market Equilibrium."

Sorry, but this answer is incorrect. Deadweight loss is represented by the triangle between quantities 10 million and 20 million and the demand and supply curves. This value is ½ × (20 million − 10 million) × ($4 − $2) = $10 million. For further review, see section “Price Ceilings."

Correct! For further review, see section “Price Ceilings."

Sorry, but this answer is incorrect. If the price ceiling is raised to $5 per gallon, the price ceiling would no longer be binding because it is above the equilibrium price of $3. The market equilibrium would prevail, and no deadweight loss would be created. For further review, see section “Price Ceilings."