Chapter 1. eFigure 3.10
eFigure
Question 1.1
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Correct! Before the regulation, consumer surplus is represented by areas A + B + C. After the regulation, consumer surplus is represented by area A. Consumer surplus is higher without the quota. The quota results in a reduction of consumer surplus by areas B + C. If the quota were less restrictive at 1,000 rather than 500 tattoos, the loss of consumer surplus would be smaller. Consumers would be closer to their desired amount of tattoos and the larger amount of consumer surplus. The more restrictive the quota, the more consumer surplus is lost.
Incorrect. Before the regulation, consumer surplus is represented by areas A + B + C. After the regulation, consumer surplus is represented by area A. Consumer surplus is higher without the quota. The quota results in a reduction of consumer surplus by areas B + C. If the quota were less restrictive at 1,000 rather than 500 tattoos, the loss of consumer surplus would be smaller. Consumers would be closer to their desired amount of tattoos and the larger amount of consumer surplus. The more restrictive the quota, the more consumer surplus is lost.
Question 1.2
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Correct! As described, producer surplus changes in two ways. Producers lose area E due to fewer tattoos being sold, as restricted by the quota. In addition, area B is transferred from consumer surplus to producer surplus due to the higher price that consumers now have to pay for tattoos, $100 in place of $50. It is this increase in price that is responsible for the transfer of area B.
Incorrect. As described, producer surplus changes in two ways. Producers lose area E due to fewer tattoos being sold, as restricted by the quota. In addition, area B is transferred from consumer surplus to producer surplus due to the higher price that consumers now have to pay for tattoos, $100 in place of $50. It is this increase in price that is responsible for the transfer of area B.
Question 1.3
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Correct! The area described identifies the entire amount of surplus lost due to the regulatory policy. This is the deadweight loss resulting from the quota and includes areas C and E. Area C is the lost consumer surplus while area E is the lost producer surplus. These result from the quota establishing a limit on the number of tattoos that will be provided by the market. Under the quota of $100, there are consumers who would be willing to pay less than $100 for a tattoo and producers who would be willing to provide tattoos to these consumers, but the regulation prevents those sales from ever taking place.
Incorrect. The area described identifies the entire amount of surplus lost due to the regulatory policy. This is the deadweight loss resulting from the quota and includes areas C and E. Area C is the lost consumer surplus while area E is the lost producer surplus. These result from the quota establishing a limit on the number of tattoos that will be provided by the market. Under the quota of $100, there are consumers who would be willing to pay less than $100 for a tattoo and producers who would be willing to provide tattoos to these consumers, but the regulation prevents those sales from ever taking place.