Use the following to answer question: Figure 3.3 -(Figure 3.3) The decrease in supply from S₁ to S₂ will cause consumer surplus to _____ and producer surplus to _____. A) decrease by $10.50; decrease by $4.50 B) decrease by $5.50; increase by $3 C) increase by $6; decrease by $18 D) increase by $8.75; increase by $6.67

Question

Quizplus · Accepted Answer

When the supply decreases, the equilibrium price increases from P1 to P2. As a result, the consumer surplus decreases from the area above P1 and below the demand curve to the area above P2 and below the demand curve. The producer surplus decreases from the area below P1 and above the supply curve to the area below P2 and above the supply curve.

The magnitude of the decrease in consumer surplus is equal to the area of the triangle bounded by P1, P2, and the vertical axis. In this case, the height of the triangle is 5 units and the base is $1.05 (the increase in price from $9.50 to $10.55). Therefore, the decrease in consumer surplus is 0.5 x 5 x $1.05 = $2.63.

The magnitude of the decrease in producer surplus is equal to the area of the rectangle bounded by the horizontal axis, P1, P2, and the quantity axis. In this case, the height of the rectangle is 10 units and the base is $1.05. Therefore, the decrease in producer surplus is 10 x $1.05 = $10.50.

Therefore, consumer surplus decreases by $2.63 and producer surplus decreases by $10.50, leading to a total decrease in surplus of $13.13. This is best captured by choice A.

Use the Following to Answer Question