Suppose that the equilibrium price in the market for widgets is $5.If a law increased the minimum legal price for widgets to $6,
A)the resulting increase in consumer surplus would be larger than any possible loss of producer surplus.
B)the resulting increase in consumer surplus would be smaller than any possible loss of producer surplus.
C)any possible increase in producer surplus would be larger than the loss of consumer surplus.
D)any possible increase in producer surplus would be smaller than the loss of consumer surplus.

Question

Quizplus · Accepted Answer

The minimum legal price for widgets is increased from $5 to $6 which means that the new price is above the equilibrium price. This will result in a decrease in the quantity demanded by consumers and an increase in the quantity supplied by producers. As a result, there will be an increase in producer surplus due to the higher price received for each widget sold. However, the loss of consumer surplus will be larger as the higher price reduces the amount of widgets that consumers can afford to buy. Therefore, any possible increase in producer surplus would be smaller than the loss of consumer surplus. Choice D is correct.

Suppose That the Equilibrium Price in the Market for Widgets