Assume the market is in equilibrium in the graph shown at demand D and supply S₂ (at a quantity of 6). If the supply curve shifts to S₁, and a new equilibrium is reached (at a quantity of 4), which of the following is true? A) Total surplus would increase by $7.50. B) Total surplus would decrease by $16.50. C) Total surplus would increase by $32. D) Total surplus would decrease by $14.00.

Question

Quizplus · Accepted Answer

When the supply curve shifts to the left, the equilibrium price and quantity both decrease. In this case, the new equilibrium quantity is 4. The old equilibrium quantity was 6. Therefore, there is a decrease in quantity by 2. The new equilibrium price is unknown, but we know that it is lower than the old equilibrium price. The area that represents the consumer surplus decreases by ($10 x 2)/2 = $10. The area that represents the producer surplus decreases by ($5 x 2)/2 = $5. The area that represents the deadweight loss increases by ($10 + $5) x 2/2 = $15. Therefore, the total surplus decreases by $10 + $5 + $15 = $30. Since the question asks for the change in total surplus, we need to subtract the old total surplus from the new total surplus. The old total surplus was ($10 x 6)/2 + ($5 x 6)/2 = $45. The new total surplus is ($10 x 4)/2 + ($5 x 4)/2 = $30. The change in total surplus is -$15. Therefore, the correct answer is D, Total surplus would decrease by $14.00.

Assume the Market Is in Equilibrium in the Graph Shown