Question

Compare a market operating at a quantity lower than equilibrium (ie. a price floor) with the same market operating at the equilibrium quantity. Which of the following statements are true?

a. A market operating below equilibrium will transfer some producer surplus to consumers.

b. A market operating below equilibrium will transfer some consumer surplus to producers.

c. A price floor will increase the producer and total surplus.

d. It is unclear if the consumer surplus is greater or less at the market operating below equilibrium.

A price ceiling when it is set ________ the equilibrium price creates ________.

a. below; excess supply

b. above; excess demand

c. above; excess supply

d. below; excess demand

Answer 1

1)If a Market is being regulated with a price floor then the quantity in the market is lower than the equilibrium quantity in the market which would have been without a price floor.

A price floor is is generally above the equilibrium price. So so the price in the market is above the equilibrium price and the quantity is below the equilibrium Quantity. When the price is above the equilibrium price then the the market which is operating below equilibrium quantity will transfer some consumer surplus to producers and the producer surplus will increase.

Hence, option b is correct.

2) a price ceiling is effective when it is set below the equilibrium price. When the price which result due to a price ceiling is lower then the equilibrium price, at that price the quantity demanded is greater than the quantity supplied and there is excess demand in market.

Hence, a price ceiling when it is set below the equilibrium price creates excess demand.

Therefore, option d is correct.