TutorOn by Sanath Withanage

Question:

Setting an effective price floor would
(1) increase consumer surplus and producer surplus.
(2) increase consumer surplus and decrease producer surplus.
(3) decrease consumer surplus and producer surplus.
(4) decrease consumer surplus and increase producer surplus.
(5) leave both consumer and producer surplus unchanged.

Correct Answer:

(4)

Answer Explanation:

An effective price floor (a legal minimum price) is set above the natural market equilibrium. This forces consumers to pay a higher price for fewer units, strictly decreasing Consumer Surplus. Conversely, it provides producers with a higher price for the units they do manage to sell, which is specifically designed to increase Producer Surplus at the consumers’ expense.

Topic: Price Controls Year: 2019