Question:
If the demand function is $Q_d = 240 – 3P$, what would be the impact of a minimum price of Rs. 60 (up from equilibrium Rs. 50) on consumer surplus?
(1) increases by Rs. 600
(2) decreases by Rs. 600
(3) increases by Rs. 750
(4) decreases by Rs. 750
(5) decreases by Rs. 1350
Correct Answer:
(4)
Answer Explanation:
First, find max price (where $Q_d = 0$): $0 = 240 – 3P rightarrow P = 80$. At P=50, $Q_d = 240 – 150 = 90$. Initial CS = $0.5 times 90 times (80 – 50) = 1350$. At new P=60, $Q_d = 240 – 180 = 60$. New CS = $0.5 times 60 times (80 – 60) = 600$. The change is $600 – 1350 = -750$. It decreases by 750.
Topic: Consumer Surplus Year: 2021
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