Question:
Assume a competitive market is in equilibrium at Rs. 100. Assume the market supply curve changes from being elastic to become inelastic and the equilibrium price does not change. What is the effect on consumer and producer surplus?
(1) Inc / Dec
(2) Inc / Unchanged
(3) Unchanged / Increases
(4) Unchanged / Unchanged
(5) Dec / Inc
Correct Answer:
(3)
Answer Explanation:
Consumer surplus is determined by the demand curve and the equilibrium price line; since neither changed, consumer surplus remains unchanged. Producer surplus is the area above the supply curve and below the price line. When the supply curve becomes inelastic (steeper) around the same equilibrium point, it drops down further on the y-axis, causing the area between it and the price line to expand, thereby increasing producer surplus.
Topic: Welfare Economics Year: 2019
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