Question

In a perfectly competitive market for cheese with downward sloping demand and upward sloping supply, the equilibrium price is $12 per kilo. If the government imposes a price ceiling of $10, we can conclude that the government policy will: Select one: a. reduce the number of units sold only if demand is elastic b. decrease producer surplus and decrease total surplus c. reduce the number of units sold only if demand is inelastic d. decrease producer surplus but increase total surplus e. increase producer surplus but decrease total surplus 

          In a perfectly competitive market for cheese with downward sloping demand and upward sloping supply, the equilibrium price is $12 per kilo. If the government imposes a price ceiling of $10, we can conclude that the government policy will:
Select one:
a. reduce the number of units sold only if demand is elastic
b. decrease producer surplus and decrease total surplus
c. reduce the number of units sold only if demand is inelastic
d. decrease producer surplus but increase total surplus
e. increase producer surplus but decrease total surplus
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Added by Marc Z.

Principles of Economics
Principles of Economics
Gregory Mankiw 8th Edition
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In a perfectly competitive market for cheese with downward sloping demand and upward sloping supply, the equilibrium price is $12 per kilo. If the government imposes a price ceiling of $10, we can conclude that the government policy will: Select one: a. reduce the number of units sold only if demand is elastic b. decrease producer surplus and decrease total surplus c. reduce the number of units sold only if demand is inelastic d. decrease producer surplus but increase total surplus e. increase producer surplus but decrease total surplus
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Transcript

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00:01 So here we are told about a perfectly competitive market for cheese.
00:03 So let's just draw it, right? it's never a bad idea just to draw it.
00:08 Demand is downward sloping, supply is upward sloping, and in equilibrium, the price is $12.
00:15 The government is now going to come along and impose a price ceiling of 10, right? what does that ceiling at 10 mean? well, it means that up here is illegal, and down here is okay.
00:27 So this can no longer happen.
00:30 Ruled out by the ceiling.
00:32 So the new equilibrium would be right here, right? this would be the quantity supply.
00:38 This would be the quantity demanded and this gap here would be the shortage.
00:44 Right.
00:45 So we are going to end up here at time one because if you've got four people selling and 10 people buying only four units can actually get sold.
00:55 You can't sell units, can't buy units that don't exist.
01:01 So let's go through the options.
01:02 A is wrong because quantity always falls.
01:11 It has nothing to do with elastic, right? when i drew these demand curves, i didn't tell you whether the demand is inelastic or elastic.
01:20 It doesn't make any difference.
01:22 Even if the demand is inelastic, quantity will still fall, right? if i draw a different demand curve, right? now demand is more elastic, but the quantity still falls.
01:33 It's irrelevant, right? so it makes no difference, right, if demand is inelastic or elastic.
01:41 Let's think about b.
01:44 Decrease producer surplus, plus total surplus...
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