Suppose that the equilibrium price in the market for widgets...

Suppose that the equilibrium price in the market for widgets is $5. If a law increased the minimum legal price for widgets to $6, producer surplus Question 11 options: 1) would necessarily decrease because the higher price would create a surplus of widgets. 2) would necessarily increase even if the higher price resulted in a surplus of widgets. 3) might increase or decrease. 4) would be unaffected.

Transcript

00:01 So here we're talking about the effects of price controls.

00:04 And as soon as i see that the equilibrium price is $5, i want to draw a market so i can visualize what's going on because i think that's very, very useful.

00:14 So the original equilibrium price is $5.

00:17 And that means the original producer surplus is this green triangle, right? this would be the producer surplus.

00:25 So now the law is going to increase the producer, the price to six.

00:32 So at this higher price, we get quantity supplied and we get quantity demanded.

00:38 So the new producer surplus is going to be the new producer surplus, the new producer surplus, right? so here, what do we know? we have gained this area, right? this area up here has been gained to the producer surplus.

01:06 But notice that this area here, this triangular area, has been lost, right? so there's not an unambiguous gain, right? so what are my options here? so let's start ruling these out.

01:30 It definitely, right? so the first one is, let's paraphrase the first answer, would decrease, right? this one is clearly wrong, right? because it looks like the way i drew it, clearly in this market, producer surplus is increasing.

01:49 The area gained is much, much bigger than the area lost.

01:53 So it's probably going to increase.

01:54 We can't say 100 % for sure, but the way i drew it, it looks like there's the possibility.

02:00 For doubt because there's some chance that if i draw this market in a really exaggerated way, i could exaggerate these areas and make the rectangle that's gained very small and make the triangle that's lost very big...

Question

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