A perfectly competitive market is shown in the graph on the right. The equilibri

Question

A perfectly competitive market is shown in the graph on the right. The equilibrium price and quantity are $6 and 4 units, respectively Price The government institutes a price support program that works as follows. The support price is set at $7. At this price producers supply 5 units of the product. Rather than buy the excess supply the government lets the market price fall to $4, at which point consumers purchase the entire amount supplied FI The government pays suppliers the difference between the market price of $4 and the support price of $7 for each unit of the product produced and sold As a result of this support program, consumer surplus (CS) and producer surplus (PS) both change as follows CS decreases and PS increases CS and PS both decrease CS increases and PS decreases CS and PS both increase 8 9 10 Quantity

Explanation / Answer

Option 4: CS and PS both increase.

Explanation: The consumer surplus increases because they are now consuming more number of goods at a lower price. Producer surplus increases as the producers are now selling more number of goods at a higher price.

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