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 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 FI As a result of this support program, consumer surplus (CS) and producer surplus (PS) both change as follows: CS and PS both increase The increase in consumer surplus due to the support program is area 8 9 1 Quantity BF C+D E Click to select vour answerís) and then click Check Answer

Explanation / Answer

The consumer surplus was only area (A) at initial equilibrium price $7. But due to the support price by the government, the market price has decreased to $4 For the consumer. Hence the consumer surplus has increased by the areas (C+D+E). This is because the consumer surplus is the areas above the price and below the demand curve.

Hence area (C+D+E) is the correct answer.

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