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 C+D E The increase in producer surplus due to the support program is area 8 9 10 Quantity DEF C+D E A+B C Click to select your answer(s) and then click Check Answer. parts

Explanation / Answer

Producer surplus will be A+B.

This because as there is monimum support price the Price is more than the equilibrium price. Even though consumer may mot pay but goverment is paying so the producer is getting benefit of the Price support ceiling at rs 7. So the increase will be the area A+B.

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