Homework 2: Consumer and Producer Surplus

Do producers tend to favor price floors or price ceilings? Why? Producers favor

price floors because, when binding, price floors increase price above the equilibrium and may increase producer surplus.

Why would economists use the term 'deadweight loss' to describe the impact on consumer and producer surplus from a price control? Deadweight loss measures the amount of surplus

that is lost, being transferred to noone, as a result of a price control.

Consumer surplus is

the difference between the highest price a consumer is willing to pay and the price the consumer actually pays.

Producer surplus is

the difference between the lowest price a firm would be willing to accept and the price it actually receives.

How does producer surplus change as the equilibrium price of a good rises or falls?

As the price of a good rises, producer surplus increases, and as the price of a good falls, producer surplus decreases.

How does consumer surplus change as the equilibrium price of a good rises or falls?

As the price of a good rises, consumer surplus decreases, and as the price of a good falls, consumer surplus increases.

Does it matter whether buyers or sellers are legally responsible for paying a tax?

No, the market price to consumers and net proceeds to sellers are the same independent on who pays the tax.

A price ceiling is a legally determined _____ price that sellers may charge. A price floor is a legally determined _____ price that sellers may receive.

maximum; minimum