Question

Suppose the market supply curve is upward sloping and market demand is perfectly inelastic. If the market price is held above the equilibrium level, which of the following statements about the resulting outcome is not true?A) The decrease in consumer surplus is fully captured by the producers.B) There will be an excess quantity supplied.C) Quantity demanded will remain the same.D) Quantity demanded will decline.

Answer 1

The correct answer is option D.

Explanation:

The supply curve is upward sloping.

The demand curve is inelastic. It means that the demand curve will be a vertical line and quantity demanded will not change with change in price.

As price level is increased above equilibrium, the quantity demanded will remain unchanged. At this price level though, there will be excessive supply as supply will increase with an increase in price.

The consumer surplus will get reduced. This reduction in consumer surplus will be captured by producers as the producer's surplus will increase by the same amount as a reduction in consumer surplus.