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What is the value of consumer surplus?

User Yatu
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Final answer:

Consumer surplus is the benefit consumers receive when they pay less than what they are willing to pay for a product. Price controls like ceilings and floors disrupt market equilibrium, altering consumer and producer surplus and often resulting in a deadweight loss.

Step-by-step explanation:

Consumer surplus represents the difference between what consumers are willing to pay for a product based on their preferences and the market equilibrium price they actually pay. In a market situation, the equilibrium price is set at a level where demand equals supply, but consumers may have been willing to pay more, which creates a surplus for them. This surplus is graphically represented as the area under the demand curve and above the market price. When a price ceiling or floor is imposed, it changes the equilibrium and can lead to a different consumer surplus.

In the given scenarios, (a) before a price ceiling, consumer surplus is T + U and after it is T + V. The imposition of a price ceiling lowers the price from $600 to $400 and reduces the quantity supplied to 15,000, thus changing the consumer surplus. Similarly, in (b) with a price floor set at $12, above the equilibrium price of $8, the quantity demanded decreases, altering the consumer surplus to just area G. The producer surplus is also affected by these price controls, and a deadweight loss is often incurred when the market is not at equilibrium, representing a loss of total surplus (consumer plus producer surplus) in the economy.

User Ligwin
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