Question

If a price floor is set above the equilibrium price in a market, what will happen to consumer surplus?

1) Increase
2) Decrease
3) Remain unchanged
4) Cannot be determined

Answer 1

When a price floor is set above the equilibrium price, consumer surplus will decrease.

Step-by-step explanation:

When a price floor is set above the equilibrium price in a market, it creates a situation where the price is artificially kept higher than the market equilibrium. This means that suppliers are willing to sell more goods at this higher price, but consumers are not willing to buy as much at this price.

As a result, there will be a surplus of goods in the market, and consumer surplus will decrease. Consumer surplus is the difference between the price consumers are willing to pay and the actual price they pay. With a price floor, consumers have to pay more than they are willing to, resulting in a decrease in consumer surplus.

Therefore, the answer is 2) Decrease.