Question

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

1) Increase
2) Decrease
3) Remain unchanged
4) Cannot be determined without additional information

Answer 1

If a price ceiling is set above the equilibrium price, the producer surplus will decrease in the long run.

Step-by-step explanation:

A price ceiling is a government-imposed limit on how high a price can be charged for a particular good or service. If a price ceiling is set above the equilibrium price, it will not have an immediate impact on the producer surplus. However, in the long run, the producer surplus will decrease because the price ceiling results in a decrease in the quantity supplied, leading to a decrease in the producer's ability to earn profit.

For example, let's say the equilibrium price of a product is $10, but the government sets a price ceiling of $12. As long as the price remains below $12, there will be no immediate impact on the producer surplus. However, if the producers are unable to cover their costs at the price ceiling of $12, they may gradually exit the market, resulting in a decrease in the quantity supplied and a decrease in producer surplus.

Therefore, the correct answer is 2) Decrease.