Question
Asked Oct 16, 2019
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In Figure 1, suppose the marginal value for gasoline falls by $6 for every quantity demanded for all gas stations in the market. Next, assume that the government enacts a price ceiling of $2. What is the loss in consumer surplus?

A) $6
B) $2
C) $12
D) There is no consumer welfare loss because prices are lower.
E) There is not enough information to calculate.

Figure 1:
Price/Gallon
The Market for Gasoline
$17
$16
$15
$14
$13
$12
$11
$10
$9
$8
$7
$6
$5
$4
$3
$2
$1
0
1
5
6
7
8
Gallons
en
O
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Figure 1: Price/Gallon The Market for Gasoline $17 $16 $15 $14 $13 $12 $11 $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 0 1 5 6 7 8 Gallons en O

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Expert Answer

Step 1

After the marginal value for gasoline falls by $6 for every quantity demanded for all gas stations in the market, the new demand curve(D1) is shown below:

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$17 $16 $15 $14 $13 $12 $11 A $10 S $9 $8 $7 $6 $5 B $4 C $3 $2 $1 $0 0 2 3 5 6 7 Gallons en

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Step 2

Consumer surplus is the price consumer is willing to pay minus the price that is actually paid. In this case the consumer surplus can be shown by the area of triangle ABC.

Initial CS = ½ * 3 * (10-4) = $9

Step 3

After the changes, the government enacts a price ceiling of $2 (represented by the red line in the graph). Here the consumer surplus is...

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$17 $16 $15 $14 $13 $12 $11 $10 $9 $8 $7 $6 $5 $4 $3 $2 D1 $1 $0 1 2 3 7 Gallons 00 en

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