Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The firm sets a price higher than the equilibrium price.
B
Consumer demand decreases as fewer consumers can afford the higher price.
C
The quantity produced becomes less than the quantity demanded at the equilibrium price.
D
Surplus consumers are left without the product, leading to a loss in total welfare.
Understanding the Answer
Let's break down why this is correct
Answer
When a firm sets its price above the equilibrium level, it means that the price is higher than what consumers are willing to pay for that product. As a result, some buyers who would have purchased the product at the lower equilibrium price will no longer buy it, leading to fewer sales. This decrease in sales creates a gap in the market, known as deadweight loss, where potential transactions are lost because the price is too high. For example, if a book that normally sells for $10 is priced at $15, some readers who would have bought it at $10 will decide not to buy it at the higher price, causing both the firm and consumers to miss out on the benefits of those transactions. Ultimately, this situation shows how pricing above equilibrium can hurt both the firm’s sales and the overall market efficiency.
Detailed Explanation
When a firm sets a price higher than what most people are willing to pay, fewer people buy the product. Other options are incorrect because Some might think that demand just decreases without understanding why; It's easy to think that less production is the main issue.
Key Concepts
Deadweight Loss
Monopolistic Competition
Allocative Efficiency
Topic
Deadweight Loss in Pricing
Difficulty
medium level question
Cognitive Level
understand
Ready to Master More Topics?
Join thousands of students using Seekh's interactive learning platform to excel in their studies with personalized practice and detailed explanations.