Price Elasticity of Demand Determines Surplus Gain

Steps:

• Equilibrium price is $10; price floor at$12 creates surplus, with quantity sold equal to new quantity demanded.
• Producer surplus increases by the area of the trapezoid: higher price times reduced quantity, plus any rectangle gain.
• Gain is maximized when quantity demanded falls least after price rise, which occurs with inelastic demand.
• Compare elasticities: low elasticity (0-1) minimizes quantity drop, maximizing surplus rise.

Why A is correct:

• Inelastic demand (elasticity 0-1) means quantity demanded changes little with price, so producers sell nearly the same amount at $12, capturing large surplus from the$2 price hike (per law of demand).

Why the others are wrong:

• B: Unit elastic or moderately elastic demand reduces quantity more, leading to smaller surplus gain than inelastic case.
• C: Elastic demand (>1) causes large quantity drop, offsetting much of the price gain and minimizing surplus increase.
• D: Highly elastic demand (>1, steeper slope) exacerbates quantity reduction, yielding even less surplus rise than C.

Final answer: A