Multiple Choice
Buying new furniture for your home would increase which of the following, assuming you value the furniture more than its market price?
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5. Consumer and Producer Surplus; Price Ceilings and Floors
Consumer Surplus and Willingness to Pay
Multiple Choice
Refer to Figure 7-1. When the price is p_1, consumer surplus is:
A
the area between the supply and demand curves from zero to the equilibrium quantity
B
the area below the price p_1 and above the supply curve
C
the area between the demand curve and the price p_1, from zero to the quantity purchased
D
the area above the price p_1 and below the supply curve
Verified step by step guidance1
Step 1: Understand the concept of consumer surplus. Consumer surplus is the difference between what consumers are willing to pay for a good (represented by the demand curve) and what they actually pay (the market price). It measures the net benefit to consumers from participating in the market.
Step 2: Identify the relevant curves and price on the graph. The demand curve shows the maximum price consumers are willing to pay for each quantity, and the price p_1 is the actual market price consumers pay.
Step 3: Determine the quantity purchased at price p_1 by finding the point where the price line p_1 intersects the demand curve. This quantity represents how much consumers buy at that price.
Step 4: Recognize that consumer surplus is the area between the demand curve and the price line p_1, from zero up to the quantity purchased. This area captures the difference between willingness to pay and actual payment for all units bought.
Step 5: Conclude that the consumer surplus is NOT the area between supply and demand, nor the area below price p_1 and above supply, but specifically the area between the demand curve and price p_1, from zero to the quantity purchased.
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