Multiple Choice
Which of the following situations best illustrates consumer surplus in relation to willingness to pay?
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5. Consumer and Producer Surplus; Price Ceilings and Floors
Consumer Surplus and Willingness to Pay
Multiple Choice
In the context of consumer surplus and willingness to pay, which price range would maximize consumer surplus if a consumer's willingness to pay for a good is 95 and the market price falls within the following ranges?
A
85 to 89
B
95 to 99
C
80 to 84
D
90 to 94
Verified step by step guidance1
Recall that consumer surplus is defined as the difference between a consumer's willingness to pay (WTP) and the actual market price paid, i.e., \(\text{Consumer Surplus} = \text{WTP} - \text{Price}\), provided that the price is less than or equal to the WTP.
Identify the consumer's willingness to pay, which is given as 95 in this problem.
Examine each price range and determine whether the prices fall below the consumer's willingness to pay. Only prices less than or equal to 95 will generate a positive consumer surplus.
Among the given price ranges, find the range with the lowest prices because a lower price increases the difference \(95 - \text{Price}\), thus maximizing consumer surplus.
Conclude that the price range that maximizes consumer surplus is the one with prices furthest below 95, which is the range 80 to 84, since it yields the largest positive difference between willingness to pay and price.
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