Multiple Choice
Which of the following statements about market segmentation is true in relation to consumer surplus and willingness to pay?
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5. Consumer and Producer Surplus; Price Ceilings and Floors
Consumer Surplus and Willingness to Pay
Multiple Choice
Which of the following is NOT true concerning substitutes in the context of consumer surplus and willingness to pay?
A
An increase in the price of one substitute increases the demand for the other.
B
Substitutes provide consumers with alternative choices, potentially increasing consumer surplus.
C
Consumers' willingness to pay for a good may decrease if a close substitute becomes cheaper.
D
If two goods are substitutes, a decrease in the price of one will increase the quantity demanded of the other.
Verified step by step guidance1
Step 1: Understand the concept of substitutes in microeconomics. Substitutes are goods that can replace each other in consumption, meaning if the price of one good changes, it affects the demand for the other.
Step 2: Recall the relationship between price changes and demand for substitutes. Specifically, if the price of one substitute increases, the demand for the other typically increases because consumers switch to the relatively cheaper option.
Step 3: Analyze the statements given. The first three statements align with the standard economic theory about substitutes: price increase in one raises demand for the other, substitutes increase consumer choice and surplus, and willingness to pay for one may decrease if a close substitute becomes cheaper.
Step 4: Focus on the last statement: 'If two goods are substitutes, a decrease in the price of one will increase the quantity demanded of the other.' Consider the law of demand and substitution effect. When the price of one good decreases, consumers tend to buy more of that good, which usually reduces the demand for its substitute.
Step 5: Conclude that the last statement is NOT true because a decrease in the price of one substitute generally leads to a decrease (not increase) in the quantity demanded of the other substitute.
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