Multiple Choice
Which of the following statements best describes the example commonly used to demonstrate consumer surplus and willingness to pay in markets?
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5. Consumer and Producer Surplus; Price Ceilings and Floors
Consumer Surplus and Willingness to Pay
Multiple Choice
How does the imposition of a sales tax affect consumer surplus?
A
It increases consumer surplus by lowering the price paid by consumers.
B
It eliminates consumer surplus entirely.
C
It has no effect on consumer surplus because only producers are affected.
D
It decreases consumer surplus by increasing the price paid by consumers.
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 and what they actually pay. It represents the net benefit to consumers from participating in the market.
Step 2: Recognize that a sales tax effectively increases the price that consumers pay for a good. If the original price is \(P\), and the sales tax per unit is \(t\), then the new price paid by consumers becomes \(P + t\).
Step 3: Analyze how the increase in price affects consumer surplus. Since consumers now pay a higher price, the area representing consumer surplus on a supply and demand graph shrinks because fewer consumers are willing or able to buy the good at the higher price.
Step 4: Note that the reduction in consumer surplus is due to both the higher price and the decrease in quantity demanded. The tax causes a movement along the demand curve to a lower quantity, reducing the total benefit consumers receive.
Step 5: Conclude that the imposition of a sales tax decreases consumer surplus by increasing the price paid by consumers, which reduces their net benefit from purchasing the good.
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