Multiple Choice
How has the rise of the digital economy affected consumer expectations regarding willingness to pay and consumer surplus?
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5. Consumer and Producer Surplus; Price Ceilings and Floors
Consumer Surplus and Willingness to Pay
Multiple Choice
How can a large retailer increase profits by reducing the markup on a fast-selling product?
A
By lowering the price, the retailer can attract more buyers, increasing the quantity sold and total profit.
B
Reducing the markup will only benefit the retailer if the product is not selling well.
C
By reducing the markup, the retailer will decrease consumer surplus and lose customers.
D
Lowering the markup will always reduce total revenue, regardless of demand.
Verified step by step guidance1
Step 1: Understand the relationship between price, quantity sold, and profit. Profit is calculated as total revenue minus total cost, where total revenue is price multiplied by quantity sold.
Step 2: Recognize that reducing the markup means lowering the price closer to the retailer's cost, which can make the product more attractive to consumers and increase the quantity demanded.
Step 3: Analyze the price elasticity of demand for the fast-selling product. If demand is elastic, a lower price will lead to a proportionally larger increase in quantity sold, potentially increasing total revenue.
Step 4: Calculate the new total revenue by multiplying the reduced price by the increased quantity sold, and compare it to the original total revenue to see if it has increased.
Step 5: Determine the impact on profit by subtracting total costs from the new total revenue. If the increase in quantity sold compensates for the lower markup, the retailer's profit will increase.
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