Question

Is there something you ever purchased that you would have been willing to pay more for than the listed price? What was it?            

      a) What was the difference between the amount you were willing to pay and the actual price you paid?

      b) Why was there such a discrepancy?

Answer the following questions about taxes & subsidies:

1) Give an example of something you purchase that has a special tax placed on it. For example, cigarettes have a special tax placed on them.

      a) How high would the price have to go (due to a tax increase) in order for you to no longer purchase it?

2) Give an example of something you purchase that is subsidized. For example, cotton is subsidized.          

      a) Do you think you would still purchase this product or service even if it wasn't subsidized (because it would be more expensive)?

Answer 1

   Answer: a) the difference between the amount we are willing to pay and what we actually pay is known as consumer surplus. Consumer surplus is the difference between prices what we are expecting of a product and what is actually prevailing in the market

b) the discrepancy arises due to our willingness to pay higher for the commodity. If we expect the price of a particular commodity high in the market and we are willing to pay that much amount but the actual market price is less and we have to pay less than what we were willing it creates difference in the prices and leads to monetary gain of consumer

1) a) if the prices will go higher than our budget line or our willingness to pay for the commodity than we will not purchase it as the consumer is assumed to be rational so if he thinks the commodity is not worth paying this much high price consumer will not purchase it

2. a) the willingness to purchase a good mainly depends on the importance of the good if the commodity is necessary than consumer will buy it regardless of the price if he has budget and if the commodity is not necessary than consumer will react according to the price of the good (if price elasticity high with increase in price consumer decrease demand instantly). So if cotton is necessary than we will still purchase it if it is not subsidies though the quantity can differ.