Consumer surplus a. varies directly with price b. varies indirectly with price c. is independent of...

Consumer surplus

a. varies directly with price

b. varies indirectly with price

c. is independent of price

d. none of the above

Solutions

Expert Solution

Ans) Willingness to pay is the highest amount that a consumer is willing to pay for any product. If he/she is able to buy the product at a price below its willingness to pay, he/she is benefitted. This benefit is known as consumer surplus.

Consumer surplus = Willingness to pay - market price

Suppose, there are two friends Jack and Jill. They want to buy a jacket. Jack is willing to pay $80 while Jill is willing to pay $75. The market price of that jacket is $50. So the consumer surplus of Jack is $30 while consumer surplus of Jill is $25.

Further, suppose you want to buy a shirt. And you are willing to pay $50. The price of that shirt is $35. Your consumer surplus will be $15. But few days later, that shirt comes in discount and now it's price becomes $20. And if you buy that shirt, your consumer surplus will be $30.

So, we see that if price is high, consumer surplus is low. And if price is low, consumer surplus is high. That is, consumer surplus varies indirectly with price.

Option b.

Rahul Sunny answered 1 year ago

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