Question

In an unregulated, competitive market consumer surplus exists because:

1.some sellers are willing to take a lower price than the equilibrium price.

2.some consumers are willing to pay more than the equilibrium price.

3.some sellers will only sell at prices above equilibrium price (or actual price).

4.some consumers are willing to make purchases only if the price is below the actual price.

choose 1 answer

Answer 1

In a unregulated competitive market, the price of a good will be equal to the marginal cost of the good.

So any seller willing to take a price lower than equilibrium price would suffer a loss and nobody would be willing to do so. So option 1 cannot be the answer.

According to option 3, if some sellers set a price greater than equilibrium price then we can say that an increase in selling price will decrease consumer surplus and moreover if a seller sells the good at a higher price, the buyers will shift to other sellers and not buy from the seller , selling goods at a higher price.So option 3 cannot be the answer.

In the same way according to option 4, a buyer cannot buy the good at a lower price than equilibrium price in competitive market , because no seller would be ready to sell the good at a lower price and would prefer to sell their goods at equilibrium price to other buyers. So option 4 cannot be the correct answer.

In option 2, we can see that the consumers can have different willingness to pay for a good , but they can buy the goods only at the fixed equilibrium price. And we know that consumer surplus is the difference between the willingness to pay and the price actually paid for a good. So a person having higher willingness to pay for a good than the equilibrium price will have a consumer surplus. So option 2 is the correct answer.