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In the context of consumer surplus and willingness to pay, how do self-interest and competition affect outcomes in free markets?
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5. Consumer and Producer Surplus; Price Ceilings and Price Floors
Willingness to Pay and Consumer Surplus
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Which of the following best describes the relationship between a consumer's income and their demand for a normal good?
A
As income increases, the demand for a normal good remains unchanged.
B
As income increases, the demand for a normal good increases.
C
As income increases, the demand for a normal good decreases.
D
There is no relationship between income and the demand for a normal good.
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Step 1: Understand the definition of a normal good. A normal good is a type of good for which demand increases as the consumer's income increases, holding other factors constant.
Step 2: Recall the income effect on demand. When income rises, consumers have more purchasing power, which typically leads to an increase in the quantity demanded of normal goods.
Step 3: Contrast normal goods with inferior goods. For inferior goods, demand decreases as income increases, which is the opposite of the behavior of normal goods.
Step 4: Analyze the options given. The statement 'As income increases, the demand for a normal good increases' aligns with the definition and typical behavior of normal goods.
Step 5: Conclude that the correct relationship is that demand for a normal good rises with an increase in income, reflecting a positive income elasticity of demand.
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