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When an investor is diversified, only ________ risk matters.
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5. Consumer and Producer Surplus; Price Ceilings and Price Floors
Willingness to Pay and Consumer Surplus
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Given the demand curve above, if price decreases from \$8 to \$4 per unit, total consumer surplus will:
A
remain unchanged
B
become zero
C
decrease
D
increase
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Recall that consumer surplus is the area between the demand curve and the price line, representing the difference between what consumers are willing to pay and what they actually pay.
Identify the initial consumer surplus when the price is \$8 by calculating the area between the demand curve and the price line at \$8.
Identify the new consumer surplus when the price decreases to \$4 by calculating the area between the demand curve and the price line at \$4.
Compare the two consumer surplus values: since the price decreases, consumers pay less for each unit, increasing the area between the demand curve and the price line.
Conclude that the total consumer surplus increases because a lower price means consumers gain more surplus from purchasing the product.
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