Which of the following is true about consumer surplus and willingness to pay for goods and services?

• A. Consumer surplus is the difference between what a consumer is willing to pay and what they actually pay.
• B. Willingness to pay is always equal to the market price.
• C. Willingness to pay is determined solely by the cost of production.
• D. Consumer surplus is maximized when the price of a good increases.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of willingness to pay (WTP). WTP is the maximum amount a consumer is ready to pay for a good or service based on the value they place on it.
2. Step 2: Define consumer surplus. Consumer surplus is the difference between the consumer's willingness to pay and the actual price they pay in the market. Mathematically, it can be expressed as \(\text{Consumer Surplus} = \text{WTP} - \text{Price}\).
3. Step 3: Analyze the relationship between willingness to pay and market price. WTP varies among consumers and is generally not equal to the market price; the market price is determined by supply and demand, not solely by WTP.
4. Step 4: Consider the role of production cost. Willingness to pay is based on consumer preferences and utility, not on the cost of production, which affects supply and pricing but not directly WTP.
5. Step 5: Evaluate how consumer surplus changes with price. Consumer surplus is maximized when the price is lower, because the difference between WTP and price is larger; if the price increases, consumer surplus decreases.