Multiple Choice
Which one of the following is NOT a determinant of consumption spending?
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5. Consumer and Producer Surplus; Price Ceilings and Floors
Consumer Surplus and Willingness to Pay
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Which of the following is a required element for consumer surplus to exist in a market?
A
The market price must be higher than the consumer's willingness to pay.
B
The quantity demanded must be less than the quantity supplied.
C
The consumer's willingness to pay must be greater than the market price.
D
The consumer's willingness to pay must equal the market price.
Verified step by step guidance1
Understand the concept of consumer surplus: it is the difference between what a consumer is willing to pay for a good or service and what they actually pay in the market.
Identify the consumer's willingness to pay (WTP) as the maximum price a consumer is ready to pay for a product.
Recognize that consumer surplus exists only when the market price (P) is less than the consumer's willingness to pay, i.e., when \(P < WTP\).
Note that if the market price is higher than or equal to the consumer's willingness to pay, the consumer will not gain any surplus because they either do not buy the product or pay exactly what they are willing to pay.
Conclude that the required element for consumer surplus to exist is that the consumer's willingness to pay must be greater than the market price.
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