How does the increased risk associated with buying a used car, compared to a new car, typically affect a consumer's willingness to pay and consumer surplus?

• A. It has no effect on willingness to pay or consumer surplus.
• B. It increases the consumer's willingness to pay, which increases consumer surplus.
• C. It lowers the consumer's willingness to pay, which reduces consumer surplus.
• D. It raises willingness to pay but decreases consumer surplus.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of willingness to pay (WTP). WTP is the maximum amount a consumer is willing to pay for a good or service, reflecting the value they place on it.
2. Step 2: Recognize that increased risk (such as buying a used car with potential hidden defects) generally makes consumers less confident about the product's value and reliability.
3. Step 3: Because of this increased risk, consumers typically lower their willingness to pay for the used car compared to a new car, which is perceived as less risky and more reliable.
4. Step 4: Consumer surplus is the difference between what consumers are willing to pay and what they actually pay. When willingness to pay decreases due to higher risk, consumer surplus also decreases if the price remains constant.
5. Step 5: Therefore, increased risk associated with buying a used car lowers the consumer's willingness to pay and reduces consumer surplus, reflecting the consumer's reduced net benefit from the purchase.