Suppose a firm is considering an advertising campaign with a budget of 5000. If the firm's willingness to pay for the campaign is 7000, what is the consumer surplus from undertaking the campaign?

• A. 2000
• B. 12000
• C. 7000
• D. 5000

Answer: (A)

Verified step by step guidance

1. Identify the willingness to pay (WTP) for the advertising campaign, which represents the maximum amount the firm values the campaign. In this problem, WTP = 7000.
2. Identify the cost or budget of the advertising campaign, which is the actual amount the firm must pay. Here, the cost = 5000.
3. Recall that consumer surplus is the difference between the willingness to pay and the actual cost paid. It measures the net benefit or gain from the transaction.
4. Set up the formula for consumer surplus: \(\text{Consumer Surplus} = \text{Willingness to Pay} - \text{Cost}\).
5. Substitute the given values into the formula: \(\text{Consumer Surplus} = 7000 - 5000\). This will give the net benefit from undertaking the campaign.