In the context of consumer surplus and willingness to pay, what incentive do higher prices present in a free market economy?

• A. They lead to a decrease in market supply.
• B. They encourage producers to supply more of the good.
• C. They increase consumer surplus for all buyers.
• D. They reduce the willingness to pay among consumers.

Answer: (B)

Verified step by step guidance

1. Understand the concept of willingness to pay (WTP), which is the maximum price a consumer is willing to pay for a good or service.
2. Recall that consumer surplus is the difference between what consumers are willing to pay and what they actually pay, so higher prices generally reduce consumer surplus.
3. Recognize that in a free market economy, prices act as signals to both consumers and producers; higher prices indicate higher demand or scarcity.
4. Analyze the producer's perspective: higher prices increase potential revenue, providing an incentive for producers to supply more of the good to the market.
5. Conclude that higher prices encourage producers to increase supply, rather than decreasing supply or increasing consumer surplus.