Which of the following best describes the difference between consumer surplus and willingness to pay?

• A. Consumer surplus is the total amount paid by consumers, while willingness to pay is the market price of the good.
• B. Willingness to pay is the difference between consumer surplus and producer surplus.
• C. Consumer surplus is the difference between what a consumer is willing to pay and what they actually pay, while willingness to pay is the maximum price a consumer is prepared to pay for a good.
• D. Consumer surplus is always equal to willingness to pay for every consumer in the market.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of willingness to pay (WTP). WTP is the maximum price a consumer is prepared to pay for a good or service. It reflects the value or benefit the consumer expects to receive from the good.
2. Step 2: Understand the concept of consumer surplus (CS). Consumer surplus is the difference between the consumer's willingness to pay and the actual price they pay in the market. It measures the net benefit or gain the consumer receives from purchasing the good at a lower price than their maximum willingness to pay.
3. Step 3: Express consumer surplus mathematically. If \(P\) is the market price and \(WTP\) is the willingness to pay, then consumer surplus is given by: \[CS = WTP - P\]
4. Step 4: Compare consumer surplus and willingness to pay. While willingness to pay is the maximum price a consumer is willing to pay, consumer surplus is the extra benefit they get when the market price is lower than this maximum. Therefore, consumer surplus depends on both willingness to pay and the actual market price.
5. Step 5: Evaluate the given options based on these definitions. The correct description is that consumer surplus is the difference between willingness to pay and the actual price paid, and willingness to pay is the maximum price a consumer is prepared to pay.