Which of the following statements best describes the relationship between consumer surplus and willingness to pay in the context of product pricing?

• A. Consumer surplus is maximized when the price is set below the consumer's willingness to pay.
• B. Willingness to pay is always equal to the market price.
• C. Consumer surplus increases as the price rises above the consumer's willingness to pay.
• D. Consumer surplus is unrelated to the difference between willingness to pay and price.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of willingness to pay (WTP), which is the maximum amount a consumer is ready to pay for a good or service.
2. Step 2: Define consumer surplus as the difference between the consumer's willingness to pay and the actual market price paid, expressed as \(\text{Consumer Surplus} = \text{WTP} - \text{Price}\).
3. Step 3: Analyze how consumer surplus changes when the price is set below the willingness to pay, noting that the consumer gains surplus equal to the difference between WTP and price.
4. Step 4: Consider what happens if the price equals or exceeds the willingness to pay: if price equals WTP, consumer surplus is zero; if price exceeds WTP, consumer surplus becomes negative or zero because the consumer would not buy the product.
5. Step 5: Conclude that consumer surplus is maximized when the price is set below the consumer's willingness to pay, as this creates a positive difference between WTP and price, increasing the consumer's net benefit.