How does the shift from a homogeneous marketplace to one with more niche products affect consumer surplus and willingness to pay?

• A. Consumer surplus is unaffected by changes in product variety.
• B. Consumer surplus may increase for individuals whose preferences are better matched, while willingness to pay for niche products may be higher.
• C. Consumer surplus always decreases because niche products are more expensive.
• D. Willingness to pay becomes irrelevant in a marketplace with niche products.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of consumer surplus, which is the difference between what consumers are willing to pay for a good and what they actually pay. It measures the benefit consumers receive from purchasing a product at a given price.
2. Step 2: Recognize that in a homogeneous marketplace, products are very similar, so consumer choices are limited, and consumer surplus depends mainly on price and quantity.
3. Step 3: When the market shifts to include more niche products, product variety increases, allowing consumers to find products that better match their specific preferences and tastes.
4. Step 4: Because consumers can find products that fit their preferences more closely, their willingness to pay for these niche products may increase, reflecting higher perceived value.
5. Step 5: As a result, consumer surplus may increase for those consumers whose preferences are better matched by niche products, even if prices are higher, because the additional satisfaction or utility gained outweighs the cost.