Which of the following best explains how consumer surplus is affected if the price of t-shirts increases due to trade restrictions?

• A. Consumer surplus increases because consumers value t-shirts more when they are expensive.
• B. Consumer surplus increases because trade restrictions lead to higher quality t-shirts.
• C. Consumer surplus remains unchanged because willingness to pay does not depend on price.
• D. Consumer surplus decreases because consumers pay more than their previous willingness to pay.

Answer: (D)

Verified step by step guidance

1. Recall the definition of consumer surplus: it is the difference between what consumers are willing to pay for a good and what they actually pay. Mathematically, consumer surplus is the area between the demand curve and the price line, up to the quantity purchased.
2. Understand that when the price of t-shirts increases due to trade restrictions, the price consumers pay rises above the original price, reducing the difference between willingness to pay and actual price.
3. Recognize that a higher price typically leads to a decrease in the quantity demanded, as some consumers will no longer find it worthwhile to buy t-shirts at the new higher price.
4. Visualize the effect on consumer surplus: the area representing consumer surplus shrinks because the price line moves up, and fewer units are purchased, reducing the total surplus consumers receive.
5. Conclude that consumer surplus decreases because consumers either pay more for the same t-shirts or stop buying some t-shirts altogether, leading to a loss in the net benefit they previously enjoyed.