What is the main reason companies offer free or promotional items and services?

• A. To increase consumer surplus by encouraging purchases from consumers whose willingness to pay is close to the market price
• B. To ensure that only high-income consumers purchase their products
• C. To decrease the producer surplus in the market
• D. To reduce the overall market demand for their products

Answer: (A)

Verified step by step guidance

1. Understand the concept of consumer surplus, which is the difference between what consumers are willing to pay for a good or service and what they actually pay.
2. Recognize that companies offer free or promotional items to attract consumers who are on the margin—those whose willingness to pay is close to the market price but might hesitate to purchase otherwise.
3. Analyze how providing free or promotional items effectively increases consumer surplus by giving additional value without increasing the price paid, thus encouraging more purchases.
4. Consider why the other options are less plausible: offering free items does not aim to restrict purchases to high-income consumers, nor does it intend to decrease producer surplus or reduce market demand.
5. Conclude that the main reason companies offer free or promotional items is to increase consumer surplus and stimulate demand by making the purchase more attractive to consumers near the price threshold.