Which of the following best explains how consumer surplus is related to a consumer's willingness to pay and utility maximization?

• A. Consumer surplus is the price of a good minus the cost of production.
• B. Consumer surplus is the total amount a consumer spends on a good, regardless of their willingness to pay.
• C. Consumer surplus is the amount by which a consumer's utility decreases after making a purchase.
• D. Consumer surplus is the difference between what a consumer is willing to pay for a good and what they actually pay, reflecting the extra utility gained from the purchase.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of consumer surplus. Consumer surplus is the difference between the maximum amount a consumer is willing to pay for a good and the actual price they pay for it.
2. Step 2: Recognize that a consumer's willingness to pay is based on the utility or satisfaction they expect to gain from consuming the good. The higher the utility, the higher the willingness to pay.
3. Step 3: Connect consumer surplus to utility maximization. When consumers purchase a good at a price lower than their willingness to pay, they gain extra utility, which is captured by the consumer surplus.
4. Step 4: Express consumer surplus mathematically as \(\text{Consumer Surplus} = \text{Willingness to Pay} - \text{Price Paid}\), highlighting that it measures the net benefit to the consumer.
5. Step 5: Conclude that consumer surplus reflects the additional utility or benefit a consumer receives beyond the cost of the good, which aligns with the principle of utility maximization.