Which of the following statements is true regarding consumer surplus and willingness to pay in the context of consumer finance companies and credit?

• A. Access to credit does not affect a consumer's willingness to pay for goods and services.
• B. Willingness to pay is always equal to the amount of credit offered by finance companies.
• C. Consumer surplus increases when consumers can access credit to purchase goods they value above the market price.
• D. Consumer finance companies reduce consumer surplus by charging interest on credit.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of consumer surplus. Consumer surplus is the difference between what a consumer is willing to pay for a good or service and what they actually pay. It represents the net benefit to the consumer from a purchase.
2. Step 2: Analyze how access to credit affects willingness to pay. When consumers have access to credit, they can purchase goods or services even if they do not have enough cash immediately, effectively increasing their ability to pay and potentially increasing their consumer surplus.
3. Step 3: Evaluate the statement that willingness to pay is always equal to the amount of credit offered. Willingness to pay is a subjective valuation by the consumer and is independent of the credit amount offered; credit is a financial tool, not a direct measure of willingness to pay.
4. Step 4: Consider the impact of interest charged by consumer finance companies. While interest increases the cost of borrowing, it does not necessarily reduce consumer surplus if the consumer values the good or service more than the total cost (price plus interest).
5. Step 5: Conclude which statement is true by comparing the effects of credit access on consumer surplus. Since access to credit allows consumers to buy goods they value more than the market price, consumer surplus can increase, making the statement about consumer surplus increasing with credit access the correct one.