Multiple Choice
Which of the following best explains a limitation of the incentives expressed in the advertisement in terms of consumer surplus and willingness to pay?
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5. Consumer and Producer Surplus; Price Ceilings and Floors
Consumer Surplus and Willingness to Pay
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According to the concept of consumer surplus, customers do not buy products when:
A
the market price is below their willingness to pay
B
the market price exceeds their willingness to pay
C
the product is a necessity
D
consumer surplus is maximized
Verified step by step guidance1
Understand the concept of consumer surplus: it is the difference between what a consumer is willing to pay for a good and what they actually pay.
Recall that a consumer will only buy a product if the market price is less than or equal to their willingness to pay, because this ensures a non-negative consumer surplus.
Analyze the condition when the market price exceeds the consumer's willingness to pay: in this case, the consumer surplus would be negative, so the consumer will not buy the product.
Recognize that if the market price is below the willingness to pay, the consumer gains positive surplus and will buy the product.
Conclude that customers do not buy products when the market price exceeds their willingness to pay.
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