Multiple Choice
For seasonal products, the service level should be set to equal:
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5. Consumer and Producer Surplus; Price Ceilings and Floors
Consumer Surplus and Willingness to Pay
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When people consider purchasing a good, they typically compare:
A
the equilibrium price to the producer surplus
B
the price of the good to their willingness to pay
C
the cost of production to the market supply
D
the marginal cost to the marginal revenue
Verified step by step guidance1
Understand the concept of willingness to pay (WTP), which represents the maximum amount a consumer is ready to pay for a good or service.
Recognize that when consumers decide whether to purchase a good, they compare the market price of the good to their own willingness to pay.
If the price is less than or equal to their willingness to pay, the consumer will buy the good because it provides them with positive consumer surplus (the difference between WTP and price).
Producer surplus and cost of production are more relevant from the producer's perspective, not the consumer's decision-making process.
Marginal cost and marginal revenue comparisons are typically used by firms to determine optimal production levels, not by consumers when deciding to purchase.
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