All else held constant, which one of the following will decrease if a firm increases its net income?

• A. Consumer surplus
• B. Producer surplus
• C. Willingness to pay
• D. Market demand

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the key terms involved in the problem. Net income refers to the firm's profit after all costs are deducted. Consumer surplus is the difference between what consumers are willing to pay and what they actually pay. Producer surplus is the difference between the price producers receive and their minimum acceptable price. Willingness to pay is the maximum price a consumer is willing to pay for a good. Market demand is the total quantity demanded by all consumers at various prices.
2. Step 2: Analyze the relationship between a firm's net income and these economic concepts. An increase in net income typically means the firm is earning more profit, possibly due to higher prices or lower costs.
3. Step 3: Consider how an increase in net income might affect consumer surplus. If the firm raises prices to increase net income, consumers pay more, reducing the difference between willingness to pay and actual price, thus decreasing consumer surplus.
4. Step 4: Evaluate the effect on producer surplus. Since producer surplus is related to the firm's revenue minus costs, an increase in net income usually means producer surplus increases or remains stable, not decreases.
5. Step 5: Reflect on willingness to pay and market demand. Willingness to pay is a consumer preference and does not change directly due to the firm's net income. Market demand depends on prices and consumer preferences, but an increase in net income alone does not directly decrease market demand.