Which of the following best describes the relationship between the cost of a tire and a consumer's willingness to pay, assuming the cost reflects the expected life of the tire?

• A. Consumers are willing to pay more for tires with a longer expected life, increasing consumer surplus.
• B. Consumers' willingness to pay is always equal to the cost of the tire, regardless of expected life.
• C. Consumers are always willing to pay less for tires with a longer expected life, decreasing consumer surplus.
• D. The cost of a tire has no impact on consumer surplus or willingness to pay.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of willingness to pay (WTP). WTP is the maximum amount a consumer is willing to pay for a good or service based on the perceived value or utility they expect to receive.
2. Step 2: Recognize that the expected life of a tire affects its perceived value. A tire with a longer expected life provides more utility to the consumer because it lasts longer, reducing the frequency and cost of replacement.
3. Step 3: Analyze how the cost of the tire relates to WTP. If the cost reflects the expected life, then consumers will generally be willing to pay more for tires that last longer because the higher cost is justified by the greater utility.
4. Step 4: Connect consumer surplus to this relationship. Consumer surplus is the difference between what consumers are willing to pay and what they actually pay. When consumers value longer-lasting tires more, their WTP increases, potentially increasing consumer surplus if the price is less than their WTP.
5. Step 5: Conclude that the best description is that consumers are willing to pay more for tires with a longer expected life, which increases consumer surplus, reflecting the positive relationship between tire cost (due to expected life) and consumer willingness to pay.