Which of the following best describes the likely effect of an increase in consumer wealth on consumer surplus, assuming other factors remain constant?

• A. Consumer surplus decreases because consumers save more and spend less.
• B. Consumer surplus increases because consumers are willing to pay more for goods.
• C. Consumer surplus remains unchanged because wealth does not affect willingness to pay.
• D. Consumer surplus decreases because market prices rise above consumers' willingness to pay.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of consumer surplus. Consumer surplus is the difference between what consumers are willing to pay for a good and what they actually pay. It measures the net benefit to consumers from participating in the market.
2. Step 2: Consider the effect of an increase in consumer wealth. When consumers become wealthier, their willingness to pay for goods generally increases because they have more resources and higher marginal utility from consumption.
3. Step 3: Analyze how an increase in willingness to pay affects consumer surplus. If consumers are willing to pay more but the market price remains constant, the area representing consumer surplus on a demand curve typically increases.
4. Step 4: Evaluate the other options. Saving more and spending less would reduce consumer surplus, but the problem states other factors remain constant, so this is less likely. Similarly, if market prices rise above willingness to pay, consumer surplus would decrease, but this is not a direct effect of increased wealth alone.
5. Step 5: Conclude that an increase in consumer wealth, holding other factors constant, leads to an increase in consumer surplus because consumers are willing to pay more for goods, increasing the net benefit they receive.