When inflation increases, which of the following is a likely consumer response in terms of willingness to pay and consumer surplus?

• A. Consumers will increase their willingness to pay, resulting in a higher consumer surplus.
• B. Consumer willingness to pay and consumer surplus will remain unchanged.
• C. Consumers will stop purchasing all goods and services entirely.
• D. Consumers may reduce their willingness to pay for goods and services, leading to a decrease in consumer surplus.

Answer: (D)

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, reflecting the value they place on it.
2. Step 2: Recognize that inflation means a general increase in prices, which effectively reduces consumers' purchasing power, making goods and services more expensive relative to their income.
3. Step 3: Analyze how inflation affects willingness to pay. Since consumers have less real income, they may lower their WTP for many goods and services because they cannot afford to pay as much as before.
4. Step 4: Define consumer surplus as the difference between what consumers are willing to pay and what they actually pay. If WTP decreases while prices rise, the gap (consumer surplus) tends to shrink.
5. Step 5: Conclude that with inflation, consumers typically reduce their willingness to pay, which leads to a decrease in consumer surplus, reflecting a loss in consumer welfare.