Multiple Choice
Which type of surplus can be thought of as the wealth that trade creates for consumers in a market?
5. Consumer and Producer Surplus; Price Ceilings and Floors
Consumer Surplus and Willingness to Pay
Multiple Choice
After a tax is imposed on a good, what happens to consumer surplus in the market?
A
Consumer surplus increases because the tax revenue is redistributed to consumers.
B
Consumer surplus remains unchanged because taxes only affect producers.
C
Consumer surplus increases because the market price falls after the tax.
D
Consumer surplus decreases because buyers pay a higher price and purchase less of the good.
Verified step by step guidance1
Understand the definition of consumer surplus: it is the difference between what consumers are willing to pay for a good and what they actually pay.
Recognize that when a tax is imposed on a good, it effectively increases the price that consumers pay for that good.
Analyze the effect of the higher price on consumer behavior: consumers will generally buy less of the good because it is more expensive.
Consider how the reduction in quantity purchased and the higher price paid reduce the total consumer surplus in the market.
Conclude that consumer surplus decreases because buyers pay a higher price and purchase less of the good after the tax is imposed.
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