Question

With the increase in prices the consumer surplus ____________

• A. Fall
• B. Increase
• C. Remain stable
• D. Any of the above three possible

Answer 1

Answer: (A)

Fall

Consumer surplus always increases as the price of a good falls and decreases as the price of a good rises. Recall that the consumer surplus is calculating the area between the demand curve and the price line for the quantity of goods sold. Increase in the price will reduce consumer surplus, while a decrease in the price will increase consumer surplus. The level of consumer surplus changes as the market price for a good or service changes. Hence an increase in market demand causes an increase to consumer surplus hence option ‘a’ is correct answer.