Asked by Anika Desai on Jun 10, 2024
Verified
Charging prices closer to what consumers are willing to pay for a good
A) Reduces consumers surplus
B) Increases producer surplus
C) Both a and b
D) None of the above
Producer Surplus
The difference between the amount that producers are willing and able to sell a product for and the actual amount they do sell it for.
Consumers Surplus
The gap between the aggregate sum consumers are ready and capable of paying for a good or service versus what they actually shell out.
- Explain the role of consumer surplus and producer surplus in pricing decisions.
Verified Answer
RM
Rawan MozayaJun 16, 2024
Final Answer :
C
Explanation :
Charging prices closer to what consumers are willing to pay for a good will reduce consumer surplus but increase producer surplus, resulting in benefits for both parties. Consumer surplus refers to the difference between what a consumer is willing to pay and the actual price they pay, whereas producer surplus refers to the difference between the actual price received by a producer and the minimum price they are willing to accept for a good or service. By charging prices closer to what consumers are willing to pay, the producer can capture more of the value created by the exchange, which leads to a higher producer surplus. However, consumers will have to pay more for the same good or service, resulting in a reduction in consumer surplus.
Learning Objectives
- Explain the role of consumer surplus and producer surplus in pricing decisions.