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Homework answers / question archive / Suppose that the demand for a good is described as follows: Qx = - 4Px + 20 a) What do you understand by consumer surplus? ( b) Imagine that the price of the good reduces from 4 u
Suppose that the demand for a good is described as follows: Qx = - 4Px + 20
a) What do you understand by consumer surplus? (
b) Imagine that the price of the good reduces from 4 u.m to 3 u.m. Without showing any calculations, explain succinctly whether the consumer surplus will increase or decrease
Given, Q = 20 - 4P
A. Consumer surplus is defined as the area below the demand curve and above the price. In other words we can explain it as follows, assume a customer is willing to pay a price of $ 10 for one unit but in the market the price is $ 4. Then, the difference between the willingness to pay and price will be the consumer surplus derived the consumer that is, CS = 10 - 4 = $ 6.
B. The price has been reduced from 4 to 3, then the quantity demanded will increase. (Note: According to law of demand higher the price lower the demand and lower the price higher the demand). Higher demand will increase the area under the demand curve.
As demand has increased therefore the consumer surplus will increase.
