Which of the following will cause an increase in consumer surplus?
a. An increase in the production cost of the good.
b. A technological improvement in the production of the good.
c. A decrease in the number of sellers of the good.
d. The imposition of a binding price floor in the market.
The correct answer and explanation is :
The correct answer is b. A technological improvement in the production of the good.
Explanation:
Consumer surplus is the difference between what consumers are willing to pay for a good or service and what they actually pay for it. It represents the benefit to consumers from participating in the market at the prevailing price. An increase in consumer surplus means consumers are able to enjoy more of the good at a lower price or better value.
Let’s analyze each option:
a. An increase in the production cost of the good:
- An increase in production costs typically leads to a decrease in supply because it becomes more expensive for producers to manufacture the good. This reduction in supply causes the equilibrium price to rise, and the equilibrium quantity to fall. Higher prices mean consumers are paying more for the good, and the quantity available may be lower, both of which result in a decrease in consumer surplus.
b. A technological improvement in the production of the good:
- Technological improvements in production typically lead to increased productivity and lower production costs. This, in turn, shifts the supply curve to the right (i.e., an increase in supply). As a result, the price of the good decreases, and the quantity available in the market increases. The reduction in price and the increase in quantity benefit consumers by allowing them to purchase more of the good at a lower price. This increases consumer surplus.
c. A decrease in the number of sellers of the good:
- A decrease in the number of sellers reduces market competition, leading to a decrease in supply. With less competition, producers can raise their prices, which typically results in a decrease in consumer surplus, as consumers have fewer choices and higher prices.
d. The imposition of a binding price floor in the market:
- A binding price floor is a minimum price set above the equilibrium price, which creates a price that is higher than what would naturally occur in a competitive market. As a result, consumers must pay a higher price for the good, and the quantity demanded decreases, which reduces consumer surplus.
Thus, only technological improvements lead to lower prices and increased supply, benefiting consumers and increasing consumer surplus.