Suppose televisions are a normal good and buyers of televisions experience a decrease in income. As a result, consumer surplus in the television market
a. Decreases.
b. Is unchanged.
c. Increases.
d. May increase, decrease, or remain unchanged.
The correct answer and explanation is :
The correct answer is:
a. Decreases.
Explanation:
Consumer surplus is the difference between what consumers are willing to pay for a good and what they actually pay. It is represented by the area between the demand curve and the price level that consumers pay, up to the quantity bought and sold.
Now, let’s break down the effects of a decrease in income on the television market:
- Televisions as a Normal Good:
Since televisions are considered a normal good, this means that when consumers’ income decreases, their demand for televisions will decrease as well. In simpler terms, when people earn less money, they will purchase fewer televisions. - Shift in Demand Curve:
A decrease in income leads to a leftward shift in the demand curve for televisions. This shift indicates that, at every price level, consumers are now willing to buy fewer televisions than they were before the income drop. - Impact on Price and Quantity:
With the demand curve shifting to the left, the equilibrium price and quantity of televisions in the market will likely decrease. The suppliers, seeing lower demand, may reduce prices in an attempt to sell the reduced quantity of televisions. - Effect on Consumer Surplus:
Consumer surplus depends on both the price and quantity of televisions in the market. As demand decreases:
- The quantity of televisions bought and sold will decrease.
- The price may decrease, but not enough to fully offset the loss in quantity. The reduction in quantity directly leads to a smaller area under the demand curve, which means the total consumer surplus in the market decreases. Even though consumers may face lower prices, they are purchasing fewer televisions, and the overall consumer surplus declines.
In conclusion, a decrease in income for buyers of televisions results in a reduction of consumer surplus in the television market. Therefore, the correct answer is a. Decreases.