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:
A normal good is a good for which demand increases as income rises and decreases as income falls. In the case of televisions, since they are a normal good, a decrease in consumer income will lead to a reduction in the demand for televisions.
Consumer Surplus refers to the difference between what consumers are willing to pay for a good and what they actually pay. It represents the net benefit to consumers from participating in the market.
When income decreases:
- Demand decreases: Since televisions are a normal good, a decrease in income means that fewer people are willing to buy televisions at any given price, shifting the demand curve to the left.
- Equilibrium Price and Quantity: As demand decreases, the new equilibrium will likely occur at a lower quantity and possibly a lower price. The decrease in demand reduces the total quantity of televisions sold, and if the supply remains unchanged, the price of televisions is likely to fall as well.
- Consumer Surplus: With a decrease in demand, the price drops, and fewer televisions are sold. Although consumers may benefit from lower prices for the few that are still purchasing televisions, the reduction in quantity sold and the overall lower willingness to pay across the market leads to a net decrease in consumer surplus. This is because the total benefit that consumers receive from purchasing the good, as measured by the area under the demand curve and above the price, becomes smaller.
In summary, when incomes decrease for buyers of normal goods, demand decreases, leading to lower prices and fewer goods purchased. This results in a decrease in consumer surplus, as both the quantity of televisions purchased and the overall consumer benefit from purchasing the televisions decline.