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 :
Correct Answer:
a. Decreases.
Explanation:
Consumer surplus is the difference between what consumers are willing to pay for a good and what they actually pay. When income decreases, the demand for normal goods (like televisions) falls because consumers have less purchasing power and shift their spending toward essential goods or inferior goods (goods for which demand increases as income falls).
In the television market, this reduction in demand leads to a leftward shift in the demand curve. As a result, the equilibrium price and quantity of televisions sold in the market decrease. Since consumer surplus is represented graphically as the area between the demand curve and the price level, a shift in demand downward reduces this area. This leads to a decrease in consumer surplus because:
- Lower Willingness to Pay: Consumers now value televisions less due to their lower income, which reduces their maximum willingness to pay.
- Fewer Televisions Sold: With lower demand, the quantity of televisions purchased decreases, further reducing consumer surplus.
- Price Reduction Doesn’t Compensate: While a decrease in price may somewhat offset the decline in consumer surplus, it is not enough to fully counteract the drop in demand and the lower quantity purchased.
In conclusion, since televisions are a normal good, a decrease in consumer income leads to lower demand, reducing both the equilibrium price and quantity, thereby decreasing consumer surplus in the television market. Hence, option (a) Decreases is the correct answer.