If the price of oak lumber increases, what happens to consumer surplus in the market for oak cabinets?
a. Consumer surplus increases.
b. Consumer surplus decreases.
c. Consumer surplus will not change; only producer surplus changes.
d. Consumer surplus depends on what event led to the increase in the price of oak lumber.
The correct answer and explanation is :
Correct Answer: b. Consumer surplus decreases.
Explanation:
Consumer surplus is the difference between what consumers are willing to pay for a product and the actual price they pay. In the market for oak cabinets, the price of oak lumber is a key determinant of production costs. If the price of oak lumber increases, the cost of producing oak cabinets also rises. This leads to a decrease in the supply of oak cabinets, shifting the supply curve to the left.
As a result, the equilibrium price of oak cabinets increases, and the quantity of cabinets available in the market decreases. Consumers now face higher prices, which reduces the consumer surplus. Consumer surplus is maximized when prices are low, but as prices rise, the difference between consumers’ willingness to pay and the actual price they pay shrinks, reducing total consumer surplus.
From a graphical perspective, in a supply and demand diagram, consumer surplus is represented by the area above the price level and below the demand curve. When the price of oak cabinets rises due to increased lumber costs, the new price level is higher, and the triangular area representing consumer surplus becomes smaller.
Additionally, the decrease in quantity available in the market means fewer consumers are able to purchase oak cabinets at all. Some buyers may leave the market entirely, further reducing consumer surplus.
In contrast, producer surplus might increase for some firms that can still afford to produce at higher costs, but overall, both total surplus (consumer + producer surplus) and market efficiency may decline due to the negative supply shock.
Therefore, consumer surplus decreases when the price of oak lumber rises, making answer (b) the correct choice.