Question

The amount by which consumers are better off, i.e., consumers' surplus is measured by _______; and assuming that the inverse demand function for a good can be written as: P = 30 - 2Q and the current price P = $10, the resulting consumer surplus would be equal to ________; the situation in which a firm is able to charge the maximum price consumers are willing to pay for each unit of output the firm sells is referred to as _____. A) The difference between the amount actually spent on a good less the total willingness to pay for the good; $100; second-degree price discrimination. B) The difference between the total willingness to pay for a good less the amount actually spent; $100; first-degree price discrimination. C) The difference between the total willingness to pay for a good less the amount actually spent; $200; first-degree price discrimination D) The difference between the amount actually spent on a good less the total willingness to pay for the good; $100; first-degree price discrimination.

Answer 1

Option (B).

Consumer surplus (CS) = Maximum willingness to pay - Actual market price paid by consumer

When Price equals MC, it is first-degree price discrimination.

From demand function, when Q = 0, P = $30 (Maximum willingness to pay)

When P = $10,

10 = 30 - 2Q

2Q = 20

Q = 10

CS = Area between demand curve & market price = (1/2) x $(30 - 10) x 10 = 5 x $20 = $100

When firm charges each consumer their maximum willingness to pay, it is first degree price discrimination.