Question

A. Draw a typical demand curve for gasoline in Charlotte. Label the axis and the demand curve. Assume that the current price is $2.65 per gallon. Shade in the consumer surplus in the market.

B. What does consumer surplus measure? What are the units for consumer surplus?

C. On the same graph as A above, show an increase in price to $2.95. Mark the change in consumer surplus. Is this a loss or a gain in consumer surplus?

Answer 1

A. Consumer surplus is the area above the price i.e $2.65 per gallon and below the demand curve . It is shown by the triangle area in the below figure.

B. Consumer surplus is the difference between the consumer's willingness to pay and what consumer is actually paying. It measures the total benefit received by consumer. Units of consumer surplus is dollars.

C. When price increases to $2.95 , consumer surplus decrease because now the consumer surplus is the area above the price i.e $2.95 and below the demand curve. There is loss in consumer surplus . It is shown in the below figure.