Question

Price ($/month) 100 Demand Consumer Surplus - - - - - - - - 80 120 Quantity (thousand households) The figure above shows the market for an artificially scarce good-cable television. The shaded area represents consumer surplus when the price of cable per month is $30. What is the price associated with the highest level of consumer surplus? $0 $100 $80 $120 $30

Answer 1

Consumer surplus is the area above the price line and below the demand curve. When the price is $30 then quantity demanded is 80 units and consumer surplus is the area of the shaded region:

$\fn_phv \frac{1}{2}\times 80 \times 70 = 2800$

It is clearly visible that lower the price the greater will be the consumer surplus because consumers would want to purchase goods and services at a low price.

So, the price at which the consumer surplus is maximum is $0. In this case there will be no producer surplus and the entire welfare of the economy will be the consumer surplus