Question

What happens to consumer surplus in the ipod market if ipods are normal goods and buyers of ipods experience an increase in income?

a. consumer surplus decreases.
b. consumer surplus remains unchanged.
c. consumer surplus increases.
d. consumer surplus may increase, decrease, or remain unchanged?

Answer 1

A.

As IPods are normal goods, an increase in income will lead to an increase in their demand, therefore people will be willing to pay higher prices and the equilibrium price will be pushed up too. As a result, consumer surplus will diminish, but producer surplus will increase.