Question

If the price of oak increases, what happens to consumer surplus in the market for oak cabinets?

a. consumer surplus does not change, but producer surplus changes.
b. consumer surplus increases.
c. consumer surplus will increase, then decrease.
d. consumer surplus decreases.

Answer 1

Consumer surplus in the market for oak cabinets decreases when the price of oak increases, as consumers pay a higher price for the same or a lower quantity, leading to a reduction in the value they receive for their purchase. So the correct answer is option C.

Step-by-step explanation:

If the price of oak increases, consumer surplus in the market for oak cabinets decreases. This scenario can be analyzed from an economics standpoint where consumer surplus is defined as the difference between what consumers are willing to pay for a good and what they actually pay.

If the price increases, consumers now pay more for the same quantity, or they pay the higher price for a lower quantity, which means they receive less surplus from their purchase. Referring to the steps provided, when barriers to trade are imposed, resulting in an increase in price, domestic quantity supplied increases (due to producers seeing a chance to sell at a higher price), and thus producer surplus increases, represented by the area of a triangle on the supply and demand graph.

However, the consumer surplus shrinks as consumers are now faced with a higher price, which translates to them getting a lower quantity (Q instead of Q d). The consumer surplus is now to the area of the triangle P No Trade, E, and B. In summary, with an increased price and other factors constant, consumers experience a drop in consumer surplus because they are either paying more for the same amount or receiving a reduced quantity for their money.

Answer 2

The increase in the price of oak leads to a decrease in consumer surplus in the market for oak cabinets due to higher prices and reduced purchasing power, alongside a greater loss in consumer welfare overall.

Step-by-step explanation:

When the price of oak increases, the consumer surplus in the market for oak cabinets decreases. This outcome is a result of consumers now paying a higher price for oak, which translates into a higher cost for oak cabinets, thus reducing their surplus. With the barriers to trade and exclusion of imports leading to a price increase to PNoTrade, the domestic quantity supplied rises while the consumer surplus shrinks as shown by the transition from triangle Ptrade, A, E, B to the smaller triangle PNoTrade, E, B. This effectively means that consumers can buy less with the same amount of money, causing a decrease in consumer surplus.

The net effect of the price increase is a larger loss in consumer surplus than the gain in producer surplus, signifying a net loss in welfare within the economy. Specifically, while producer surplus increases - as indicated by the area between Ptrade, C, E, PNoTrade - the loss in consumer surplus is more substantial, represented by the area between Ptrade, A, E, PNoTrade.