Question

When the price rises from p1 to p2, what happens to consumer surplus?

1) Increases
2) Decreases
3) Remains the same
4) Cannot be determined

Answer 1

When the price rises from p1 to p2, consumer surplus decreases because consumers are paying a higher price for a lower quantity, which reduces the area between the demand curve and the higher price level, representing their surplus.

Step-by-step explanation:

When the price rises from p1 to p2, the consumer surplus decreases. Consumer surplus is the difference between what consumers are willing to pay for a good and what they actually pay. As prices increase, consumers end up paying more, or they purchase less quantity, or both, which results in a smaller area between the demand curve and the new, higher price level, thus reducing consumer surplus.

In the scenario described in the steps, the imposition of trade barriers leads to higher prices (from p1 to PNoTrade) and decreased consumer surplus, depicted as the area of the triangle PNoTrade, E, and B. The domestic quantity supplied increases to Q, causing producer surplus to increase. However, these new domestic quantities are at a higher price, and the quantity demanded by consumers decreases, leading to a reduction in consumer surplus.