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Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509

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Principles of Macroeconomics (Mind...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305971509
Chapter 7, Problem 2CQQ
Textbook Problem
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The demand curve for cookies is downward-sloping. When the price of cookies is $2, the quantity demanded is 100. If the price rises to $3, what happens to consumer surplus?

a. It falls by less than $100.

b. It falls by more than $100.

c. It rises by less than $100.

d. It rises by more than $100.

To determine
The impact of price increase on consumer surplus.

Explanation of Solution

Option (a):

The consumer surplus is the difference between the maximum willing to pay price and the actual price paid for the item. Thus, an increase in the price will decrease the consumer surplus. Here, the price of the item was $2 and the quantity demanded was 100 units. Thus, the total cost to the consumer is $200. When the price increases to $3 per item and the demand remains the same, it will increase the total cost of the item to $300 for the consumer. Thus, the consumer surplus will reduce by $100, which means that option 'a' is correct.

Option (b):

The consumer surplus is the difference between the maximum willing to pay price and the actual paying price of the item. Thus, an increase in the price will decrease the consumer surplus. The initial price was $2 and the demand was 100 units, which cost a total of $200 to the consumer. But, the increase in the price to $3 makes the total cost $300, which is $100 more than the previous level...

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