Exhibit 6-17 Consider Exhibit 6-17 which represents the market demand for DVDs.If the price of DVDs increases from $20 to $25, what happens to consumer's surplus?

Question

Exhibit 6-17  Consider Exhibit 6-17 which represents the market demand for DVDs.If the price of DVDs increases from $20 to $25, what happens to consumer's surplus?

Quizplus · Accepted Answer

When the price of DVDs increases from $20 to $25, the quantity demanded decreases from 40 to 20. This reduces consumer surplus. To calculate the reduction in consumer surplus, we need to calculate the area of the triangle formed by the new price ($25), the horizontal axis, and the vertical difference between the new price and the original demand curve ($20). The new consumer surplus is equal to the original consumer surplus minus the area of this triangle. The area of the triangle is (1/2) x (25-20) x (40-20) = $100. Therefore, the reduction in consumer surplus is $100/2 = $50. This represents a decrease of $17.50 from the original consumer surplus of $67.50, making the correct answer C.

Exhibit 6-17 Consider Exhibit 6-17 Which Represents the Market