Question

Firm A is a new producer in the market for good X, which is characterized by linear demand and supply curves. Initially, to attract customers, the firm prices its product low at $8 per unit. While the firm sells 1,000 units of the product at this price, there is a shortage in the market. This shortage can be cleared if price is increased to $10 per unit. The quantity demanded and supplied at this higher price will be 1,500 units. Dan Taylor, the firm's financial head, thinks that consumer surplus will certainly decline if the price is increased to $10 because consumers prefer to pay lower prices. Which of the following is a flaw in Dan's reasoning?
A. He is confusing producer surplus with consumer surplus.
B. He is ignoring the higher cost of advertising associated with a new product in the market.
C. He is assuming that competing firms have increased the prices of their goods.
D. He is confusing consumer surplus with total revenue.
E. He is not accounting for the new consumers who will benefit from being able to consume the product.

Answer 1

Answer:

E. He is not accounting for the new consumers who will benefit from being able to consume the product.

Explanation:

With the increase in price of product, Demand equals Supply i.e., no shortage exists in the market. Thus, the equilibrium level is achieved at price of $ 10. Further, The most important advantage of increasing the price in the given question is that shortage which exists earlier no longer remains now which will benefit all the consumers including some new consumers as they will able to get the sufficient number of quantities of product for the consumption now. Financial Head of Firm is ignoring the new consumers who will benefit from able to consume the product.

Therefore, He is not accounting for the new consumers who will benefit from able to consume the product.