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Difficulty: MediumConcept and Calculation of Consumer Surplus

A consumer's evaluation of marginal utility (maximum willingness to pay) for purchasing successive bottles of fruit juice is presented in the table below:

Unit (Bottle)Willingness to Pay (₦)
1st bottle500
2nd bottle400
3rd bottle300
4th bottle200
5th bottle100

If the prevailing market price per bottle is ₦200, what is the total consumer surplus derived from consuming the optimal quantity of fruit juice?

  1. A
    ₦300
  2. ₦600Answer
  3. C
    ₦1,200
  4. D
    ₦1,400

Answer

The total consumer surplus derived is ₦600.
The correct option is ₦600 because the consumer will buy 4 bottles (where willingness to pay ≥ ₦200). Total willingness to pay is ₦500 + ₦400 + ₦300 + ₦200 = ₦1,400, while total outlay is 4 × ₦200 = ₦800. Net consumer surplus is ₦1,400 - ₦800 = ₦600.

Step-by-Step Solution

1
Determine the optimal quantity consumed.
4 bottles are purchased.
A rational consumer continues purchasing as long as Marginal Utility (willingness to pay) is greater than or equal to the market price (₦200). The 5th bottle is excluded because its willingness to pay (₦100) is below market price.
2
Calculate total willingness to pay (Total Utility in monetary terms) for the optimal quantity.
Total Willingness to Pay = ₦500 + ₦400 + ₦300 + ₦200 = ₦1,400.
Summing the consumer's maximum valuation for each of the 4 units purchased.
3
Calculate total expenditure paid by the consumer.
Total Expenditure = 4 units × ₦200 = ₦800.
Multiplying the quantity bought by the market price per unit.
4
Compute consumer surplus.
Consumer Surplus = ₦1,400 - ₦800 = ₦600.
Consumer surplus is the difference between total willingness to pay and total actual expenditure.

Key Concept

Consumer Surplus from Marginal Utility Schedule
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Topics

Concept and Calculation of Consumer Surplus

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