Skip to content

IAI Actuarial Core Principles · Business Economics · How competitive markets operate

In a competitive market, consumer surplus for a unit of a good is best defined as:

Consumer surplus is the gap between the highest price a buyer is willing to pay and the price actually paid. It shows the net benefit to buyers from trading at the market price, and summed over units it is the area under demand above price.

  1. AThe difference between the price paid and the cost of producing the good
  2. BThe difference between the maximum price a consumer is willing to pay and the price actually paidCorrect
  3. CThe total revenue received by all sellers in the market
  4. DThe difference between the market price and the producer's minimum acceptable price
  5. The area under the supply curve up to the equilibrium quantity

Explanation

Consumer surplus measures the benefit buyers receive over and above what they pay. It is the willingness to pay minus the price paid, summed over all units bought. Option 3 describes producer surplus, and option 0 describes a profit margin.

Did you get it right without looking?

One question tells you little. A timed set on How competitive markets operate shows your real accuracy, how long you take and where you lose marks.

Practise How competitive markets operateFree diagnostic mock

More How competitive markets operate questions