1. will always increase the consumer rent, no matter how income is initially distributed.
2. will always increase both the consumer surplus and the total gross benefit to society from consuming the product.
3. will give a different measure of the consumer rent for each different distribution of income.
4. will do all of the above.
Choose the option that yields the correct answer.
The correct answer is option 4 . A fall in the price of the commodity will increase the quantity bought by consumers in the market. This will result in an increase in the area under the demand curve up to the quantity consumed. The total benefit to some or all consumers in the economy from consuming the good will thus be larger. It will be larger no matter how the community's income is initially distributed among its members. A different initial distribution of income in the community will imply a different total benefit, but the total benefit will always increase in response to a fall in the price. Since the price is lower, the net benefit or rent will also always increase.
The correct answer is illustrated in the Figure below.
When the price falls from P0 to P1 the quantity increases from Q0 to Q1. The total area under the demand curve to the left of Q1 is clearly greater than the total area to the left of Q0. And the triangular area above the line P1a is also clearly larger than the area A . We must assume, of course, that there are no consumption externalities---that is, that people's consumption of the product does not make others in the economy better or worse off simply from knowing that this consumption of the commodity is taking place.
As the price falls each individual consumer in the market will move down along his/her own demand curve. Different consumers' demand curves will have different slopes, and the shares of the different consumers in the market demand will depend on their incomes. How the society's income is distributed among the individual consumers will therefore affect the position of the demand curve and its slope. It will therefore affect the sizes of the initial areas A and B as well as the change in these areas that will occur as the price falls. But the directions of the effects of the fall in price on the total benefit, payment by consumers and consumer rent will be the same regardless of the distribution of income.