Chad is willing to pay $5.00 to get his first cup of morning latté;he is willing to pay $4.50 for a second cup.He buys his first cup from a vendor selling latté for $3.75 per cup.He returns to that vendor later in the morning to find that the vendor has increased her price to $3.90 per cup.Chad buys a second cup.Which of the following statements is correct?
A)Chad's willingness to pay for his second cup of latté was smaller than his willingness to pay for his first cup of latté.
B)Chad's consumer surplus on his second cup of latté was larger than his consumer surplus on his first cup of latté.
C)Chad is irrational in that he is willing to pay a different price for his second cup of latté than what he is willing to pay for his first cup of latté.
D)Chad places a higher value on his second cup of latté than on his first cup of latté.

Question

Quizplus · Accepted Answer

Chad's willingness to pay for his second cup of latte was smaller than his willingness to pay for his first cup of latte because he was willing to pay $5 for the first cup but only $4.50 for the second cup. This means that his consumer surplus on the first cup was higher than his consumer surplus on the second cup, making (B) incorrect. Chad may have chosen to buy the second cup from the same vendor because it was convenient or he preferred the taste, but this does not necessarily make him irrational, making (C) incorrect. Lastly, we cannot infer that Chad places a higher value on his second cup of latte than on his first cup of latte based on the information given, making (D) incorrect.

Chad Is Willing to Pay $5