Consumer surplus is explained by keeping which of the following constant ?

Question

Accepted Answer

The correct option is 3:
Consumer surplus is the difference between the maximum price a consumer is willing to pay for a good or service and the actual price they pay. When Alfred Marshall first developed the concept of consumer surplus, he relied on the assumption of constant marginal utility of money. This assumption means that as the price of a commodity changes, the consumer's perception of their real purchasing power, or real income, remains effectively constant in the context of the commodity being analyzed. Since the purchasing power of money is what determines the real income effect, keeping the marginal utility of money constant is essentially equivalent to holding the consumer's real income constant for the purpose of analyzing demand behavior and surplus. This allows the analysis to focus purely on the substitution effect of a price change.

The incorrect option is 1:
Absolute income (or nominal income) refers to the monetary amount a consumer earns. While absolute income is a key determinant of demand, Marshall's analysis focuses on *real* purchasing power in the context of the price change, not the fixed monetary income, as real income changes with price changes.

The incorrect option is 2:
Marginal utility (of the good itself) is the additional satisfaction gained from consuming one more unit. Marginal utility is assumed to be diminishing as consumption increases, and it is this diminishing marginal utility, when compared to the price, that creates the consumer surplus, but it is not the factor kept constant for the *explanation* of the concept.

The incorrect option is 4:
Total utility is the entire satisfaction gained from consuming all units of a good. Like marginal utility, total utility is the outcome of consumption, not the assumption held constant to derive the concept of consumer surplus.