Question

Given below are two statements:
Statement (I): The sum of consumer surplus and producer surplus is known as total economic surplus.
Statement (II): Any shift of the supply curve to the left reduces the consumer surplus. In light of the above statements, choose the most appropriate answer from the options given below.

• A. Both Statement (I) and Statement (II) are correct.
• B. Both Statement (I) and Statement (II) are incorrect.
• C. Statement (I) is correct but Statement (II) is incorrect.
• D. Statement (I) is incorrect but Statement (II) is correct.

Hint:

Total Economic Surplus = Consumer Surplus + Producer Surplus. Leftward supply shift $\rightarrow$ Decreased Supply $\rightarrow$ Reduced Consumer Surplus.

Answer 1

The Correct Option is A

Step 1: Total economic surplus equals consumer surplus plus producer surplus, by definition, so Statement (I) is true.
Step 2: A leftward supply shift raises equilibrium price and lowers equilibrium quantity.
Step 3: Higher price and lower quantity both shrink the consumer surplus area, so Statement (II) is true.
\[ \boxed{\text{Both Statement (I) and (II) correct, Option (1)}} \]