Question

Consider the following statements: A. Consumer surplus equals area under demand curve above price line, B. Marshall's measure assume constant marginal utility of money, C. Hicksian compensatory variation is better welfare measure than Marshallian surplus, D. Consumer surplus is always zero for perfectly elastic demand, E. Price elasticity of demand is unitary when total revenue \(TR\) is maximum.

• A. A, B, C, D Only
• B. A, B, E, D Only
• C. A, B, C, E Only
• D. A, B, C, D, E

Hint:

Consumer surplus is area under demand curve above price, and total revenue is maximum when demand elasticity is unitary.

Answer 1

The Correct Option is D

Concept: Consumer surplus and elasticity are important concepts in welfare economics and demand analysis.

Step 1: Check statement A.
Consumer surplus is the area below demand curve and above price line. \[ A = \text{Correct} \]

Step 2: Check statement B.
Marshallian consumer surplus assumes constant marginal utility of money. \[ B = \text{Correct} \]

Step 3: Check statement C.
Hicksian compensatory variation is considered a better welfare measure because it adjusts for utility changes more carefully. \[ C = \text{Correct} \]

Step 4: Check statement D.
For perfectly elastic demand, price is fixed and consumer surplus is treated as zero in the standard diagram. \[ D = \text{Correct} \]

Step 5: Check statement E.
Total revenue is maximum when price elasticity of demand is unitary. \[ E_d = 1 \] \[ E = \text{Correct} \] Therefore, all statements are correct.