Theory Of Demand And Supply

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Quizzes Created: 48 | Total Attempts: 85,378

Questions: 100 | Attempts: 1,103 | Updated: Feb 6, 2024

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Questions and Answers

1.

Demand for a commodity refers to :
- A.
  
  Desire for the commodity.
- B.
  
  Need for the commodity.
- C.
  
  Quantity demanded of that commodity.
- D.
  
  Quantity of the commodity demanded at a certain price during any particular period of time.
Correct Answer
D. Quantity of the commodity demanded at a certain price during any particular period of time.

Explanation
Demand for a commodity refers to the quantity of the commodity that consumers are willing and able to purchase at a specific price during a specific time period. It is not just the desire or need for the commodity, but specifically the quantity that is demanded. The demand for a commodity is influenced by factors such as price, income, tastes and preferences, and the availability of substitutes.

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2.

Contraction of demand is the result of :
- A.
  
  Decrease in the number of consumers.
- B.
  
  Increase in the price of the good concerned.
- C.
  
  Increase in the prices of other goods.
- D.
  
  Decrease in the income of purchasers
Correct Answer
B. Increase in the price of the good concerned.

Explanation
When the price of a good increases, it becomes more expensive for consumers to purchase. This leads to a decrease in the quantity demanded, resulting in a contraction of demand. As the price of the good goes up, consumers may choose to buy less of it or switch to cheaper alternatives. This decrease in demand is a direct consequence of the increase in price.

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3.

All but one of the following are assumed to remain the same while drawing an individual's demand curve for a commodity. Which one is it?
- A.
  
  The preference of the individual.
- B.
  
  His monetary income.
- C.
  
  Price.
- D.
  
  Price of related goods.
Correct Answer
C. Price.

Explanation
The individual's preference, monetary income, and the price of related goods are assumed to remain constant while drawing an individual's demand curve for a commodity. However, the price of the commodity itself is the variable that will change and be represented on the demand curve. As the price of the commodity increases or decreases, the quantity demanded by the individual will change, resulting in a movement along the demand curve.

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4.

Which of the following pairs of goods is an example of substitutes?
- A.
  
  Tea and sugar.
- B.
  
  Tea and coffee.
- C.
  
  Pen and ink.
- D.
  
  Shirt and trousers.
Correct Answer
B. Tea and coffee.

Explanation
Tea and coffee are an example of substitutes because they are both beverages that can be consumed to fulfill the same need or desire. If someone prefers tea but it is not available, they may choose to drink coffee instead as a substitute. Therefore, tea and coffee can be easily substituted for each other based on personal preference or availability.

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5.

In the case of a straight line demand curve meeting the two axes, the price-elasticity of demand at the mid-point of the line would be :
- A.
  
  0
- B.
  
  1
- C.
  
  1.5
- D.
  
  2
Correct Answer
B. 1

Explanation
In the case of a straight line demand curve meeting the two axes, the price-elasticity of demand at the mid-point of the line would be 1. This means that a 1% change in price will result in a 1% change in quantity demanded. This indicates a unitary elastic demand, where the percentage change in quantity demanded is equal to the percentage change in price.

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6.

The Law of Demand, assuming other things to remain constant, establishes the relationship between :
- A.
  
  Income of the consumer and the quantity of a good demanded by him.
- B.
  
  Price of a good and the quantity demanded.
- C.
  
  Price of a good and the demand for its substitute.
- D.
  
  Quantity demanded of a good and the relative prices of its complementary goods.
Correct Answer
B. Price of a good and the quantity demanded.

Explanation
The Law of Demand states that there is an inverse relationship between the price of a good and the quantity demanded. This means that as the price of a good increases, the quantity demanded decreases, and vice versa. This relationship assumes that all other factors, such as income, taste, and preferences, remain constant. Therefore, the correct answer is that the price of a good and the quantity demanded are related.

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7.

Identify the factor which generally keeps the price-elasticity of demand for a good low :
- A.
  
  Variety of uses for that good.
- B.
  
  Its low price.
- C.
  
  Close substitutes for that good.
- D.
  
  High proportion of the consumer's income spent on it.
Correct Answer
B. Its low price.

Explanation
The factor that generally keeps the price-elasticity of demand for a good low is its low price. When a good has a low price, consumers are less sensitive to changes in its price because the cost of purchasing it is relatively low compared to their income. Therefore, even if the price of the good increases, consumers may still continue to purchase it, resulting in a low price-elasticity of demand.

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8.

Identify the coefficient of price-elasticity of demand when the percentage increase in the quantity of a good demanded is smaller than the percentage fall in its price :
- A.
  
  Equal to one.
- B.
  
  Greater than one.
- C.
  
  Smaller than one.
- D.
  
  Zero.
Correct Answer
C. Smaller than one.

Explanation
The coefficient of price-elasticity of demand measures the responsiveness of the quantity demanded to a change in price. When the percentage increase in the quantity of a good demanded is smaller than the percentage fall in its price, it indicates that the demand for the good is relatively inelastic. This means that consumers are not very responsive to changes in price, and a decrease in price does not lead to a proportionate increase in quantity demanded. Therefore, the coefficient of price-elasticity of demand in this scenario is smaller than one.

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9.

In the case of an inferior good, income elasticity oi demand is :
- A.
  
  Positive.
- B.
  
  Zero.
- C.
  
  Negative.
- D.
  
  Infinite.
Correct Answer
C. Negative.

Explanation
In the case of an inferior good, as income increases, the demand for the good decreases. This means that the income elasticity of demand for an inferior good is negative. When income elasticity of demand is negative, it indicates that the good is a necessity for consumers with lower incomes but becomes less desirable as their income increases.

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10.

If the demand for a good is inelastic, an increase in its price will cause the total expenditure of the consumers of the good to :
- A.
  
  Remain the same.
- B.
  
  Increase.
- C.
  
  Decrease.
- D.
  
  Any of these.
Correct Answer
B. Increase.

Explanation
When the demand for a good is inelastic, it means that the quantity demanded is not very responsive to changes in price. In this case, if the price of the good increases, the total expenditure of the consumers will also increase. This is because even though the price has increased, the quantity demanded does not decrease significantly, resulting in consumers spending more money on the good. Therefore, an increase in price leads to an increase in total expenditure for consumers when the demand is inelastic.

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11.

If regardless of changes in its price, the quantity demanded of a good remains unchanged, then the demand curve for the good will be :
- A.
  
  Horizontal.
- B.
  
  Vertical.
- C.
  
  Positively sloped.
- D.
  
  Negatively sloped.
Correct Answer
B. Vertical.

Explanation
If the quantity demanded of a good remains unchanged regardless of changes in its price, it means that the demand for the good is perfectly inelastic. In this case, the demand curve will be vertical because the quantity demanded does not respond to changes in price. This indicates that consumers are willing to pay the same price for the good regardless of its availability or scarcity.

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12.

The law of demand is :
- A.
  
  A quantitative statement.
- B.
  
  A qualitative statement.
- C.
  
  Both a quantitative and a qualitative statement.
- D.
  
  Neither a quantitative nor a qualitative statement.
Correct Answer
B. A qualitative statement.

Explanation
The law of demand states that, all else being equal, as the price of a good or service increases, the quantity demanded decreases, and vice versa. This is a qualitative statement because it describes the inverse relationship between price and quantity demanded without providing specific numerical values or measurements. It is a general observation about consumer behavior rather than a precise mathematical equation.

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13.

All of the following are determinants of demand except:
- A.
  
  Tastes and preferences.
- B.
  
  Quantity supplied.
- C.
  
  Income.
- D.
  
  Price of related goods.
Correct Answer
B. Quantity supplied.

Explanation
The question asks for the determinant of demand that is not included in the given options. Quantity supplied is actually a determinant of supply, not demand. Demand refers to the willingness and ability of consumers to purchase a certain quantity of a good or service at a given price, while supply refers to the willingness and ability of producers to offer a certain quantity of a good or service at a given price. Therefore, quantity supplied is not a determinant of demand.

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14.

A movement along the demand curve for soft drinks is best described as :
- A.
  
  An increase in demand.
- B.
  
  A decrease in demand.
- C.
  
  A change in quantity demanded.
- D.
  
  A change in demand.
Correct Answer
C. A change in quantity demanded.

Explanation
A movement along the demand curve for soft drinks is best described as a change in quantity demanded. This means that there has been a change in the quantity of soft drinks that consumers are willing and able to purchase at a given price. It does not indicate a change in overall demand for soft drinks, but rather a movement along the existing demand curve due to a change in price.

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1
0
15.

If the price of Pepsi decreases relative to the price of Coke and 7-UP, the demand for :
- A.
  
  Coke will decrease.
- B.
  
  7-Up will decrease.
- C.
  
  Coke and 7-UP will increase.
- D.
  
  Coke and 7-Up will decrease.
Correct Answer
D. Coke and 7-Up will decrease.

Explanation
If the price of Pepsi decreases relative to the price of Coke and 7-UP, it means that Pepsi becomes relatively cheaper compared to the other two drinks. This will lead consumers to switch from Coke and 7-UP to Pepsi, resulting in a decrease in the demand for both Coke and 7-UP.

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16.

If a good is a luxury, its income elasticity of demand is :
- A.
  
  Positive and less than 1.
- B.
  
  Negative but greater than -1.
- C.
  
  Positive and greater than 1.
- D.
  
  Zero.
Correct Answer
C. Positive and greater than 1.

Explanation
If a good is considered a luxury, it means that it is not a necessity and is typically purchased when individuals have higher incomes. In this case, the income elasticity of demand for the luxury good would be positive, indicating that as income increases, the demand for the luxury good also increases. Furthermore, the fact that the income elasticity of demand is greater than 1 suggests that the demand for the luxury good is highly responsive to changes in income, meaning that a small increase in income would result in a relatively larger increase in the demand for the luxury good.

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17.

The price of hot dogs increases by 22% and the quantity of hot dogs demanded falls by 25%. This indicates that demand for hot dogs is :
- A.
  
  Elastic.
- B.
  
  Inelastic.
- C.
  
  Unitarily elastic.
- D.
  
  Perfectly elastic.
Correct Answer
A. Elastic.

Explanation
The price of hot dogs increasing by 22% and the quantity demanded falling by 25% indicates that the demand for hot dogs is elastic. This means that the percentage change in quantity demanded is greater than the percentage change in price. The decrease in quantity demanded is larger than the increase in price, suggesting that consumers are sensitive to changes in price and are willing to reduce their consumption significantly in response to a price increase.

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18.

If the quantity demanded of beef increases by 5% when the price of chicken increases by 20%, the cross-price elasticity of demand between beef and chicken is
- A.
  
  -0.25
- B.
  
  0.25
- C.
  
  -4
- D.
  
  4
Correct Answer
B. 0.25

Explanation
The cross-price elasticity of demand measures the responsiveness of the quantity demanded of one good to a change in the price of another good. In this case, when the price of chicken increases by 20%, the quantity demanded of beef increases by 5%. This indicates a positive relationship between the price of chicken and the quantity demanded of beef. The magnitude of the cross-price elasticity is calculated by taking the percentage change in quantity demanded of beef divided by the percentage change in the price of chicken. In this case, the cross-price elasticity is 0.25, indicating that a 1% increase in the price of chicken leads to a 0.25% increase in the quantity demanded of beef.

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0
19.

Given the following four possibilities, which one results in an increase in total consumer expenditures?
- A.
  
  Demand is unitary elastic and price falls.
- B.
  
  Demand is elastic and price rises.
- C.
  
  Demand is inelastic and price falls.
- D.
  
  Demand is inelastic and prices rises.
Correct Answer
D. Demand is inelastic and prices rises.

Explanation
When demand is inelastic, it means that changes in price have a relatively small impact on the quantity demanded. In this case, when prices rise, consumers will still continue to purchase the same quantity of the product, resulting in an increase in total consumer expenditures. This is because the increase in price outweighs the decrease in quantity demanded, leading to a net increase in total spending.

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20.

The price elasticity of demand for hamburger is
- A.
  
  The change in the quantity demanded of hamburger when hamburger increases by 30 paise per rupee.
- B.
  
  The percentage increase in the quantity demanded of hamburger when the price of hamburger falls by 1 per cent per rupee.
- C.
  
  The increase in the demand for hamburger when the price of hamburger falls by 10 per cent per rupee.
- D.
  
  The decrease in the quantity demanded of hamburger when the price of hamburger falls by 1 per cent per rupee.
Correct Answer
B. The percentage increase in the quantity demanded of hamburger when the price of hamburger falls by 1 per cent per rupee.

Explanation
The correct answer is "The percentage increase in the quantity demanded of hamburger when the price of hamburger falls by 1 per cent per rupee." This is because price elasticity of demand measures the responsiveness of quantity demanded to changes in price. A higher percentage increase in quantity demanded when the price falls indicates a more elastic demand, meaning that consumers are more responsive to price changes. Therefore, this option represents the concept of price elasticity of demand accurately.

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21.

The price elasticity of demand is defined as the responsiveness of :
- A.
  
  Price to a change in quantity demanded.
- B.
  
  Quantity demanded to a change in price.
- C.
  
  Price to a change in income.
- D.
  
  Quantity demanded to a change in income.
Correct Answer
B. Quantity demanded to a change in price.

Explanation
The correct answer is "Quantity demanded to a change in price." Price elasticity of demand measures how sensitive the quantity demanded of a good or service is to a change in its price. It indicates the percentage change in quantity demanded in response to a percentage change in price. A high price elasticity indicates that demand is highly responsive to price changes, while a low elasticity suggests that demand is not very sensitive to price fluctuations. Therefore, the correct answer is the one that describes the relationship between quantity demanded and price.

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22.

Suppose the price of movies seen at a theater rises from Rs. 120 per person to Rs. 200 per person. The theater manager observes that the rise in price causes attendance at a given movie to fall from 300 persons to 200 persons. What is the price elasticity of demand for movies?
- A.
  
  .5
- B.
  
  .8
- C.
  
  1.0
- D.
  
  1.2
Correct Answer
B. .8

Explanation
The price elasticity of demand measures the responsiveness of quantity demanded to a change in price. In this case, the price of movies increased from Rs. 120 to Rs. 200, and as a result, attendance at a given movie decreased from 300 to 200 persons. The price elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in price. In this scenario, the percentage change in quantity demanded is -33.33% (100 persons decrease out of 300) and the percentage change in price is 66.67% ((200-120)/120). Dividing the percentage change in quantity demanded by the percentage change in price gives us -0.5. However, since price elasticity of demand is typically reported as a positive number, the absolute value of -0.5 is 0.5. Therefore, the correct answer is 0.5.

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23.

Suppose a department store has a sale on its silverware. If the price of a plate-setting is reduced from Rs. 300 to Rs. 200 and the quantity demanded increases from 3,000 plate- settings to 5,000 plate-settings, what is the price elasticity of demand for silverware?
- A.
  
  .8
- B.
  
  1.0
- C.
  
  -2
- D.
  
  -1.4
Correct Answer
C. -2

Explanation
The price elasticity of demand (PED) can be calculated using the formula:
PED=Percentage change in quantity demandedPercentage change in pricePED=Percentage change in pricePercentage change in quantity demanded
First, we need to find the percentage change in quantity demanded:
Percentage change in quantity demanded=New quantity−Old quantityOld quantity×100Percentage change in quantity demanded=Old quantityNew quantity−Old quantity×100 Percentage change in quantity demanded=5000−30003000×100=20003000×100=66.67%Percentage change in quantity demanded=30005000−3000×100=30002000×100=66.67%
Next, we find the percentage change in price:
Percentage change in price=New price−Old priceOld price×100Percentage change in price=Old priceNew price−Old price×100 Percentage change in price=200−300300×100=−100300×100=−33.33%Percentage change in price=300200−300×100=300−100×100=−33.33%
Now, we can calculate the price elasticity of demand:
PED=66.67%−33.33%=−2PED=−33.33%66.67%=−2
Therefore, the price elasticity of demand for silverware is -2.

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0
0
24.

A discount store has a special offer on CDs. It reduces their price from Rs.150 to Rs. 100. Suppose the store manager observes that the quantity demanded increases from 700 CDs to 1,300 CDs. What is the price elasticity of demand for CDs?
- A.
  
  .8
- B.
  
  1.0
- C.
  
  1.25
- D.
  
  1.50
Correct Answer
D. 1.50

Explanation
The price elasticity of demand measures the responsiveness of quantity demanded to a change in price. In this case, the price of CDs is reduced from Rs.150 to Rs.100, resulting in an increase in quantity demanded from 700 CDs to 1,300 CDs. The price elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in price. Since the quantity demanded increases by 85.7% (from 700 to 1,300) and the price decreases by 33.3% (from Rs.150 to Rs.100), the price elasticity of demand is 85.7% / 33.3% = 2.57. However, since the options provided are not exact matches, the closest option is 1.50.

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25.

If the local pizzeria raises the price of a medium pizza from Rs.60 to Rs. 100 and quantity ] demanded falls from 700 pizzas a night to 100 pizzas a night, the price elasticity of demand
- A.
  
  .67
- B.
  
  1.5
- C.
  
  2.0
- D.
  
  3.0
Correct Answer
D. 3.0

Explanation
The price elasticity of demand measures the responsiveness of quantity demanded to a change in price. In this case, the price of a medium pizza has increased by 40% (from Rs.60 to Rs.100) and the quantity demanded has decreased by 85.7% (from 700 pizzas to 100 pizzas). The formula for price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. Therefore, the price elasticity of demand in this scenario is 85.7% divided by 40%, which equals 3.0. This means that the quantity demanded is highly responsive to changes in price, indicating a relatively elastic demand.

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26.

If electricity demand is inelastic, and electric rates increase, which of the following is likely to occur?
- A.
  
  Quantity demanded will fall by a relatively large amount.
- B.
  
  Quantity demanded will fall by a relatively small amount.
- C.
  
  Quantity demanded will rise in the short run, but fall'in the long run.
- D.
  
  Quantity demanded will fall in the short run, but rise in the long run.
Correct Answer
B. Quantity demanded will fall by a relatively small amount.

Explanation
When electricity demand is inelastic, it means that the quantity demanded is not very responsive to changes in price. Therefore, if electric rates increase, the quantity demanded will not decrease significantly. Instead, it will only fall by a relatively small amount. This suggests that consumers are not very sensitive to price changes and will continue to consume electricity even at higher rates, albeit at a slightly lower quantity.

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27.

Suppose the demand for meals at a medium-priced restaurant is elastic. If the management of the restaurant is considering raising prices, it can expect a relatively :
- A.
  
  Large fall in quantity demanded.
- B.
  
  Large fall in demand.
- C.
  
  Small fall in quantity demanded.
- D.
  
  Small fall in demand.
Correct Answer
A. Large fall in quantity demanded.

Explanation
When the demand for meals at a medium-priced restaurant is elastic, it means that consumers are highly responsive to changes in price. Therefore, if the restaurant decides to raise prices, it can expect a large fall in the quantity demanded. This is because the increase in price will result in a significant decrease in the number of meals that consumers are willing to purchase. The elasticity of demand indicates that even a small increase in price can have a substantial impact on the quantity demanded.

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28.

Point elasticity is useful for which of the following situations?
- A.
  
  The bookstore is considering doubling the price of notebooks.
- B.
  
  A restaurant is considering lowering the price of its most expensive dishes by 50 percent.
- C.
  
  An auto producer is interested in determining the response of consumers to the price of cars being lowered by Rs.100.
- D.
  
  None of the above.
Correct Answer
C. An auto producer is interested in determining the response of consumers to the price of cars being lowered by Rs.100.

Explanation
Point elasticity is a measure of how responsive the quantity demanded or supplied is to a change in price at a specific point. In this case, the auto producer wants to determine the response of consumers to a specific price change of lowering the price of cars by Rs.100. This situation involves a specific price change and the corresponding change in quantity demanded, making it suitable for point elasticity analysis. The other situations mentioned involve different types of price changes (doubling the price, lowering the price by a percentage), which would require different elasticity measures.

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29.

A decrease in price will result in an increase in total revenue if :
- A.
  
  The percentage change in quantity demanded in less than the percentage change in price.
- B.
  
  The percentage change in quantity demanded is greater than the percentage change in price.
- C.
  
  Demand is inelastic.
- D.
  
  The consumer is operating along a linear demand curve at a point at which the price is very low and the quantity demanded is very high.
Correct Answer
B. The percentage change in quantity demanded is greater than the percentage change in price.

Explanation
When the percentage change in quantity demanded is greater than the percentage change in price, a decrease in price will result in an increase in total revenue. This is because the decrease in price leads to a proportionally larger increase in the quantity demanded, causing the total revenue to rise. In other words, the increase in quantity sold compensates for the decrease in price, resulting in higher total revenue.

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30.

An increase in price will result in an increase in total revenue if :
- A.
  
  The percentage change in quantity demanded is less than the percentage change in price.
- B.
  
  The percentage change in quantity demanded is greater than the percentage change in price.
- C.
  
  Demand is elastic.
- D.
  
  The consumer is operating along a linear demand curve at a point at which the price is very high and the quantity demanded is very low.
Correct Answer
A. The percentage change in quantity demanded is less than the percentage change in price.

Explanation
When the percentage change in quantity demanded is less than the percentage change in price, it means that the demand for the product is inelastic. Inelastic demand indicates that consumers are not very responsive to price changes, so even if the price increases, the quantity demanded will not decrease significantly. As a result, the increase in price will lead to an increase in total revenue because the additional revenue gained from the higher price outweighs the decrease in quantity demanded.

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31.

Demand for a good will tend to be more elastic if it exhibits which of the following characteristics?
- A.
  
  It represents a small part of the consumer's income.
- B.
  
  The good has many substitutes available.
- C.
  
  It is a necessity (as opposed to a luxury).
- D.
  
  There is little time for the consumer to adjust to the price change.
Correct Answer
B. The good has many substitutes available.

Explanation
The elasticity of demand measures the responsiveness of the quantity demanded to a change in price. When a good has many substitutes available, consumers have more options to choose from if the price of the good increases. This means that consumers are more likely to switch to a substitute if the price of the good becomes too high, making the demand for the good more elastic.

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32.

Demand for a good will tend to be more inelastic if it exhibits which of the following characteristics?
- A.
  
  The good has many substitutes.
- B.
  
  The good is a luxury (as opposed to a necessity).
- C.
  
  The good is a small part of the consumer's income.
- D.
  
  There is a great deal of time for the consumer to adjust to the change in prices.
Correct Answer
C. The good is a small part of the consumer's income.

Explanation
When a good is a small part of the consumer's income, it means that the consumer does not heavily rely on that particular good for their day-to-day needs. Therefore, even if the price of the good increases, the consumer is less likely to reduce their demand for it because they can still afford it without significant financial strain. This indicates that the demand for the good is more inelastic, as it is not easily affected by changes in price.

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33.

Suppose a consumer's income increases from RS. 30,000 to Rs. 36,000. As a result, the consumer increases her purchases of compact discs (CDs) from 25 CDs to 30 CDs. What is the consumer's income elasticity of demand for CDs?
- A.
  
  0.5
- B.
  
  1.0
- C.
  
  1.5
- D.
  
  2.0
Correct Answer
B. 1.0

Explanation
The consumer's income elasticity of demand for CDs is 1.0. This means that for every 1% increase in income, the consumer's demand for CDs increases by 1%. In this case, the consumer's income increased by 20% (from Rs. 30,000 to Rs. 36,000), and their demand for CDs increased by 20% (from 25 CDs to 30 CDs). This indicates a proportional increase in demand in response to the increase in income, resulting in an income elasticity of demand of 1.0.

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34.

Total utility is maximum when :
- A.
  
  Marginal utility is zero.
- B.
  
  Marginal utility is at its highest point.
- C.
  
  Marginal utility is equal to average utility.
- D.
  
  Average utility is maximum.
Correct Answer
A. Marginal utility is zero.

Explanation
When marginal utility is zero, it means that consuming an additional unit of a good or service does not provide any additional satisfaction or utility. This indicates that the consumer has reached a point where they are already maximizing their total utility. Any further consumption would not increase their overall satisfaction. Therefore, the total utility is at its maximum when the marginal utility is zero.

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35.

Which one is not an assumption of the theory of demand based on analysis of indifference curves?
- A.
  
  Given scale of preferences as between different combinations of two goods.
- B.
  
  Diminishing marginal rate of substitution.
- C.
  
  Constant marginal utility of money.
- D.
  
  Consumers would always prefer more of a particular good to less of it, other things remaining the same.
Correct Answer
C. Constant marginal utility of money.

Explanation
The theory of demand based on analysis of indifference curves assumes that consumers have a scale of preferences, meaning they can rank different combinations of two goods. It also assumes that there is a diminishing marginal rate of substitution, which means that as a consumer consumes more of one good, they are willing to give up less of the other good to obtain additional units of the first good. Additionally, the theory assumes that consumers would always prefer more of a particular good to less of it, assuming all other factors remain constant. However, the theory does not assume constant marginal utility of money, as the value of money can vary for consumers depending on their individual circumstances and preferences.

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36.

The consumer is in equilibrium at a point where the budget line :
- A.
  
  Is above an indifference curve.
- B.
  
  Is below an indifference curve.
- C.
  
  Is tangent to an indifference curve.
- D.
  
  Cuts an indifference curve.
Correct Answer
C. Is tangent to an indifference curve.

Explanation
In consumer equilibrium, the budget line represents all the combinations of goods that the consumer can afford given their income and the prices of the goods. An indifference curve represents all the combinations of goods that provide the consumer with the same level of satisfaction. When the budget line is tangent to an indifference curve, it means that the consumer is maximizing their satisfaction given their budget constraint. This is because any other point on the indifference curve would require the consumer to spend more than their budget allows, and any point below the indifference curve would mean the consumer is not fully utilizing their budget.

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37.

An indifference curve slopes down towards right since more of one commodity and less of another result in :
- A.
  
  Same satisfaction.
- B.
  
  Greater satisfaction.
- C.
  
  Maximum satisfaction.
- D.
  
  Decreasing expenditure.
Correct Answer
A. Same satisfaction.

Explanation
An indifference curve slopes down towards the right because it represents different combinations of two goods that provide the same level of satisfaction to the consumer. This means that as the consumer gives up some of one good, they can compensate by increasing their consumption of the other good in order to maintain the same level of satisfaction. Therefore, the consumer remains indifferent or equally satisfied along the curve.

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38.

Which of the following statements is incorrect?
- A.
  
  An indifference curve must be downward-sloping to the right.
- B.
  
  Convexity of a curve implies that the slope of the curve diminishes as one moves from left to right.
- C.
  
  The elasticity of substitution between two goods to a consumer is zero.
- D.
  
  The total effect of a change in the price of a good on its quantity demanded is called the price effect.
Correct Answer
C. The elasticity of substitution between two goods to a consumer is zero.

Explanation
The elasticity of substitution between two goods to a consumer is not necessarily zero. It can vary depending on the preferences and substitutability of the goods.

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39.

The second glass of lemonade gives lesser satisfaction to a thirsty boy. This is a clear case of
- A.
  
  Law of demand.
- B.
  
  Law of diminishing returns.
- C.
  
  Law of diminishing utility.
- D.
  
  Law of supply.
Correct Answer
C. Law of diminishing utility.

Explanation
The law of diminishing utility states that as a person consumes more of a good or service, the additional satisfaction or utility they derive from each additional unit decreases. In this case, the second glass of lemonade gives lesser satisfaction to the thirsty boy, indicating that the utility he derives from each additional glass of lemonade is diminishing. Therefore, the correct answer is the law of diminishing utility.

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40.

The consumer is in equilibrium when the following condition is satisfied : (a) (b) (c) (d) None of the above.
- A.
  
  A
- B.
  
  B
- C.
  
  C
- D.
  
  D
Correct Answer
C. C

Explanation
In order for the consumer to be in equilibrium, the condition stated in option C must be satisfied. Without knowing the specific condition mentioned in option C, it is impossible to provide a detailed explanation. However, it can be inferred that option C contains the correct condition for the consumer to be in equilibrium, based on the structure of the question.

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41.

In the case of a Giffen good, the demand curve will be :
- A.
  
  Horizontal.
- B.
  
  Downward-sloping to the right.
- C.
  
  Vertical.
- D.
  
  Upward-sloping to the right.
Correct Answer
D. Upward-sloping to the right.

Explanation
A Giffen good is a rare type of inferior good where the demand for the good increases as its price rises. This goes against the law of demand, which states that as the price of a good increases, the quantity demanded decreases. In the case of a Giffen good, the income effect dominates the substitution effect, causing consumers to actually buy more of the good as its price increases. This leads to an upward-sloping demand curve, as the quantity demanded increases with higher prices.

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42.

By consumer surplus economists mean
- A.
  
  The area inside the budget line.
- B.
  
  The area between the average revenue and marginal revenue curves.
- C.
  
  The different between the maximum amount a person is willing to pay for a good and its market price.
- D.
  
  None of the above.
Correct Answer
C. The different between the maximum amount a person is willing to pay for a good and its market price.

Explanation
Consumer surplus refers to the difference between the maximum amount a person is willing to pay for a good and the actual market price they pay. It represents the additional benefit or value that consumers receive when they are able to purchase a good at a price lower than what they are willing to pay. This surplus can be seen as the area between the demand curve and the market price, indicating the extra satisfaction or utility gained by consumers.

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43.

Which of the following is a property of an indifference curve?
- A.
  
  It is convex to the origin.
- B.
  
  The marginal rate of substitution is constant as you move along an indifference curve.
- C.
  
  Marginal utility is constant as you move along an indifference curve.
- D.
  
  Total utility is greatest where the 45 degree line cuts the indifference curve.
Correct Answer
A. It is convex to the origin.

Explanation
An indifference curve is convex to the origin because it represents the different combinations of two goods that provide the same level of satisfaction to the consumer. The convex shape indicates that as the consumer consumes more of one good, they are willing to give up less of the other good to maintain the same level of satisfaction. This is known as the diminishing marginal rate of substitution, where the consumer becomes less willing to substitute one good for another as they consume more of it.

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44.

When economists speak of the utility of a certain good, they are referring to
- A.
  
  The demand for the good.
- B.
  
  The usefulness of the good in consumption.
- C.
  
  The satisfaction gained from consuming the good.
- D.
  
  The rate at which consumers are willing to exchange one good for another.
Correct Answer
C. The satisfaction gained from consuming the good.

Explanation
The correct answer is the satisfaction gained from consuming the good. Utility refers to the level of satisfaction or happiness that a consumer receives from consuming a certain good or service. It is a subjective measure and varies from person to person. The utility of a good is determined by factors such as its usefulness, quality, and personal preferences. Economists study utility to understand consumer behavior and make predictions about demand and consumption patterns.

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45.

A vertical supply curve parallel to Y axis implies that the elasticity of supply is :
- A.
  
  Zero
- B.
  
  Infinity
- C.
  
  Equal to one
- D.
  
  Greater than zero but less than infinity.
Correct Answer
A. Zero

Explanation
A vertical supply curve parallel to the Y axis indicates that the quantity supplied does not respond to changes in price. This means that the elasticity of supply is zero, as there is no change in quantity supplied regardless of the change in price.

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46.

The supply of a good refers to :
- A.
  
  Actual production of the good.
- B.
  
  Total existing stock of the good.
- C.
  
  Stock available for sale,
- D.
  
  Amount of the good offered for sale at a particular price per unit of time.
Correct Answer
D. Amount of the good offered for sale at a particular price per unit of time.

Explanation
The supply of a good refers to the amount of the good that is offered for sale at a particular price per unit of time. It represents the quantity of the good that producers are willing and able to sell in the market. This definition focuses on the quantity of the good that is available for purchase by consumers, rather than the actual production, total existing stock, or stock available for sale.

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47.

An increase in the supply of a good is caused by :
- A.
  
  Improvements in its technology.
- B.
  
  Fall in the prices of other goods.
- C.
  
  Fall in the prices of factors of production.
- D.
  
  All of the above.
Correct Answer
D. All of the above.

Explanation
An increase in the supply of a good can be caused by improvements in its technology, as this allows for more efficient production and higher output levels. A fall in the prices of other goods can also lead to an increase in supply, as producers may shift their resources and production towards the goods that have become relatively more profitable. Additionally, a fall in the prices of factors of production, such as labor or raw materials, can reduce production costs and incentivize producers to increase their supply. Therefore, all of the above factors can contribute to an increase in the supply of a good.

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48.

Elasticity of supply refers to the degree of responsiveness of supply of a good to changes in its :
- A.
  
  Demand.
- B.
  
  Price.
- C.
  
  Cost of production.
- D.
  
  State of technology.
Correct Answer
B. Price.

Explanation
The correct answer is "Price." Elasticity of supply measures how much the quantity supplied of a good changes in response to a change in its price. If the supply of a good is elastic, it means that a small change in price will result in a large change in quantity supplied. On the other hand, if the supply is inelastic, it means that a change in price will have a relatively small effect on the quantity supplied. Therefore, price is the key factor that determines the elasticity of supply.

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49.

A horizontal supply curve parallel to the quantity axis implies that the elasticity of supply is :
- A.
  
  Zero.
- B.
  
  Infinite.
- C.
  
  Equal to one.
- D.
  
  Greater than zero but less than one.
Correct Answer
B. Infinite.

Explanation
A horizontal supply curve parallel to the quantity axis indicates that the quantity supplied remains the same regardless of changes in price. This implies that the elasticity of supply is infinite because even a small change in price will result in an infinite change in quantity supplied. In other words, suppliers are perfectly responsive to price changes and can infinitely adjust their supply to meet any level of demand.

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50.

Contraction of supply is the result of :
- A.
  
  Decrease in the number of producers.
- B.
  
  Decrease in the price of the good concern.
- C.
  
  Increase in the prices of other goods.
- D.
  
  Decrease in the outlay of sellers.
Correct Answer
B. Decrease in the price of the good concern.

Explanation
When the price of a good decreases, it becomes less profitable for producers to supply it. As a result, they may reduce their production or exit the market altogether, leading to a contraction of supply. This decrease in supply is a direct consequence of the decrease in the price of the good concern.

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Feb 28, 2012

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Theory Of Demand And Supply

Demand for a commodity refers to :

Contraction of demand is the result of :

All but one of the following are assumed to remain the same while drawing an individual's demand curve for a commodity. Which one is it?

Which of the following pairs of goods is an example of substitutes?

In the case of a straight line demand curve meeting the two axes, the price-elasticity of demand at the mid-point of the line would be :

The Law of Demand, assuming other things to remain constant, establishes the relationship between :

Identify the factor which generally keeps the price-elasticity of demand for a good low :

Identify the coefficient of price-elasticity of demand when the percentage increase in the quantity of a good demanded is smaller than the percentage fall in its price :

In the case of an inferior good, income elasticity oi demand is :

If the demand for a good is inelastic, an increase in its price will cause the total expenditure of the consumers of the good to :

If regardless of changes in its price, the quantity demanded of a good remains unchanged, then the demand curve for the good will be :

The law of demand is :

All of the following are determinants of demand except:

A movement along the demand curve for soft drinks is best described as :

If the price of Pepsi decreases relative to the price of Coke and 7-UP, the demand for :

If a good is a luxury, its income elasticity of demand is :

The price of hot dogs increases by 22% and the quantity of hot dogs demanded falls by 25%. This indicates that demand for hot dogs is :

If the quantity demanded of beef increases by 5% when the price of chicken increases by 20%, the cross-price elasticity of demand between beef and chicken is

Given the following four possibilities, which one results in an increase in total consumer expenditures?

The price elasticity of demand for hamburger is

The price elasticity of demand is defined as the responsiveness of :

Suppose the price of movies seen at a theater rises from Rs. 120 per person to Rs. 200 per person. The theater manager observes that the rise in price causes attendance at a given movie to fall from 300 persons to 200 persons. What is the price elasticity of demand for movies?

Suppose a department store has a sale on its silverware. If the price of a plate-setting is reduced from Rs. 300 to Rs. 200 and the quantity demanded increases from 3,000 plate- settings to 5,000 plate-settings, what is the price elasticity of demand for silverware?

A discount store has a special offer on CDs. It reduces their price from Rs.150 to Rs. 100. Suppose the store manager observes that the quantity demanded increases from 700 CDs to 1,300 CDs. What is the price elasticity of demand for CDs?

If the local pizzeria raises the price of a medium pizza from Rs.60 to Rs. 100 and quantity ] demanded falls from 700 pizzas a night to 100 pizzas a night, the price elasticity of demand

If electricity demand is inelastic, and electric rates increase, which of the following is likely to occur?

Suppose the demand for meals at a medium-priced restaurant is elastic. If the management of the restaurant is considering raising prices, it can expect a relatively :

Point elasticity is useful for which of the following situations?

A decrease in price will result in an increase in total revenue if :

An increase in price will result in an increase in total revenue if :

Demand for a good will tend to be more elastic if it exhibits which of the following characteristics?

Demand for a good will tend to be more inelastic if it exhibits which of the following characteristics?

Suppose a consumer's income increases from RS. 30,000 to Rs. 36,000. As a result, the consumer increases her purchases of compact discs (CDs) from 25 CDs to 30 CDs. What is the consumer's income elasticity of demand for CDs?

Total utility is maximum when :

Which one is not an assumption of the theory of demand based on analysis of indifference curves?

The consumer is in equilibrium at a point where the budget line :

An indifference curve slopes down towards right since more of one commodity and less of another result in :

Which of the following statements is incorrect?

The second glass of lemonade gives lesser satisfaction to a thirsty boy. This is a clear case of

The consumer is in equilibrium when the following condition is satisfied : (a) (b) (c) (d) None of the above.

In the case of a Giffen good, the demand curve will be :

By consumer surplus economists mean

Which of the following is a property of an indifference curve?

When economists speak of the utility of a certain good, they are referring to

A vertical supply curve parallel to Y axis implies that the elasticity of supply is :

The supply of a good refers to :

An increase in the supply of a good is caused by :

Elasticity of supply refers to the degree of responsiveness of supply of a good to changes in its :

A horizontal supply curve parallel to the quantity axis implies that the elasticity of supply is :

Contraction of supply is the result of :