Test: Theory Of Demand- 3 - CA Foundation MCQ

When a straight-line demand curve meets the Y-axis, it represents a situation where the quantity demanded is zero, and the price is at its maximum.

At this point:

• Any small change in price will result in a proportionately infinite change in quantity demanded (from zero to some positive quantity).
• The price elasticity of demand (E_d) is calculated as:

E_d = % change in quantity demanded / % change in price

Since the denominator (price change) is finite and the numerator (quantity change) is infinite, the elasticity becomes infinity.

The correct answer is d) Infinity.

• Determinants of demand are factors that influence consumer purchasing decisions.
• Consumer's tastes and preferences shape the desire for goods.
• Income of consumers affects their ability to buy products.
• Price of related goods (substitutes and complements) can shift demand.
• Quality supplied of a commodity relates more to supply than demand; it does not directly affect how much consumers want to buy.

In economics, a complementary good or complement is a good with a negative cross elasticity of demand, in contrast to a substitute good. This means a good's demand is increased when the price of another good is decreased. Conversely, the demand for a good is decreased when the price of another good is increased.

• Goods are necessary: Essential items like food and medicine have less elastic demand because consumers need them regardless of price changes.
• Short time period: In the short term, consumers can't easily change their purchasing habits, leading to less elastic demand.
• Fewer close substitutes: When there are few alternatives available, consumers are less likely to switch to other products, resulting in reduced elasticity.

• Electricity has many uses, such as lighting, heating, and powering appliances.
• When prices change, consumers can adjust their usage, opting for less electricity or finding alternatives.
• For instance, using energy-efficient devices or solar power can reduce dependence on traditional electricity sources.
• This flexibility in usage and the availability of substitutes contribute to the elasticity of electricity demand.

The question pertains to the type of demand associated with bricks for houses. The correct answer is 'Derived Demand,' which is option 4. Derived demand occurs when the demand for one good or service arises due to the demand for another related good or service. In this case, the demand for bricks is derived from the demand for housing construction. This explanation aligns with standard economic principles outlined in textbooks on microeconomics and the theory of demand and supply.

In expansion and contraction of demand, the demand curve remains unchanged, and Slope of the demand curve changes

On a straight-line demand curve, the price elasticity of demand varies at different points. At the upper extreme point where the demand curve meets the price axis, elasticity is infinite. At the mid-point, elasticity is exactly one (unitary). Between the mid-point and the upper extreme point, elasticity is greater than one, meaning demand is elastic in this segment. Therefore, the correct answer is 'Greater than one'.

• Change in income of buyer: When buyers have more income, they tend to buy more goods, leading to increased demand.
• Change in taste and preference: If consumers prefer a product more, demand rises; if they lose interest, demand falls.
• Change in price of the commodity: Typically, as the price of a product decreases, demand increases, and vice versa.
• Change in price of related goods: If the price of a substitute rises, demand for the original product may increase, and vice versa for complementary goods.

Correct option is C. Positive but greater than 1
If a good is a luxury, its income elasticity of demand is Positive and greater than 1. If income elasticity of demand of a commodity is less than 1, it is a necessity good. If the elasticity of demand is greater than 1, it is a luxury good or a superior good

∆P = P1 - P = 6 - 4 = 2

∆Q = Q1 - Q = 10 - 15 = -5

Price Elasticity= P/Q × ∆Q/∆P =

(-) 4/15×(-)5/2

=0.66

• The price elasticity of demand measures how much the quantity demanded changes in response to a change in price.
• At the mid-point of a straight-line demand curve, the elasticity equals 1, indicating unit elasticity.
• This means that a 1% change in price results in a 1% change in quantity demanded.
• Therefore, the correct answer is 1, as demand is neither elastic nor inelastic at this point.

Correct Answer :- C

Explanation : Q1 = 100                 P1 = 125000

Q2 = 125                 P2 = 100000

(Q2-Q1)/Q = P(P2-P1)

=> (25000/125000) * (100/25)

= 4/5

= 0.8

The correct answer is:

b) Price elasticity of demand

Explanation:

• Price elasticity of demand measures the percentage change in quantity demanded due to a percentage change in price. This involves a movement along the demand curve (e.g., when price falls, quantity demanded rises, and vice versa).

Why Not the Others?

• a) Income elasticity of demand: Measures how demand changes with income, causing a shift in the demand curve (not movement along it).

• c) Substitution elasticity of demand: Refers to how demand for a good changes when the price of a substitute good changes, also leading to a shift in the demand curve.

• d) Wrong as Option B is clearly the answer

Key Distinction:

• Movement along the curve = Price changes (Price Elasticity).

• Shift of the curve = Non-price factors (Income, Substitutes, Preferences).

Answer: (b) Price elasticity of demand

In case of inferior goods, there will be negative income elasticity (Ey<0).

Arc elasticity may be expressed as: [(Q1 - Q)/(Q1 + Q)] x [(P1 + P)/(P1 - P)]

Therefore,

[(300 - 200)/(300 + 200)] x [(200 + 120)/(200 - 120)]

= (100/500) x (320/80)

So, Arc elasticity = 4/5 = 0.8

(differences were large hence arc elasticity is used.)

To determine the type of demand, we calculate the price elasticity of demand (PED) using the formula: PED = (% change in quantity demanded) / (% change in price). Here, PED = (-25%) / (+22%) ≈ -1.14. The absolute value is greater than 1, which means the demand is elastic. Elastic demand means consumers are relatively sensitive to price changes; a small increase in price leads to a larger percentage decrease in quantity demanded.

Income elasticity of demand is calculated using the formula: (Percentage change in quantity demanded) / (Percentage change in income). Here, the percentage change in demand is 40%, and the percentage change in income is 20%. Therefore, the income elasticity of demand is 40% divided by 20%, which equals 2. This calculation confirms that option 2 is correct.