Test: Theory Of Demand- 2 - CA Foundation MCQ

Explanation:

Movement along the same demand curve refers to a change in quantity demanded due to a change in price, while all other factors influencing demand remain constant. This movement is also known as a change in quantity demanded.

Key Points:

• Expansion and contraction of demand: Movement along the same demand curve can show both expansion and contraction of demand.


• Expansion of demand: When the price of a product decreases, the quantity demanded increases, leading to an expansion of demand.


• Contraction of demand: When the price of a product increases, the quantity demanded decreases, leading to a contraction of demand.

Therefore, the correct answer is C: Expansion and contraction of demand.

To calculate the price elasticity of demand, we can use the formula:
Price Elasticity of Demand = Percentage change in quantity demanded / Percentage change in price
Step 1: Calculate the percentage change in quantity demanded.
Percentage change in quantity demanded = ((New quantity demanded - Old quantity demanded) / Old quantity demanded) x 100
Given:
Old quantity demanded = 1,25,000 units
New quantity demanded = 1,00,000 units
Percentage change in quantity demanded = ((1,00,000 - 1,25,000) / 1,25,000) x 100
= (-25,000 / 1,25,000) x 100
= -20%
Step 2: Calculate the percentage change in price.
Percentage change in price = ((New price - Old price) / Old price) x 100
Given:
Old price = Rs. 100 per unit
New price = Rs. 125 per unit
Percentage change in price = ((125 - 100) / 100) x 100
= 25%
Step 3: Calculate the price elasticity of demand.
Price Elasticity of Demand = (-20% / 25%)
= -0.8
Since price elasticity of demand is always a positive value, we take the absolute value of -0.8.
Therefore, the price elasticity of demand is 0.8.
Hence, the correct option is C: 0.80.

Explanation:
The cross elasticity of demand measures the responsiveness of the quantity demanded of one good to a change in the price of another good. In the case of perfect substitutes, two goods are considered to be perfect substitutes if consumers perceive them as identical or interchangeable, meaning that they can easily switch between the two goods without any preference or difference in satisfaction.
In this scenario, the cross elasticity of demand between two perfect substitutes will be infinity. This means that a small change in the price of one good will result in an infinitely large change in the quantity demanded of the other good.
Here's why the cross elasticity of demand between two perfect substitutes is infinity:
- Perfect substitutes have identical characteristics and serve the same purpose for consumers. Therefore, consumers can easily switch between the two goods without any preference or difference in satisfaction.
- When the price of one good decreases, consumers will switch from the more expensive good to the cheaper good, resulting in a large increase in the quantity demanded of the cheaper good.
- Similarly, when the price of one good increases, consumers will switch from the more expensive good to the cheaper good, resulting in a large decrease in the quantity demanded of the more expensive good.
- Since consumers can easily switch between the two goods without any preference, even a small change in price will lead to a large change in the quantity demanded of the other good.
Therefore, the cross elasticity of demand between two perfect substitutes is infinity because the quantity demanded of one good is highly responsive to changes in the price of the other good.

Cross elasticity of demand refers to the change in demand of a commodity due to change in price of substitutes. In case of monopoly, there are no substitutes of the product,hence the cross elasticity of demand is zero.

An increase in demand can result from:

• A decline in the market price: When the market price of a product decreases, it becomes more affordable for consumers, leading to an increase in demand. This is because consumers are more willing and able to purchase the product at a lower price.


• An increase in income: When consumers' income increases, they have more purchasing power and can afford to buy more goods and services. As a result, the demand for various products and services tends to increase.


• A reduction in the price of substitutes: If the price of a substitute product decreases, consumers may switch from the higher-priced product to the cheaper substitute. This shift in consumer behavior can lead to an increase in demand for the substitute product.


• An increase in the price of complements: Complementary goods are products that are typically used together. When the price of a complement increases, consumers may reduce their consumption of that complement, leading to a decrease in demand for the complement and potentially an increase in demand for the initial product.

Overall, an increase in demand can be influenced by changes in price, income, and the prices of substitutes and complements.

Explanation:
The demand curve shows the relationship between the price of a product and the quantity of that product demanded by consumers. It is based on the principles of supply and demand in economics.
The shape of the demand curve is determined by the law of demand, which states that as the price of a product increases, the quantity demanded decreases, and vice versa. This law is based on the idea that consumers are willing to buy more of a product at lower prices and less of it at higher prices.
The demand curve is typically downward sloping because of the following reasons:
1. Income Effect: As the price of a product decreases, consumers' purchasing power increases. They can afford to buy more of the product, leading to an increase in demand.
2. Substitution Effect: When the price of one product decreases, it becomes relatively cheaper compared to other products. Consumers may switch from other products to the cheaper one, increasing its demand.
3. Law of Diminishing Marginal Utility: Consumers tend to derive less satisfaction from consuming additional units of a product. As the price decreases, consumers are willing to buy more to achieve higher levels of satisfaction.
4. Market Equilibrium: In a competitive market, the price and quantity are determined by the interaction of supply and demand. The equilibrium price is where the quantity demanded equals the quantity supplied. Any deviation from this equilibrium will result in a change in price and quantity demanded.
It is important to note that while the demand curve is generally downward sloping, there may be exceptions in certain cases, such as luxury goods or products with upward sloping demand curves. However, in most market situations, the demand curve is expected to be downward sloping.

The Law of Demand:
The law of demand states that there is an inverse relationship between the price of a product and the quantity demanded. In other words, as the price of a product increases, the demand for that product decreases, and vice versa. Let's examine each statement to determine which one is true:
A: Income rises, demand rises:
- This statement is incorrect. The law of demand focuses on the relationship between price and quantity demanded, not income. While an increase in income can lead to an increase in demand for normal goods, it does not always hold true for all goods. Some goods may be considered inferior goods, where an increase in income leads to a decrease in demand.
B: Price rises, demand rises:
- This statement is incorrect. According to the law of demand, as the price of a product increases, the demand for that product decreases. This is because consumers are less willing to purchase a product at a higher price.
C: Price falls, demand falls:
- This statement is incorrect. According to the law of demand, as the price of a product falls, the demand for that product increases. This is because consumers are more willing to purchase a product at a lower price.
D: Price falls, demand rises:
- This statement is correct. According to the law of demand, as the price of a product falls, the demand for that product increases. This is because consumers are more willing to purchase a product at a lower price.
Therefore, the correct statement about the law of demand is D: Price falls, demand rises.

Factors that keep the price-elasticity of demand for a good low:

• Variety of uses for that good: When a good has multiple uses, it is less likely to have a low price-elasticity of demand. This is because consumers can find alternative uses for the good, even if its price increases. This increases the elasticity of demand.


• Close substitutes for that good: If there are many close substitutes available for a good, consumers have more options to choose from. This means that if the price of one good increases, consumers can easily switch to a substitute, making the demand for the original good more elastic.


• High proportion of the consumer's income spent on it: When a good represents a significant portion of a consumer's income, the price-elasticity of demand tends to be higher. This is because consumers are more sensitive to price changes when a larger proportion of their income is spent on the good.


• Low price: Contrary to the other factors mentioned, a low price tends to result in a low price-elasticity of demand. This is because consumers may perceive the good as having a low value or importance if it is priced too low, and therefore, their demand for it may be less responsive to price changes.

In this case, the correct answer is B: Its low price.

Correct Answer :- b

Explanation : When the demand for a commodity is price elastic and the price of the commodity falls the in such a situation the total expenditure on the commodity rises. This is because of the fact that when the demand is price elastic the proportionate change in quantity demanded is greater than the proportionate change in price. As a result when the price falls the quantity demanded rises by a greater proportion than the proportionate fall in price such that the rise in quantity exceeds the fall and price thereby, the total expenditure rises.

Explanation:
When the demand for a commodity is unitary elastic, it means that the percentage change in quantity demanded is equal to the percentage change in price. In this case, the consumer's total expenditure on the commodity remains constant regardless of changes in price.
Here's a detailed explanation:
1. Unitary Elastic Demand:
- Unitary elastic demand refers to a situation where the price elasticity of demand is exactly equal to 1.
- This means that a given percentage change in price will result in an equal percentage change in quantity demanded.
- Mathematically, the price elasticity of demand (PED) is calculated as the percentage change in quantity demanded divided by the percentage change in price.
- When PED = 1, the percentage change in quantity demanded is equal to the percentage change in price.
2. Relationship between Price and Total Expenditure:
- Total expenditure is calculated by multiplying the price of a commodity by the quantity demanded.
- When the demand for a commodity is unitary elastic, any increase or decrease in price will result in an equal percentage change in quantity demanded.
- However, since the percentage change in price is equal to the percentage change in quantity demanded, the increase or decrease in quantity demanded will offset the change in price.
- As a result, the consumer's total expenditure on the commodity will remain constant.
3. Conclusion:
- In the case of a commodity with a unitary elastic demand curve, the consumer's total expenditure on the commodity remains constant regardless of changes in price.
- Therefore, the correct answer is option C: Remains constant.

Given:
- Initial price (P1) = Rs. 120
- Final price (P2) = Rs. 200
- Initial quantity demanded (Q1) = 300
- Final quantity demanded (Q2) = 200
To calculate the price elasticity of demand, we can use the formula:
Price elasticity of demand = ((Q2 - Q1) / ((Q1 + Q2) / 2)) / ((P2 - P1) / ((P1 + P2) / 2))
Step 1: Calculate the change in quantity demanded:
Change in quantity demanded (ΔQ) = Q2 - Q1
= 200 - 300
= -100
Step 2: Calculate the average quantity demanded:
Average quantity demanded (Qavg) = (Q1 + Q2) / 2
= (300 + 200) / 2
= 250
Step 3: Calculate the change in price:
Change in price (ΔP) = P2 - P1
= 200 - 120
= 80
Step 4: Calculate the average price:
Average price (Pavg) = (P1 + P2) / 2
= (120 + 200) / 2
= 160
Step 5: Calculate the price elasticity of demand:
Price elasticity of demand = (ΔQ / Qavg) / (ΔP / Pavg)
= (-100 / 250) / (80 / 160)
= -0.4 / 0.5
= -0.8
Since price elasticity of demand is usually expressed as a positive value, we take the absolute value of -0.8:
Price elasticity of demand = |-0.8|
= 0.8
Conclusion:
The price elasticity of demand for movies is 0.8.

The horizontal demand curve parallel to x-axis implies that the elasticity of demand is infinite.It is zero when the demand curve is parallel to the y-axis.

To calculate the price elasticity of demand, we can use the formula:
Price Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price)
Step 1: Calculate the percentage change in quantity demanded.
We can use the formula:
Percentage Change in Quantity Demanded = ((New Quantity Demanded - Initial Quantity Demanded) / Initial Quantity Demanded) * 100
Using the given values, we can calculate the percentage change in quantity demanded:
Percentage Change in Quantity Demanded = ((15 - 20) / 20) * 100
= (-5 / 20) * 100
= -25%
Step 2: Calculate the percentage change in price.
We can use the formula:
Percentage Change in Price = ((New Price - Initial Price) / Initial Price) * 100
Using the given values, we can calculate the percentage change in price:
Percentage Change in Price = ((750 - 500) / 500) * 100
= (250 / 500) * 100
= 50%
Step 3: Calculate the price elasticity of demand.
Using the calculated percentage changes, we can calculate the price elasticity of demand:
Price Elasticity of Demand = (-25% / 50%)
= -0.5
Since the price elasticity of demand is negative, we take the absolute value to determine the magnitude. Therefore, the price elasticity of demand is 0.5.
Therefore, the correct answer is option B: 0.50.

 

Answer:

Inferior goods:

• Inferior goods are products that consumers demand less of as their income increases.


• These goods are typically considered lower-quality or less desirable than other options.


• As consumers' income rises, they are more likely to switch to higher-quality substitutes, leading to a decrease in demand for inferior goods.


• Examples of inferior goods include generic brands, used items, and low-cost fast food.

Substitutes:

• Substitutes are goods that can be used in place of each other.


• When the income of households rises, they may choose to purchase more expensive substitutes instead of the original good.


• This can lead to a decrease in demand for the original good.


• For example, if the price of beef increases, consumers may switch to purchasing chicken instead, leading to a decrease in demand for beef.

Luxuries:

• Luxuries are goods that are not essential for survival but are considered desirable and enjoyable.


• As income levels rise, consumers may choose to spend more on luxury items.


• However, the demand for luxury goods may not necessarily decrease with a rise in income.


• Instead, the demand for luxury goods may increase, but at a slower rate compared to the increase in income.

Necessities:

• Necessities are goods that are essential for survival and basic needs.


• As income levels rise, the demand for necessities is unlikely to decrease.


• Instead, the demand for necessities may increase as consumers have more purchasing power.


• Examples of necessities include food, water, shelter, and basic healthcare.

In conclusion, the correct answer is Inferior goods (option A).

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.

To find the price elasticity of demand at the mid-point of a straight-line demand curve, we need to calculate the absolute value of the slope of the demand curve at that point.
Step 1: Understanding the concept
- Price elasticity of demand measures the responsiveness of quantity demanded to a change in price.
- It is calculated as the percentage change in quantity demanded divided by the percentage change in price.
Step 2: Analyzing the given information
- The demand curve is straight-line and meets the two axes, which indicates a constant slope.
- At the midpoint of the line, the slope is constant and equal to the reciprocal of the price.
- Therefore, the price elasticity of demand at the mid-point is equal to the reciprocal of the price.
Step 3: Calculating the price elasticity of demand at the mid-point
- Since the price is the reciprocal of the slope, we can calculate it by dividing the change in the vertical axis (quantity) by the change in the horizontal axis (price).
- At the mid-point, the change in quantity is equal to the distance from the mid-point to the y-axis (vertical axis), and the change in price is equal to the distance from the mid-point to the x-axis (horizontal axis).
- The slope is constant, so the change in quantity divided by the change in price will give us the price elasticity of demand at the mid-point.
Step 4: Applying the calculation
- Since the demand curve meets the two axes, the mid-point is where the price and quantity are both equal to 1.
- The change in quantity is 1, and the change in price is also 1.
- Therefore, the price elasticity of demand at the mid-point is equal to 1/1, which is 1.
Step 5: Final answer
- The price elasticity of demand at the mid-point of the straight-line demand curve is 1.
Answer: B: 1

An Engel curve describes how household expenditure on a particular good or service varies with household income. There are two varieties of Engel curves. Budget share Engel curves describe how the proportion of household income spent on a good varies with income.

EOD =6/5
=1.2
Since EOD is greater than 1. So, it is elastic.

In the expansion and contraction of demand, the demand curve remains unchanged, but the quantity demanded changes along the same demand curve. This is because the change in quantity demanded is due to a change in the price of the product, while other factors affecting demand remain constant. So, statement 1 (Demand curve remains unchanged) is correct.

The slope of the demand curve also changes when there is an expansion or contraction of demand. This is because the slope represents the responsiveness of quantity demanded to changes in price. When there is an expansion or contraction of demand, the slope will become more or less steep, depending on whether demand is more or less responsive to price changes. So, statement 3 (Slope of the demand curve changes) is correct.

When the demand is parallel to x axis i.e. demand of a commodity changes even when the price remains unchanged, the elasticity is at infinity. Hence the nature of the elasticity is perfectly elastic.

Q1 = 950, Q2 = 980

⇒ ∆Q = 30

M1 = 9000, M2 = 9800

⇒ ∆M = 800

The more possible uses of a commodity are the greater will be its price elasticity and vice versa. So we can say that demand of electricity power is elastic because it has many uses. Other example of such type of product can be milk.

Cross Elasticity of Demand for Substitute Goods:
Substitute goods are products that can be used as alternatives to each other. When the price of one substitute good increases, the demand for the other substitute good tends to increase. The cross elasticity of demand measures this relationship between substitute goods.
Definition of Cross Elasticity of Demand:
Cross elasticity of demand is a measure of the responsiveness of the quantity demanded of one good to a change in the price of another good. It indicates how sensitive the demand for one good is to a change in the price of another good.
Cross Elasticity of Substitute Goods:
For substitute goods, the cross elasticity of demand is positive. This means that an increase in the price of one substitute good leads to an increase in the demand for the other substitute good. Conversely, a decrease in the price of one substitute good leads to a decrease in the demand for the other substitute good.
Reasoning behind the Positive Cross Elasticity:
- When the price of one substitute good increases, consumers will tend to switch to the other substitute good, as it becomes relatively cheaper.
- As a result, the quantity demanded for the other substitute good increases, leading to a positive cross elasticity of demand.
Example:
- If the price of coffee increases, some consumers may switch to tea as a substitute.
- The increase in the price of coffee leads to an increase in the demand for tea, indicating a positive cross elasticity.
Conclusion:
In the case of substitute goods, the cross elasticity of demand is positive. This reflects the fact that when the price of one substitute good changes, there is a corresponding change in the demand for the other substitute good.

To calculate the price elasticity of demand using the point elasticity method, we can use the following formula:
Price elasticity of demand = ((Change in quantity demanded) / (Average quantity demanded)) / ((Change in price) / (Average price))
Given:
Initial price (P1) = Rs. 6
Final price (P2) = Rs. 4
Initial quantity demanded (Q1) = 10 units
Final quantity demanded (Q2) = 15 units
Using the formula, we can calculate the price elasticity of demand step by step:
Step 1: Calculate the change in quantity demanded:
Change in quantity demanded = Q2 - Q1 = 15 - 10 = 5 units
Step 2: Calculate the average quantity demanded:
Average quantity demanded = (Q1 + Q2) / 2 = (10 + 15) / 2 = 12.5 units
Step 3: Calculate the change in price:
Change in price = P2 - P1 = 4 - 6 = -2
Step 4: Calculate the average price:
Average price = (P1 + P2) / 2 = (6 + 4) / 2 = 5
Step 5: Calculate the price elasticity of demand:
Price elasticity of demand = ((Change in quantity demanded) / (Average quantity demanded)) / ((Change in price) / (Average price))
Price elasticity of demand = (5 / 12.5) / (-2 / 5)
Price elasticity of demand = (0.4) / (-0.4)
Price elasticity of demand = -1
The price elasticity of demand is -1.
However, since price elasticity of demand is always positive, we take the absolute value of the result. Therefore, the price elasticity of demand in this case is 1.
Hence, the correct answer is option A: 1.5.

To calculate the price elasticity of demand using the point elasticity method, we can use the formula:
Price Elasticity of Demand = (% change in quantity demanded) / (% change in price)
1. Calculate the percentage change in quantity demanded:
- Initial quantity demanded = 15 units
- Final quantity demanded = 10 units
- Change in quantity demanded = Final quantity demanded - Initial quantity demanded = 10 - 15 = -5 units
- Percentage change in quantity demanded = (Change in quantity demanded / Initial quantity demanded) * 100%
= (-5 / 15) * 100% = -33.33%
2. Calculate the percentage change in price:
- Initial price = Rs. 4
- Final price = Rs. 6
- Change in price = Final price - Initial price = 6 - 4 = 2
- Percentage change in price = (Change in price / Initial price) * 100%
= (2 / 4) * 100% = 50%
3. Calculate the price elasticity of demand:
- Price Elasticity of Demand = (% change in quantity demanded) / (% change in price)
= (-33.33% / 50%)
= -0.6666...
Therefore, the price elasticity of demand is approximately -0.66.

The Law of Demand
The law of demand is a fundamental concept in economics that describes the inverse relationship between the price of a good or service and the quantity demanded by consumers. It is an essential principle that helps us understand how consumers behave in the marketplace.
Explanation:
The law of demand states that as the price of a good or service increases, the quantity demanded by consumers decreases, and vice versa. This relationship can be explained by a number of factors:
- Substitution effect: When the price of a good increases, consumers tend to substitute it with cheaper alternatives. This leads to a decrease in the quantity demanded.
- Income effect: When the price of a good increases, consumers' purchasing power decreases. As a result, they may have to reduce their consumption of that good, leading to a decrease in quantity demanded.
- Law of diminishing marginal utility: As consumers consume more of a good, the additional satisfaction they derive from each unit decreases. Therefore, they are willing to pay less for additional units of the good.
- Market equilibrium: The law of demand is also related to the concept of market equilibrium. In a competitive market, the price and quantity of a good will adjust until the quantity demanded equals the quantity supplied.
In conclusion, the law of demand is a qualitative statement that describes the inverse relationship between price and quantity demanded. It helps economists and policymakers understand consumer behavior and make predictions about market outcomes.

Explanation:
The elasticity between two points refers to the responsiveness or sensitivity of a variable to a change in another variable. In economics, elasticity is often used to measure the relationship between the quantity demanded or supplied of a good and its price.
There are different types of elasticity that can be calculated between two points:
1. Point elasticity:
- Point elasticity measures the responsiveness of a variable at a specific point on a demand or supply curve.
- It is calculated by taking the derivative of the function at that point.
- Point elasticity can provide a more accurate measure of elasticity at a particular price or quantity.
2. Arc elasticity:
- Arc elasticity measures the responsiveness of a variable between two points on a demand or supply curve.
- It is calculated by taking the average of the initial and final values of the variable and dividing it by the average of the initial and final values of the other variable.
- Arc elasticity provides a measure of elasticity over a range or interval rather than at a specific point.
3. Cross elasticity:
- Cross elasticity measures the responsiveness of the quantity demanded or supplied of one good to a change in the price of another good.
- It is calculated by taking the percentage change in quantity demanded or supplied of the first good and dividing it by the percentage change in price of the second good.
- Cross elasticity can be used to determine if goods are substitutes or complements.
4. None:
- This option indicates that there is no elasticity between the two points being considered.
- It could be the case if the variables being analyzed are not related or if there is no change in one variable with respect to the other.
In conclusion, the correct answer is B: Arc elasticity as it measures the responsiveness between two points on a demand or supply curve.

The price elasticity of demand measures the sensitivity of the quantity demanded to changes in the price. Demand is inelastic if it does not respond much to price changes, and elastic if demand changes a lot when the price changes. Necessities tend to have inelastic demand.

Price Elasticity of Demand

The price elasticity of demand measures the responsiveness of the quantity demanded to a change in price. It is calculated using the formula:

Price Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price)

Given Information

• Initial price (P1) = Rs. 120


• Final price (P2) = Rs. 200


• Initial quantity demanded (Q1) = 300


• Final quantity demanded (Q2) = 200

Calculating the Percentage Change in Price

Percentage Change in Price = ((P2 - P1) / P1) * 100

Percentage Change in Price = ((200 - 120) / 120) * 100

Percentage Change in Price = (80 / 120) * 100

Percentage Change in Price = 66.67%

Calculating the Percentage Change in Quantity Demanded

Percentage Change in Quantity Demanded = ((Q2 - Q1) / Q1) * 100

Percentage Change in Quantity Demanded = ((200 - 300) / 300) * 100

Percentage Change in Quantity Demanded = (-100 / 300) * 100

Percentage Change in Quantity Demanded = -33.33%

Calculating the Price Elasticity of Demand

Price Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price)

Price Elasticity of Demand = (-33.33% / 66.67%)

Price Elasticity of Demand = -0.5

Interpreting the Price Elasticity of Demand

The price elasticity of demand is -0.5, which means that the demand for cylinders is inelastic. Inelastic demand indicates that the change in price has a proportionately smaller impact on the quantity demanded. In this case, a 33.33% decrease in quantity demanded is associated with a 66.67% increase in price.

Answer

The price elasticity of demand is 0.5.