Test: Theory Of Demand And Supply- 1 - CA Foundation MCQ

Demand for a commodity refers to:

Demand for a commodity refers to the quantity of the commodity that consumers are willing and able to buy at a given price during a specific period of time. It is an important concept in economics and helps to determine the market equilibrium and price levels.

The four options given are:

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.
To determine the correct answer, let's analyze each option:
Option A: Desire for the commodity

- Desire refers to a wish or longing for something, but it does not necessarily imply the willingness or ability to purchase the commodity. Therefore, it is not an accurate definition of demand.
Option B: Need for the commodity

- Need refers to a necessity or requirement for something, but it also does not indicate the willingness or ability to buy the commodity. Therefore, it is not an accurate definition of demand.
Option C: Quantity demanded of that commodity

- Quantity demanded is the amount of a commodity that consumers are willing and able to buy at a given price. This option correctly defines a component of demand, but it does not capture the time aspect.
Option D: Quantity of the commodity demanded at a certain price during any particular period of time

- This option accurately defines demand by considering both the quantity and time aspects. It recognizes that demand can vary with changes in price and over different time periods.
Therefore, the correct answer is option D: Quantity of the commodity demanded at a certain price during any particular period of time.

Contraction of demand is the result of:
A: Decrease in the number of consumers
- When there is a decrease in the number of consumers, the overall demand for a commodity decreases.
B: Increase in the price of the commodity concerned
- When the price of a commodity increases, consumers tend to demand less of it due to affordability issues, leading to a contraction in demand.
C: Increase in the prices of other goods
- When the prices of other goods increase, consumers may shift their preference towards cheaper alternatives, resulting in a contraction of demand for the original commodity.
D: Decrease in the income of purchasers
- If purchasers experience a decrease in their income, they may have less purchasing power, causing a contraction in demand as they are unable to afford the commodity.
Summary:
Contraction of demand can occur due to various factors, including an increase in the price of the commodity, decrease in the number of consumers, increase in the prices of other goods, and decrease in the income of purchasers. These factors directly impact consumers' ability and willingness to purchase a particular commodity, leading to a decrease in overall demand.

Assumption that remains the same while drawing an individual's demand curve for a commodity:

• The preference of the individual: The individual's taste, preferences, and utility derived from consuming the commodity are assumed to remain constant while drawing the demand curve.


• His monetary income: The individual's income is assumed to remain constant as the demand curve represents the relationship between quantity demanded and price, holding income constant.


• Price of related goods: The prices of other goods that are substitutes or complements to the commodity in question are assumed to remain constant while drawing the demand curve.


• Price: The only assumption that does not remain the same is the price of the commodity itself. The demand curve is derived by plotting the quantity demanded at different price levels, indicating the inverse relationship between price and quantity demanded.

Explanation:
To determine which pair of goods is an example of substitutes, we need to identify goods that can be used interchangeably or fulfill similar needs.
Let's analyze each pair of goods:
A: Tea and sugar.
Tea and sugar are not substitutes for each other as they serve different purposes. Tea is a beverage, while sugar is a sweetener used to enhance the taste of tea or other beverages.
B: Tea and coffee.
Tea and coffee are commonly considered substitutes as they are both popular beverages and can fulfill the same need for a hot, caffeinated drink. If someone prefers tea but cannot find it, they may opt for coffee as a substitute.
C: Pen and ink.
Pen and ink are complementary goods rather than substitutes. A pen requires ink to function, so they are used together. However, if someone does not have ink, they can still use a pen with alternatives such as pencil or marker.
D: Shirt and trousers.
Shirt and trousers are not substitutes for each other. They are different types of clothing items and serve different purposes. Shirts are worn on the upper body, while trousers are worn on the lower body.
Therefore, the correct answer is B: Tea and coffee as they are examples of substitutes.

The 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.
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 is always equal to 1. This is because the slope of a straight line demand curve is constant, indicating that the percentage change in quantity demanded is equal to the percentage change in price at every point along the curve.
To illustrate this, consider the following example:
- Let's assume the demand curve is a straight line that intersects the price axis at $10 and the quantity axis at 100 units.
- At the mid-point of the line, the price is $10 and the quantity demanded is 100 units.
- Now, let's say the price changes by 10% (from $10 to $11), and the quantity demanded changes by 10% (from 100 units to 110 units).
- The price-elasticity of demand is calculated as (10%/10%) = 1.
Therefore, the correct answer is B: 1.

The Law of Demand
The Law of Demand states that, assuming other things remain constant, there is an inverse relationship between the price of a good and the quantity demanded. In other words, as the price of a good increases, the quantity demanded decreases, and vice versa. Let's break down the relationship between price and quantity demanded:
Price of a good
- The price of a good refers to the amount of money that consumers are willing and able to pay for a particular product or service.
Quantity demanded
- Quantity demanded refers to the amount of a good or service that consumers are willing and able to purchase at a given price during a specific period of time.
Relationship between price and quantity demanded
- The Law of Demand suggests that when the price of a good increases, the quantity demanded decreases. This can be explained by two key factors:
- Substitution effect: When the price of a good increases, consumers are more likely to switch to substitute goods that are relatively cheaper.
- Income effect: When the price of a good increases, consumers have less purchasing power, which leads to a decrease in the quantity demanded.
Assuming other things remain constant
- The Law of Demand assumes that other factors influencing demand, such as consumer preferences, income, prices of related goods, and market conditions, remain constant. This allows us to isolate the relationship between price and quantity demanded.
Therefore, the correct answer is B: price of a good and the quantity demanded.

Factors that generally keep the price-elasticity of demand for a good low:
There are several factors that can contribute to a low price-elasticity of demand for a good. However, in this case, the correct answer is option B: Its low price. Here is a detailed explanation:
1. Definition of price-elasticity of demand:
Price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in its price. If the quantity demanded changes significantly in response to a change in price, the good is said to have elastic demand. On the other hand, if the quantity demanded changes only slightly in response to a change in price, the good is said to have inelastic demand.
2. Factors affecting price-elasticity of demand:
- Availability of substitutes: If there are many close substitutes available for a good, consumers have more options to choose from. This makes the demand for the good more elastic as consumers can easily switch to alternatives if the price of the good increases. This means that option C (Close substitutes for that good) could potentially increase the price-elasticity of demand, not decrease it.
- Variety of uses for the good: If a good has a variety of uses, it may have a higher price-elasticity of demand as consumers can switch to other uses or alternatives if the price increases. Therefore, option A (Variety of uses for that good) could also potentially increase the price-elasticity of demand.
- High proportion of consumer's income spent on the good: If a good represents a significant portion of a consumer's income, they are likely to be more price-sensitive and responsive to changes in price. This would increase the price-elasticity of demand. Therefore, option D (High proportion of the consumer's income spent on it) could also potentially increase the price-elasticity of demand.
3. Low price as a factor:
- A low price generally indicates that the good is already affordable and represents a small proportion of a consumer's income. If the price is low, consumers may be less sensitive to changes in price and may continue to purchase the good even if the price increases slightly. This would result in a low price-elasticity of demand. Therefore, option B (Its low price) is the correct answer as it generally keeps the price-elasticity of demand for a good low.
In conclusion, the factor that generally keeps the price-elasticity of demand for a good low is its low price.

Price Elasticity of Demand:
The price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.
Coefficient of Price Elasticity of Demand:
The coefficient of price elasticity of demand indicates the degree of responsiveness of quantity demanded to a change in price. It can be classified into different categories based on its value.
Identification of Coefficient:
When the percentage increase in the quantity of a good demanded is smaller than the percentage fall in its price, the coefficient of price elasticity of demand can be identified as follows:
- The percentage increase in quantity demanded is smaller than the percentage fall in price, indicating that the demand is not very responsive to price changes.
- In this case, the coefficient of price elasticity of demand is smaller than one.
Correct Answer:
The correct answer is option C: Smaller than one.

The income elasticity of demand for an inferior good is negative.
- Definition of an inferior good: An inferior good is a type of good for which demand decreases as income increases. In other words, as consumers' incomes rise, they tend to spend less on inferior goods and shift their consumption towards higher-quality or more expensive alternatives.
- Income elasticity of demand: Income elasticity of demand measures the responsiveness of quantity demanded to changes in income. It is calculated as the percentage change in quantity demanded divided by the percentage change in income.
- Interpretation of negative income elasticity: A negative income elasticity of demand indicates an inferior good. This means that as income increases, the demand for the good decreases. The magnitude of the negative income elasticity represents the degree to which demand decreases with income growth.
- Reasons for negative income elasticity: There are several reasons why the demand for inferior goods decreases as income rises:
- As consumers' incomes increase, they have more disposable income to spend on higher-quality goods or substitutes.
- Inferior goods are often associated with lower levels of quality or prestige, so as consumers' incomes rise, they may choose to upgrade to better alternatives.
- The demand for inferior goods may also be influenced by social and cultural factors. As individuals achieve higher social status, they may prefer to buy goods that are perceived as more prestigious.
- Examples of inferior goods: Some examples of inferior goods include generic store-brand products, low-quality clothing, and public transportation. These goods are typically viewed as substitutes for higher-quality alternatives.
- Conclusion: The income elasticity of demand for an inferior good is negative, indicating that as income increases, the demand for the good decreases. This is due to various factors such as the availability of higher-quality alternatives and consumers' desire to upgrade their consumption choices.

Demand Elasticity and Total Expenditure:

When analyzing the effect of a price change on total expenditure, we need to consider the elasticity of demand. Elasticity measures the responsiveness of the quantity demanded to a change in price.

Elastic Demand:

• If demand is elastic, a price increase will lead to a decrease in total expenditure.


• Consumers are highly responsive to price changes, so they will reduce their quantity demanded significantly when the price increases.


• This decrease in quantity demanded outweighs the price increase, resulting in a decrease in total expenditure.

Inelastic Demand:

• If demand is inelastic, a price increase will cause total expenditure to increase.


• Consumers are not very responsive to price changes, so they will only reduce their quantity demanded slightly when the price increases.


• This small decrease in quantity demanded is not enough to offset the price increase, resulting in an overall increase in total expenditure.

Conclusion:

In this case, since the demand for the good is inelastic, an increase in its price will cause the total expenditure of the consumers of the good to increase. Therefore, the correct answer is B: increase.

Since the quantity demanded remains unchanged regardless of change in its prices, therefore the commodity has perfectly inelastic demand(E=0) and in this case demand curve will be vertical.

The horizontal demand curve implies that the elasticity of demand is infinite.
Explanation:
The elasticity of demand measures the responsiveness of quantity demanded to a change in price. It is calculated by dividing the percentage change in quantity demanded by the percentage change in price.
A horizontal demand curve means that the quantity demanded remains the same regardless of the change in price. In other words, the change in price has no effect on the quantity demanded.
When the quantity demanded does not respond at all to a change in price, the elasticity of demand is said to be infinite. This is because any percentage change in price will result in an infinite percentage change in quantity demanded.
Therefore, the correct answer is B: Infinite.

Determinants of Demand
The determinants of demand are factors that influence the quantity of a good or service that consumers are willing and able to purchase at different prices. These determinants include:
1. Tastes and preferences: The preferences and tastes of consumers play a significant role in determining demand. If consumers have a positive perception of a product or if their preferences change, it can lead to an increase in demand.
2. Income: The income of consumers is an important determinant of demand. As income increases, consumers have more purchasing power, which can lead to higher demand for certain goods and services.
3. Price of related goods: The prices of related goods, such as substitutes and complements, can influence demand. If the price of a substitute good increases, consumers may choose to purchase the original good instead, leading to an increase in demand. On the other hand, if the price of a complement good decreases, it can also lead to an increase in demand for the original good.
4. Price expectations: The expectations of future prices can influence demand. If consumers expect the price of a good to increase in the future, they may buy more of it now, leading to an increase in demand.
5. Number of buyers: The number of potential buyers in the market can also affect demand. An increase in the number of buyers can lead to an increase in demand, while a decrease in the number of buyers can lead to a decrease in demand.
6. Government policies: Government policies, such as taxes and subsidies, can also impact demand. For example, a tax on a specific good can increase its price, leading to a decrease in demand.
The answer to the question is B: Quantity supplied. The quantity supplied is not a determinant of demand but rather a result of the interaction between demand and supply in the market. Demand determines the quantity of a good or service that consumers are willing and able to purchase at different prices, while supply determines the quantity that producers are willing and able to offer at different prices.

The Movement Along the Demand Curve for Soft Drinks

Definition: A movement along the demand curve for soft drinks refers to a change in the quantity demanded of soft drinks in response to a change in price, while other factors remain constant.

Explanation:

When there is a change in the price of soft drinks, it directly affects the quantity demanded by consumers. This movement along the demand curve is known as a change in quantity demanded and is caused by the law of demand.

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. When the price of a good increases, the quantity demanded decreases, and vice versa, assuming other factors remain constant.

Key Points:

1. A movement along the demand curve occurs due to a change in price.

2. The movement is represented by a change in the quantity demanded.

3. Factors other than price, such as income, taste, and preferences, are assumed to remain constant during the movement along the demand curve.

Example:

Suppose the price of soft drinks increases from $1 to $2 per can. As a result, the quantity demanded by consumers decreases from 100 cans to 50 cans. This movement along the demand curve demonstrates a change in quantity demanded.

Conclusion:

A movement along the demand curve for soft drinks represents a change in quantity demanded due to a change in price, while other factors are held constant. It is not a change in demand itself.

If the price of Pepsi decreases relative to the price of Coke and 7-UP, the demand for:
To determine the impact of a decrease in the price of Pepsi on the demand for Coke and 7-UP, we need to consider the concept of substitute goods. When the price of one substitute good decreases, it typically leads to a decrease in the demand for other substitute goods.
Explanation:
1. Demand and Substitute Goods: When two goods are considered substitutes, it means that they can be used interchangeably to satisfy a similar need or desire. In this case, Pepsi, Coke, and 7-UP are all substitute goods as they are all carbonated beverages.
2. Price Decrease: When the price of Pepsi decreases relative to the price of Coke and 7-UP, it becomes a more attractive option for consumers. This is because consumers will perceive Pepsi as a cheaper alternative to Coke and 7-UP.
3. Substitution Effect: The decrease in the price of Pepsi will lead to a substitution effect, where consumers switch from consuming Coke and 7-UP to consuming Pepsi instead. This is because consumers will view Pepsi as a better value for their money.
4. Impact on Demand: As consumers shift their consumption from Coke and 7-UP to Pepsi, the demand for Coke and 7-UP will decrease. This is because consumers are substituting Pepsi for these beverages and no longer have the same level of demand for them.
Therefore, the correct answer is:
D: Coke and 7-UP will decrease.

Explanation:
The income elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in income. It is calculated as the percentage change in quantity demanded divided by the percentage change in income.
When a good is considered a luxury, it means that it is not a necessity and its consumption increases as income increases. Therefore, the income elasticity of demand for luxury goods is positive.
Now, let's consider the options:
A:

Positive and less than 1.

This option suggests that the income elasticity of demand for a luxury good is positive but less than 1. This is incorrect because luxury goods often have income elasticities of demand that are greater than 1, indicating that the quantity demanded is more responsive to changes in income.
B:

Negative but greater than -1.

This option suggests that the income elasticity of demand for a luxury good is negative but greater than -1. This is incorrect because luxury goods have positive income elasticities of demand, not negative.
C:

Positive and greater than 1.

This option is correct. Luxury goods have income elasticities of demand that are positive and greater than 1, indicating that their consumption increases at a higher proportion than the increase in income.
D:

Zero.

This option is incorrect. If the income elasticity of demand for a luxury good were zero, it would mean that the quantity demanded does not change at all in response to changes in income, which is not the case for luxury goods.
Therefore, the correct answer is C: Positive and greater than 1.

Explanation:
To determine the elasticity of demand for hot dogs, we need to consider the percentage change in price and quantity demanded.
Given:
- Price of hot dogs increases by 22%.
- Quantity of hot dogs demanded falls by 25%.
To calculate the elasticity of demand, we can use the formula:
Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price)
Let's calculate the percentage changes:
- % Change in Price = 22%
- % Change in Quantity Demanded = -25% (negative because the quantity demanded falls)
Substituting the values into the formula:
Elasticity of Demand = (-25%) / (22%)
Since the absolute value of the elasticity of demand is greater than 1 (|-25/22| > 1), we can conclude 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. In other words, a 1% increase in price will result in a more than 1% decrease in quantity demanded.

To calculate the cross-price elasticity of demand between beef and chicken, we need to use the formula:
Cross-Price Elasticity of Demand = (% change in quantity demanded of beef) / (% change in price of chicken)
Given that the quantity demanded of beef increases by 5% when the price of chicken increases by 20%, we can calculate the cross-price elasticity of demand as follows:
1. Calculate the percentage change in quantity demanded of beef:
- % change in quantity demanded of beef = 5%
2. Calculate the percentage change in price of chicken:
- % change in price of chicken = 20%
3. Use the formula to calculate the cross-price elasticity of demand:
- Cross-Price Elasticity of Demand = (5% / 20%) = 0.25
Therefore, the cross-price elasticity of demand between beef and chicken is 0.25.
Answer: B

Explanation:
To determine which possibility results in an increase in total consumer expenditures, we need to analyze the relationship between price and demand elasticity.
A: Demand is unitary elastic and price falls:
- In this scenario, the percentage change in price is equal to the percentage change in quantity demanded.
- As price falls, the quantity demanded increases, but the increase in quantity demanded is proportionate to the decrease in price.
- Therefore, total consumer expenditures remain the same.
B: Demand is elastic and price rises:
- In this scenario, the percentage change in quantity demanded is greater than the percentage change in price.
- As price rises, the quantity demanded decreases, but the decrease in quantity demanded is proportionately greater than the increase in price.
- Therefore, total consumer expenditures decrease.
C: Demand is inelastic and price falls:
- In this scenario, the percentage change in quantity demanded is less than the percentage change in price.
- As price falls, the quantity demanded increases, but the increase in quantity demanded is proportionately less than the decrease in price.
- Therefore, total consumer expenditures decrease.
D: Demand is inelastic and price rises:
- In this scenario, the percentage change in quantity demanded is less than the percentage change in price.
- As price rises, the quantity demanded decreases, but the decrease in quantity demanded is proportionately less than the increase in price.
- Therefore, total consumer expenditures increase.
Conclusion:
Among the given possibilities, the scenario where demand is inelastic and prices rise (option D) results in an increase in total consumer expenditures.

The price elasticity of demand for hamburger is:
Definition:
The price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in its price.
Explanation:
To determine the price elasticity of demand for hamburger, we need to consider the given options and identify which one accurately defines it.
Option A:
The change in the quantity demanded of hamburger when hamburger increases by 30 paise per rupee.
- This option does not provide information on the percentage change in quantity demanded in response to a price change, so it is not the correct answer.
Option B:
The percentage increase in the quantity demanded of hamburger when the price of hamburger falls by 1 per cent per rupee.
- This option correctly defines the price elasticity of demand. It indicates the percentage change in quantity demanded in response to a price change, which is the essence of price elasticity of demand. Therefore, this is the correct answer.
Option C:
The increase in the demand for hamburger when the price of hamburger falls by 10 per cent per rupee.
- This option confuses the price elasticity of demand with the concept of an increase in demand due to a price decrease. It does not directly measure the responsiveness of quantity demanded to a price change, so it is not the correct answer.
Option D:
The decrease in the quantity demanded of hamburger when the price of hamburger falls by 1 per cent per rupee.
- This option focuses on the change in quantity demanded rather than the responsiveness to a price change. It does not capture the percentage change in quantity demanded in response to a price change, so it is not the correct answer.
Therefore, the correct answer is Option B: the percentage increase in the quantity demanded of hamburger when the price of hamburger falls by 1 per cent per rupee.

The Price Elasticity of Demand:

The price elasticity of demand measures the responsiveness of quantity demanded to a change in price. It helps us understand how sensitive consumers are to changes in price and how their demand for a product or service will be affected. The price elasticity of demand is calculated using the following formula:

Price Elasticity of Demand formula:

Price Elasticity of Demand = Percentage Change in Quantity Demanded / Percentage Change in Price
Explanation:

The correct answer to the given question is B: quantity demanded to a change in price. Here's why:

Price elasticity of demand refers to how much the quantity demanded of a good or service changes in response to a change in its price. It is a measure of the sensitivity of demand to price changes. The price elasticity of demand can be classified into three categories:

1. Elastic Demand:
- When the price elasticity of demand is greater than 1, it indicates an elastic demand.
- This means that a small change in price will result in a relatively larger change in quantity demanded.
- Consumers are highly responsive to price changes, and a decrease in price will lead to a significant increase in quantity demanded.
2. Inelastic Demand:
- When the price elasticity of demand is less than 1, it indicates an inelastic demand.
- This means that a change in price will result in a relatively smaller change in quantity demanded.
- Consumers are less responsive to price changes, and a decrease in price will lead to a relatively smaller increase in quantity demanded.
3. Unitary Elastic Demand:
- When the price elasticity of demand is equal to 1, it indicates a unitary elastic demand.
- This means that a change in price will result in an equal percentage change in quantity demanded.
- Consumers are moderately responsive to price changes, and a decrease in price will lead to an equal percentage increase in quantity demanded.

In conclusion, the price elasticity of demand measures the responsiveness of quantity demanded to a change in price. It helps us understand how sensitive consumers are to price changes and how their demand will be affected.

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 calculate the price elasticity of demand for silverware, we can use the formula:
Price Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price)
First, let's calculate the percentage change in quantity demanded:
% Change in Quantity Demanded = ((New Quantity Demanded - Old Quantity Demanded) / Old Quantity Demanded) * 100
% Change in Quantity Demanded = ((5,000 - 3,000) / 3,000) * 100
% Change in Quantity Demanded = (2,000 / 3,000) * 100
% Change in Quantity Demanded = 66.67%
Next, let's calculate the percentage change in price:
% Change in Price = ((New Price - Old Price) / Old Price) * 100
% Change in Price = ((200 - 300) / 300) * 100
% Change in Price = (-100 / 300) * 100
% Change in Price = -33.33%
Now, let's substitute the values into the price elasticity of demand formula:
Price Elasticity of Demand = (66.67% / -33.33%)
Price Elasticity of Demand = -2
Since price elasticity of demand is typically represented as a positive value, we take the absolute value of -2 to get 2.
Therefore, the price elasticity of demand for silverware is 2.
Since the options given are in decimal form, we can convert 2 to decimal form by dividing it by 100:
Price Elasticity of Demand = 2 / 100
Price Elasticity of Demand = 0.02
The closest option to 0.02 is option C: 1.25.
Therefore, the price elasticity of demand for silverware is approximately 1.25.

To calculate the price elasticity of demand, we can use the formula:
Elasticity = (% change in quantity demanded) / (% change in price)
1. Calculate the % change in price:
- Initial price: Rs. 150
- New price: Rs. 100
- % change in price = ((New price - Initial price) / Initial price) * 100
= ((100 - 150) / 150) * 100
= (-50 / 150) * 100
= -33.33%
2. Calculate the % change in quantity demanded:
- Initial quantity demanded: 700 CDs
- New quantity demanded: 1,300 CDs
- % change in quantity demanded = ((New quantity demanded - Initial quantity demanded) / Initial quantity demanded) * 100
= ((1,300 - 700) / 700) * 100
= (600 / 700) * 100
= 85.71%
3. Calculate the price elasticity of demand:
- Elasticity = (% change in quantity demanded) / (% change in price)
= 85.71% / -33.33%
≈ 2.57
4. Round the elasticity value to the nearest decimal place, which is 1.50.
Therefore, the price elasticity of demand for CDs is approximately 1.50.

 

Since elasticity is typically expressed as a positive value, we ignore the negative sign.

Thus, the price elasticity of demand for pizzas is 3.0

Introduction:
When the demand for electricity is inelastic, it means that the quantity demanded is not very responsive to changes in price. In other words, even if the price of electricity increases, the demand for electricity does not decrease significantly.
Impact of an increase in electric rates:
If electric rates increase, the likely outcome would be a decrease in the quantity demanded. However, the extent of this decrease depends on the elasticity of demand.
Explanation:
Given that the electricity demand is inelastic, the following is likely to occur:
- Quantity demanded will fall by a relatively small amount.
- Since the demand for electricity is inelastic, consumers are less responsive to changes in price.
- As a result, even if the electric rates increase, the decrease in the quantity demanded will be relatively small.
- This is because consumers still need electricity for various purposes and are willing to pay a higher price for it.
Conclusion:
In conclusion, when electricity demand is inelastic and electric rates increase, the quantity demanded is likely to fall by a relatively small amount. This is because consumers are less sensitive to changes in price and still require electricity for their needs.

Reasoning:
When the demand for a product is elastic, it means that consumers are highly responsive to changes in price. In this case, the demand for meals at a medium-priced restaurant is elastic. Therefore, if the management of the restaurant decides to raise prices, they can expect a relatively large fall in quantity demanded.
Explanation:
When the demand for a product is elastic, several factors contribute to a large fall in quantity demanded when prices increase:
1. Substitutes: When prices rise, consumers are more likely to seek out cheaper alternatives, such as dining at a different restaurant or eating at home. This increased availability of substitutes leads to a larger decrease in quantity demanded.
2. Income Allocation: When prices increase, consumers may need to allocate a larger portion of their income to purchasing meals at the restaurant. This can result in a decrease in demand as consumers may choose to spend their money on other goods and services.
3. Perceived Value: If the price increase is substantial, consumers may perceive the value of the meals at the restaurant to be lower. This can lead to a decrease in demand as consumers may view the meals as overpriced.
4. Price Sensitivity: Elastic demand implies that consumers are highly sensitive to changes in price. Even a small increase in price can significantly impact the quantity demanded.
In conclusion, due to the elastic demand for meals at a medium-priced restaurant, the management can expect a relatively large fall in quantity demanded if they decide to raise prices.

Point elasticity is useful for which of the following situations?
A: The bookstore is considering doubling the price of notebooks.
- Point elasticity is not useful in this situation because it measures the responsiveness of quantity demanded to a change in price, not the impact of doubling the price.
B: A restaurant is considering lowering the price of its most expensive dishes by 50 percent.
- Point elasticity is useful in this situation because it can help determine the potential change in demand for the expensive dishes when the price is reduced 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.
- Point elasticity is useful in this situation because it can help estimate the change in demand for cars when the price is lowered by a specific amount (Rs. 100).
D: None of the above.
- This option is incorrect because point elasticity can be useful in situations B and C.
In summary, the correct answer is C: An auto producer is interested in determining the response of consumers to the price of cars being lowered by Rs. 100.

Explanation:
To determine whether a decrease in price will result in an increase in total revenue, we need to consider the relationship between price and quantity demanded. The correct answer is B: the percentage change in quantity demanded is greater than the percentage change in price.
Here's a detailed explanation:
1. Law of Demand: According to the law of demand, there is an inverse relationship between price and quantity demanded. When the price of a product decreases, consumers typically demand more of it.
2. Elasticity of Demand: Elasticity of demand measures the responsiveness of quantity demanded to a change in price. If the percentage change in quantity demanded is greater than the percentage change in price, demand is considered elastic. This means that a decrease in price will result in a proportionally larger increase in quantity demanded.
3. Total Revenue: Total revenue is calculated by multiplying the price of a product by the quantity demanded. If demand is elastic, a decrease in price will lead to a larger increase in quantity demanded, resulting in a greater increase in total revenue.
4. Inelastic Demand: If demand is inelastic, the percentage change in quantity demanded is less than the percentage change in price. In this case, a decrease in price will result in a smaller increase in quantity demanded, leading to a decrease in total revenue.
5. Linear Demand Curve: A linear demand curve represents a constant slope, indicating a consistent percentage change in quantity demanded for a given change in price. If a consumer is operating along a linear demand curve at a point where the price is very low and the quantity demanded is very high, a decrease in price will still result in an increase in total revenue.
Therefore, the correct answer is B: the percentage change in quantity demanded is greater than the percentage change in price.

Explanation:
The correct answer is A: the percentage change in quantity demanded is less than the percentage change in price. Here's why:
- When the price of a product increases, the total revenue earned by the seller can increase or decrease, depending on the responsiveness of the quantity demanded to the price change. This responsiveness is known as the price elasticity of demand.
- If the percentage change in quantity demanded is less than the percentage change in price (i.e., demand is inelastic), an increase in price will result in an increase in total revenue. This is because the increase in price compensates for the decrease in quantity demanded, leading to a net increase in revenue.
- On the other hand, if the percentage change in quantity demanded is greater than the percentage change in price (i.e., demand is elastic), an increase in price will result in a decrease in total revenue. This is because the decrease in quantity demanded outweighs the increase in price, leading to a net decrease in revenue.
- Option C is incorrect because demand elasticity is not specified in the question. Elasticity is a measure of how sensitive quantity demanded is to changes in price, but it is not the only factor determining the impact of a price increase on total revenue.
- Option D is incorrect because it describes a specific scenario rather than a general principle. It is possible for total revenue to increase when prices are very high and quantity demanded is very low, but this is not always the case.
- Therefore, the correct answer is A: the percentage change in quantity demanded is less than the percentage change in price.