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Direction: Read the following Passage and Answer the Questions.
A consumer usually decides his demand for a commodity on the basis of utility (or satisfaction) that he derives from it. What is utility? Utility of a commodity is its want-satisfying capacity. The more the need of a commodity or the stronger the desire to have it, the greater is the utility derived from the commodity. Utility is subjective. Different individuals can get different levels of utility from the same commodity.
Q1: What is utility in the context of economics, and how is it defined?
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Q2: How does the strength of desire or need for a commodity relate to its utility?
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Q3: Why is utility considered subjective, and how does this subjectivity manifest in economics?
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Direction: Read the following Passage and Answer the Questions.
The negative slope of the demand curve can also be explained in terms of the two effects namely, substitution effect and income effect that come into play when price of a commodity changes. When bananas become cheaper, the consumer maximises his utility by substituting bananas for mangoes in order to derive the same level of satisfaction of a price change, resulting in an increase in demand for bananas.Moreover, as price of bananas drops, consumer’s purchasing power increases, which further increases demand for bananas (and mangoes). This is the income effect of a price change, resulting in further increase in demand for bananas. Law of Demand: Law of Demand states that other things being equal, there is a negative relation between demand for a commodity and its price. In other words, when price of the commodity increases, demand for it falls and when price of the commodity decreases, demand for it rises, other factors remaining the same.
Q1: What are the two effects that explain the negative slope of the demand curve when the price of a commodity changes?
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Q2: How does the substitution effect contribute to an increase in demand for bananas when their price decreases?
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Q3: What is the income effect, and how does it influence the demand for bananas when their price decreases?
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Direction: Read the following Passage and Answer the Questions.
The demand function is a relation between the consumer’s demand for a good and its price when other things are given. Instead of studying the relation between the demand for a good and its price, we can also study the relation between the consumer’s demand for the good and the income of the consumer. The quantity of a good that the consumer demands can increase or decrease with the rise in income depending on the nature of the good. For most goods, the quantity that a consumer chooses, increases as the consumer’s income increases and decreases as the consumer’s income decreases. Such goods are called normal goods.
Q1: What does the demand function describe, and what are its key variables?
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Q2: How is the concept of normal goods defined in relation to changes in consumer income?
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Q3: Can you explain the alternative approach to studying consumer demand mentioned in the passage?
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Direction: Read the following Passage and Answer the Questions.
The quantity of a good that the consumer chooses can increase or decrease with the rise in the price of a related good depending on whether the two goods are substitutes or complementary to each other. Goods which are consumed together are called complementary goods. Examples of goods which are complement to each other include tea and sugar, shoes and socks, pen and ink, etc. Since tea and sugar are used together, an increase in the price of sugar is likely to decrease the demand for tea and a decrease in the price of sugar is likely to increase the demand for tea. Similar is the case with other complements. In general, the demand for a good moves in the opposite direction of the price of its complementary goods.
Q1: What factors determine whether the quantity of a good a consumer chooses will increase or decrease with the rise in the price of a related good?
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Q2: What are complementary goods, and can you provide examples of such goods mentioned in the passage?
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Q3: How does the price change of complementary goods impact the demand for the main good, and what is the general relationship between the price of complementary goods and the demand for the main good?
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Direction: Read the following Passage and Answer the Questions.
The demand function is a relation between the amount of the good and its price when other things remain unchanged. The demand curve is a graphical representation of the demand function. At higher prices, the demand is less, and at lower prices, the demand is more. Thus, any change in the price leads to movements along the demand curve. On the other hand, changes in any of the other things lead to a shift in the demand curve.
Q1: What does the demand function represent, and how is it related to the demand curve?
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Q2: How do changes in price impact the demand curve, and what kind of movement occurs along the curve?
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Q3: What causes a shift in the demand curve, and what are the implications of changes in factors other than price on consumer demand?
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Direction: Read the following Passage and Answer the Questions.
The demand for a good moves in the opposite direction of its price. But the impact of the price change is always not the same. Sometimes, the demand for a good changes considerably even for small price changes. On the other hand, there are some goods for which the demand is not affected much by price changes. Demands for some goods are very responsive to price changes while demands for certain others are not so responsive to price changes. Price elasticity of demand is a measure of the responsiveness of the demand for a good to changes in its price.
Q1: What does the direction of demand for a good in response to price changes depend on, and why is the impact not always the same?
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Q2: How is price elasticity of demand defined, and what does it measure?
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Q3: What does it mean when a good has high price elasticity of demand, and what about goods with low price elasticity of demand?
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Direction: Read the following Passage and Answer the Questions.
When the percentage change in quantity demanded equals the percentage change in its market price, eD is estimated to be equal to one and the demand for the good is said to be Unitary-elastic at that price. Note that the demand for certain goods may be elastic, unitary elastic and inelastic at different prices. In fact, in the next section, elasticity along a linear demand curve is estimated at different prices and shown to vary at each point on a downward sloping demand curve.
Q1: What is meant by a good having unitary-elastic demand, and what condition must be met for eD to equal one?
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Q2: Can a good have different elasticity values at various price points, and why does this occur?
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Q3: What will be demonstrated in the next section regarding elasticity along a linear demand curve, and why does it vary at different points on such a curve?
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Direction: Read the following Passage and Answer the Questions.
The price elasticity of demand for a good depends on the nature of the good and the availability of close substitutes of the good. Consider, for example, necessities like food. Such goods are essential for life and the demands for such goods do not change much in response to changes in their prices. Demand for food does not change much even if food prices go up. On the other hand, demand for luxuries can be very responsive to price changes. In general, demand for a necessity is likely to be price inelastic while demand for a luxury good is likely to be price elastic.
Q1: What factors influence the price elasticity of demand for a good?
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Q2: How does the demand for necessities, like food, typically respond to changes in their prices, and what is the likely elasticity in such cases?
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Q3: What characterizes the demand for luxury goods in terms of responsiveness to price changes, and what is the expected price elasticity for luxury goods?
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Direction: Read the following Passage and Answer the Questions.
The expenditure on a good is equal to the demand for the good times its price. Often it is important to know how the expenditure on a good changes as a result of a price change. The price of a good and the demand for the good are inversely related to each other. Whether the expenditure on the good goes up or down as a result of an increase in its price depends on how responsive the demand for the good is to the price change.
Q1: How is the expenditure on a good calculated, and what does it depend on?
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Q2: What is the general relationship between the price of a good and its demand, and how does this relationship affect the expenditure on the good when the price changes?
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Q3: How does the elasticity of demand for a good influence changes in its expenditure when its price increases?
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