Test: Theory Of Demand- 1 - CA Foundation MCQ

The correct answer is option A 'Change in the price of commodity '

• An expansion or contraction of demand occurs as a result of the income effect or substitution effect.
• When the price of a commodity falls, an individual can get the same level of satisfaction for less expenditure, provided it's a normal good.
• In this case, the consumer can purchase more of the goods on a given budget.

The correct answer is option C 'Amount of the commodity demanded during a particular price and particular time '
The demand for a commodity is defined as:

• The amount of the commodity that consumers are willing and able to purchase.
• This is measured during a specific period and at a particular price.

The correct answer is option D ' All of the Above'

1. Price of related goods:
a. Substitute Goods: 
When the price of substitute goods increases the demand of the given commodity increases and vice versa.
Example: Tea and coffee, when price of tea increases demand for coffee increases and vice versa.

b.Complementary Goods: 
When the price of complementary goods increases, the demand of the given commodity decreases and vice versa.
Example: Car and petrol, if the price of car increases demand for petrol decreases.

2. Income of the consumer: 
As the income of the consumer increases, his purchasing power increases and therefore the demand of the given commodity increases. Similarly, when the income of the consumer decreases, his purchasing power contracts and hence the demand of the given commodity decreases.

Given:

• Initial quantity demanded (Q1) = 300 persons

• Final quantity demanded (Q2) = 200 persons

• Initial price (P1) = Rs. 120

• Final price (P2) = Rs. 200

Step 1: Calculate the change in quantity and price

• Change in quantity = Q2 - Q1 = 200 - 300 = -100

• Change in price = P2 - P1 = 200 - 120 = 80

Step 2: Calculate the average quantity and price

• Average quantity = (Q1 + Q2) ÷ 2 = (300 + 200) ÷ 2 = 500 ÷ 2 = 250

• Average price = (P1 + P2) ÷ 2 = (120 + 200) ÷ 2 = 320 ÷ 2 = 160

Step 3: Apply the Arc Elasticity formula

Formula:
Elasticity (Ed) = (Change in quantity ÷ Average quantity) ÷ (Change in price ÷ Average price)

Or simplified:
Ed = (Q2 - Q1) × (P1 + P2) ÷ [(P2 - P1) × (Q1 + Q2)]

Now substitute the values:
Ed = (-100) × (120 + 200) ÷ [80 × (300 + 200)]
Ed = -100 × 320 ÷ (80 × 500)
Ed = -32000 ÷ 40000
Ed = -0.8

Step 4: Interpret the elasticity

We take the absolute value for interpretation:
|Ed| = 0.8

Since 0.8 is less than 1, this means demand is inelastic. That is, quantity demanded changes less than the price change.

Step 5: Verification (Percentage change method)

• Percentage change in quantity = (Q2 - Q1) ÷ Average quantity = -100 ÷ 250 = -0.4 or -40%

• Percentage change in price = (P2 - P1) ÷ Average price = 80 ÷ 160 = 0.5 or 50%

• Elasticity = -40% ÷ 50% = -0.8

Absolute value = 0.8, which matches our earlier result.

Final Answer:

The price elasticity of demand for movies is 0.8, which means demand is inelastic.

The correct answer is option A 'Elastic'

• According to relatively elastic demand, an increase in price will lead to greater than proportionate change in quantity demanded.
• In this case, price increases by 22% and quantity demanded falls by 25% which is greater than 22% (increase in price) so the ans is elastic.

The correct answer is option C ' Infinity'
Infinity because price does not change but demand change due to change in other factors.

The correct answer is option C ' Necessities'

• An increase or decrease in the price of such a good does not affect its quantity demanded.
• These goods have a perfectly inelastic relationship, in that any change in price does not change the quantity demanded.

Complementary goods are those goods which consume together.
For example - Car and petrol

When price of car increase then demand of petrol and car decreases because petrol is necessary to drive a car and when price of car increases then people do not buy car and due to this reason petrol is also not in demand so, demand curve shifts to left and remember complementary goods are joint goods.

The correct answer is option C 'Curve named after Ernst Engel '

• The Engel curve, named after the German statistician Ernst Engel (1821-96), is a relation between the demand for a good and the income of its buyers, the former depending on the latter.
• The Engel curve of an individual consumer can be obtained from his ICC.

The correct answer is option B '2'
E_d= (% change in demand) / (% change in price)
E_d = (40% / 20%)
E_d = 2 %

The correct answer is option B 'Reduce the demand '.

• A Giffen good is typically an inferior product that does not have easily available substitutes.
• They are quite rare, to the extent that there is some debate about their actual existence.
• So fall in the price of such good like Bajra will also reduce its demand as income effect dominates the substitution effect.

The correct answer is option A  '5'

Income elasticity = (% change in quantity demand ÷ % change in income)
Hence, income elasticity = 5 ÷ 1
= 5

The correct answer is option C ' Negative'

• In the case of an inferior good, the income elasticity of demand is Negative.
• A negative income elasticity of demand is associated with inferior goods; an increase in income will lead to a fall in demand and may lead to changes to more luxurious substitutes.

The correct answer is option B '1'
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.

The correct answer is option A 'Demand'

• In economics and consumer theory, a Giffen good is a product that people consume more of as the price rises and vice versa—violating the basic law of demand in microeconomics.
• According to the Law of Demand, when the price of a commodity falls the demand for it rises.
• Giffen's Paradox is an exception to this law.

The correct answer is option C 'A rise in consumer’s real income '

• When the price of normal good falls, consumer's real income increases and this induces him to buy more of that commodity.
• This is known as the income effect.

The correct answer is option B 'Not be affected'.

• In a very short period, supply is fixed as suppliers cannot increase the supply of a commodity.
• Since, in a very short period price is determined by demand only (supply being constant), thus the price that prevails in the very short period is called market price.
• Hence if the number of customers in the market increases suddenly, the supply will not be affected.

When the price of inferior goods decreases, several effects can occur:

• People tend to buy more of these goods because they are now cheaper.
• This leads to an increase in demand for the inferior goods.
• As the price falls, consumers may shift away from more expensive alternatives.

In summary, a decrease in the price of inferior goods typically results in an increase in demand for these products.

The correct answer is option B ' Negative'

• Complementary goods have a negative cross-price elasticity: As the price of one good increases, the demand for the second good decreases.
• Substitute goods have a positive cross-price elasticity: As the price of one good increases, the demand for the other good increases.

To determine the type of demand, calculate the price elasticity of demand using the formula:
Elasticity = (% Change in Quantity Demanded) / (% Change in Price) = 40% / (-20%) = -2
We take the absolute value, so elasticity is 2.
Interpretation:
- If elasticity is less than 1, demand is inelastic.
- If elasticity is greater than 1, demand is elastic.
- If elasticity is much greater than 1 (commonly, elasticity of 2 or more), demand is called highly elastic in many textbooks and exam guidelines.
- If elasticity is infinity, demand is perfectly elastic.
Here, since the elasticity is 2, the demand is best described as highly elastic.

The correct answer is option B ' Price elasticity of demand '

• Movement along a demand curve occurs when the demand of a commodity changes due to a change in its own price.
• A shift in demand occurs when demand changes due to other factors, keeping its own price constant.
• Price elasticity of demand measures the relationship between price and demand of the product and hence it measures movement along the demand curve.

The correct answer is option D ' Infinity'

• The slope of a straight-line demand curve, one with a constant slope, has constantly changing elasticity.
• No two points on a straight-line demand curve have the same elasticity.
• The price elasticity of demand is different at each point on a demand curve with constant slope.

The correct answer is option C 'Inferior good'

• Those goods which are considered inferior by the consumers and which occupy a substantial place in consumers' budget are called 'Giffen' goods.
• These goods have got their name after Sir Robert Giffen.

The correct answer is option C 'More than one'

The income elasticity of demand measures how much the demand for a good changes when income changes.

• A 10% increase in income leads to a 30% increase in demand for goods.
• Income elasticity is calculated as the percentage change in demand divided by the percentage change in income.
• Here, income elasticity = 30% / 10% = 3.0.
• Since the elasticity is greater than one, it indicates the demand is elastic, meaning it is more sensitive to income changes.

Therefore, the income elasticity is more than one.

The correct answer is option D 'Positive Infinity'

• In the case of perfect substitutes, the cross elasticity of demand will be equal to positive infinity.
• Substitutes: Two goods that are substitutes have a positive cross elasticity of demand: as the price of good Y rises, the demand for good X rises.
• Two goods may also be independent of each other.

The correct answer is option C 'Positive income elasticity'

• A normal good, also called a necessary good, is the opposite of an inferior good.
• A luxury good means a greater increase in income results in a larger percentage increase in demand.
• A normal good has an income elasticity of demand that is positive, but less than one.

The correct answer is option B 'Inferior goods'

• Because there is a negative relation between income and demand of inferior good.
• We know that when our income increases we would not like to purchase low quality products.
• So we can say that when income increases then demand of inferior good decreases.

The correct answer is option B '0'
When the price elasticity of demand for a good is perfectly inelastic (E_d =0), changes in the price do not affect the quantity demanded for the good;  and hence option B is the correct answer.

The correct answer is option B 'Expansion and contraction of demand'

• A movement along the demand curve will occur when the price of the good changes and the quantity demanded changes in accordance to the original demand relationship.
• In other words, a movement occurs when a change in the quantity demanded is caused only by a change in price.
• Contraction of demand refers to the increase in own price of the commodity.
• Expansion in demand refers to a rise in the quantity demanded due to a fall in the price of the commodity, other factors remaining constant.

The correct answer is option A '  reduce the demand'

• A Giffen good is typically an inferior product that does not have easily available substitutes.
• They are quite rare, to the extent that there is some debate about their actual existence.
• So fall in the price of such good like Bajra will also reduce its demand as income effect dominates the substitution effect.