1. If the demand for a product is "Perfectly Inelastic," an increase in the supply of the product will lead to:
An increase in equilibrium quantity and a decrease in equilibrium price.
A decrease in equilibrium price, but the equilibrium quantity remains unchanged.
An increase in equilibrium price and decrease in quantity.
No change in either price or quantity.
Explanation:
Perfectly inelastic demand means the demand curve is a vertical line (quantity demanded does not change with price). If supply increases (supply curve shifts right), the intersection point moves down along the vertical demand line, resulting in a lower price but the exact same quantity.
2. A "Giffen Good" is a special type of inferior good that violates the Law of Demand because:
As its price rises, quantity demanded also rises.
It has no substitutes.
It is a luxury item.
As its price rises, quantity demanded decreases sharply.
Explanation:
For a Giffen good (e.g., staple food like bread/rice for the very poor), the income effect of a price rise is so strong (consumers feel poorer and cut back on expensive foods like meat) that they end up buying MORE of the staple Giffen good, despite the price rise.
3. A "Shift" in the Demand Curve (as opposed to movement along the curve) is caused by changes in:
Factors other than the price of the commodity (e.g., income, tastes).
The cost of production.
The technology used.
The price of the commodity itself.
Explanation:
A change in the price of the good causes movement *along* the curve. A change in non-price determinants (Income, Tastes, Price of substitutes) shifts the entire curve left or right.
4. If the Cross Elasticity of Demand between two goods is Positive, it indicates that the goods are:
Unrelated
Substitutes (e.g., Tea and Coffee)
Complements (e.g., Car and Petrol)
Inferior goods
Explanation:
Positive cross elasticity means if the price of Good A rises, the demand for Good B rises. This happens with substitutes (people switch from expensive Tea to cheaper Coffee). For complements, it is negative.
5. If the Cross Price Elasticity of Demand between Product X and Product Y is Negative , then X and Y are:
Unrelated goods.
Substitutes (e.g., Coke and Pepsi).
Complements (e.g., Bread and Butter).
Giffen goods.
Explanation:
A negative cross elasticity means that if the price of X rises, the demand for Y falls. This happens with complementary goods because they are consumed together (e.g., if the price of Petrol rises, demand for Cars may fall).
6. Consumer Surplus is defined as:
The extra quantity of goods a consumer buys when price falls.
The difference between what a consumer is willing to pay and what they actually pay.
The profit made by the seller.
The difference between cost of production and selling price.
Explanation:
If a consumer is willing to pay ?100 for a product but buys it for ?80, the Consumer Surplus is ?20. It represents the net benefit to consumers.
7. What happens to equilibrium price and quantity if Demand increases and Supply remains constant?
Price falls, Quantity falls
Price falls, Quantity rises
Price rises, Quantity rises
Price rises, Quantity falls
Explanation:
An increase in demand shifts the demand curve to the right. With a fixed upward-sloping supply curve, this leads to a higher equilibrium price and a higher equilibrium quantity.
8. The "Veblen Effect" refers to a situation where:
Demand falls as income rises.
Demand rises as the price of substitutes falls.
Demand for a good increases as its price rises due to snob appeal.
Demand for a good falls as its price rises (Law of Demand).
Explanation:
Veblen goods are luxury goods for which demand increases as price increases, because the higher price confers status (Conspicuous Consumption). This is an exception to the Law of Demand.
9. Which of the following will cause a movement along the supply curve?
Change in input prices.
Change in technology.
Change in the price of the good.
Change in government tax policy.
Explanation:
Movement along the supply curve (expansion or contraction) is caused ONLY by a change in the price of the good itself. All other factors shift the curve.
10. If demand is "Unitary Elastic" (Ed = 1), a 10% increase in price will lead to:
A 5% decrease in quantity demanded.
No change in quantity demanded.
A 20% decrease in quantity demanded.
A 10% decrease in quantity demanded.
Explanation:
Unitary elasticity means the percentage change in quantity demanded is exactly equal to the percentage change in price.
11. If both Demand and Supply increase simultaneously in the same proportion, what will be the effect on the Equilibrium Price and Quantity?
Price remains constant, Quantity increases.
Price remains constant, Quantity remains constant.
Price decreases, Quantity increases.
Price increases, Quantity increases.
Explanation:
When both demand and supply curves shift to the right by the same magnitude, the upward pressure on price from increased demand is exactly offset by the downward pressure on price from increased supply. However, both shifts contribute to an increase in the quantity traded, resulting in a higher equilibrium quantity at the same price.
12. A binding "Price Ceiling" imposed by the government (e.g., on rent or medicines) typically leads to:
An increase in quality.
A shortage of the product.
Equilibrium in the market.
A surplus of the product.
Explanation:
A Price Ceiling sets a maximum legal price below the equilibrium price. At this lower price, quantity demanded increases (people want more cheap goods) while quantity supplied decreases (producers make less profit), resulting in excess demand or a shortage .
13. A "Perfectly Elastic Supply" curve is represented graphically as:
A downward sloping curve.
A rectangular hyperbola.
A horizontal straight line parallel to the X-axis.
A vertical straight line.
Explanation:
Perfect elasticity means that at a specific price, suppliers are willing to supply an infinite amount. Even a tiny drop in price reduces supply to zero. This is depicted by a horizontal line.
14. Which of the following is an EXCEPTION to the Law of Demand (i.e., Demand curve slopes upwards)?
Substitute Goods
Veblen Goods
Complementary Goods
Normal Goods
Explanation:
The Law of Demand states price and quantity are inversely related. Veblen goods (status symbols like diamonds) violate this because people buy MORE of them as their price rises to show off wealth.