# Theory of Demand and Supply Important Questions

## Theory of Demand and Supply

Q1. A higher negative value of cross-elasticity indicates that the two commodities are

• Very good complements
• Very good substitutes
• Poor complements
• Poor substitutes

Ans. Very good complements

Q2. Arc elasticity gives a better estimate of point elasticity of a curvilinear demand curve as:

• The size of the becomes smaller
• The curvature of the demand curve over the area becomes less
• Both of the above
• Neither of the above

Ans. The size of the becomes smaller

Q3. Electricity demand is elastic because:

• It is very expensive
• It has several close substitutes
• It has alternative uses
• None of the above

Ans. It has alternative uses

Q4. On a straight-line demand curve elasticity of demand at the midpoint of the curve is

• 1
• ½
• 0
• 1/3

Ans. 1

Q5.The total outlay method of measuring price elasticity of demand was suggested by

• Stigler
• Alfred Marshall
• Pigou
• Dalton

Ans. Alfred Marshall

Q6. A consumer always prefers a collection having more of both goods or more of one good and no less of another is technically referred to as

• Transitivity
• Consistency
• Non-satiation
• Rationality

Ans. Non-satiation

Q7. The consumer’s preferences are completely described by his

• Budget line
• Indifference map
• Iso- cost line
• Iso- revenue line

Ans. Indifference map

Q8. The degree of price elasticity of demand for a good is influenced by whether

1. It is a durable good or a single-use good
2. It accounts for a small or large proportion of households total income
3. Its output is easily altered
4. It has close substitutes

• 1, 2 and 4
• 1 and 4
• 2, 3 and 4
• All of them

Ans. 1,2 and 4

Q9. If the amount of a commodity purchased remains unchanged when the price of another commodity changes, the cross elasticity of demand between them is:

• Negative
• Positive
• Zero
• One

Ans. Zero

Q10. Whenever a part of the whole of the demand curve is of the shape of a rectangular hyperbola, its elasticity of demand on that part is

• Negative
• Greater than one
• Equal to one
• Lesser than one

Ans. Equal to one

Q11. A downward-sloping linear demand curve will have a

• Higher price, the elasticity of demand coefficient along the top of the demand curve
• Lower price elasticity of demand coefficient along the top of the demand curve.
• Constant price elasticity of demand coefficient throughout the length of the demand curve
• Unitary price elasticity of demand at the lower end of the demand curve.

Ans. Higher price, the elasticity of demand coefficient along the top of the demand curve

Q12. To determine whether two goods are substitutes or complements, an economist would estimate the

• Price elasticity of demand
• Income elasticity of demand
• Cross-elasticity of demand
• Price elasticity of supply

Ans. Cross elasticity of demand

Q13. If the government wanted to raise tax revenue and shift most of the tax burden to the sellers, it would impose a tax on a good with a

• Steep (inelastic) demand curve and a steep (inelastic) supply curve
• Steep (inelastic) demand curve and a flat (elastic) supply curve
• Flat (elastic) demand curve and a steep (inelastic) supply curve
• Flat (elastic) demand curve and a flat (elastic) supply curve.

Ans. Flat (elastic) demand curve and a steep (inelastic) supply curve

Q14. An exceptional demand curve is one that slopes

• Vertically
• Downwards to the left
• Downwards to the right
• Upwards to the right

Ans. Upwards to the right

Q15. The law of demand indicates

• The relationship between the price of a commodity and its quantity demanded
• The relationship between the price of one commodity and its substitutes
• The relationship between the income of a consumer and the quantity demanded.
• The relationship between the price of two commodities.

Ans. The relationship between the price of a commodity and its quantity demanded

Q16. Total expenditure remains the same with the fall in price when the price elasticity of demand is

• <1
• >1
• 1
• 0

Ans. 1

Q17. Total expenditure increases with the fall in price elasticity of demand are

• < 1
• > 1
• 1
• 0

Ans. > 1

Q18.The concept of elasticity of demand was introduced into economic theory by

• Marshall
• Joel Dean
• Lipsey

Ans. Marshall

Q19. The concept of elasticity of price expectation is very useful in formulating future

• Pricing policy
• Income policy
• Profit policy
• Monetary policy

Ans. Pricing policy

Q20. Which of the following pairs is correctly matched?

• The percentage change in quantity demanded of a commodity to the percentage change in the price of a related commodity

-Cross elasticity of demand

• The ratio between the change in price and the change in quantity demanded.

-Infinite elasticity of demand

• The ratio between the change in income and the change in quantity demanded.

-Price elasticity of demand

• The demand changes more than proportionately to a change in price- Inelastic demand.

Ans. The percentage change in quantity demanded of a commodity to the percentage change in the price of a related commodity – Cross elasticity of demand

Q21. The importance of elasticity demand is

1. It helps in business decision
2. Useful in taxation
3. It helps in monopoly pricing

Codes:

• 1 alone is correct
• 1 and 3 are correct
• 2 and 4 are correct
• All are correct

Ans. All are correct

Q22. The demand curve for a normal good whose price elasticity is one

• Downward sloped and linear
• Downward sloped and convex to the origin
• Downward sloped and concave to the origin
• None of these

Ans. Downward sloped and convex to the origin

Q23. If a seller reduces the price of produce and this leads to an increase in the quantity sold, what can be concluded?

• Demand is elastic
• Demand is inelastic
• Demand is unitary elastic
• Nothing can be concluded about the degree of elasticity

Ans. Nothing can be concluded about the degree of elasticity

Q24. In general, demand for a product is more elastic

• The fewer the substitutes and the larger the fraction of the family budget spent on that product
• The greater the number of substitutes and the larger the fraction of the family budget spent on that product
• The fewer the substitutes and the smaller the fraction of the family budget spent on that product
• The greater the number of substitutes and the smaller the fraction of the family budget spent on that product.

Ans. The greater the number of substitutes and the larger the fraction of the family budget spent on that product

Q25. If the demand for the commodity is inelastic, an increase in its price will cause the total expenditure of the consumers of the commodity to

• Remain the same
• Increase
• Decrease
• Any of the above

Ans. Increase

Q26. If regardless of changes in its prices, the quantity demanded of the commodity remains unchanged, then the demand curve for the commodity will be

• Horizontal
• Vertical
• Positively sloped
• Negatively sloped

Ans. Horizontal

Q27. A manufacturer of computers reduces his price by 5% and as a result, the volume of sales of computer rises by 4%. The price elasticity of demand for his good is

• Greater than unity
• Equal to unity
• Less than unity
• Indeterminate from available information

Ans. Less than unity

Q28. Which of the following has more elastic demand?

• A commodity on which a small fraction of consumers income is spent
• A commodity the use of which cannot be postponed
• A commodity with substitutes
• A commodity of habitual necessity

Ans. A commodity with substitutes

Q29. Which of the following statements is correct?

• With a change in the slope of a curve, its elasticity necessarily changes
• The slope of a curve and its elasticities are the same things
• The slope of a curve may remain constant, elasticity still can and does change
• Two parallel demand curves, each cutting the two axes, have the same elasticity at a point corresponding to the same price.

Ans. With a change in the slope of a curve, its elasticity necessarily changes

Q30. The demand for common salt is likely to be price inelastic because

1. It involves only a small fraction of consumers budget
2. It is a single-use good
3. It has no class substitutes
4. Its use cannot be easily foregone

Of these

• 1 and 2 only
• 1 and 3 only
• 1, 2, and 3 only
• 1, 2, 3 and 4

Ans. 1, 2, 3 and 4

Q31. When the income elasticity of demand for an essential commodity is less than unity, an increase in income leads to

• The proportionate increase in demand
• Loss than proportionate increase in demand
• More than proportionate increase in demand
• No change in demand

Ans. Loss than proportionate increase in demand

Q32. Marginal utility is

• Total utility divided by the number of units
• In addition to total utility
• Total utility minus average utility
• Total Utility plus average utility

Ans. In addition to total utility

Q33. The total utility is maximum when

• Marginal utility is zero
• Marginal utility is negative
• Marginal utility is equal to average utility
• Marginal utility is the highest

Ans. Marginal utility is zero

Q34. We can solve the diamond water paradox with the aid of the tool

• Marginal utility
• Average utility
• Total utility
• Zero utility

Ans. Marginal utility

Q35. An economist who argued that it is marginal utility, not the total utility that is related to price is

• William Stanley Jevons
• Marshall
• Veblen

Ans. William Stanley Jevons

Q36. The concept that demonstrates that transfer of income from the rich to the poor will increase the economic welfare of the community is

• Consumers surplus
• Diminishing marginal utility
• Equi- marginal utility
• Marginal preferences

Ans. Diminishing marginal utility

Q37. Consumer surplus is described as

• Point of bliss
• Optimum satisfaction
• Excess supply over demand
• Difference between potential price and the actual price

Ans. Difference between potential price and the actual price

Q38. Consumer surplus is also known as

• Differential surplus
• Producers surplus
• Intermediaries surplus

Q39. The doctrine of consumer’s surplus is based on

• The law of substitutes
• The law of diminishing marginal utility
• Revealed preference theory
• Modern utility theory

Ans. The law of diminishing marginal utility

Q40. Consumer’s surplus in case of decreasing cost industry when a subsidy is given will

• Increase
• Decrease
• Remain constant
• Any of these

Ans. Increase

Q41. Choose the most appropriate answer from the given options in respect of the following:

Expansion in demand is the result of

• Decrease in the price of the goods concerned
• Increase in the number of consumers
• Decrease in the prices of other related goods
• Increase in the income of consumers

Ans. Decrease in the price of the goods concerned

Q42. Choose the most appropriate answer from the given options in respect of the following

The elasticity of demand for a necessity like salt is normally

• Equal to 1
• Less than 1
• Greater than 1
• Infinite

Ans. Less than 1

Q43. Choose the most appropriate answer from the given options in respect of the following

In the case of a free good, the level of consumption where marginal utility is zero and the total utility is maximum is called

• Consumers equilibrium
• Consumers dissatisfaction
• Negative utility
• Equi- marginal utility

Ans. Consumers equilibrium

Q44. Choose the most appropriate answer from the given options in respect of the following:

A consumer will continue to purchase good until its

• Marginal utility falls to zero
• Total utility falls to the level of  price
• Total utility falls to zero
• Marginal utility falls to the level of its price

Ans. Marginal utility falls to the level of its price

Q45. The phenomenon where the quantity demanded of some special inferior goods fall with a fall in their price is called

Q46. Which of the following statements is incorrect?

• An indifference curve must be downward sloping to the right
• The convexity of a curve implies that the slope of the curve diminishes as one moves from left to right
• The elasticity of substitution between two goods to a consumer is zero
• The total effect of a change in the price of a good on its quantity demanded is called the price effect.

Ans. The elasticity of substitution between two goods to a consumer is zero

Q47. When consumption bundles contain a ‘bad’ and a ‘good’ the indifference curves are

• Downward sloping
• Upward sloping
• Horizontal
• Vertical

Ans. Upward sloping

Q48. For a Giffen good

• The negative substitution effect outweighs the positive income effect
• The positive income effect outweighs the negative substitution effect
• The negative income effect outweighs the positive substitution effect
• The positive substitution effect outweighs the negative income effect

Ans. The negative income effect outweighs the positive substitution effect

Q49. If the quantity purchased of a commodity increases more than proportionate to increase in his income, it is called a

• Luxury
• Necessity
• Normal
• Inferior

Ans. Luxury

Q50. The amount by which the money income of the consumer is changed so that the consumer is neither better off nor worse off than before is called

• Compensating variation in income
• Equivalent variation in income
• The equivalent difference in cost
• None of the above

Ans. Compensating variation in income

Q51. Price consumption curve (PCC) traces out the

• Income effect
• Substitution effect
• Price effect
• None of the above

Ans. Price effect

Q52. Consider the following statements:

Assertion (A): Indifference curves never interest each other

Reason (R): Since a higher indifference curve gives a higher level of satisfaction and a lower indifference curve gives less satisfaction

Now find out the answer from the following:

• Both (A) and (R) and true and (R) is the correct explanation of (A).
• (A) is true but (R) is false
• (A) is false but (R) is true
• The total statement is incorrect.

Ans. Both (A) and (R) and true and (R) is the correct explanation of (A).

Q53. Consider the following factors/ statements:

1. Income effect and substitution effect combine to increase the ability and willingness of a consumer to buy more of a commodity whose price has fallen.
2. Increase in production of the commodity
3. The law of diminishing marginal utility.

Those which account for the downward sloping demand curve include

• 2 and 3
• 1 and 3
• 1 and 2
• 1, 2 and 3

Ans. 1 and 3

Q54. The law of demand, assuming other things to remain constant, establishes the relationship between:

• Income of the consumer and the quantity of a good demanded by him
• Price of a good and the quantity demanded.
• Price of a good and the demand for its substitute.
• Quantity demanded of a good and the relative prices of its complementary goods.

Ans. Price of a good and the quantity demanded.

Q55. In the case of an inferior good, the income elasticity of demand is:

• Positive
• Zero
• Negative
• Infinite

Ans. Negative

Q56. All of the following are determinants of demand except:

• Tastes and preferences
• Quantity supplied
• Income of the consumer
• Price of related goods

Ans. Quantity supplied

Q57. If a good is a luxury, its income elasticity of demand is:

• Positive and less than 1
• Negative but greater than -1
• Positive and greater than 1
• Zero

Ans. Positive and greater than 1

Q58. If the quantity demanded of mutton increases by 5% when the price of chicken increases by 20%, the cross-price elasticity of demand between mutton and chicken is:

• – 0.25
• 0.25
• – 4
• 4

Ans. 0.25

Q59. Which of the following is an incorrect statement?

• When goods are substitutes, a fall in the price of one (ceteris paribus) leads to a fall in the quantity demanded of its substitutes
• When commodities are complements, a fall in the price of one (other things being equal) will cause the demand of the other to rise
• As the income of the consumer increases, the demand for the commodity increases always and vice versa.
• When a commodity becomes fashionable people prefer to buy it and therefore its demand increases.

Ans. As the income of the consumer increases, the demand for the commodity increases always and vice versa.

Q60. When the numerical value of cross elasticity between two goods is very high, it means

• The goods are perfect complements and therefore have to be used together
• The goods are perfect substitutes and can be used with ease in place of one another.
• There is a high degree of substitutability between the two goods
• The goods are neutral and therefore cannot be considered substitutes.

Ans. There is a high degree of substitutability between the two goods

Q61. Suppose the demand for meals at a medium-priced restaurant is elastic. If the management of the restaurant is considering raising prices, it can expect a relatively:

• Large fall in quantity demanded
• Large fall in demand
• Small fall in quantity demanded
• Small fall in demand

Ans. Large fall in quantity demanded.

Q62. A price decrease will increase total revenue if:

• The percentage changes in quantity demanded is less than the percentage change in price
• The percentage change in quantity demanded is greater than the percentage change in price
• Demand is inelastic
• The consumer is operating along a linear demand curve at a point at which the price is very low and the quantity demanded is very high.

Ans. The percentage change in quantity demanded is greater than the percentage change in price

Q63. Demand for a commodity will tend to be more elastic if it exhibits which of the following characteristics?

• It represents a small part of the consumer’s income.
• The good has many substitutes available.
• It is a necessity (as opposed to a luxury)
• There is little time for the consumer to adjust to the price change.

Ans. The good has many substitutes available

Q64. Which one is not an assumption of the theory of demand based on analysis of indifference curves?

• Given the scale of preferences as between different combinations of two goods.
• Diminishing marginal rate of substitution
• Constant marginal utility of money
• Consumers would always prefer more of a particular good to less of it, other things remaining the same.

Ans. Constant marginal utility of money

Q65. Which of the following statements is incorrect?

• An indifference curve must be downward sloping to the right
• The convexity of a curve implies that the slope of the curve diminishes as one moves from left to right
• The income elasticity for inferior goods to a consumer is positive
• The total effect of a change in the price of a good on its quantity demanded is called the price effect.

Ans. The income elasticity for inferior goods to a consumer is positive

Q66. The second glass of lemonade gives lesser satisfaction to a thirsty boy. This  is a clear case of

• Law of demand
• Law of diminishing returns
• Law of diminishing utility
• Law of supply

Ans. Law of diminishing utility

Q67. By consumer surplus, economists mean

• The area inside the budget line.
• The area between the average revenue and marginal revenue curves,
• The difference between the maximum amount a person is willing to pay for a good and its market price
• None of the above

Ans. The difference between the maximum amount a person is willing to pay for a good and its market price

Q68. The supply of a good refers to:

• The actual production of the good
• The total existing stock of the good
• Stock available for sale
• Amount of the good offered for sale at a particular price per unit of time.

Ans. Amount of the good offered for sale at a particular price per unit of time.

Q69. An increase in the supply of a good is caused by:

• Improvements in its technology
• Fall in the prices of other goods
• Fall in the prices of factors of production
•  all of the above

Ans. All of the above

Q70.Conspicuous goods are also known as:

• Prestige goods
• Snob goods
• Veblen goods
• All of the above

Ans. All of the above

Q71. The luxury goods like jewelry and fancy articles will have

• Low-income elasticity of demand
• High-income elasticity of demand
• Zero income elasticity of demand
• None of the above

Ans. High-income elasticity of demand

Q72. A good which cannot be consumed more than once is known as

• Durable good
• Non- durable good
• Producer good
• None of the above

Ans. Non- durable good

Q73. A point below the budget line of a consumer

• Represents a combination of goods which costs the whole of consumer’s income
• Represents a combination of goods that costs less than the consumer’s income
• Represents a combination of goods that is unattainable to the consumer given his/ her money income.
• Represents a combination of goods that costs more than the consumer’s income.

Ans. Represents a combination of goods that costs less than the consumer’s income

Q74. When total demand for a commodity whose price has fallen increases, it is due to:

• Income effect
• Substitution effect
• Complementary effect
• Price effect

Ans. Price effect

Q75. In the book market, the supply of books will decrease if any of the following occurs except

• A decrease in the number of book publishers
• A decrease in the price of the book
• An increase in the future expected price of the book
• An increase in the price of paper used.

Ans. A decrease in the price of the book

Q76. If the supply of bottled water decreases, other things remaining the same, the equilibrium price _______________ and the equilibrium quantity _____________

• Increase; decrease
• Decrease; increase
• Decrease; decrease
• Increase; increase

Ans. Increase; decrease

Q77. A decrease in the demand for cameras, other things remaining the same will.

• Increase the number of cameras bought
• Decrease the price but increase the number of cameras bought
• Increase the price of cameras
• Decrease the price and decrease the number of cameras bought.

Ans. Decrease the price and decrease the number of cameras bought.

Q78. If good growing conditions increase the supply of strawberries and hot weather increases the demand for strawberries, the number of strawberries bought

• Increase and the price might rise, fall or not change
• Does not change but the price rises
• Does not change but the price falls
• Increase and the price rises.

Ans. Increase and the price might rise, fall or not change

Q79. When the supply curve moves to the right, it means

• Supply increases
• Supply decrease
• Supply remains constant
• None of the above

Ans. Supply increase

Q80. At higher prices people demand more of certain goods not for their worth but their prestige value- This is called

• Veblen effect
• Speculative effect
• None of the above

Ans. Veblen effect

Q81. Which of the following statements is correct?

• When the price falls the quantity demanded falls
• Seasonal changes do not affect the supply of a commodity
• Taxes and subsidies do not influence the supply of the commodity.
• With lower costs, it is profitable to supply more of the commodity.

Ans. With lower costs, it is profitable to supply more of the commodity.

Q82. The income elasticity of tomatoes is 0.25, which means tomatoes are:

• Inferior goods
• Luxury goods
• Normal goods
• Can’t say

Ans. Normal goods

Q83. Which of the following statements is correct?

• With the help of statistical tools, the demand can be forecasted accurately.
• The more the number of substitutes of a commodity, the more elastic is the demand.
• Demand for butter is perfectly elastic.
• Gold jewelry will have a negative income elasticity

Ans. The more the number of substitutes of a commodity, the more elastic is the demand.

Q84. Suppose the income elasticity of educations in a private school in India is 1.6. What does this indicate:

• Private school education is a luxury
• Private school education is a necessity
• Private school education is an inferior commodity
• We should have more private schools.

Ans. Private school education is a luxury