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.
No change in either price or quantity.
An increase in equilibrium price and decrease in 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:
It is a luxury item.
As its price rises, quantity demanded decreases sharply.
As its price rises, quantity demanded also rises.
It has no substitutes.
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:
The price of the commodity itself.
The cost of production.
The technology used.
Factors other than the price of the commodity (e.g., income, tastes).
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
Inferior goods
Complements (e.g., Car and Petrol)
Substitutes (e.g., Tea and Coffee)
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:
Substitutes (e.g., Coke and Pepsi).
Giffen goods.
Unrelated goods.
Complements (e.g., Bread and Butter).
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 difference between cost of production and selling price.
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.
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 falls
Price rises, Quantity rises
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 for a good increases as its price rises due to snob appeal.
Demand rises as the price of substitutes falls.
Demand for a good falls as its price rises (Law of Demand).
Demand falls as income rises.
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 the price of the good.
Change in input prices.
Change in technology.
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.
A 10% decrease in quantity demanded.
No change in quantity demanded.
A 20% 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 decreases, Quantity increases.
Price increases, Quantity increases.
Price remains constant, Quantity remains constant.
Price remains constant, 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:
A shortage of the product.
A surplus of the product.
Equilibrium in the market.
An increase in quality.
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 horizontal straight line parallel to the X-axis.
A vertical straight line.
A rectangular hyperbola.
A downward sloping curve.
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)?
Veblen Goods
Complementary Goods
Normal Goods
Substitute 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.