Set 1: Basics of Demand and Law of Demand

Question 1. Which of the following is not a determinant of demand?

a) Price of the commodity
b) Price of substitutes
c) Production technique
d) Consumer income

Answer: c) Production technique

Explanation: Demand depends on consumer-side factors, not supply-side production
methods.

Question 2. If the price of apples falls from one hundred rupees per kilogram to eighty
rupees per kilogram and quantity demanded rises from fifty kilograms to seventy kilograms,
the slope of the demand curve is:
a) Zero point five
b) One
c) Two
d) Zero point two five

Answer: a) Zero point five

Explanation: Slope is calculated as the change in price divided by the change in quantity
demanded, which gives twenty divided by forty equals zero point five.

Question 3. The law of demand states that, other things remaining constant:
a) Demand increases when price rises
b) Demand decreases when income falls
c) Demand increases when price falls
d) Demand increases when supply increases

Answer: c) Demand increases when price falls

Explanation: There is an inverse relationship between price and quantity demanded.

Question 4. Market demand curve is derived by:

a) Adding individual demand quantities at each price
b) Adding individual demand prices at each quantity
c) Taking geometric mean of individual demands
d) Summing supply curves

Answer: a) Adding individual demand quantities at each price

Explanation: Quantities demanded by all consumers are summed at each price to get market
demand.
Question 5. If quantity demanded rises from one hundred units to one hundred twenty units
when price falls from fifty rupees to forty rupees, point elasticity of demand at price fifty
rupees is:
a) One
b) Two
c) Zero point eight three
d) One point five

Answer: b) Two
Explanation: Elasticity is calculated as change in quantity divided by change in price,
multiplied by price divided by quantity, which gives two.

Question 6. Which demand curve represents perfectly elastic demand?

a) Vertical line
b) Horizontal line
c) Downward sloping straight line
d) Upward sloping curve

Answer: b) Horizontal line

Explanation: Perfectly elastic demand means consumers will buy any quantity at a given
price.

Question 7. If the demand function is quantity demanded equals five hundred minus five
times price, what is the quantity demanded when price is sixty rupees?
a) Three hundred
b) Two hundred
c) Two hundred fifty
d) One hundred

Answer: b) Two hundred

Explanation: Substitute sixty into the demand function: five hundred minus five times sixty
equals two hundred.

Question 8. Latent demand refers to:

a) Demand that is not backed by purchasing power
b) Demand in the future
c) Current market demand
d) Derived demand

Answer: a) Demand that is not backed by purchasing power

Explanation: Consumers want the product but cannot afford it.
Question 9. If demand for a good increases when income decreases, it is:
a) Normal good
b) Inferior good
c) Luxury good
d) Complementary good

Answer: b) Inferior good

Explanation: Demand rises when income falls.

Question 10. Which of the following shows a positively sloped demand curve?
a) Giffen good
b) Normal good
c) Complementary good
d) Derived demand

Answer: a) Giffen good

Explanation: For a Giffen good, higher price increases demand because the income effect
dominates.
Set 2: Elasticity of Demand and Demand Theory
Question 1. Who is known as the father of modern demand theory?
a) Alfred Marshall
b) Adam Smith
c) Karl Marx
d) John Maynard Keynes

Answer: a) Alfred Marshall

Explanation: Marshall introduced the concept of demand and supply curves and the idea of
elasticity.

Question 2. Price elasticity of demand measures:

a) Responsiveness of demand to change in income
b) Responsiveness of demand to change in price
c) Responsiveness of supply to change in price
d) Responsiveness of production to cost

Answer: b) Responsiveness of demand to change in price

Explanation: It shows how quantity demanded changes when price changes.

Question 3. If quantity demanded of a commodity rises from two hundred units to two
hundred forty units when price falls from one hundred rupees to eighty rupees, price elasticity
of demand at price one hundred rupees is:
a) Zero point six
b) One point zero
c) One point two
d) Two

Answer: c) One point two

Explanation: Elasticity is calculated as change in quantity divided by change in price,
multiplied by price divided by initial quantity.

Question 4. Cross elasticity of demand is positive for:

a) Complementary goods
b) Substitute goods
c) Inferior goods
d) Normal goods

Answer: b) Substitute goods

Explanation: When price of one good rises, demand for its substitute rises.
Question 5. Income elasticity of demand measures:
a) How quantity demanded changes with price change
b) How quantity demanded changes with change in income
c) How quantity supplied changes with income
d) How price changes with quantity demanded

Answer: b) How quantity demanded changes with change in income

Explanation: Positive elasticity indicates a normal good; negative elasticity indicates an
inferior good.

Question 6. Who first used the concept of marginal utility to explain demand?
a) Alfred Marshall
b) William Stanley Jevons
c) Adam Smith
d) David Ricardo

Answer: b) William Stanley Jevons

Explanation: Jevons, along with Carl Menger and Leon Walras, developed the marginal
utility theory of demand.

Question 7. Point elasticity of demand refers to:

a) Elasticity between two distant points on demand curve
b) Elasticity at a particular point on the demand curve
c) Elasticity of supply
d) Income elasticity

Answer: b) Elasticity at a particular point on the demand curve

Explanation: It is used to measure exact responsiveness at a specific price and quantity.

Question 8. Arc elasticity of demand is used when:

a) Price changes are very small
b) Price changes are large between two points
c) Quantity demanded is zero
d) Only for supply curve

Answer: b) Price changes are large between two points

Explanation: Arc elasticity calculates average elasticity over a range of prices.

Question 9. If the demand for a commodity increases from five hundred units to six hundred
units when income rises from ten thousand rupees to twelve thousand rupees, the income
elasticity of demand is:
a) Zero point five
b) One
c) One point five
d) Two

Answer: a) Zero point five

Explanation: Income elasticity is calculated as percentage change in quantity demanded
divided by percentage change in income.

Question 10. According to Alfred Marshall, elasticity of demand can be classified as:
a) Perfectly elastic, elastic, unitary, inelastic, perfectly inelastic
b) Normal, inferior, Giffen
c) Joint and composite
d) Derived and autonomous

Answer: a) Perfectly elastic, elastic, unitary, inelastic, perfectly inelastic

Explanation: Marshall categorized elasticity based on responsiveness of quantity demanded
to price changes.
Set 3: Types of Demand
Question 1. Composite demand refers to a situation where:
a) A good has multiple alternative uses
b) Demand depends on another good
c) Demand increases with price
d) A good is inelastic

Answer: a) A good has multiple alternative uses

Explanation: For example, sugar can be used for sweetening or making alcohol; demand for
one use affects others.

Question 2. Joint demand occurs when:

a) Two goods are demanded together
b) Demand for one good reduces demand for another
c) Demand is determined by price alone
d) Demand is independent of other goods

Answer: a) Two goods are demanded together

Explanation: Example: Cars and petrol; one cannot be used without the other.

Question 3. Complementary goods are:

a) Goods that satisfy similar needs
b) Goods that are used together
c) Goods that have multiple uses
d) Goods that are inferior

Answer: b) Goods that are used together

Explanation: Example: Tea and sugar; increase in demand for tea increases demand for
sugar.

Question 4. Competitive demand is when:

a) Goods compete for the same purpose
b) Goods are used together
c) Goods are inferior
d) Goods are luxury items

Answer: a) Goods compete for the same purpose

Explanation: Example: Tea and coffee; if price of tea falls, demand for coffee may fall.
Question 5. Derived demand occurs when:
a) Demand depends on demand for another good
b) Demand depends on consumer taste
c) Demand depends on price only
d) Demand is independent

Answer: a) Demand depends on demand for another good

Explanation: Example: Demand for steel depends on demand for cars.

Question 6. Snob effect demand refers to:

a) Demand increases with higher price due to prestige
b) Demand falls when price rises
c) Demand is stable regardless of price
d) Demand depends on substitutes

Answer: a) Demand increases with higher price due to prestige

Explanation: Luxury watches or branded handbags may be more desired if they are
expensive.

Question 7. Giffen goods are characterized by:

a) Demand rises when price rises due to income effect
b) Demand falls when price rises
c) Demand is independent of price
d) Goods are normal

Answer: a) Demand rises when price rises due to income effect

Explanation: Example: Staple foods for very poor consumers.

Question 8. If the demand for petrol rises from five hundred liters to six hundred liters when
the price of petrol remains constant, and price of cars rises causing petrol demand to fall, this
is an example of:
a) Joint demand
b) Competitive demand
c) Composite demand
d) Snob effect

Answer: b) Competitive demand

Explanation: Cars and petrol can show competitive effect if demand for one reduces the
other in specific contexts.

Question 9. Sugar is demanded both for sweetening and making alcohol. If demand for
alcohol rises, demand for sugar also rises. This is an example of:
a) Composite demand
b) Derived demand
c) Joint demand
d) Giffen demand

Answer: a) Composite demand

Explanation: The good has multiple uses, and increase in one use increases total demand.

Question 10. If the demand for leather shoes rises when income rises, but rich consumers
prefer branded shoes, making lower-priced shoes less demanded, this illustrates:
a) Snob effect
b) Complementary demand
c) Joint demand
d) Giffen goods

Answer: a) Snob effect

Explanation: Higher price and prestige increase demand among a certain class of consumers.
Set 4: Slope of Demand Curve and Market Demand
Question 1. The slope of the demand curve is calculated as:
a) Change in price divided by change in quantity demanded
b) Change in quantity demanded divided by change in price
c) Price multiplied by quantity
d) Income divided by quantity demanded

Answer: a) Change in price divided by change in quantity demanded

Explanation: The slope shows how much price changes for each change in demand.

Question 2. If price of a good decreases from sixty rupees to fifty rupees and demand
increases from one hundred units to one hundred fifty units, the slope of the demand curve is:
a) Zero point one
b) Zero point two
c) Zero point three
d) Zero point four

Answer: b) Zero point two

Explanation: Change in price is ten, change in quantity is fifty, so slope equals ten divided
by fifty equals zero point two.

Question 3. Who introduced the concept of consumer surplus in relation to demand curve?
a) Adam Smith
b) Alfred Marshall
c) J B Say
d) Leon Walras

Answer: b) Alfred Marshall

Explanation: Marshall defined consumer surplus as the difference between what a consumer
is willing to pay and what is actually paid.

Question 4. The market demand curve is derived by:

a) Adding individual quantities demanded at each price
b) Adding individual prices at each quantity
c) Taking geometric average of demand curves
d) Using supply schedules

Answer: a) Adding individual quantities demanded at each price

Explanation: Market demand is horizontal summation of all individual demands.
Question 5. If consumer A demands twenty units at price ten rupees and consumer B
demands thirty units at the same price, then the market demand at that price is:
a) Twenty units
b) Thirty units
c) Fifty units
d) Ten units

Answer: c) Fifty units

Explanation: Market demand is the sum of individual demands, which is twenty plus thirty
equals fifty.

Question 6. A downward sloping demand curve indicates:

a) Direct relation between price and demand
b) Inverse relation between price and demand
c) Demand is fixed
d) No relation between price and demand

Answer: b) Inverse relation between price and demand

Explanation: As price falls, demand rises, and vice versa.

Question 7. If demand function is given as quantity demanded equals two hundred minus
two times price, what is slope of demand curve?
a) Minus one
b) Minus two
c) Minus three
d) Minus four

Answer: b) Minus two

Explanation: The coefficient of price shows slope; here it is minus two.

Question 8. Who is credited with introducing the indifference curve analysis that provides an
alternative view of demand?
a) Alfred Marshall
b) Vilfredo Pareto
c) Lionel Robbins
d) John Hicks and R G D Allen

Answer: d) John Hicks and R G D Allen

Explanation: They developed indifference curve approach in their book "Value and Capital".

Question 9. Market demand differs from individual demand because:

a) It includes all sellers in the market
b) It is obtained by summing demand of all consumers
c) It represents supply side behaviour
d) It is independent of price

Answer: b) It is obtained by summing demand of all consumers

Explanation: Market demand is aggregate of individual demands at each price level.

Question 10. If three consumers demand ten, fifteen, and twenty units respectively at price
five rupees, then market demand is:
a) Thirty units
b) Forty-five units
c) Twenty-five units
d) Fifteen units

Answer: b) Forty-five units

Explanation: Market demand is the sum of ten plus fifteen plus twenty equals forty-five.
Set 5: Advanced Elasticities and Applications
Question 1. Arc elasticity of demand is calculated when:
a) Price change is very small
b) Price change is large between two points
c) Quantity demanded is zero
d) Income is constant

Answer: b) Price change is large between two points

Explanation: Arc elasticity measures average responsiveness over a range of prices.

Question 2. If demand increases from one hundred units to one hundred twenty units when
price falls from ten rupees to eight rupees, the arc elasticity of demand is approximately:
a) Zero point nine five
b) One point zero five
c) One point one five
d) One point two five

Answer: c) One point one five

Explanation: Elasticity is measured as percentage change in quantity divided by percentage
change in price, using averages of price and quantity.

Question 3. Cross elasticity of demand between two goods is negative when:

a) The goods are substitutes
b) The goods are complementary
c) The goods are unrelated
d) The goods are inferior

Answer: b) The goods are complementary

Explanation: When price of one good rises, demand for its complement falls, hence negative
cross elasticity.

Question 4. If the price of tea rises from twenty rupees to twenty-five rupees and the demand
for coffee increases from one hundred cups to one hundred twenty cups, the cross elasticity of
demand is:
a) Zero point six
b) Zero point eight
c) One point zero
d) One point two

Answer: b) Zero point eight

Explanation: Cross elasticity is percentage change in demand for one good divided by
percentage change in price of another.
Question 5. Income elasticity of demand for a luxury good is generally:
a) Less than zero
b) Equal to zero
c) Between zero and one
d) Greater than one

Answer: d) Greater than one

Explanation: Luxury goods show more than proportionate increase in demand when income
rises.

Question 6. If income rises from ten thousand rupees to twelve thousand rupees and demand
for restaurant meals rises from ten meals to fifteen meals, income elasticity of demand is:
a) Zero point five
b) One
c) One point five
d) Two

Answer: d) Two
Explanation: Percentage change in demand is fifty percent and percentage change in income
is twenty percent, giving elasticity of two.

Question 7. Price elasticity of demand helps government in:

a) Deciding tax rates
b) Determining supply
c) Increasing exports only
d) Determining population policy

Answer: a) Deciding tax rates

Explanation: Goods with inelastic demand can bear higher taxes without large fall in
demand.

Question 8. If government imposes tax on salt, revenue collection will be higher because:
a) Salt has perfectly elastic demand
b) Salt has perfectly inelastic demand
c) Salt has unitary elastic demand
d) Salt has cross elasticity

Answer: b) Salt has perfectly inelastic demand

Explanation: Demand for salt hardly changes with price, so tax will not reduce demand.
Question 9. Who developed the concept of elasticity of demand formally?
a) Adam Smith
b) Alfred Marshall
c) Karl Marx
d) John Hicks

Answer: b) Alfred Marshall

Explanation: Marshall introduced elasticity of demand in his book "Principles of
Economics".

Question 10. If the elasticity of demand for a product is greater than one, then:
a) Demand is elastic
b) Demand is inelastic
c) Demand is unitary elastic
d) Demand is perfectly inelastic

Answer: a) Demand is elastic

Explanation: A small change in price leads to a larger change in demand.
Set 6: Special Cases of Demand
Question 1. Which of the following is an exception to the law of demand?
a) Normal goods
b) Inferior goods
c) Giffen goods
d) Substitutes

Answer: c) Giffen goods

Explanation: For Giffen goods, when price rises, demand also rises due to strong negative
income effect.

Question 2. A Giffen good is usually:

a) A luxury good
b) A high-prestige good
c) A staple inferior good consumed by the poor
d) A complementary good

Answer: c) A staple inferior good consumed by the poor

Explanation: Examples include coarse grains or potatoes in historical studies.

Question 3. The Veblen effect refers to:

a) Demand increases because of prestige associated with higher price
b) Demand decreases with price fall
c) Demand is unaffected by price
d) Demand depends only on income

Answer: a) Demand increases because of prestige associated with higher price

Explanation: Consumers purchase expensive goods to display wealth and status.

Question 4. If demand for diamond jewelry rises when its price rises, this is an example of:
a) Giffen demand
b) Veblen effect
c) Derived demand
d) Joint demand

Answer: b) Veblen effect

Explanation: Luxury goods often exhibit this "snob appeal" demand pattern.

Question 5. Latent demand refers to:

a) Present demand at market price
b) Demand that exists without purchasing power
c) Demand for inputs derived from output
d) Market demand curve

Answer: b) Demand that exists without purchasing power

Explanation: People want the product but cannot afford to purchase it.

Question 6. If consumers expect price of gold to rise in future, demand for gold increases
today. This is known as:
a) Latent demand
b) Speculative demand
c) Derived demand
d) Composite demand

Answer: b) Speculative demand

Explanation: Demand arises because of expectations about future price.

Question 7. Which economist first explained the concept of Giffen goods?

a) Alfred Marshall
b) Robert Giffen
c) Adam Smith
d) David Ricardo

Answer: a) Alfred Marshall

Explanation: Marshall gave the example of bread consumed by the poor as a Giffen good,
though he attributed it to Robert Giffen.

Question 8. Which of the following illustrates derived demand?

a) Demand for sugar for tea and sweets
b) Demand for labor in construction industry
c) Demand for luxury handbags
d) Demand for diamond jewelry

Answer: b) Demand for labor in construction industry

Explanation: Demand for labor is derived from demand for houses or buildings.

Question 9. When a fall in price of a good makes consumers think it is of inferior quality,
leading to lower demand, this is called:
a) Snob effect
b) Veblen effect
c) Prestige effect
d) Paradox of demand
Answer: c) Prestige effect
Explanation: Certain goods are demanded for status; lower prices reduce their appeal.

Question 10. Which of the following is not an exception to the law of demand?
a) Giffen goods
b) Veblen effect goods
c) Speculative demand goods
d) Normal goods

Answer: d) Normal goods

Explanation: Normal goods obey the law of demand.
Set 7: Demand Functions and Equations
Question 1. If the demand function is quantity demanded equals five hundred minus five
times price, what is the quantity demanded at price fifty rupees?
a) Two hundred
b) Two hundred fifty
c) Three hundred
d) One hundred

Answer: a) Two hundred

Explanation: Substituting price fifty into the function gives five hundred minus two hundred
fifty equals two hundred.

Question 2. For the demand function quantity demanded equals one hundred minus two
times price, what is the slope of the demand curve?
a) Minus one
b) Minus two
c) Minus three
d) Minus four

Answer: b) Minus two

Explanation: The coefficient of price in the function represents the slope.

Question 3. If the demand function is quantity demanded equals fifty plus three times
income, and income is one thousand rupees, what is the quantity demanded?
a) Three hundred
b) Three thousand fifty
c) Fifty-three
d) One hundred fifty

Answer: b) Three thousand fifty

Explanation: Substituting income one thousand gives fifty plus three times one thousand
equals three thousand fifty.

Question 4. Suppose the demand function is quantity demanded equals four hundred minus
four times price. At price fifty rupees, calculate the point elasticity of demand.
a) Zero point five
b) One
c) Two
d) Three
Answer: b) One
Explanation: Elasticity is slope times price divided by quantity. Substituting values gives
one.

Question 5. If the demand function is quantity demanded equals two hundred plus ten times
income minus five times price, and income is one hundred rupees, price is ten rupees, find
quantity demanded.
a) One thousand two hundred
b) One thousand three hundred
c) One thousand one hundred fifty
d) One thousand

Answer: c) One thousand one hundred fifty

Explanation: Substituting gives two hundred plus one thousand minus fifty equals one
thousand one hundred fifty.

Question 6. If market demand is the sum of two demand functions, where demand of
consumer A is one hundred minus price and demand of consumer B is two hundred minus
two times price, the market demand function is:
a) Three hundred minus three times price
b) Three hundred minus two times price
c) Two hundred minus three times price
d) Three hundred minus price

Answer: a) Three hundred minus three times price

Explanation: Adding both demand functions gives one hundred minus price plus two
hundred minus two times price equals three hundred minus three times price.

Question 7. In a linear demand curve, elasticity of demand is:

a) Same at all points
b) Different at different points
c) Always equal to one
d) Independent of price

Answer: b) Different at different points

Explanation: Elasticity varies along a straight-line demand curve, being greater than one at
higher prices, equal to one at the midpoint, and less than one at lower prices.

Question 8. If quantity demanded is ten units when price is twenty rupees, and quantity
demanded is zero when price is forty rupees, the linear demand function is:
a) Quantity equals fifty minus price
b) Quantity equals forty minus price
c) Quantity equals twenty minus zero point five times price
d) Quantity equals twenty minus price

Answer: c) Quantity equals twenty minus zero point five times price
Explanation: Using two points to form equation gives required demand function.

Question 9. Who introduced the concept of demand schedules and demand curves in modern
economics?
a) Alfred Marshall
b) Adam Smith
c) Karl Marx
d) Lionel Robbins

Answer: a) Alfred Marshall

Explanation: Marshall systematized demand schedules and graphical demand curves.

Question 10. If the demand function is quantity demanded equals one hundred plus twenty
times income minus ten times price, and income rises by ten units, demand increases by:
a) Two hundred units
b) Two units
c) Twenty units
d) Ten units

Answer: c) Twenty units

Explanation: Coefficient of income in the function shows marginal effect of income on
demand.
Set 8: Market Demand, Aggregation, and Consumer
Behaviour
Question 1. Individual demand differs from market demand in that:
a) Individual demand is the demand of a single seller, while market demand is of a single
buyer
b) Individual demand is shown by a horizontal curve, market demand by a vertical curve
c) Individual demand is the quantity demanded by one consumer at each price, market
demand is the sum of quantities demanded by all consumers at each price
d) Individual demand depends only on price, market demand depends only on income

Answer: c) Individual demand is the quantity demanded by one consumer at each price,
market demand is the sum of quantities demanded by all consumers at each price
Explanation: Market demand aggregates individual demands across all buyers at each price
point.

Question 2. At a price of ten rupees, consumer A demands twenty units and consumer B
demands thirty units. The market demand at that price is:
a) Twenty units
b) Thirty units
c) Fifty units
d) Ten units

Answer: c) Fifty units

Explanation: Market demand equals the sum of individual demands, twenty plus thirty
equals fifty.

Question 3. If consumer A has demand function quantity equals one hundred minus two
times price and consumer B has demand function quantity equals eighty minus price, the
market demand function is:
a) One hundred minus three times price
b) One hundred eighty minus three times price
c) One hundred eighty minus price
d) One hundred minus price

Answer: b) One hundred eighty minus three times price

Explanation: Add the two functions: one hundred minus two times price plus eighty minus
price equals one hundred eighty minus three times price.

Question 4. Suppose two consumers demand fifteen units and twenty five units respectively
at price eight rupees. The market demand at that price is:
a) Thirty units
b) Twenty units
c) Forty units
d) Forty five units

Answer: c) Forty units

Explanation: Market demand is fifteen plus twenty five equals forty.

Question 5. If market demand rises from one thousand units to one thousand two hundred
units because of population growth, the change in demand in percent is:
a) Ten percent
b) Fifteen percent
c) Twenty percent
d) Twenty five percent

Answer: c) Twenty percent

Explanation: The change is two hundred units over the original one thousand units, which is
twenty percent increase.

Question 6. The Engel curve for a good shows the relationship between:
a) Price of the good and quantity supplied
b) Consumer income and quantity demanded of the good
c) Price of the good and consumer income
d) Quantity demanded and quantity supplied

Answer: b) Consumer income and quantity demanded of the good

Explanation: Engel curve plots how demand varies when income changes, holding other
factors constant.

Question 7. If consumer A demands quantity equal to fifty minus price and consumer B
demands quantity equal to thirty minus two times price, then at price ten rupees the market
demand is:
a) Thirty units
b) Fifty units
c) Forty units
d) Twenty units

Answer: b) Fifty units

Explanation: At price ten, A demands forty units and B demands ten units, so market
demand is forty plus ten equals fifty.

Question 8. Horizontal summation is the method used to derive market demand because:
a) Prices at each quantity are added across consumers
b) Quantities at each price are added across consumers
c) Supply is added horizontally to demand
d) Demand of producers is subtracted from demand of consumers

Answer: b) Quantities at each price are added across consumers

Explanation: For a given price, individual quantities demanded are added horizontally to get
market quantity demanded.

Question 9. A rightward shift of the market demand curve can be caused by:
a) Fall in population
b) A decrease in consumer income for a normal good
c) An increase in the price of a substitute good
d) A reduction in consumers taste for the good

Answer: c) An increase in the price of a substitute good

Explanation: If substitute becomes more expensive, some buyers switch to this good,
increasing its demand at each price and shifting demand rightward.

Question 10. Who formulated Engel's law, which describes how expenditure on food
changes as income changes?
a) Alfred Marshall
b) Ernst Engel
c) William Stanley Jevons
d) John Hicks

Answer: b) Ernst Engel

Explanation: Ernst Engel observed that as family income rises, the proportion of income
spent on food falls, a relationship known as Engel's law.
Set 9: Applied Demand – Pricing, Tax Incidence, and
Welfare
Question 1. A firm faces demand function quantity equals one hundred minus price. At price
forty rupees, revenue is:
a) Two thousand four hundred
b) Three thousand
c) One thousand six hundred
d) Two thousand

Answer: a) Two thousand four hundred

Explanation: At price forty, quantity equals sixty. Revenue equals price times quantity
equals forty times sixty equals two thousand four hundred.

Question 2. In the same demand function quantity equals one hundred minus price, at price
forty rupees, the marginal revenue is:
a) Twenty
b) Thirty
c) Ten
d) Zero

Answer: c) Ten
Explanation: Total revenue is price times quantity equals P times (100 minus P) equals 100P
minus P squared. Marginal revenue equals 100 minus 2P. At P equals 40, MR equals 100
minus 80 equals 20. (Corrected: answer a) Twenty).

Question 3. If the price elasticity of demand is greater than one, a reduction in price will:
a) Decrease total revenue
b) Increase total revenue
c) Leave total revenue unchanged
d) First increase and then decrease total revenue

Answer: b) Increase total revenue

Explanation: When demand is elastic, fall in price increases total revenue because
percentage rise in quantity demanded exceeds percentage fall in price.

Question 4. Suppose government imposes a tax of five rupees per unit on a commodity. If
demand is perfectly inelastic, the entire tax burden will fall on:
a) Buyers
b) Sellers
c) Both equally
d) Government
Answer: a) Buyers
Explanation: With perfectly inelastic demand, consumers cannot reduce demand, so they
bear full burden of tax.

Question 5. If demand is perfectly elastic, the burden of a per unit tax falls on:
a) Buyers only
b) Sellers only
c) Both equally
d) Cannot be determined

Answer: b) Sellers only

Explanation: With perfectly elastic demand, buyers refuse to pay higher prices, so sellers
must absorb tax.

Question 6. Consumer surplus is defined as:

a) The difference between what the consumer is willing to pay and what he actually pays
b) The excess of cost over revenue
c) The profit made by producers
d) The difference between supply and demand

Answer: a) The difference between what the consumer is willing to pay and what he actually
pays
Explanation: Marshall defined consumer surplus as extra satisfaction consumers receive
over what they actually pay.

Question 7. Suppose a consumer is willing to pay one hundred rupees for a good but buys it
for seventy rupees. Consumer surplus is:
a) One hundred rupees
b) Seventy rupees
c) Thirty rupees
d) Zero

Answer: c) Thirty rupees

Explanation: Surplus equals willingness to pay minus actual payment equals thirty.

Question 8. Who introduced the concept of consumer surplus in demand theory?

a) Adam Smith
b) Alfred Marshall
c) J R Hicks
d) Vilfredo Pareto
Answer: b) Alfred Marshall
Explanation: Marshall developed consumer surplus as a tool to measure welfare from
consumption.

Question 9. The compensated demand curve, used in welfare economics, was introduced by:
a) Alfred Marshall
b) J R Hicks
c) Adam Smith
d) Irving Fisher

Answer: b) J R Hicks
Explanation: Hicks developed compensated demand curves to separate income effect and
substitution effect.

Question 10. If a firm faces demand function quantity equals sixty minus two times price,
what price maximises total revenue?
a) Fifteen
b) Thirty
c) Twenty
d) Ten

Answer: a) Fifteen
Explanation: Total revenue equals price times quantity equals P times (60 minus 2P) equals
60P minus 2P squared. Maximised when marginal revenue equals zero, that is 60 minus 4P
equals 0, P equals 15.
Set 10: Special Cases and Types of Demand
Question 1. A Giffen good is one in which:
a) Demand increases when price falls
b) Demand increases when price rises because of strong substitution effect
c) Demand increases when price rises because the income effect dominates substitution effect
negatively
d) Demand remains constant regardless of price

Answer: c) Demand increases when price rises because the income effect dominates
substitution effect negatively
Explanation: Giffen goods are inferior goods where higher price reduces real income so
much that demand rises.

Question 2. The Giffen paradox was first observed in:

a) Bread in England
b) Potatoes during Irish famine
c) Rice in Japan
d) Wheat in America

Answer: b) Potatoes during Irish famine

Explanation: Robert Giffen observed that higher potato prices led poor people to consume
more potatoes.

Question 3. Goods that are demanded because they confer prestige on the consumer are
called:
a) Giffen goods
b) Veblen goods
c) Normal goods
d) Public goods

Answer: b) Veblen goods

Explanation: Thorstein Veblen described goods whose higher price itself makes them
attractive as status symbols.

Question 4. Snob effect in demand refers to:

a) Desire to buy goods because everyone else buys them
b) Desire to buy goods because few others possess them
c) Decrease in demand with increase in income
d) Increase in demand due to fashion

Answer: b) Desire to buy goods because few others possess them

Explanation: Snob effect is opposite of bandwagon effect, arising from exclusivity.
Question 5. Which type of demand arises when a commodity is used for multiple purposes?
a) Joint demand
b) Composite demand
c) Latent demand
d) Derived demand

Answer: b) Composite demand

Explanation: When one commodity can satisfy more than one want, such as coal used for
power and steel, it is composite demand.

Question 6. When two goods are demanded together because they are complements, the
demand is called:
a) Competitive demand
b) Joint demand
c) Derived demand
d) Latent demand

Answer: b) Joint demand

Explanation: Examples include car and petrol, printer and ink.

Question 7. If the demand for labour depends on the demand for goods produced by labour,
this is an example of:
a) Latent demand
b) Composite demand
c) Derived demand
d) Joint demand

Answer: c) Derived demand

Explanation: Demand for factors of production depends on demand for final goods.

Question 8. Latent demand refers to:

a) Demand which is fully expressed in the market
b) Demand that exists but is not backed by purchasing power
c) Demand arising from high prices of luxury goods
d) Demand for public goods only

Answer: b) Demand that exists but is not backed by purchasing power

Explanation: Latent demand is potential demand that cannot be realised due to low income
or other constraints.
Question 9. Who introduced the concept of conspicuous consumption, related to Veblen
goods?
a) Alfred Marshall
b) Thorstein Veblen
c) Adam Smith
d) J R Hicks

Answer: b) Thorstein Veblen

Explanation: Veblen in his work “Theory of the Leisure Class” explained conspicuous
consumption.

Question 10. When demand for a product rises due to many people buying it because others
are also buying, this is called:
a) Bandwagon effect
b) Snob effect
c) Giffen effect
d) Latent demand

Answer: a) Bandwagon effect

Explanation: Bandwagon effect shows imitation behaviour in consumption.