QUESTION SET-I
1. Demand refers to various quantities of a commodity that the consumer is ready to buy at different
possible prices of that commodity.
Quantity demanded refers to a specific quantity to be purchased against a specific price of the commodity.
2. Marginal utility is the utility derived from an additional unit of a commodity.
Total utility is the sum total of marginal utilities from the consumption of different units of a commodity.
3. Indifference curve is a curve showing different combinations of a set of 2-Goods, each combination
offering the same level of satisfaction to the consumer.
4. Budget line is a line showing different combinations of a set of 2-Goods that the consumer can buy,
given his income and prices of the goods. It is also called price line, as it shows price ratio between Good-X and Good-Y.
5. A consumer is in a state of equilibrium when he maximises his satisfaction by spending his given income
on different goods and services, with a given set of prices.
6. The law of diminishing marginal utility states that marginal utility derived from the consumption of a
commodity declines as more units of that commodity are consumed at a point of time.
7. Law of demand states that, other things remaining constant, more of a commodity is purchased in
response to decrease in its price.
8. The price elasticity of demand is the degree of responsiveness of quantity demanded of a commodity to
the change in its price.
9. Individual demand schedule is a table showing various quantities of a commodity which a consumer is
ready to buy at different possible prices of the commodity at a point of time.
Market demand schedule is a schedule showing various quantities of a commodity which all the buyers in the market are ready to buy at different possible prices of the commodity at a point of time.
10. Demand curve is a graphic presentation of demand schedule, showing inverse relationship between
price and quantity demanded of a commodity.
11. Demand function shows the relationship between demand for a commodity and its various determinants. 12. Substitute goods are those goods which can be substituted for each other.
Complementary goods are those goods which complete the demand for each other.
13. A normal good is that good in case of which there is a positive relationship between consumer’s income
and quantity demanded. Implying that income effect is positive.
An inferior good is that good in case of which there is a negative relationship between consumer’s income and quantity demanded.
A giffen good is that good in case of which income effect is negative as well as greater than substitution effect. Implying that the law of demand fails.
14. When quantity demanded of a commodity changes due to change in own price of the commodity, other
factors remain constant, it is a situation of extension and contraction of demand.
15. When quantity demanded of a commodity changes owing to a change in other factors, other than price
of the concerned commodity, it is a situation of increase and decrease in demand.
16. Movement along the demand curve occurs when quantity demanded is related to changes in price of
the commodity.
Shift in demand curve occurs when demand for a commodity is related to factors other than price of the commodity.
QUESTION SET-II
1. No. Demand for a commodity is always expressed with reference to price.
2. Yes. Because demand refers to various quantities of a commodity that the consumer is ready to buy
against different possible prices.
3. Yes. Demand for a commodity refers to the entire demand schedule showing various quantities of the
commodity that the buyers in the market are ready to buy at different possible prices at a point of time.
4. Yes. It is quantity demanded of a commodity that changes in response to change in its own price.
Change in demand occurs even when price of the commodity remains constant.
5. Yes. Total utility is the sum total of marginal utilities. TU = SMU.
6. Yes. We know TU = SMU. Accordingly TU will increase so long as MU is positive, even when it is
decreasing.
7. No. When marginal utility starts declining, total utility increases at a diminishing rate. Total utility is
maximum when marginal utility is zero.
8. No. Increase in demand refers to increase in quantity demanded of a commodity at its existing price. It
is a situation of forward shift in demand curve, not of extension of demand.
9. No. Decrease in demand refers to decrease in quantity demanded of a commodity at its existing price. It
is a situation of backward shift in demand curve, not of contraction of demand.
10. No. In case of inferior goods, law of demand fails only when negative income effect is greater than
substitution effect. When negative income effect is less than substitution effect law of demand does not fail.
11. Yes. Because giffen goods by definition are those inferior goods in case of which two conditions are
satisfied: (i) income effect is negative, and (ii) income effect is greater than substitution effect. In case of inferior goods, on the other hand, only one condition needs to be satisfied: that income effect is negative.
12. Yes. Because, cheaper good replaces the one which is more expensive.
13. No. In case of complementary goods, a rise in price of Good-X causes a fall in demand for Good-Y.
Because consumption of both goods X and Y goes together.
14. No. Indifference curve is convex to the origin, in accordance with the general law that MRS tends to
diminish.
15. Yes. As we move along the indifference curve marginal rate of substitution (MRS) tends to diminish.
Because when we have less of a commodity, intensity of its desire increases. Accordingly, less and less of it is sacrificed for every additional unit of the other commodity.
16. No. All attainable combinations of Good-X and Good-Y are below as well as along the budget line. 17. Yes. A consumer attains his equilibrium when MU
P
X X
= MUM, in case of single commodity.
18. Yes. A consumer attains his equilibrium when MU
P MU P X X Y Y
= = MUM in case of two commodities.
19. Yes. In terms of indifference curve approach, a consumer strikes his equilibrium when:
Slope of IC = Slope of Price Line
Or
MRS = P P
X Y
20. No. A consumer attains his equilibrium only when: MRS = P
P
X Y
. It is a point of maximum satisfaction.
21. No. A consumer attains his equilibrium only when: P
P MU MU X Y X Y
= . It is a situation of maximum satisfaction.
QUESTION SET-III
1. Yes. MU must diminishes as more and more standard units of a commodity are continuously
consumed. This is in accordance with the law of diminishing marginal utility.
2. No. Cross price effect can occurs in case of substitute goods as well as in case of complementary goods.
Because substitute goods as well as complementary goods are related to each other.
3. Yes. Higher indifference curve shows higher level of satisfaction. Because, higher IC corresponds to
higher level of income of the consumer or higher level of consumption of both goods X and Y.
4. Yes. Shift in demand curve occurs due to change in factors other than own price of the commodity such
as change in income of the consumer, tastes or preferences.
5. Yes. QX may increase or decrease due to change in other determinants of demand even when PX
remains constant.
6. No. Elasticity of demand is always measured as a percentage change in quantity demanded in response
to a percentage change in price.
7. Yes. When total expenditure on the commodity remains constant, price elasticity of demand also
remains constant (which is equal to one), no matter price of the commodity increases or decreases.
8. No. Price elasticity of demand along a straight line demand curve is different at different points on the
demand curve. Because, at a particular point on the demand curve, Ed =
lower segment
upper segment, which tends to change from point to point.
9. No. When Ed = 0, demand remains constant, no matter what the price is. Implying that total
expenditure may increase/decrease, but not the quantity demanded.
10. Yes. Elasticity of demand is high in case of goods with close substitutes. Because availability of close
substitutes makes it possible for the consumer to switch from one commodity to the other in response to change in the relative price structure.
11. No. Elasticity of demand tends to be high over longer period of time. Because, during short periods
consumers tend to be more sticky with regard to their consumption pattern.
12. Yes. Complementary goods often exhibit low elasticity of demand. Because, increase or decrease in the
demand for Good-1 causes a simultaneous increase or decrease in the demand for Good-2 even when price of Good-2 has not changed.
13. No. Luxuries of life have greater elasticity of demand. Change in their prices has a great effect on their
demand. Because, these goods are not essentials of life.
14. Yes. Elasticity of demand will be high at higher level of price of the commodity. Because corresponding
to higher level of PX, the ratio
lower segment upper segment æ è çç ö ø ÷÷ tends to be high.
15. No. A horizontal straight line demand curve parallel to X-axis shows infinite elasticity of demand
(Ed = ¥).
16. No. A vertical straight line demand curve parallel to Y-axis shows no change in the demand irrespective
of change in price. 17. No. We know Ed = D D Q P P Q ´ Slope of the demand curve = D
D P Q So that, Ed = 1
Slope of Demand Curve P Q ´
18. Yes. From a point of intersection of the demand curve, flatter the curve, more elastic it is. Because, for a
given change in PX, (at the point of intersection) flatter demand curve shows greater change in QX.
19. Yes. Income effect is positive when increase in income causes increase in demand. It occurs in case of
normal goods. It is negative when increase in income causes decrease in demand. It occurs in case of inferior goods.
20. Yes. In case of giffen goods, income effect is higher than the substitution effect. Implying law of
demand fails in case of giffen goods.
QUESTION SET-IV
1. contracts.
2. shifts to the right. 3. remains constant.
4. income of the consumer and demand. 5. diminish.
6. constant.
7. IC and price line are tangent to each other. 8. MU P X X = MUM. 9. MU P MU P X X Y Y = = MUM.
10. diminishing marginal utility. 11. demand.
12. diminishing marginal rate of substitution.
13. percentage change in quantity demanded due to percentage change in price of the commodity. 14. (i) articles of distinction
(ii) ignorance of the buyer (iii) giffen goods.
15. (i) increase in income of the consumer (ii) increase in price of substitute good
(iii) decrease in price of complementary good.
16. decrease.
17. (i) fall in income
(ii) decrease in price of substitute good (iii) increase in price of complementary good.
18. 1 (one). 19. 1 (one).
20. horizontal straight line parallel to X-axis. 21. vertical straight line parallel to Y-axis.
HOTS (Higher Order Thinking Skills)
1. False. It is a situation of zero price elasticity of demand. Because, when expenditure on the commodity
is increasing proportionate to increase in price, total purchase of the commodity remains constant. Constant purchase means zero elasticity of demand.
2. True. Because increase in price is not causing any change in expenditure on the commodity. This is in
accordance with expenditure method of measuring elasticity.
3. False. Because Ed = 1
Slope of Demand Curve P Q ´
When slope of two demand curves is the same, elasticity of demand depends on the initial price and initial quantity of the commodity.
4. True. We know
Ed = 1
Slope of Demand Curve P Q ´ = 1 0 P Q ´ = ¥ 5. True. We know Ed = 1
Slope of Demand Curve P Q ´ = 1 ¥´ P Q = 0