Economic Analysis for Business Decisions Multiple Choice Questions Unit-2: Demand Analysis

1. The law of demand states that an increase in the price of a good:

a. Increases the supply of that good. b. Decreases the quantity demanded for that good.

c. Increases the quantity supplied of that good. d. None of these answers.

2. The law of supply states that an increase in the price of a good:

a. None of these answers. b. Increases the quantity supplied of that good.

c. Decreases the demand for that good. d. Decreases the quantity demanded for that good.

3. If an increase in consumer incomes leads to a decrease in the demand for camping equipment, then
camping equipment is:

a. A normal good b. An inferior good. c. A substitute good d. A complementary good.

4. Which of the following shifts the demand for watches to the right?

a. An increase in the price of watches b. None of these answers

c. A decrease in the price of watch batteries if watch batteries and watches are complements

d. A decrease in consumer incomes if watches are a normal good

5. If the price of a good is above the equilibrium price,

a. There is a surplus and the price will rise. b. There is a shortage and the price will fall.

c. There is a shortage and the price will rise d. The quantity demanded is equal to the quantity
supplied and the price remains unchanged. e. There is a surplus and the price will fall.

6.. If the price of a good is equal to the equilibrium price,

a. There is a shortage and the price will fall. b. The quantity demanded is equal to the quantity
supplied and the price remains unchanged. c. There is a surplus and the price will rise.
d. There is a shortage and the price will rise. e. There is a surplus and the price will fall.

7. An inferior good is one for which an increase in income causes a(n)

a. Decrease in supply. b. Increase in demand. c. Increase in supply. d. Decrease in demand.

8. If a small percentage increase in the price of a good greatly reduces the quantity demanded for that
good, the demand for that good is
 a. Income inelastic. b. Price inelastic. c. Price elastic. d. Unit price elastic. e. Income elastic.

9. The price elasticity of demand is defined as

a. The percentage change in the quantity demanded divided by the percentage change in income.

b. The percentage change in income divided by the percentage change in the quantity demanded.

c. The percentage change in the quantity demanded of a good divided by the percentage change in the
price of that good.

d. The percentage change in price of a good divided by the percentage change in the quantity
demanded of that good.

10. In general, a flatter demand curve is more likely to be:

a. Price elastic. b. Unit price elastic. c. None of these answers. d. Price inelastic.

11. Which of the following would cause a demand curve for a good to be price inelastic?

a. The good is a luxury. b. There are a great number of substitutes for the good.

c. The good is a necessity. d. The good is an inferior good.

12. If the cross-price elasticity between two goods is negative, the two goods are likely to be:

a. Substitutes. b. Complements. c. Necessities. d. Luxuries.

13. If the income elasticity of demand for a good is negative, it must be:

a. An elastic good. b. An inferior good c. A normal good. d. A luxury good.

14. Two goods are _____________ if the quantity consumed of one increases when the price of the
other decreases.

a. Normal b. Superior c. Complementary d. Substitute

15. If the price elasticity of demand for a good is .75, the demand for the good can be described as:

a. Normal. B. Elastic. C. Inferior d. Inelastic.

16. Cross elasticity of demand is:

a. Negative for complementary goods b. Negative for substitute goods.

c. Unitary for inferior goods d. Positive for inferior goods.

17. A 3 percent increase in the price of tea causes a 6 percent increase in the demand for coffee. The
cross elasticity of demand for coffee with respect to the price of tea is:
 a. -0.5 b. +0.5 c. -2.0 d. +2.0

18. Demand for a product should have the following pre-requisite

a. Ability to buy b. Willingness c. Need d. All of these

26. Cross elasticity of demand between two perfect substitutes will be

a. Low b. High c. Zero d. Infinity

27. The fall in the price of one commodity leads to fall in demand for other commodity and vice versa for

a. Substitutes b. Complementary c. Both (a) and (b)

28. Decrease or fall in the price of commodity leads to increase in demand because of

a. Substitution Effect, i.e., Relatively cheaper than related goods

b. Income Effect, i.e., Consumer become better off c. Both (a) and (b)

29. The law of demand can be derived with the help of

a. Law of D.M.U. (Diminishing Marginal Utility) b. Law of EMU (Equi-Marginal Utility)

c. None of these

30. The value of elasticity of demand ranges from

a. Zero to one b. One to infinity c. Zero to infinity d. None of these

31. When the quantity demanded of goods increases by a larger percentage as compared with the
income of the consumer, income elasticity of demand is high

a. Unitary Income Elasticity b. Low-Income Elasticity

c. Zero-Income Elasticity d. High-Income Elasticity

32. The relation between price and supply in law of supply is

a. Direct b. Inverse c. Proportional d. None of these

33. An increase in income will:

a. Lead to a movement along the demand curve b. Shift the supply curve

c. Shift the demand curve d. Lead to an extension of demand

34. Assuming a downward sloping demand curve and upward sloping supply curve, a higher equilibrium
price may be caused by:

a. A fall in demand b. An increase in supply

35. A movement along the supply curve may be caused by:

a. A change in technology b. A change in the number of producers

c. A shift in demand d. A change in costs

36. Demand for a normal product may shift outwards if:

a. Price decreases b. The price of a substitute rises c. The price of a complement rises

d. Income falls

37. According to the law of diminishing marginal utility:

a. Utility is at a maximum with the first unit

b. Increasing units of consumption increase the marginal utility

c. Marginal product will fall as more units are consumed

d. Total utility will rise at a falling rate as more units are consumed

38. If marginal utility is zero:

a. Total utility is zero b. An additional unit of consumption will decrease total utility

c. An additional unit of consumption will increase total utility d. Total utility is maximized

39. A decrease in income should:

a. Shift demand for an inferior product inwards b. Shift demand for an inferior product outwards

c. Shift supply for an inferior product outwards d. Shift supply for an inferior product inwards

40. An increase in the price of a complement for product A would:

a. Shift demand for product A outwards b. Shift demand for product A inwards

c. Shift supply for product A outwards d. Shift supply for product A inwards

41. An increase in price, all other things unchanged, leads to:

a. Shift demand outwards b. Shift demand inwards

c. A contraction of demand d. An extension of demand

42. If a product is a Veblen good:

a. Demand is inversely related to income b. Demand is inversely related to price

43. If a product is an inferior good:

a. Demand is inversely related to income b. Demand is inversely related to price

c) Demand is directly related to price d) Demand is directly related to the price of substitutes

44. Demand for a normal product may shift outwards if:

a. Price decreases b. The price of a substitute rises c. The price of a complement rises

d. Income falls

45. According to the law of diminishing marginal utility:

a. Utility is at a maximum with the first unit

b. Increasing units of consumption increase the marginal utility

c. Marginal product will fall as more units are consumed

d. Total utility will rise at a falling rate as more units are consumed

46. Average income increases from £20,000 p.a. to £22,000 p.a. Quantity demanded per year increases
from 5000 to 6000 units. Which of the following is correct?

a) Demand is price inelastic b) The good is inferior

c) Income elasticity is -2 d) The product is normal

47. The price decreases from £2,000 to £1,800. Quantity demanded per year increases from 5000 to
6000 units. Which of the following is correct?

a. The price elasticity of demand is -2 b. The good is inferior

c. Income elasticity is + 0.5 d. Income elasticity is + 2

48. If the price elasticity of demand is unit then a fall in price:

a. Reduces revenue b. Leaves revenue unchanged c) Increases revenue d. Reduces costs

49. If the cross elasticity of demand is -2:

a. The products are substitutes and demand is cross price elastic

b. The products are substitutes and demand is cross price inelastic

c. The products are complements and demand is cross price elastic

d. The products are complements and demand is cross price inelastic

a. 3000 b. 7000 c. 5500 d. 4500