Test Your Understanding

1. Given the demand function Q = a - (aIb) P, if a = 3200 and b = 80;

(I) State the demand equation and the inverse demand equation.
(ii) State the new demand equation if a changes to 1600.
(iil) Draw the demand curves of (a) and (b) on the same graph and find Q for P= 40.
[Hint: Demand Equation: Q = 3200 - 40P and inverse demand equation: P = 80 - Q/40.
Demand curve: for P = 80, Q = 0; and for P = 0, Q= 3200. Join the two end points to get
demand curve.]
2. Demand function for a. variety of Bakeman biscuits is :
Q= 2.02P+ .03 A - .04Ac+ .06 Pc+ .001/
where Q and P are quantity and price of the Bakeman biscuits respectively; A and Ac are
company's own and competitors advertisement expenditure, Pc is price of competitors' and I
the average personal disposable income.
Given A = 50,Ac= l00,Pc= 5 and/=20,000
(I) Write down the demand equation and the inverse demand equation.
(ii) Draw the demand curve and find Q for P = 10,000.
3. A survey observed that the city has two different health systems-A and B, with the
following demand characteristics :
(I) System A : Price elasticity = -0.6; and income elasticity = -0.2
(iI) System B : Price elasticity = -0.3; and income elasticity = +0.9
(iii) Cross elasticity between System A and System B = +0.5
Compare the two health systems and suggests policy measures.
4. If P = 120 - 1.5Q is the equation for the demand curve, find the corresponding total
revenue function, marginal revenue function and average revenue function.

5. Indicate whether the following statements are True or False. Justify your answer.
(i) Change in demand means an increase in demand or a decrease in demand.
(ii) An increase in disposable income increases demand for an kinds of goods
(iii) If more is demanded at the same price, the fact is known as increase of demand.
(iv) The law of demand states that when price faits, demand fans.
(v) An increase in demand results from factors which cause extension of demand.
(VI) Upward shift in the demand curve is due to increase in the price of the commodity.
(vii) Downwards shift in demand is known as decrease in demand.
(viii) Demand curve is always negatively sloping.
(ix) Demand for capital goods is derived from the demand for the products they produce.
(x) A decrease in the price of the complementary product shall increase the demand for the
given product.

6. Out of the following multiple choice questions, indicate the most

appropriate answer:
(i) We can say with certainty that when the demand for TVs increases in the
long run, prices
(a) will go down.
(b) will go up.
(c) change proportionately
(d) settle at the original level.
(e) cannot be predicted without the knowledge of elasticity of
demand.
(ii) In the typical demand schedule, quantity demanded
(a) varies directly with price.
(b) varies indirectly with price.
(c) varies inversely with price.
(d) is independent of price.
(iii) By 'increase' in demand we mean
(a) movement upwards on a demand curve.
(b) movement downwards on a demand curve.
(c) movement upwards of a demand curve.
(d) none of these .
(iv) Suppose that the quantity demanded of Nestle's crunchy chocolate is a function of price
of the bar(Pn), average price of all other competing bar (Pr)' size of the Nestle bar (Sn), and
its advertising expenditure (A). Other things remaining at the current level. the management
of Nestle decides to increase size of its chocolate bar by 10 percent. Would you say that for
Nestle this means:
(a) upward movement along its demand curve;
(b) downward movement along its demand curve;
(c) upward shift of the demand curve;
(d) downward shift of the demand curve;
(e) None of the above.
(v) At what price the firm 'prices itself out of the market', given the demand function: Q =
2000-100 P :
(a) P=100
(b) P = 0
(c) P=200
(d) P=400
(e) none of the above.
(VI) Points A and B are marked on a linear demand curve-their quantity-price coordinates
being (1000, 0) and (0, 50). The equation of the demand curve is:
(a) Q=2000-10P
(b) Q = 1000 - 20P
(c) Q=500 - 40P
(d) none of the above.
(vii) On a linear demand curve two points A(Q = 2500, P = 10) and B(Q = 1500, P = 20) have
been identified. The demand function is :
(a) Q=3500-100P
(b) Q = 3000 – 50P
(c) Q=2500- I50P
(d) none of the above.
7. Out of the following multiple choice questions, indicate the most appropriate answer:
(i) The demand for a commodity is said to be elastic if the total amount spent on it is
(a) less when the price is low than when the price is high;
(b) more when the price is low than when the price is high;
 (c) the same whether the price is high or low.
(ii) Elasticity is :
(a) the slope of demand curve;
(b) usually greater than unity;
(c) usually less than unity; and
(d) a ratio of relative changes between a dependent variable and an independent
variable.
(III) Demand for electricity is elastic because
(a) it has a number of close substitutes;
(b) it has alternative uses;
(c) None of the above.
(iv) If demand is inelastic and price increases:
(a) total revenue will fall;
( b) total revenue will rise; and
(c) total revenue will be unchanged.
(V) Demand function of a firm is Q= 1000-4P+ 2A + 0.00 II (where Q=quantity; P= price; A
= advertisement expenditure: and I = income). The management knows from this function
that quantity demanded increases by 1 unit if the only change is:
(a) increase in P by I unit;
(b) decrease in A by I unit;
(c) increase in Iby Rs. 1000;
(d) none of the above.
(vi) The demand function is given by P = 15- 0.0025Q. At P = 12, the demand is :
(a) unitary elastic
(b) indeterminate
(c) elastic
(d) inelastic
8. Indicate whether the following statements are True or False:
(i) If price elasticity of demand assumes the value of minus 2.06, then it can be said
that demand is inelastic.
(ii) Cross price elasticities are important tools for managerial decisions especially for
the products with close substitutes.
(iii) Demand for a product is more elastic over a period than at a point of time.
(iv) The price of the commodities, whose demand is highly elastic, is high.
(v) If the demand of the product is price elastic, increase in price will not be as gainful
as maintaining the price.
(vi) The more and better the available substitutes for a commodity, the lesser its price
elasticity of demand is likely to be.

Answers
Que 5. (i) False; (ii) False; (iil) True; (iv) Faise; (v) False; (VI) False; (vil) True; (viii) False;
(ix) True; (x) True.
Que 6. (I) (e); (ii) (c); (iii) (c); (iv) (c); (v) (d); (VI) (b); (vii) (a)]
Que 7. (i) (b); (ii) (c): (iil) (c); (iv) (b); (v) (c); (vi) (c).
Que 8. (i) False; (il) True; (iil) True; (iv) False; (v) True; (vi) False.]