Multiple Choice Questions:

1. Monthly income of an individual increases from 5,000 to 15,000. Now, his demand for
clothes increases from 35 units to 70 units. Calculate the income elasticity of demand by using
Percentage method.

a) Ey =1

b) Ey <1

c) Ey >1

d) Ey =0

Answer: (b) Ey <1

2. Economics is a social science which deals with human behavior as a relationship between
________.

a) Unlimited buyers and limited sellers

b) Unlimited wants and scarce resources

c) Unending wants and limited people

d) Consumption and production

Answer: b) Unlimited wants and scarce resources

3. The demand for commodity turns out to be ____ when the demanded quantity of
commodity does not respond to change in its prices.

a) inelastic

b) unit elastic

c) elastic

d) perfectly inelastic

Answer: (D) perfectly inelastic

4. When price of a good increases from Rs. 15 per unit to Rs.19 per unit, its quantity supplied
increases from 75 units to 95 units. Calculate the price elasticity of supply.

a) 1

b) 0

c) 0.25

d) 2
Answer. a) 1

5. Law of supply states that, other things remaining constant, the quantity of any commodity
that firms will produce and offer for sale ____with a rise in price and ____ with a fall in price

a) rises, rises

b) falls, rises

c) rises, falls

d) falls, falls

Answer: (c) rises, falls

6. When the quantity supplied of a commodity falls due to a fall in its own price, other factors
being same, it’s called

a) expansion of supply

b) decrease in supply

c) increase in supply

d) contraction of supply

Answer: (d) contraction of supply

7. Changes in the price of chocolate cake cause the demand curve for chocolate cake to shift,
whereas changes in income cause a movement along the demand curve for chocolate cake.

a) True

b) False

Answer: b) False

8. the price of a bottle of water is Rs.15 and its demand is 200 units. As the price increases to
Rs.20, the demand remains constant at 200 units .it implies the demand is:

a) perfectly inelastic.

b) Perfectly elastic
c) Unit Elastic

d) relatively elastic

Answer: (a) perfectly inelastic

9. Which one out of the mentioned options is not a cause of change or shift in demand for any
product?

a) when the substitute price is changed

b) when the complementary goods price is changed

c) when a change in consumer income is seen

d) when there is a change in the product price

Answer: (d) when there is a change in the product price

10. Which factors determine equilibrium price?

a) demand for commodity

b) supply for commodity

c) both a) and b)

d) Price of the commodity and income of the consumer

Answer: c) both a) and b)

11. ABC Electronics initially sold 1500 LED televisions a year at $1000 per TV. The price of LED TV
reduced to $900, and the demand increased to 1800 units. Find the elasticity of demand by using
Midpoint Method.

a) Ed=0

b) Ed<1

c) Ed=1

d) Ed˃1

Answer: (d) Ed˃1

12. Which of the following statements about the economy is correct?

a) An economy is a system that helps in the production of goods and also enables people to
earn a living

b) An economy is a system that helps in the production of services and also enables people to
earn a living

c) Both a and b are correct

d) A correct and B incorrect

Answer: (c). Both a and b are correct

13. Which one of the following set of Commodities represents Substitute goods?

(a) Tea and Sugar

(b) Automobile and Petrol

(c) Pen and ink

(d) None of the above

Answer: (d) None of the above

14. With a fall in the price of a commodity:

(a) Consumer’s real income increases.

(b) Consumer’s real income de-creases.

(c) There is no change in the real income of the consumer.

(d) None of the above.

Answer: (a) Consumer’s real income increases.

15. The Law of Demand, assuming other things to remain constant, establishes the relationship
between:

(a) Income of the consumer and the quantity of a good demanded by him.

(b) Price of a good and the quantity demanded.

(c) Price of a good and the demand for its substitute.

(d) Quantity demanded of a good and the relative prices of its complementary goods.
 Answer: (b) Price of a good and the quantity demanded.

16. ________ the demand curve indicates that there is a change in demand at each possible
price because one or more other factors, such as income, tastes or the price of related goods, etc.
have changed.

(a) A Shift of

(b) A movement along

(c) No movement in

(d) None of these

Answer: (a) A Shift of

17. In case of wheat & Common salt, the nature of Price elasticity of demand is ________.

a. Elastic

b. Inelastic

c. Perfectly Elastic

d. None of the above.

Answer: (b) Inelastic

18. Suppose that cold temperatures cause a decrease in the supply of tea. What should happen
in the market for coffee, assuming tea and coffee are substitutes?

a) The equilibrium price will increase, and the equilibrium quantity will decrease.

b) The equilibrium price will decrease, and the equilibrium quantity will increase.

c) Both the equilibrium price and quantity will increase.

d) Both the equilibrium price and quantity will decrease.

Answer: c) Both the equilibrium price and quantity will increase.

19. Changes in the price of cheese cause a movement along the supply of cheese curve, whereas
changes in input prices cause the supply of cheese curve to shift.

a) True
b) False

Answer: a) True

20. if there is an increase of 25% in consumer’s income, the demand for milk is increased by only
10%.

a) Ey = 1

b) Ey = 25

c) Ey = 0.4

d) Ey = 2.5

Answer: (c) Ey = 0.4

21. price of a chocolate increases from Rs.10 to Rs.20 and the associated demand decreases
from 10 chocolates to 5 chocolates. Calculate Price Elasticity of Demand by using Percentage Method

a) Ed > 1

b) Ed = 1

c) Ed < 1

d) Ed = 0

Answer: (c)Ed <1

22. Which of the following pairs of goods is not an example of complementary goods?

(a) Tea and sugar.

(b) Tea and coffee.

(c) Pen and ink.

(d) Shirt and trousers.

Answer: (b) Tea and coffee.

23. What will happen in the wheat market if buyers are expecting higher wheat prices in the
near future?
(a) The demand for wheat will increase.

(b) The demand for wheat will de-crease.

(c) The demand for wheat will be unaffected.

(d) None of the above.

Answer: (a) The demand for wheat will increase.

24. An advance in technology would shift the

a) supply curve to the right.

b) supply curve to the left.

c) demand curve to the right.

d) demand curve to the left.

Answer: a) supply curve to the right.

25. ______ is the central problem in economics.

a) Scarcity

b) Production

c) Revenue

d) Capital

Answer: (a) Scarcity

26. Suppose that the price of sugar falls. How does this change affect the supply of ice cream?

a) supply curve for ice cream shifts to the left.

b) supply curve for ice cream shifts to the right.

c) Expansion of supply curve for ice cream

d) Contraction of supply curve for ice cream

Answer: b) supply curve for ice cream shifts to the right.

27. In case of inferior goods, with rise of income of consumers, demand of good will ________?
a) Increases

b) Decreases

c) No change

d) None of these

Answer: (b) Decreases

28. The price of hot dogs increases by 22% and the quantity of hot dogs demanded falls by 25%.
This indicates that demand for hot dogs is:

a. Elastic.

b. Inelastic.

c. Unitarily elastic.

d. Perfectly elastic.

Answer: (a) Elastic.

29. Which of the following is the major causes of economic problems?

a) unlimited human wants

b) alternative usage of resources

c) scarcity of economic resources

d) All of the above

Answer: (d) All of the above

30. If there is an increase of 25% in consumer’s income, the demand for milk is increased by only
35%. Calculate Income Elasticity of Demand by percentage method

a) Ey = 1

b) Ey = 0.71

c) Ey = 0.4

d) Ey = 1.4

Answer: (d) Ey = 1.4

31. Ram has a monthly income of $1,500 and every month he spends his entire income on pizzas
and shoes. The price of a pizza is $10, and the price of a pair of shoes is $50. Which of the following
combinations is a point of Ram’s budget curve?

a) 150 pizzas and 0 pairs of shoes

b) 100 pizzas and 10 pairs of shoes

c) 50 pizzas and 20 pairs of shoes

d) all of the above

Ans. D. all of the above

32. The budget constraint of the consumer shows the different consumption bundles that yield
the same amount of utility.

a) True

b) False

Ans. B. False

33. The most common shape of an indifferent curve is.

(a) parallel to x axis

(b) concave to the origin

(c) convex to the origin

(d) parallel to y axis

Ans – option (c) convex to the origin

34. What is the difference between a normal good and an inferior good?

a) Normal goods are more expensive than inferior goods

b) Normal goods have a positive income elasticity of demand, while inferior goods have a
negative income elasticity of demand

c) Normal goods are of higher quality than inferior goods

d) Normal goods are produced by large corporations, while inferior goods are produced by
small businesses

Ans: B. Normal goods have a positive income elasticity of demand, while inferior goods have a
negative income elasticity of demand

35. When M.U keeps on decreasing, T.U increases as long as the M.U is

(a) positive

(b) negative

(c) constant

(d) none of the above

Answer: (a) positive

36. What is the equi-marginal principle of economics?

a) A principle that states that average utility must be equalized across all goods and services

b) A principle that states that total utility must be equalized across all goods and services

c) A principle that states that marginal utility must be equalized across all goods and services

d) None of the above

Ans: C. A principle that states that marginal utility must be equalized across all goods and services

37. A consumer of two goods X and Y where the price of good X is 10 and price of good Y is 20
respectively. If MUx is 20 utils then what will be MUy?

a) 100

b) 25

c) 250

d) 40

Ans. d) 40

38. Consumer’s Equilibrium is attained when

(a) the consumer selects the combination which reaches the highest attainable indifference curve.

(b) price line is tangential to the indifference curve.

(c) when the marginal rate of substitution of the goods X and Y is equal to the ratio between the
prices of the two goods.

(d) All of the Above.

Answer: (d) All of the Above.

39. Given X axis for Good x and Y axis for Good y, When income consumption curve (ICC) tilted
towards X axis, which one of the following is correct.

a) Good x is inferior and good y is normal

b) Good y is inferior and good x is normal

c) Good x and good y are normal

d) Good x and good y are inferior

Answer: Option b) : Good y is inferior and good x is normal

40. If MUx > Px , a utility maximizing consumer will purchase _____ of the commodity

(a) more

(b) Less

(c) Same
(d) none of the above

Answer: (a) more

41. In indifference map, higher IC indicates:

(a) Lower level of satisfaction

(b) same level of satisfaction

(c) Higher level of satisfaction

(d) either higher or same level of satisfaction

Ans. (c) Higher level of satisfaction

42. A consumer will maximize his total utility when he allocates his income among various
commodities in such a way that the _________ utility of the last rupee spent on each commodity is
______

(a) total, equal

(b) marginal, unequal

(c) marginal, equal

(d) Total, unequal

Ans. (c) marginal, equal

43. Two indifference curves cannot cut each other because:

(a) They slope downwards.

(b) They are convex to origin

(c) They represent those combinations of two goods that give the same satisfaction.

(d) Each indifference curve represents a different level of satisfaction

Ans. (d) Each indifference curve represents a different level of satisfaction

44. How are two goods (apple and orange) related when, as a result of rise in the price of apples,
demand for oranges increases?

(a) substitute goods

(b) complementary goods

(c) normal goods

(d) inferior goods

Ans. (a) substitute goods

45. What is the formula for calculating M.U of nth term ?

(a) TU n + TU n+1

(b) TU n – TU n+1
(c) TU n + TU n-1

(d) TU n – TU n -1

Answer: (d) TU n – TU n -1

46. What is Point of Satiation

(a) Point at which TU Is maximum

(b) Point at which MU is least

(c) Point at which MU is maximum

(d) Point at which MU = TU

Ans.(a) Point at which TU Is maximum

47. Which type of utility is in the situation when a carpenter is making a table?

a) Place

b) Form

c) Time

d) Marginal

Ans. a) Form Utility

48. Which of the following must be true when the marginal utility is negative?

a) The average utility is positive.

b) The average utility is negative.

c) The total utility is decreasing.

d) The total utility is negative.

Ans. c) The total utility is decreasing.

49. Why is indifference curve convex to origin?

(a)Due to law of diminishing marginal utility

(b) Due to monotonic preferences

(c) Due to continuous decline of marginal rate of substitution

(d) Both a and b

Ans. (c) Due to continuous decline of marginal rate of substitution

50. Smoking a cigarette has harmful effects on a person, even after this, why does it possess utility.

(a) Utility is not measurable

(b) Utility is abstract

(c) Utility is different from usefulness

(d) none of the above

Ans. (c) Utility is different from usefulness

51. A consumer attains equilibrium, in case of one commodity, when:

(a) MUx = MUm.Px

(b) Mux< MUm.Px

(c) MUx>Px

(d) MUx<px

Ans. (a) MUx = MUm.Px

52. The utility maximizing consumer must allocate his income among various commodities in such a
way that the last unit of money spent on each commodity gives him the same Marginal Utility. Name
this Law

(a) Law of Equi-Marginal utility

(b) Consumer Equilibrium Law

(c) Law of Diminishing Marginal Utility

(d) Law of Equilibrium Satisfaction

Ans. (a) Law of Equi-Marginal utility

Conceptual Questions:
1. What is Economics and how it differs from Economy?
2. Briefly explain about Managerial Economics?
3. What are the importance of studying economics ?
4. Mention two main differences between micro and macro economics.
5. What are the basic economic problems?
6. What are the main three reasons for economic problems?
7. What is equilibrium Analysis?
8. What is Positive Economics?
9. What is Normative economics
10. Define the term Demand?
11. Briefly explain law of demand?
12. What is demand schedule?
13. What is demand curve?
14. What do you mean by movement of demand curve along the demand curve?
15. What do you mean by shift of demand curve?
16. Define the term supply ?
17. Briefly explain law of supply ?
18. What is supply schedule?
19. What is supply curve?
20. What do you mean by movement of supply curve along the supply curve?
21. What do you mean by shift of supply curve?
22. What do you mean by elasticity of demand?
23. What are the three types of elasticity?
24. What do you mean by price elasticity of demand?
25. What is the formula of price elasticity of demand?
26. What is cross elasticity of demand ?
27. What is income elasticity of demand?
28. What is the formula for arc elasticity of demand?
29. What is elasticity of supply?
30. What is utility?
31. What do you mean by consumer behaviour?
32. What are the types of utility?
33. What do you mean by cardinal utility approach?
34. What do you mean by ordinal utility approach?
35. Define total utility?
36. Define marginal utility?
37. What is the formula for total utility?
38. What is the formula for marginal utility?
39. What is point of satiety?
40. What are the two approaches of Cardinal utility analysis ?
41. What is law of diminishing marginal utility?
42. What is the law of Equi-marginal utility?
43. What is the concept of indifference curve?
44. What is marginal rate of substitution (MRS) ?
45. What is indifference map?
46. What is budget line?
47. What do you mean by income consumption curve (ICC)?
48. What is the slope of ICC Curve for normal and luxury goods?
49. What do you mean by price consumption curve?
50. What is consumer surplus?