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InterviewSolution
This section includes InterviewSolutions, each offering curated multiple-choice questions to sharpen your knowledge and support exam preparation. Choose a topic below to get started.
| 1. |
Give meaning of perfectly elastic demand and perfectly inelastic demand of a commodity. |
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Answer» Perfectly Inelastic Demand: When demand is perfectly inelastic, quantity demanded for a good does not change in response to a change in price. Perfectly Elastic Demand: When the demand for a good is perfectly elastic, any increase in the price will cause the demand to drop to zero. |
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| 2. |
Price elasticity of demand of a good is (-) 2. At a price of Rs. 10 per unit 40 units of this good are bought . How units will be bought at a price of Rs. 11 per unit ? Calculate. |
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Answer» `E_(P)=(P)/(Q)xx(DeltaQ)/(DeltaP)` `(-)2=(10)/(40)xx(DeltaQ)/(1)` `(-)80=10DeltaQ` `DeltaQ=-8` New `Q=Q+DeltaQ=40+(-8)=32` units. |
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| 3. |
The quantity demanded of a commodity rises from 800 units to 850 units when its price falls from Rs. 20 per unit to Rs. 19 per unit . Calculate its elasticity of demand. |
| Answer» `E_(P)=(%"change in " Q_(d))/(% " change in P")=((50)/(800)xx100)/(-(1)/(20)xx100)=(-)1.25.` | |
| 4. |
At a price of Rs. 50 per unit the quantity demanded of a commodity is 1000 units . When its price falls by 10 percent , its quantity demanded rises to 1080 units . Calculate its price elasticity of demand . Is its demand inelastic ? Given reasons for your answer. |
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Answer» `E_(P)=(P)/(Q)xx(DeltaQ)/(DeltaP)=(50)/(1000)xx(80)/(-5)=(-)(4)/(5)=(-)0.8` The demand is inelastic because the absolute value of clasticity is less than 1 (sign ignored). |
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| 5. |
When price of a good falls by 10 percent , its quantity demanded rises from 40 units to 50 units. Calculate price elasticity of demand by the percentage method. |
| Answer» `E_(P)=(%" change in Qty . Demanded")/(% " change in price")=((10)/(40)xx10)/(-10)=(25)/(-10)=(-)2.5` | |
| 6. |
Price elasticity of demand (-3) means 3 percent fall in demand due to :A. 3 per cent fall in priceB. 3 per cant rise in priceC. One per cent rise in priceD. One per cent fall in price |
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Answer» Correct Answer - c |
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| 7. |
Price elasticity of demand measure shows :A. Response of price to change in demandB. Response of demand to change in priceC. Degree of response of price to change in demandD. Degree of response of demand to change in price |
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Answer» Correct Answer - d |
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| 8. |
What is the relation between good x and y in each case , if with the rise in price of x demand for good y (i) rises and (ii) falls ? Given reason. |
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Answer» (i) Goods x and y are substitutes . It is because when price of x rises , y becomes relatively cheaper in relation to y. The consumer buys more of by reducing demand for x. (ii) Goods x and y are complementary goods . It because x and y are used jointly . When with the rise in price of good x , demand for x falls , demand for y also falls. |
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| 9. |
Show that there is inverse relation between price of a commodity and its quantity demanded . Use Utility Analysis. |
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Answer» Assuming that the consumer consumes only two goods X and Y and is in equilibrium. Then , `(MU_(x))/(P_(x))=(MU_(y))/(P_(y))` Now suppose Px falls ,then `(MU_(x))/(P_(x))gt(MU_(y))/(P_(y))` Since per rupee marginal utility of X is greater than per rupee marfinal utility of Y , the consumer will buy more of X . It shows inverse relation between price of X and demand for X. |
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| 10. |
The measure of price elasticity of demand of a normal good carries minus sing while price elasticity of supply carries plus sing . Explain why ? |
| Answer» The measure of price elasticity of demand has a minus sign because there is an inverse relation between price and demand of a normal good , while measure of price elasticity of supply of a good. | |
| 11. |
Price elasticty of demand of good X is -2 and of good Y is -3. which of the two goods is more price elastic and why ? |
| Answer» Good Y is more price elastic because one percent change in price of Y will lead to 3 percent change in demand for Y . It is higher than the percentage change in demand for good X. | |
| 12. |
A consumer consumes only two goods X and Y whose prices are Rs. 4 and Rs. 5 per unit respectiveely. If the consumer chooses a combination of the two goods with marginal utility of X equal to 5 and that of Y equal to 4 , is the consumer in equilibrium ? Given reasons . What will a rational consumer do in this situation ? Use utility analysis. |
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Answer» Given `P_(x)=4,P_(y)=5and MU_(x)=5,MU_(y)=4` , a consumer will be in equilibrium when : `(MU_(x))/(P_(x))=(MU_(y))/(P_(y))` Substituting values , we find that `(5)/(4)gt(4)/(5)" Or " (MU_(x))/(P_(x))gt(MU_(y))/(P_(y))` Since per rupess `MU_(x)` is higher than per rupee `MU_(y)` , consumer is not in equilibrium. The consumer will continue till `(MU_(x))/(P_(x))and(MU_(y))/(P_(y))` are equal and consumer is in equilibrium. |
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| 13. |
Price elasticity of demand of a good is (-)2. The consumer buys a certain quantity of this good at a price of Rs. 8 per unit . When the price falls he buys 50 percent more quantity . What is the new price ? |
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Answer» `E_(P)=(% "change in " Q_(d))/(% " change in P")` `(-)2=(50%)/(% " change in P")` `%` Change in P `=(50)/(-2)=-25%` New `P=P+%` change in P `=8+(-25% " change of " 8) =8-2=Rs.6` per unit. |
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| 14. |
When price of a good is Rs. 13 per units , the consumer buys 11 units of that good . When price rises to Rs. 15 per unit , the consumer continues to buy 11 units . Calculate price elasticity of demand. |
| Answer» `E_(P)=(P)/(Q)xx(DeltaQ)/(DeltaP)=(13)/(11)xx(0)/(2)=0` | |
| 15. |
When price of a good is Rs. 7 per unit a consumer busy 12 units . When price fails to Rs. 6 per unit he spends Rs. 72 on the good . Calculate price elasticity of demand by using percentage method. Comment on the likely shape of demand curve based on based on this measure of elasticity. |
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Answer» `{:(" Price"," Demand"),(" " 7," "12),(" "6," "(72)/(6)=12):}` `E_(P)=(P)/(Q)xx(DeltaQ)/(DeltaP)` `=(7)/(12)xx(0)/(-1)=0` The demand curve is parallel to the y- axis. |
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| 16. |
There is an item of consumption crucial for health of the people . Government decides to subsidize it . After subsidy , government found that on an average a family is now spending more on this item. Give reason. |
| Answer» This might be because of the fact that elasticity of that good might be greater than one. | |
| 17. |
A consumption good has harmful effects on health . Government wants to bring its consumption down by imposing heavy tax on it . How much success government will be able to achieve will depend price elasticity of demand. Explain how ? |
| Answer» If the demand for the good is elastic, then even a small amount of tax will help in reducing its demand significantly whereas if the demand for the good is inelastic then the government will have to impose a heavy tax in order to induce consumers to reduce the demand of the given product. | |
| 18. |
When price of a priduct doubles , its demad falls to half of what it was before the price change. Calculate price elasticity of demand . |
| Answer» `E_(P)=(% " change in " Q_(d))/(% " change in P")=(-50%)/(100%)=(-)0.5` | |
| 19. |
A consumer consumes only two goods A and B and is in equilicbrium . Price of good a falls . Show that it will lead to rise in dmand for good A . Use Utility Analysis. |
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Answer» When consumer is in equilibrium : `(MU_(A))/(P_(A))=(MU_(B))/(P_B)` When price of good A `(P_(A))` falls , then `(MU_(A))/(P_(A))gt(MU_(B))/(P_B)` Since per rupee marginal utility of A `(MU_(A))` is now higher than per rupee `MU_(B)` , the consumer will divert expenditure from good B to good A. This raises demand for good A. |
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| 20. |
Explain the relation between time period and `E_(P)` with the help of an example. |
| Answer» Demand is more price elastic, the longer that consumers have to respond to a price change. They have more time to search for cheaper substitutes and switch their spending. | |
| 21. |
Explain the percentage change method of measuring `E_(P)` . Also give an example. |
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Answer» The price elasticity of demand is measured by its coefficient (Ep). This coefficient (Ep) measures the percentage change in the quantity of a commodity demanded resulting from a given percentage change in its price. Thus,where q refers to quantity demanded, p to price and Δ to change. If EP>1, demand is elastic. If EP< 1, demand is inelastic, and Ep= 1, demand is unitary elastic. |
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| 22. |
Explain the relaction between close substitutes of a good and `E_(P)` . |
| Answer» If close substitutes for a particular good are available in the market, then the demand for the good would be relatively more elastic. For example, since tea, a close substitute for coffee, is available in the market, a rise in the price of coffee would result in a considerable fall in its demand and a consequent rise in the demand for tea. | |
| 23. |
Define `E_(P)` . Explain the percentage change method of measuring `E_(P)`. |
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Answer» The price elasticity of demand is measured by its coefficient (Ep). This coefficient (Ep) measures the percentage change in the quantity of a commodity demanded resulting from a given percentage change in its price. Thus,where q refers to quantity demanded, p to price and Δ to change. If EP>1, demand is elastic. If EP< 1, demand is inelastic, and Ep= 1, demand is unitary elastic. |
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| 24. |
Explain briefly any two factors determining `E_(P)` . |
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Answer» 1. Nature of the Good: The elasticity of demand for a good depends upon the nature of the good, i.e., whether the good is a necessary or a luxury good. The elasticity of demand for a necessary good is relatively small. For example, if the price of such a good rises, its buyers generally are not able to reduce its demand. Again, if the price of a necessary good diminishes, the buyers cannot considerably increase their purchase of the good, since the good is a necessity, they had been purchasing the required quantities at the previous price. For example, rice is very much a necessary good to us, and so its demand cannot be reduced considerably when its price rises. 2. Availability of Substitute Goods: If close substitutes for a particular good are available in the market, then the demand for the good would be relatively more elastic. For example, since tea, a close substitute for coffee, is available in the market, a rise in the price of coffee would result in a considerable fall in its demand and a consequent rise in the demand for tea. |
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| 25. |
Explain any three factors determining `E_(P)`. |
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Answer» 1. Nature of the Good: The elasticity of demand for a good depends upon the nature of the good, i.e., whether the good is a necessary or a luxury good. The elasticity of demand for a necessary good is relatively small. For example, if the price of such a good rises, its buyers generally are not able to reduce its demand. Again, if the price of a necessary good diminishes, the buyers cannot considerably increase their purchase of the good, since the good is a necessity, they had been purchasing the required quantities at the previous price. For example, rice is very much a necessary good to us, and so its demand cannot be reduced considerably when its price rises. 2. Availability of Substitute Goods: If close substitutes for a particular good are available in the market, then the demand for the good would be relatively more elastic. For example, since tea, a close substitute for coffee, is available in the market, a rise in the price of coffee would result in a considerable fall in its demand and a consequent rise in the demand for tea. 3. Number and Variety of Uses of the Product: The more the number and variety of uses of a good, the more would be its elasticity of demand. One such good is electricity that is used in a number of ways. For example, use of electricity for the purposes of lighting, heating, cooking, ironing and also use electricity as a source of power in industries. |
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| 26. |
Explain the relaction between habit and `E_(P)` . |
| Answer» The habits of people also play an important role in determining the extent of the elasticity of demand for a good. Sometimes some people completely surrender to the consumption of articles of addiction like drugs, alcohol and tobacco products. Consequently, if the prices of these goods increase, demand for them do not decreases considerably and so their elasticity of demand will be relatively small. | |
| 27. |
Explain briefly and three factors influencing `E_(P)`. |
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Answer» 1. Nature of the Good: The elasticity of demand for a good depends upon the nature of the good, i.e., whether the good is a necessary or a luxury good. The elasticity of demand for a necessary good is relatively small. For example, if the price of such a good rises, its buyers generally are not able to reduce its demand. Again, if the price of a necessary good diminishes, the buyers cannot considerably increase their purchase of the good, since the good is a necessity, they had been purchasing the required quantities at the previous price. For example, rice is very much a necessary good to us, and so its demand cannot be reduced considerably when its price rises. 2. Availability of Substitute Goods: If close substitutes for a particular good are available in the market, then the demand for the good would be relatively more elastic. For example, since tea, a close substitute for coffee, is available in the market, a rise in the price of coffee would result in a considerable fall in its demand and a consequent rise in the demand for tea. 3. Number and Variety of Uses of the Product: The more the number and variety of uses of a good, the more would be its elasticity of demand. One such good is electricity that is used in a number of ways. For example, use of electricity for the purposes of lighting, heating, cooking, ironing and also use electricity as a source of power in industries. |
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| 28. |
What is the relation between the price of a good and the expenditure on that good when (a) `E_(P)gt1 and(b) E_(P)lt1`? |
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Answer» (a) When elasticity is greater than one, price and expenditure move in the opposite direction. (b) When elasticity is less than one, price and expenditure move in the opposite directions. |
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| 29. |
Explain the concept of (MRS) with the help of a numerical example . Also explain its behaviour along the Indifference Curve. |
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Answer» Marginal Rate of Substitution (MRS) means the rate at which a consumer is willing to sacrifice quantity of one good to obtain one more unit of the other good. Let the two goods consumed be A and B . Suppose the following combinations of these two goods have same utility level for him : `{:(" Good A"," Good B"," MRS"),(" "1," "8," "-),(" "2," "4," "4B:1A),(" "3," "1," "3B:1A):}` The consumer is willing to sacrifice 4B to obtain second unit of A. For the third unit of A, he is willing to sacrifice less because marginal utility of A decreases as he consumes more of A. |
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