Part A: MCQs

Part A: MCQs 1. Price Elasticity of Demand measures: a) Change in supply due to price b) Responsiveness of quantity demanded to price change c) Change in income due to price d) Production efficiency 2. If PED > 1, demand is: a) Inelastic b) Perfectly elastic c) Elastic d) Unit elastic 3. Goods with negative income elasticity are called: a) Normal goods b) Inferior goods c) Substitute goods d) Complementary goods 4. If the price of coffee increases and demand for tea increases, the goods are: a) Complements b) Substitutes c) Inferior goods d) Unrelated goods 5. A vertical demand curve represents: a) Perfectly elastic demand b) Perfectly inelastic demand c) Unit elastic demand d) Elastic demand 6. When demand is elastic, a price decrease will: a) Decrease total revenue b) Increase total revenue c) Not affect revenue d) Stop production 7. Cross elasticity for complementary goods is: a) Positive b) Negative c) Zero d) Infinite 8. Which of the following goods usually has inelastic demand? a) Luxury cars b) Designer handbags c) Medicine d) Vacation trips 9. If PED = 1, demand is: a) Elastic b) Inelastic c) Unit elastic d) Perfectly elastic 10. If a small price increase causes demand to fall to zero, demand is: a) Perfectly elastic b) Inelastic c) Unit elastic d) Perfectly inelastic Part B: Numericals 1. Price of a product increases from Rs. 100 to Rs. 120. Quantity demanded falls from 50 units to 40 units. 1. Calculate Price Elasticity of Demand (PED). 2. State whether demand is: Elastic Inelastic Unit elastic Given: - Initial Price (P1) = Rs. 100 - New Price (P2) = Rs. 120 - Initial Quantity (Q1) = 50 units - New Quantity (Q2) = 40 units Step 1: Formula for PED (midpoint method) PED = (Percentage change in quantity demanded) / (Percentage change in price) PED = ((Q2 - Q1)/((Q1 + Q2)/2)) / ((P2 - P1)/((P1 + P2)/2)) Step 2: Calculate percentage changes Quantity change: Q2 - Q1 = 40 - 50 = -10 Average quantity: (50 + 40)/2 = 45 % change in quantity: -10 / 45 = -0.2222 or -22.22% Price change: P2 - P1 = 120 - 100 = 20 Average price: (100 + 120)/2 = 110 % change in price: 20 / 110 = 0.1818 or 18.18% Step 3: Calculate PED PED = -22.22% / 18.18% = -1.22 Step 4: Interpret Ignore negative sign PED = 1.22 > 1 ? Demand is Elastic Answer: - PED = 1.22 - Demand is Elastic 2. Income Elasticity of Demand (YED) Given: - % change in income = 10% - % change in demand = 15% Step 1: Formula YED = (Percentage change in quantity demanded) / (Percentage change in income) YED = 15% / 10% = 1.5 Step 2: Interpret YED > 0 ? Normal good YED > 1 ? Luxury good Answer: - YED = 1.5 - Good is Normal