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CHSE Odisha Business Economics study materials
CHSE Odisha Business Economics study resources

CHSE Odisha Business Economics practice questions

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Question 1Introduction to Business Economics and Basic Concepts

Business economics is best described as the study of how firms apply economic reasoning to which of the following?

  1. Decision-making about production, pricing and resource allocation Correct answer.
  2. Recording day-to-day cash receipts in ledgers
  3. Designing advertisements for retail customers
  4. Training workers in machine operation

Explanation

Business economics (managerial economics) applies microeconomic tools such as demand, cost and market structure to the choices managers make about output, price and inputs. It is normative and prescriptive, aiming to guide decisions rather than merely describe the economy. Accounting, advertising and shop-floor training are separate functional areas.

Question 2Introduction to Business Economics and Basic Concepts

Which statement correctly distinguishes microeconomics from macroeconomics in the context of business decisions?

  1. Microeconomics studies individual units such as a firm or household, while macroeconomics studies aggregates like national income Correct answer.
  2. Microeconomics and macroeconomics differ only in the data sources they use, not in scope
  3. Microeconomics deals only with government policy, while macroeconomics deals only with private firms
  4. Microeconomics studies national income, while macroeconomics studies a single firm's costs

Explanation

The dividing line is the unit of analysis: microeconomics examines individual decision units (consumers, firms, single markets), whereas macroeconomics examines economy-wide aggregates such as output, employment and the general price level. A manager pricing one product is applying microeconomics, while the same manager reading inflation forecasts is using macroeconomics.

Question 3Introduction to Business Economics and Basic Concepts

A firm uses a plot of land it already owns for a new factory. In business economics, the rent that the land could have earned if leased to another party is called what?

  1. Sunk cost
  2. Opportunity cost Correct answer.
  3. Fixed cost
  4. Marginal cost

Explanation

Opportunity cost is the value of the next best alternative forgone when a resource is committed to one use. By building on the land, the firm gives up the rental income it could have received, so that forgone rent is a genuine economic cost even though no cash is paid.

Question 4Introduction to Business Economics and Basic Concepts

According to the law of demand, other things remaining constant, what happens when the price of a good rises?

  1. Quantity demanded falls because consumers substitute away and purchasing power shrinks Correct answer.
  2. Quantity demanded rises because the good becomes more valuable
  3. Quantity demanded stays unchanged because tastes are fixed
  4. Demand shifts to the right because sellers offer more

Explanation

The law of demand states an inverse relationship between price and quantity demanded, holding other determinants constant. A higher price pushes some buyers toward substitutes (substitution effect) and reduces real purchasing power (income effect). The movement is along the demand curve, not a shift of it.

Question 5Introduction to Business Economics and Basic Concepts

A firm's total fixed cost is ₹500 and total variable cost at 20 units of output is ₹1,500. What is the average total cost at 20 units?

  1. ₹75
  2. ₹100 Correct answer.
  3. ₹2,000
  4. ₹125

Explanation

Total cost equals fixed cost plus variable cost, so here it is ₹500 + ₹1,500 = ₹2,000. Average total cost is total cost divided by output: ₹2,000 ÷ 20 = ₹100 per unit. The figure ₹2,000 is total cost, not average cost.

Question 6Introduction to Business Economics and Basic Concepts

Which of the following is a normative statement in business economics?

  1. Average cost fell as output expanded from 100 to 200 units
  2. The firm's sales rose by 8 per cent last year
  3. An increase in excise duty raises the market price of the product
  4. The government ought to reduce excise duty on small firms Correct answer.

Explanation

A normative statement expresses a value judgement about what should be done and cannot be tested purely by evidence. The word 'ought' signals a policy recommendation. The other options are positive statements describing what is or what happens, which can be verified against data.

Question 7Introduction to Business Economics and Basic Concepts

A firm's demand curve shifts to the right. Which factor could explain this movement?

  1. A rise in consumers' income for a normal good Correct answer.
  2. A technological improvement in the firm's factory
  3. A rise in the price of a key raw material
  4. A fall in the price of the good itself

Explanation

A rightward shift of demand reflects an increase in demand at every price, caused by a non-price determinant. Higher income for a normal good raises consumers' ability to buy at each price, shifting demand right. Changes in the good's own price move quantity demanded along the existing curve instead.

Question 8Introduction to Business Economics and Basic Concepts

The supply curve of a commodity typically slopes upward to the right because:

  1. consumers buy less of a good as its price rises
  2. costs of production fall automatically as output rises
  3. firms always produce a fixed quantity regardless of price
  4. higher prices encourage firms to expand output as production becomes more profitable Correct answer.

Explanation

A higher price raises the revenue from each unit sold, so producers are willing to supply more, and rising marginal costs make additional units worthwhile only at higher prices. This produces the positive price-quantity relationship shown by an upward-sloping supply curve.

Question 9Introduction to Business Economics and Basic Concepts

At a market price above the equilibrium price, which situation arises?

  1. Equilibrium, because quantity supplied equals quantity demanded
  2. Excess demand, pushing the price further up
  3. Shortage, because sellers withdraw from the market
  4. Excess supply, pushing the price down toward equilibrium Correct answer.

Explanation

When the price exceeds equilibrium, quantity supplied exceeds quantity demanded, creating a surplus. Unsold stock induces sellers to cut prices, and the price falls until the surplus is eliminated at equilibrium. Excess demand arises only when the price is below equilibrium.

Question 10Introduction to Business Economics and Basic Concepts

The price elasticity of demand for a product is 2. If its price rises by 10 per cent, what is the approximate change in quantity demanded?

  1. It falls by 2 per cent
  2. It falls by 5 per cent
  3. It falls by 20 per cent Correct answer.
  4. It rises by 20 per cent

Explanation

Price elasticity of demand measures the percentage change in quantity demanded divided by the percentage change in price. With an elasticity of 2 and a 10 per cent price increase, quantity demanded changes by 2 × 10 = 20 per cent, and the direction is negative because demand is inversely related to price.

Question 11Introduction to Business Economics and Basic Concepts

A firm's revenue rises when it increases price because demand is inelastic. What does inelastic demand mean here?

  1. The elasticity coefficient is greater than one in absolute value
  2. Quantity demanded changes by the same percentage as price
  3. The elasticity coefficient is less than one in absolute value Correct answer.
  4. The elasticity coefficient is exactly zero in every case

Explanation

Demand is inelastic when the absolute value of the price elasticity is less than one, so quantity demanded responds proportionately less than price. The percentage fall in quantity is smaller than the percentage rise in price, so total revenue increases when price is raised.

Question 12Introduction to Business Economics and Basic Concepts

Which set of curves is used to show the maximum output obtainable from given resources and technology?

  1. The average fixed cost curve
  2. The Lorenz curve
  3. The production possibility frontier Correct answer.
  4. The demand curve

Explanation

The production possibility frontier traces combinations of two goods that can be produced when all resources are fully and efficiently used with a given technology. Points on the frontier are efficient, points inside indicate underused resources, and points beyond are unattainable.

Question 13Introduction to Business Economics and Basic Concepts

A firm can produce either 100 units of good X or 50 units of good Y with its fixed resources. What is the opportunity cost of one unit of good X?

  1. Two units of good Y
  2. One unit of good Y
  3. Fifty units of good Y
  4. Half a unit of good Y Correct answer.

Explanation

Opportunity cost is the amount of the alternative good sacrificed per unit of the chosen good. Sacrificing 50 units of Y to gain 100 units of X means each unit of X costs 50 ÷ 100 = 0.5 units of Y. The constant trade-off reflects a linear frontier.

Question 14Introduction to Business Economics and Basic Concepts

As output expands, a firm's average fixed cost falls continuously while average variable cost begins to rise. What happens to average total cost?

  1. It is U-shaped, falling at first and then rising when rising average variable cost outweighs falling average fixed cost Correct answer.
  2. It always falls because fixed cost per unit is falling
  3. It rises from the very first unit because variable cost is positive
  4. It remains constant because the two effects cancel exactly

Explanation

Average total cost is the sum of average fixed cost and average variable cost. Early on, spreading fixed cost over more units dominates, so average total cost falls; later, diminishing returns make average variable cost rise faster than average fixed cost falls, so average total cost turns upward, giving the familiar U-shape.

Question 15Introduction to Business Economics and Basic Concepts

Which of the following best describes the relationship between total utility and marginal utility as consumption of a good increases?

  1. Total utility and marginal utility both remain constant
  2. Total utility falls while marginal utility rises throughout
  3. Total utility is zero whenever marginal utility is positive
  4. Total utility rises while marginal utility falls, and total utility peaks when marginal utility becomes zero Correct answer.

Explanation

The law of diminishing marginal utility states that each additional unit consumed adds less satisfaction than the previous one. Total utility therefore keeps rising at a decreasing rate as long as marginal utility is positive, and reaches its maximum where marginal utility is zero; beyond that point total utility falls.

Question 16Introduction to Business Economics and Basic Concepts

A manager must choose between two mutually exclusive projects. Project A yields a net return of ₹40,000 and Project B yields ₹55,000; only one can be undertaken. What is the opportunity cost of choosing Project A?

  1. ₹55,000, the forgone return of Project B Correct answer.
  2. ₹40,000, the return of the chosen project
  3. ₹15,000, the difference between the two returns
  4. Zero, because the projects are mutually exclusive

Explanation

Opportunity cost is measured by the value of the best alternative forgone, which here is the ₹55,000 net return from Project B. The return of the chosen project is a benefit, not a cost, and the ₹15,000 difference is only the net advantage of B over A.

Question 17Introduction to Business Economics and Basic Concepts

A firm operating in a perfectly competitive market faces a horizontal demand curve. What does this imply about its marginal revenue?

  1. Marginal revenue is zero because the demand curve is flat
  2. Marginal revenue equals price, so the firm is a price taker Correct answer.
  3. Marginal revenue exceeds price at every level of output
  4. Marginal revenue falls as output rises because the firm must cut price

Explanation

In perfect competition the individual firm is too small to influence the market price, so it can sell any quantity at the prevailing price. Its demand curve is horizontal at that price, and each extra unit adds exactly the price to total revenue, making marginal revenue equal to price.

Question 18Introduction to Business Economics and Basic Concepts

A monopolist faces a downward-sloping demand curve. How does its marginal revenue compare with price?

  1. Marginal revenue is less than price because selling an extra unit requires lowering the price on all units Correct answer.
  2. Marginal revenue is greater than price at all output levels
  3. Marginal revenue equals price because the monopolist sets the price
  4. Marginal revenue is unrelated to the demand curve

Explanation

To sell one more unit, a monopolist must lower the price not only on that unit but on all units previously sold at the higher price. The gain from the extra unit is therefore offset by the revenue lost on existing units, so marginal revenue lies below price and the marginal revenue curve slopes twice as steeply as a linear demand curve.

Question 19Introduction to Business Economics and Basic Concepts

A firm's total revenue is ₹8,000 at 100 units and ₹8,400 at 110 units. What is the marginal revenue of the additional 10 units, and what does the result suggest?

  1. ₹40 in total, suggesting the firm should stop producing
  2. ₹800 in total, or ₹80 per unit, suggesting price is constant
  3. ₹400 in total, or ₹40 per unit, suggesting demand is downward-sloping Correct answer.
  4. ₹8,400, because marginal revenue equals total revenue at the higher output

Explanation

Marginal revenue is the change in total revenue divided by the change in output: (₹8,400 − ₹8,000) ÷ 10 = ₹40 per unit. Because total revenue rose by less than the extra units would fetch at the original average price of ₹80, the firm must be lowering price to sell more, which is consistent with downward-sloping demand.

Question 20Introduction to Business Economics and Basic Concepts

A firm's production function shows that adding a third worker raises output by 15 units while the second worker added 20 units. Which principle does this illustrate, and what should the manager infer?

  1. The law of diminishing marginal returns, so the marginal product of labour is falling as labour is added to fixed capital Correct answer.
  2. Negative returns, because the third worker added less than the second
  3. Constant returns, because total output is still rising
  4. Increasing returns, so more workers should be hired indefinitely

Explanation

With at least one input fixed, successive units of a variable input eventually add smaller increments to output, which is the law of diminishing marginal returns. Here the marginal product falls from 20 to 15 units, so the manager should weigh the falling marginal product against the wage before hiring further workers. Marginal product is still positive, so returns are diminishing rather than negative.

Question 21Demand and Supply Analysis

In demand analysis, which statement best describes the law of demand, other things remaining constant?

  1. Quantity demanded rises only when consumer income rises.
  2. Quantity demanded stays the same whatever the price.
  3. Quantity demanded rises as price falls, and falls as price rises. Correct answer.
  4. Quantity demanded rises as price rises, and falls as price falls.

Explanation

The law of demand states an inverse relationship between price and quantity demanded, assuming all other determinants such as income and tastes are held constant. This inverse relation produces a downward-sloping demand curve. The other statements either reverse the relation or confuse it with income effects.

Question 22Demand and Supply Analysis

A movement along a given demand curve for rice is caused by a change in which factor?

  1. Consumer preferences
  2. The price of rice itself Correct answer.
  3. Consumer income
  4. The price of wheat

Explanation

A change in the good's own price changes quantity demanded and is shown as movement along the existing demand curve. Changes in income, prices of related goods, or tastes shift the whole curve. This distinction between movement along and shift of the curve is fundamental.

Question 23Demand and Supply Analysis

Which pair of goods is the clearest example of substitutes?

  1. Car and petrol
  2. Bread and butter
  3. Tea and coffee Correct answer.
  4. Pen and ink

Explanation

Substitutes are goods that satisfy the same want, so a rise in the price of one raises demand for the other. Tea and coffee serve similar purposes and are easily swapped. The other pairs are complements used together.

Question 24Demand and Supply Analysis

If the price of coffee rises and this increases the demand for tea, the cross-price elasticity of demand between tea and coffee is:

  1. Equal to one
  2. Positive Correct answer.
  3. Negative
  4. Zero

Explanation

For substitutes, a rise in the price of one good increases demand for the other, giving a positive cross-price elasticity. Complements give negative values, and unrelated goods give near-zero values. The sign, not the magnitude, identifies the relationship.

Question 25Demand and Supply Analysis

The supply curve of a commodity slopes upward mainly because:

  1. Higher prices make additional production profitable for firms Correct answer.
  2. Costs fall as output expands
  3. Firms always produce at full capacity
  4. Consumers buy less at higher prices

Explanation

A higher price allows firms to cover the rising marginal cost of extra output, so more is offered for sale. This profitability motive explains the positive price-quantity relation in supply. Consumer behaviour explains demand, not supply.

Question 26Demand and Supply Analysis

An increase in the price of a raw material used in making biscuits will most likely:

  1. Cause movement down along the biscuit supply curve
  2. Leave the biscuit supply curve unchanged
  3. Shift the supply curve of biscuits to the left Correct answer.
  4. Shift the demand curve for biscuits to the right

Explanation

Input prices are a determinant of supply, and a cost increase reduces supply at every price, shifting the supply curve leftward. This is a shift, not movement along the curve. Demand is not directly shifted by production costs.

Question 27Demand and Supply Analysis

At a price above the equilibrium price in a competitive market, the immediate result is:

  1. Equilibrium quantity exchanged
  2. Excess demand, creating upward pressure on price
  3. A shortage equal to the surplus
  4. Excess supply, creating downward pressure on price Correct answer.

Explanation

Above equilibrium, quantity supplied exceeds quantity demanded, producing a surplus. Sellers reduce price to clear unsold stock, so price falls toward equilibrium. A shortage arises only below equilibrium.

Question 28Demand and Supply Analysis

A price ceiling set below the equilibrium price will typically produce:

  1. A persistent surplus of the good
  2. An automatic rise in equilibrium price
  3. No effect on the market
  4. A persistent shortage of the good Correct answer.

Explanation

A binding ceiling holds price below equilibrium, so quantity demanded exceeds quantity supplied and a shortage appears. Non-price rationing may then develop. A surplus would require a floor, not a ceiling.

Question 29Demand and Supply Analysis

Demand for salt is generally price inelastic because:

  1. Salt is a luxury good
  2. Salt is produced by many firms
  3. Salt has few close substitutes and forms a small part of the budget Correct answer.
  4. Salt has many close substitutes

Explanation

Inelastic demand arises when consumers cannot easily substitute the good and when its budget share is small, so quantity changes little when price changes. Salt fits both conditions. The number of producers affects supply, not the elasticity of demand.

Question 30Demand and Supply Analysis

If a 10 per cent fall in price raises quantity demanded by 25 per cent, the price elasticity of demand (using the simple percentage method) is:

  1. 25
  2. 0.25
  3. 0.4
  4. 2.5 Correct answer.

Explanation

Price elasticity of demand equals percentage change in quantity demanded divided by percentage change in price, ignoring sign. Here 25 divided by 10 gives 2.5, which is elastic. The value 0.4 reverses the ratio.

Question 31Demand and Supply Analysis

When demand is perfectly inelastic, the demand curve is:

  1. Upward sloping
  2. Vertical Correct answer.
  3. Horizontal
  4. Downward sloping but flat

Explanation

Perfectly inelastic demand means quantity demanded does not change at all when price changes, so the curve is vertical and elasticity equals zero. A horizontal curve represents perfectly elastic demand instead. Upward-sloping demand is an exceptional case, not perfect inelasticity.

Question 32Demand and Supply Analysis

A firm selling a product with elastic demand wants to raise total revenue. It should:

  1. Reduce price, since the quantity gain outweighs the price loss Correct answer.
  2. Raise price, since each unit then earns more
  3. Keep price unchanged in every case
  4. Raise price only if costs are rising

Explanation

With elastic demand, a given percentage price cut raises quantity demanded by a larger percentage, so total revenue rises. When demand is inelastic, the reverse holds. The revenue test links elasticity to the direction of the price change.

Question 33Demand and Supply Analysis

The income elasticity of demand for a normal necessity is typically:

  1. Negative
  2. Greater than one
  3. Positive but less than one Correct answer.
  4. Exactly zero

Explanation

For a normal necessity, demand rises with income but proportionately less, so income elasticity lies between zero and one. Luxuries show values above one, while inferior goods show negative values. The sign and size together classify the good.

Question 34Demand and Supply Analysis

The demand curve for a Giffen good is:

  1. Horizontal
  2. Vertical
  3. Upward sloping Correct answer.
  4. Downward sloping like an ordinary good

Explanation

For a Giffen good, the negative income effect of a price rise outweighs the substitution effect, so quantity demanded rises with price. This exceptional case gives an upward-sloping demand curve. It is distinct from an ordinary inferior good.

Question 35Demand and Supply Analysis

A simultaneous increase in demand and decrease in supply will definitely cause:

  1. No change in equilibrium quantity
  2. A rise in equilibrium quantity
  3. A rise in equilibrium price Correct answer.
  4. A fall in equilibrium price

Explanation

Higher demand and lower supply both push price upward, so price unambiguously rises. The effect on quantity is ambiguous because the two shifts push quantity in opposite directions. Only the price direction is certain.

Question 36Demand and Supply Analysis

Consumer surplus in a market is best described as:

  1. The total amount consumers actually spend on the good
  2. The tax revenue collected by the government
  3. The difference between what consumers are willing to pay and what they actually pay Correct answer.
  4. The profit earned by producers at equilibrium

Explanation

Consumer surplus measures the gain to buyers: willingness to pay above the market price, summed over units purchased. It is the area below the demand curve and above the price line. Producer profit and tax revenue are different concepts.

Question 37Demand and Supply Analysis

The supply of a good is likely to be more elastic when:

  1. Firms operate at full capacity
  2. Production requires highly specialised machinery
  3. Firms have spare capacity and time to adjust output Correct answer.
  4. The good is perishable and cannot be stored

Explanation

Supply elasticity rises when producers can respond quickly to price changes, for example with spare capacity and a longer adjustment period. Specialised inputs, perishability, and full capacity all restrain the response. Time is a key determinant of supply elasticity.

Question 38Demand and Supply Analysis

An increase in consumers' income, with the good being normal, will:

  1. Shift the supply curve to the right
  2. Cause movement up along the demand curve
  3. Shift the demand curve to the left
  4. Shift the demand curve to the right Correct answer.

Explanation

For a normal good, higher income raises demand at every price, shifting the demand curve rightward. This is a shift caused by a demand determinant other than price. It is not movement along the curve.

Question 39Demand and Supply Analysis

Two goods are complements if a fall in the price of one causes:

  1. A rise in demand for the other Correct answer.
  2. No change in demand for the other
  3. A fall in supply of the other
  4. A fall in demand for the other

Explanation

Complements are consumed together, so a cheaper printer raises demand for ink cartridges. The cross-price elasticity is negative in this case. Substitutes show the opposite demand response.

Question 40Demand and Supply Analysis

The market demand curve is obtained by:

  1. Horizontally summing individual demand curves at each price Correct answer.
  2. Multiplying individual quantities by the market price
  3. Vertically summing individual demand curves at each quantity
  4. Averaging the prices each consumer is willing to pay

Explanation

At any given price, market quantity demanded is the sum of the quantities each consumer demands, so individual curves are added horizontally. Vertical summation applies to public goods or to price concepts, not to private market demand. The result reflects total willingness to buy.

Question 41Demand and Supply Analysis

A price floor fixed above the equilibrium price in the market for a farm product will lead to:

  1. A shortage that requires rationing
  2. Equilibrium quantity being traded
  3. A surplus that the government may need to buy Correct answer.
  4. A fall in the market price to clear the surplus

Explanation

A binding floor holds price above equilibrium, so quantity supplied exceeds quantity demanded and a surplus develops. Governments often purchase the surplus under support price schemes. A shortage would arise from a ceiling, not a floor.

Question 42Demand and Supply Analysis

If demand is perfectly elastic, the demand curve faced by the seller is horizontal, which means:

  1. The seller can set any price it chooses
  2. Any price above the market price reduces sales to zero Correct answer.
  3. Quantity demanded is fixed regardless of price
  4. A price rise increases total revenue

Explanation

Perfectly elastic demand means buyers will purchase any amount at the ruling price but nothing above it, so the curve is horizontal. The seller is a price taker. This situation is typical of a firm in perfect competition.

Question 43Demand and Supply Analysis

The elasticity of demand for a good tends to be higher:

  1. In the long run than in the short run Correct answer.
  2. When it takes a tiny share of income
  3. When the good has no substitutes
  4. In the short run than in the long run

Explanation

Over time consumers can adjust habits and find substitutes, so demand becomes more responsive to price in the long run. Short-run demand is usually less elastic. Absence of substitutes and small budget shares both reduce elasticity.

Question 44Demand and Supply Analysis

Which factor would shift the supply curve of cloth to the right?

  1. A fall in the price of cotton Correct answer.
  2. An increase in the tax on cloth
  3. A rise in the wages of textile workers
  4. A rise in the market price of cloth

Explanation

Cheaper raw material lowers production cost and increases supply at every price, shifting the supply curve rightward. Wage increases and taxes raise costs and shift supply left. A change in the good's own price moves along the curve instead.

Question 45Demand and Supply Analysis

In the case of two complementary goods, the cross-price elasticity of demand is:

  1. Negative Correct answer.
  2. Positive
  3. Zero
  4. Always greater than one

Explanation

For complements, a price rise in one good reduces demand for the other, so the cross-price elasticity is negative. Substitutes give positive values. The sign of the cross elasticity is the standard test of the relationship.

Question 46Demand and Supply Analysis

Which of the following will cause a movement along the demand curve for rice, rather than a shift of the demand curve?

  1. A change in consumer tastes in favour of rice
  2. A rise in the price of wheat, a substitute
  3. A fall in the market price of rice Correct answer.
  4. A rise in consumers' income

Explanation

A change in the good's own price changes the quantity demanded and is shown as a movement along a given demand curve. The other events change demand at every price, so they shift the whole curve. This distinction between a movement along the curve and a shift of the curve is central to demand analysis.

Question 47Demand and Supply Analysis

A supply curve that passes through the origin is drawn as a straight line from the origin. Its price elasticity of supply is:

  1. Greater than one at every price
  2. Less than one at every price
  3. Equal to one at every price Correct answer.
  4. Zero at every price

Explanation

When a straight-line supply curve passes through the origin, the percentage change in quantity supplied equals the percentage change in price at every point. Hence elasticity of supply equals unity all along the curve. This is a standard result of the geometric method of measuring elasticity.

Question 48Demand and Supply Analysis

The government imposes a specific tax on the sellers of a good whose demand is perfectly inelastic. The burden of the tax falls:

  1. Entirely on the buyers Correct answer.
  2. Entirely on the sellers
  3. Equally on buyers and sellers
  4. Mainly on the sellers, with a small part on buyers

Explanation

Tax incidence depends on the relative elasticities of demand and supply. With perfectly inelastic demand, buyers cannot reduce quantity in response to the price rise, so the full tax is passed on and buyers bear the whole burden. Sellers' net receipts remain unchanged.

Question 49Demand and Supply Analysis

A consumer's demand for a good rises when its price rises because the income effect of the price rise outweighs the substitution effect. Such a good is called:

  1. A Giffen good Correct answer.
  2. A luxury good
  3. An inferior good
  4. A normal good

Explanation

A Giffen good is a special inferior good in which the negative income effect of a price rise dominates the substitution effect, so quantity demanded moves in the same direction as price. An ordinary inferior good still obeys the law of demand because the substitution effect dominates. The defining feature is the direction of the total effect, not inferiority alone.

Question 50Demand and Supply Analysis

In a market, demand is given by Qd = 100 - 2P and supply by Qs = 20 + 2P. The government fixes a price of 25. Which statement correctly describes the resulting market situation?

  1. A surplus of 40 units arises, because supply doubles at the fixed price
  2. The market clears, because the fixed price equals the equilibrium price
  3. A shortage of 20 units arises, because quantity demanded exceeds quantity supplied
  4. A surplus of 20 units arises, because quantity supplied exceeds quantity demanded Correct answer.

Explanation

Setting 100 - 2P = 20 + 2P gives equilibrium price 20. At the fixed price of 25, quantity demanded is 50 and quantity supplied is 70, so a surplus of 20 units appears. A price fixed above equilibrium therefore creates excess supply.