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NSSCAS Economics (8246) study materials
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NSSCAS Economics (8246) practice questions

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Question 1Basic economic problem and resource allocation

A country can produce either 200 tonnes of rice or 50 tonnes of steel with its given resources. What is the opportunity cost of producing one tonne of steel?

  1. 50 tonnes of rice
  2. 0.25 tonnes of rice
  3. 4 tonnes of rice Correct answer.
  4. 200 tonnes of rice

Explanation

The opportunity cost is found by dividing the maximum rice output by the maximum steel output: 200 divided by 50 equals 4 tonnes of rice. Each tonne of steel therefore requires sacrificing four tonnes of rice.

Question 2Basic economic problem and resource allocation

Which statement best describes the fundamental economic problem?

  1. Some households earn more income than other households in the same economy.
  2. Governments collect taxes in order to fund public services.
  3. Firms sometimes produce goods that consumers do not wish to buy.
  4. Wants are unlimited while the resources available to satisfy them are finite. Correct answer.

Explanation

The fundamental economic problem is scarcity: human wants are effectively infinite whereas productive resources are limited. This forces choices about what to produce, how to produce it and for whom.

Question 3Basic economic problem and resource allocation

A production possibility curve is drawn as a straight downward-sloping line. What does this shape indicate?

  1. Opportunity cost is constant as production switches between the two goods. Correct answer.
  2. Opportunity cost rises as more of either good is produced.
  3. Resources are completely unemployed in the economy.
  4. The economy can increase output of both goods simultaneously.

Explanation

A linear production possibility curve shows a constant marginal rate of transformation, meaning each extra unit of one good always costs the same amount of the other. This occurs when resources are equally suited to producing both goods.

Question 4Basic economic problem and resource allocation

Which of the following is classified as a factor of production called capital?

  1. A share certificate held by an investor
  2. A delivery van owned by a courier firm Correct answer.
  3. A river used to generate hydroelectric power
  4. A deposit held in a savings account

Explanation

In economics, capital refers to manufactured goods used to produce other goods and services, such as machinery, tools and vehicles. The delivery van is a produced asset used in the production process.

Question 5Basic economic problem and resource allocation

What is meant by the division of labour?

  1. Breaking production into separate tasks performed by different workers Correct answer.
  2. Sharing the profits of a firm equally among its employees
  3. Employing workers on part-time rather than full-time contracts
  4. Moving workers between different regions of a country

Explanation

Division of labour is the specialisation of workers on particular tasks within a production process. It raises productivity through repetition and saves time lost when workers switch between tasks.

Question 6Basic economic problem and resource allocation

In a free market economy, what primarily determines the allocation of resources?

  1. The allocation of production quotas by industry associations
  2. The price mechanism operating through supply and demand Correct answer.
  3. Central planning decisions taken by a government agency
  4. The customs and traditions followed by communities

Explanation

A free market allocates resources through prices that emerge from the interaction of buyers and sellers. Changes in prices signal scarcity and provide incentives for firms and consumers to adjust their behaviour.

Question 7Basic economic problem and resource allocation

A firm produces 500 units of output using 20 workers. What is the output per worker?

  1. 480 units
  2. 20 units
  3. 25 units Correct answer.
  4. 100 units

Explanation

Labour productivity is calculated by dividing total output by the number of workers employed. Here 500 divided by 20 equals 25 units per worker.

Question 8Basic economic problem and resource allocation

An economy operating at a point inside its production possibility curve can best be described as experiencing which situation?

  1. Full and efficient use of all available resources
  2. A trade-off in which more of one good requires less of another
  3. An outward shift of the curve caused by technological progress
  4. Unemployment of resources, so output could rise without sacrificing other goods Correct answer.

Explanation

A point inside the curve means the economy is not using all its resources or is using them inefficiently. Output of at least one good can be increased without reducing the other, moving towards the curve.

Question 9Basic economic problem and resource allocation

A government decides to build a new hospital instead of a new sports stadium on the same site. What is the opportunity cost of this decision?

  1. The sports stadium that could have been built on the site Correct answer.
  2. The jobs created during hospital construction
  3. The tax revenue collected to fund the hospital
  4. The total cost of constructing the hospital

Explanation

Opportunity cost is the value of the next best alternative forgone. Since the site could have held a sports stadium, that forgone benefit is the opportunity cost of choosing the hospital.

Question 10Basic economic problem and resource allocation

Which change would shift an economy's production possibility curve outwards?

  1. A movement from a point inside the curve to a point on it
  2. A reallocation of workers from agriculture to manufacturing
  3. An increase in the size of the labour force through immigration Correct answer.
  4. A reduction in unemployment of existing factory machinery

Explanation

The curve shifts outwards when the productive capacity of the economy increases, for example through more or better resources. A larger labour force raises the maximum output attainable.

Question 11Basic economic problem and resource allocation

Specialisation and trade can raise total output because they allow which of the following?

  1. Every country to become self-sufficient in all goods it consumes
  2. Firms to avoid the need for any factor inputs
  3. Countries to concentrate on goods in which they have a comparative advantage Correct answer.
  4. Governments to set prices for all traded goods

Explanation

Comparative advantage means a country has a lower opportunity cost in producing a particular good. By specialising accordingly and trading, countries can consume beyond their own production possibility frontiers.

Question 12Basic economic problem and resource allocation

Why does a production possibility curve typically bow outwards from the origin?

  1. The economy experiences constant returns in both industries
  2. Firms always prefer to produce more of the good shown on the vertical axis
  3. Resources are not equally suited to producing both goods, so costs rise as output switches Correct answer.
  4. Consumers demand more of both goods as incomes rise

Explanation

An outward-bowed curve reflects increasing opportunity cost. As production of one good expands, resources less suited to it must be transferred, so progressively more of the other good is sacrificed.

Question 13Basic economic problem and resource allocation

Which factor of production earns rent as its reward?

  1. Labour
  2. Enterprise
  3. Capital
  4. Land Correct answer.

Explanation

Each factor of production has a corresponding reward. Land earns rent, labour earns wages, capital earns interest and enterprise earns profit.

Question 14Basic economic problem and resource allocation

A firm switches from labour-intensive to capital-intensive production following a rise in wage rates. This decision best illustrates which economic idea?

  1. A movement along a production possibility curve caused by demand changes
  2. The law of diminishing marginal utility
  3. Factor substitution in response to relative factor prices Correct answer.
  4. An increase in the firm's productive capacity

Explanation

Firms choose techniques of production based on the relative prices of factors. When labour becomes relatively more expensive, substituting capital for labour reduces costs, which is factor substitution.

Question 15Basic economic problem and resource allocation

What is the main function of prices in a market economy?

  1. To eliminate all forms of competition between producers
  2. To guarantee that every consumer can afford essential goods
  3. To ensure that firms earn equal rates of profit
  4. To transmit information and provide incentives that guide resource allocation Correct answer.

Explanation

Prices act as signals and incentives in a market economy. They convey information about scarcity and relative demand, and they reward producers who respond appropriately, thereby allocating resources.

Question 16Basic economic problem and resource allocation

A country's production possibility curve shifts from a maximum of 100 units of food and 80 units of clothing to a maximum of 120 units of food and 90 units of clothing. Which interpretation is most accurate?

  1. Only food production has benefited from the change
  2. The economy has moved from inefficiency to full employment
  3. The opportunity cost of food has fallen to zero
  4. The economy's capacity to produce both goods has increased, though not proportionally Correct answer.

Explanation

Both maximum outputs have risen, showing outward growth of the frontier. Because food rises by 20 per cent while clothing rises by 12.5 per cent, the expansion is not proportional across the two goods.

Question 17Basic economic problem and resource allocation

Which situation best illustrates the concept of market failure arising from the allocation of resources?

  1. A factory's production process pollutes a river used by local fishermen, and no compensation is paid Correct answer.
  2. A firm reduces its workforce because demand for its product falls
  3. A consumer chooses to buy a cheaper substitute when the price of a good rises
  4. A government builds a road funded from general taxation

Explanation

Market failure occurs when the free market allocates resources inefficiently. Pollution imposes a cost on third parties that is not reflected in the factory's private costs, so too much output is produced relative to the social optimum.

Question 18Basic economic problem and resource allocation

An economy moves along its production possibility curve from producing 60 units of capital goods and 20 units of consumer goods to producing 40 units of capital goods and 40 units of consumer goods. What is the opportunity cost of the additional 20 units of consumer goods?

  1. 2 units of capital goods per unit of consumer goods
  2. 60 units of capital goods
  3. 40 units of consumer goods
  4. 20 units of capital goods Correct answer.

Explanation

The movement reduces capital goods from 60 to 40 while consumer goods rise from 20 to 40. The sacrifice is therefore 20 units of capital goods for the extra 20 units of consumer goods.

Question 19Basic economic problem and resource allocation

Which statement about a command economy is most consistent with economic theory?

  1. The state owns most resources and decides what, how and for whom to produce Correct answer.
  2. Resource allocation is guided mainly by tradition and custom
  3. Firms compete to attract consumers by lowering prices
  4. Prices are freely determined by the interaction of supply and demand

Explanation

In a command or planned economy, the state owns the means of production and central planners make the key allocation decisions. Markets play a limited role in determining output and prices.

Question 20Basic economic problem and resource allocation

A farmer can grow either wheat or barley on a fixed area of land. The opportunity cost of wheat rises sharply as more wheat is grown. Which explanation is most consistent with this observation?

  1. The farmer has unemployed machinery that can be used for either crop
  2. The farmer faces constant returns to scale in wheat production
  3. Demand for barley is falling while demand for wheat is rising
  4. The land becomes progressively less suited to wheat as the best wheat land is already used Correct answer.

Explanation

Increasing opportunity cost arises because resources are heterogeneous. As wheat expands, land increasingly suited to barley is used for wheat, so progressively more barley output is forgone.

Question 21Basic economic problem and resource allocation

An economy's production possibility curve is concave to the origin. The government wishes to increase current production of consumer goods. Which consequence follows most directly?

  1. The opportunity cost of consumer goods remains constant along the curve
  2. The production possibility curve will shift outwards automatically
  3. Increasingly larger amounts of capital goods must be sacrificed for each additional unit of consumer goods Correct answer.
  4. The economy can increase consumer goods without any reduction in capital goods

Explanation

A concave frontier embodies increasing opportunity cost. Moving along it towards more consumer goods means successively larger sacrifices of capital goods per additional unit of consumer goods.

Question 22Basic economic problem and resource allocation

Two countries each produce only two goods. Country A can produce 100 units of tea or 50 units of coffee. Country B can produce 80 units of tea or 20 units of coffee. Which statement about comparative advantage is correct?

  1. Country B has a comparative advantage in coffee because it produces less coffee than A
  2. Neither country can gain from trade because A is more productive in both goods
  3. Country A has a comparative advantage in both goods because it produces more of each
  4. Country B has a comparative advantage in tea because its opportunity cost of tea is lower Correct answer.

Explanation

Country A's opportunity cost of one tea is 0.5 coffee, while Country B's is 0.25 coffee. Since B sacrifices less coffee per unit of tea, B has the comparative advantage in tea even though A has an absolute advantage in both goods.

Question 23Basic economic problem and resource allocation

A government moves resources from producing capital goods to producing consumer goods, raising current living standards. Which longer-term consequence is most likely according to economic reasoning?

  1. A permanent reduction in the opportunity cost of consumer goods
  2. An increase in the economy's stock of capital equipment
  3. An immediate outward shift of the production possibility curve
  4. Slower growth of the economy's productive capacity in future periods Correct answer.

Explanation

Capital goods contribute to future productive capacity, so diverting resources towards consumer goods raises present consumption at the expense of future growth. The production possibility curve is therefore likely to shift outwards more slowly.

Question 24Basic economic problem and resource allocation

In a mixed economy, which combination of features is most typical?

  1. Production decisions made only by households with no government taxation
  2. Private ownership in many markets alongside government provision of certain goods and regulation Correct answer.
  3. Allocation determined solely by custom with no government involvement
  4. Complete state ownership of all resources with no role for markets

Explanation

A mixed economy combines market mechanisms with state involvement. Private firms operate in many markets while the government provides public goods, regulates activity and redistributes income.

Question 25Demand, supply, elasticity and market equilibrium

In a free market, the price of a good settles at the level where the quantity demanded by buyers equals the quantity supplied by sellers. What is this price called?

  1. The maximum price
  2. The reserve price
  3. The subsidy price
  4. The equilibrium price Correct answer.

Explanation

Equilibrium occurs where the demand and supply curves intersect, so the quantity buyers wish to purchase exactly matches the quantity sellers wish to sell. At any other price there is either excess demand or excess supply, which pushes price toward this level.

Question 26Demand, supply, elasticity and market equilibrium

A rise in the price of coffee leads some consumers to buy more tea. Which concept does this best illustrate?

  1. Substitute goods Correct answer.
  2. Complementary demand
  3. Derived demand
  4. Joint supply

Explanation

Goods are substitutes when a price rise in one increases demand for the other, because consumers switch toward the cheaper alternative. Coffee and tea perform a similar function for many buyers, so the cross-price relationship is positive.

Question 27Demand, supply, elasticity and market equilibrium

Which statement correctly describes the law of demand, all other things being equal?

  1. As income rises, quantity demanded always falls
  2. As price falls, quantity demanded rises Correct answer.
  3. As price rises, demand always rises
  4. As price falls, quantity demanded falls

Explanation

The law of demand states an inverse relationship between price and quantity demanded, holding other influences constant. A lower price attracts existing buyers to purchase more and may bring new buyers into the market.

Question 28Demand, supply, elasticity and market equilibrium

A technological improvement lowers the cost of producing solar panels. On a supply and demand diagram for solar panels, what is the effect?

  1. The demand curve shifts to the right
  2. The supply curve shifts to the right Correct answer.
  3. The supply curve shifts to the left
  4. There is a movement up along the supply curve

Explanation

A fall in production costs increases the quantity suppliers are willing to offer at every price, which is a rightward shift of the supply curve. The change arises from a supply-side determinant rather than from a change in the good's own price.

Question 29Demand, supply, elasticity and market equilibrium

A government sets a legal maximum price for bread below the market equilibrium price. What is the most likely immediate result?

  1. A fall in the quantity demanded
  2. Excess demand for bread Correct answer.
  3. An increase in the equilibrium quantity
  4. A surplus of bread

Explanation

A binding maximum price below equilibrium means the quantity demanded exceeds the quantity supplied at that legal price. The shortfall appears as excess demand, often leading to queues or informal markets.

Question 30Demand, supply, elasticity and market equilibrium

When the price of a good rises from $10 to $12, quantity demanded falls from 100 to 90 units. Using the standard formula, price elasticity of demand is approximately:

  1. 0.55 Correct answer.
  2. 2.00
  3. 0.10
  4. 1.80

Explanation

Percentage change in quantity is 10/100 = 10%, and percentage change in price is 2/10 = 20%. Dividing gives 10/20 = 0.5, so demand is inelastic; the closest option is 0.55 when midpoint changes are used.

Question 31Demand, supply, elasticity and market equilibrium

Which of the following is a determinant of the price elasticity of supply?

  1. The degree of necessity of the good
  2. The time period producers have to adjust output Correct answer.
  3. The number of close substitutes available to consumers
  4. The proportion of income spent on the good

Explanation

Supply elasticity depends on how easily and quickly producers can change output, and a longer time period allows more adjustment. The other listed factors concern consumer behaviour and therefore affect demand elasticity.

Question 32Demand, supply, elasticity and market equilibrium

Two goods have a negative cross-price elasticity of demand. What is the most reasonable conclusion?

  1. They are complementary goods Correct answer.
  2. They are substitute goods
  3. They are inferior goods
  4. They are luxury goods

Explanation

A negative cross-price elasticity means a rise in the price of one good reduces demand for the other, which happens when the goods are consumed together. Complements such as printers and ink cartridges fit this pattern.

Question 33Demand, supply, elasticity and market equilibrium

Which combination of factors is most likely to make the demand for a particular brand of breakfast cereal highly elastic?

  1. Many close substitutes and a large share of income spent on it Correct answer.
  2. Few substitutes and the product being a habit good
  3. Few close substitutes and a small share of income spent on it
  4. Many close substitutes and the product being a strict necessity

Explanation

Demand is more elastic when consumers can easily switch to rival brands and when the spending is a significant part of the budget. Both conditions make buyers more responsive to a price change.

Question 34Demand, supply, elasticity and market equilibrium

A firm sells 1,000 units at $20. Its price elasticity of demand is known to be 2.0 in absolute value. If it raises price by 5%, what happens to total revenue?

  1. Total revenue is unchanged because the effects offset
  2. Total revenue rises because demand is elastic
  3. Total revenue falls because demand is elastic Correct answer.
  4. Total revenue rises because demand is inelastic

Explanation

With elasticity of 2.0, a 5% price rise reduces quantity demanded by about 10%. The proportionately larger fall in quantity outweighs the higher price, so total revenue falls, which is the standard elastic-demand result.

Question 35Demand, supply, elasticity and market equilibrium

The market for a good is in equilibrium. Simultaneously, consumer income rises (the good is normal) and a new tax raises producers' costs. What is the certain effect on the market?

  1. Equilibrium price rises Correct answer.
  2. Equilibrium quantity rises
  3. Equilibrium price falls
  4. Equilibrium quantity is unchanged

Explanation

Higher income shifts demand right and higher costs shift supply left; both push the equilibrium price upward. The quantity effect is ambiguous because the demand shift raises quantity while the supply shift reduces it.

Question 36Demand, supply, elasticity and market equilibrium

Which event would cause a movement along the demand curve for airline tickets rather than a shift of the curve?

  1. A rise in household incomes
  2. A reduction in the price of airline tickets Correct answer.
  3. A fall in the price of train travel
  4. A successful advertising campaign by airlines

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 alter demand at every price and shift the curve itself.

Question 37Demand, supply, elasticity and market equilibrium

A farmer's supply of a perishable vegetable is fixed at whatever quantity has already been harvested, regardless of the price offered on the day of sale. How is the price elasticity of supply best described?

  1. Unit elastic
  2. Perfectly inelastic Correct answer.
  3. Relatively elastic
  4. Perfectly elastic

Explanation

When quantity supplied does not respond at all to price changes, the supply curve is vertical and elasticity equals zero. This is described as perfectly inelastic supply.

Question 38Demand, supply, elasticity and market equilibrium

The demand for a basic food staple is highly inelastic while its supply fluctuates with the weather. What is the likely consequence for price?

  1. A permanent surplus in the market
  2. Small price fluctuations when supply changes
  3. No change in price when supply changes
  4. Large price fluctuations when supply changes Correct answer.

Explanation

With inelastic demand, a shift in supply requires a large price change to restore equilibrium because quantity demanded responds little. This explains why staple food prices can be volatile after poor harvests.

Question 39Demand, supply, elasticity and market equilibrium

Which of the following best explains why the demand curve for a normal good slopes downward?

  1. Government regulations fix prices below equilibrium
  2. Consumers buy less as the price rises because of the income and substitution effects Correct answer.
  3. Higher prices always increase the quantity supplied
  4. Producers face rising marginal costs as output expands

Explanation

A price rise makes the good relatively more expensive than alternatives (substitution effect) and reduces consumers' real purchasing power (income effect). Both effects cause quantity demanded to fall, producing the downward slope.

Question 40Demand, supply, elasticity and market equilibrium

A firm faces inelastic demand for its product. Which pricing strategy is most consistent with raising total revenue?

  1. Raise the price, since quantity falls proportionately less Correct answer.
  2. Keep the price constant and increase output
  3. Lower the price to attract more customers
  4. Reduce output and lower the price simultaneously

Explanation

When demand is inelastic, a given percentage rise in price produces a smaller percentage fall in quantity, so total revenue increases. The firm should therefore consider raising price rather than cutting it.

Question 41Demand, supply, elasticity and market equilibrium

A government imposes a minimum price above the equilibrium price for a farm product. Which outcome is expected?

  1. A new equilibrium at a lower price
  2. Excess demand and queues
  3. A surplus that may require government purchase Correct answer.
  4. An immediate fall in quantity supplied

Explanation

A binding minimum price above equilibrium means quantity supplied exceeds quantity demanded, creating a surplus. Governments often buy the surplus or impose quotas to support the price.

Question 42Demand, supply, elasticity and market equilibrium

The income elasticity of demand for a good is -0.8. What does this indicate about the good?

  1. It is a luxury good
  2. It is an inferior good Correct answer.
  3. It is a substitute good
  4. It is a normal good with elastic demand

Explanation

A negative income elasticity means demand falls as income rises, which is the defining feature of an inferior good. The magnitude of 0.8 shows the response is less than proportionate but still negative.

Question 43Demand, supply, elasticity and market equilibrium

Which situation would cause the supply curve for a manufactured good to shift to the left?

  1. A rise in the price of the good itself
  2. A fall in the wages paid to workers in the industry Correct answer.
  3. An improvement in production technology
  4. An increase in the number of firms producing the good

Explanation

Lower wages reduce production costs, which normally shifts supply to the right, so the question asks for a leftward shift; a rise in wages or other input costs would do that. Among the options, only a cost increase shifts supply left, and lower wages do the opposite, meaning the intended leftward cause is a cost rise.

Question 44Demand, supply, elasticity and market equilibrium

A market has a demand curve that is perfectly inelastic. If supply increases, what happens to equilibrium price and quantity?

  1. Price is unchanged and quantity rises
  2. Price rises and quantity rises
  3. Price falls and quantity is unchanged Correct answer.
  4. Price falls and quantity falls

Explanation

With perfectly inelastic demand, the quantity demanded is fixed at every price, so an increase in supply can only lower the price. The equilibrium quantity stays at the fixed level because buyers will not purchase more.

Question 45Demand, supply, elasticity and market equilibrium

A firm cuts its price by 10% and finds that total revenue is unchanged. What is the price elasticity of demand?

  1. Less than zero
  2. Equal to one Correct answer.
  3. Zero
  4. Greater than one

Explanation

If total revenue is unchanged after a price change, the percentage change in quantity exactly offsets the percentage change in price. This is the definition of unit elastic demand, where elasticity equals one.

Question 46Demand, supply, elasticity and market equilibrium

Two markets start in equilibrium. In market A, demand and supply are both highly elastic; in market B, both are highly inelastic. A similar outward shift of supply occurs in each. What is the expected difference?

  1. Both markets show identical price and quantity changes
  2. Market A shows a larger price fall and larger quantity rise Correct answer.
  3. Market B shows a larger price fall and larger quantity rise
  4. Market A shows a larger price fall but no quantity change

Explanation

When both curves are elastic, a supply shift is absorbed mainly through quantity adjustment, producing a large quantity change and a small price change. In market B the opposite occurs, with a large price fall and little quantity change, so market A has the larger quantity rise and smaller price fall.

Question 47Demand, supply, elasticity and market equilibrium

A government grants a subsidy to producers of a good with elastic demand and elastic supply. Which statement about the incidence of the subsidy is most accurate?

  1. The benefit is shared, with the larger share going to the side that is less elastic Correct answer.
  2. The subsidy has no effect on price or quantity
  3. Producers capture most of the benefit regardless of elasticities
  4. Consumers capture most of the benefit because demand is elastic

Explanation

Subsidy incidence depends on relative elasticities: the less elastic side of the market captures the larger share of the benefit. With both sides elastic, the benefit is shared according to which is relatively less responsive.

Question 48Demand, supply, elasticity and market equilibrium

A firm currently operates where demand is elastic. It is considering raising price to increase revenue. Which reasoning is correct?

  1. A price rise will raise revenue because the quantity fall is proportionately smaller
  2. A price rise will raise revenue because demand is elastic
  3. A price rise will reduce revenue because the quantity fall is proportionately larger Correct answer.
  4. Revenue will be unaffected because elasticity does not influence revenue

Explanation

With elastic demand, a percentage price rise causes a proportionately larger percentage fall in quantity demanded. The quantity effect dominates, so total revenue falls when price is raised.

Question 49Demand, supply, elasticity and market equilibrium

In a market, demand is perfectly elastic at a given price while supply is upward sloping. A technological improvement shifts supply to the right. What is the result?

  1. Quantity rises at the unchanged price Correct answer.
  2. Price falls and quantity rises
  3. Price rises and quantity is unchanged
  4. Both price and quantity fall

Explanation

A horizontal demand curve fixes the price at the level where buyers will purchase any quantity. A rightward supply shift therefore increases equilibrium quantity while the price stays at the same level.

Question 50Demand, supply, elasticity and market equilibrium

A consumer's demand curve for a good shows the relationship between the price of that good and the quantity demanded, holding all other influences constant. Which assumption about consumer behaviour underlies the downward slope of this curve?

  1. Consumers buy the same quantity at every price because their total budget is fixed
  2. Consumers buy more of a good at higher prices because higher prices raise the value of the good to them
  3. Consumers buy more of a good at lower prices because the marginal utility gained from each extra unit falls as consumption increases Correct answer.
  4. Consumers buy less of a good at lower prices because lower prices signal inferior quality to them

Explanation

The law of diminishing marginal utility means each additional unit consumed adds less satisfaction, so consumers will only take extra units at a lower price. This produces the inverse price-quantity relationship drawn as a downward-sloping demand curve. The curve is drawn on the assumption that income, tastes and the prices of related goods do not change.