Economics MCQ Questions and Solutions with Explanations | Commerce

Demand curve can be derived from MU curve and PCC. Marginal utility and the law of diminishing marginal utility can be used to provide insight into market demand, the law of demand, and the demand curve. Downward-sloping price consumption curve for a good means that demand for the good is elastic, upward-sloping price consumption curve means that demand for the good is inelastic and horizontal straight-line price consumption curve means that demand for the good is unit elastic.

The exception to law of demand is Veblen goods and Giffen goods.
Giffen goods are the inferior goods whose demand increases with the increase in its prices. There are several inferior commodities, much cheaper than the superior substitutes often consumed by the poor households as an essential commodity. Whenever the price of the Giffen goods increases its quantity demanded also increases because, with an increase in the price, and the income remaining the same, the poor people cut the consumption of superior substitute and buy more quantities of Giffen goods to meet their basic needs.
Another exception to the law of demand is given by the economist Thorstein Veblen, who proposed the concept of “Conspicuous Consumption.” According to Veblen, there are a certain group of people who measure the utility of the commodity purely by its price, which means, they think that higher priced goods and services derive more utility than the lesser priced commodities.

The upper portion of the kinked demand curve is relatively more elastic. The kinked-demand curve is a demand curve comprised of two segments, one that is relatively more elastic, which results if a firm increases its price, and the other that is relatively less elastic, which results if a firm decreases its price. These two segments are joined at a corner or "kink."

Price discrimination is not possible in case of Perfect competition. Price discrimination is not possible under perfect competition, even if the two markets could be kept separate. Since market demand in each market is perfectly elastic, every seller would try to sell in that market in which could get the highest price. Competition would make the price equal in both the markets. However, price discrimination is possible and profitable only when markets are imperfect.

If the income elasticity is greater than one, the commodity is Luxury item. Luxury goods represent normal goods associated with income elasticities of demand greater than one. Consumers will buy proportionately more of a particular good compared to a percentage change in their income.

The 'Diamond water' controversy is explained by marginal utility. Marginal utility is the additional satisfaction or gain someone gets from using or purchasing an additional unit of a particular good or service. People are willing to pay a higher price for goods with greater marginal utility.
So, let's go back to water and diamonds. There is plenty of water in most parts of the world (not scarce), which means that, as consumers, we usually have a low marginal utility for water. In a typical situation, we aren't willing to pay a lot of money for one more drink of water. Diamonds, however, are scarce. Because they are harder to find and attain, our marginal utility (additional satisfaction), for adding a diamond to our collection is much higher than someone offering us one more drink of water. If one is dying of thirst, then this paradox might not make sense, and the marginal utility from another drink of water would be much higher than the additional satisfaction of owning a diamond.

Natural resources, Human capital and Physical capital all are sources of growth.

The IC curve approach assumes Rationality, Consistency and Transitivity.

A higher indifference curve shows a higher level of satisfaction. A higher indifference curve will represent a higher level of satisfaction than a lower indifference curve. In other words, the combinations which lie on a higher indifference curve will be preferred to the combinations which lie on a lower indifference curve.

In the case of two perfect substitutes, the indifference curve will be Straight line. This is because perfect substitutes have a fixed ratio of substitution. An indifference curve is usually concave towards the origin because the two goods are usually not perfect substitutes. This means that the exchange rate varies hence the slope of the line tangent to the curve (exchange rate) varies.