CUET UG Economics Booster Test 3 - Market Demand and Elasticity -

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CUET UG Economics Booster Test 3 - Market Demand and Elasticity

⏱️ 30 Minutes

❓ 20 Questions

📌 Answers are locked once submitted — results and explanations appear at the end.

CUET UG Economics Booster Test 3 - Market Demand and Elasticity

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QUESTION 1 OF 20

What specific condition creates a "kink" in the aggregated market demand curve when derived from the horizontal summation of two linear individual demand curves?

Answer Review

1 What specific condition creates a "kink" in the aggregated market demand curve when derived from the horizontal summation of two linear individual demand curves?

A Both consumers having identical demand functions across all prices

B One consumer demanding zero units at a price where the other consumer still demands a positive quantity

C Consumers treating the good as a Giffen good at certain price ranges

D Both consumers reaching their horizontal intercept simultaneously

💡 Short Explanation

A kink occurs when one consumer exits the market. The other consumer continues to demand the good. The market demand equation changes across price ranges.

✅ Correct Answer Explanation

A market demand curve is obtained by horizontally summing individual demand curves. A kink appears at the price where one consumer's demand becomes zero while another consumer still purchases the good. Beyond this point, only the remaining consumer contributes to market demand, changing the slope of the aggregated demand curve.

❓ Why Other Options Are Incorrect

Option A: Identical demand curves do not create a kink.
Option C: Giffen goods are unrelated to horizontal summation.
Option D: If both consumers stop demanding simultaneously, the market demand simply becomes zero without creating the characteristic kink.

🎯 Strategy

Used

Concept MCQ

🧠 Memory Trick

One Consumer Leaves → Kink Appears

📚 Theory of Consumer Behaviour – Market Demand (Horizontal Summation)

2 Complete the statement:
When calculating aggregate market choice mathematically, if Consumer A's demand drops to zero at a lower price than Consumer B's, the uppermost segment of the market demand curve purely represents the demand of ________.

A both consumers equally

B Consumer B only

C Consumer A only

D neither consumer

💡 Short Explanation

Consumer A's demand becomes zero. Consumer B still purchases the good. The upper segment reflects only Consumer B's demand.

✅ Correct Answer Explanation

When Consumer A's demand reaches zero, Consumer A no longer contributes to market demand. Therefore, for prices above A's choke price but below B's choke price, the market demand consists solely of Consumer B's demand.

❓ Why Other Options Are Incorrect

Option A: Consumer A contributes nothing after demand becomes zero.
Option C: Consumer A has already exited the market.
Option D: Consumer B still demands the commodity.

🎯 Strategy

Used

Statement Completion

🧠 Memory Trick

First Consumer Exits → Remaining Consumer Determines Demand

📚 Theory of Consumer Behaviour – Market Demand Curve

3 Arrange the algebraic intervals to properly construct the piecewise market demand curve (D(p)) from (d_1(p)=20-p) and (d_2(p)=30-2p):
1. For price (p>20), both (d_1) and (d_2) are 0, making (D(p)=0).
2. Identify the zero-intercept limits: (d_1) drops to 0 at (p=20), and (d_2) drops to 0 at (p=15).
3. For (15<p\le20), (d_2=0) but (d_1>0), making (D(p)=20-p).
4. For (p\le15), both demands are strictly positive, making (D(p)=50-3p).

A 2, 1, 3, 4

B 1, 2, 3, 4

C 2, 3, 4, 1

D 4, 3, 2, 1

💡 Short Explanation

Find each consumer's choke price. Identify intervals based on zero demand. Construct the piecewise market demand.

✅ Correct Answer Explanation

The correct procedure is: First identify where each individual's demand becomes zero. Recognize that above the highest choke price, market demand is zero. Between the two choke prices, only one consumer contributes. Below the lower choke price, both consumers contribute and their demands are added horizontally. Hence, the correct sequence is 2 → 1 → 3 → 4.

❓ Why Other Options Are Incorrect

Option B: Starts before identifying the intercepts.
Option C: Misses the zero-demand region before intermediate demand.
Option D: Reverses the logical derivation.

🎯 Strategy

Used

Sequence

🧠 Memory Trick

Intercepts → Zero Demand → One Consumer → Both Consumers

📚 Theory of Consumer Behaviour – Piecewise Market Demand Function

4 Match the following algebraic equations to their correct valid price intervals for the graphical totaling of (d_1=20-𝛼) and (d_2=30-2𝛼):

List I	List II
1. (D(𝛼)=50-3𝛼)	a. Valid for (15<𝛼\le20)
2. (D(𝛼)=20-𝛼)	b. Valid for (𝛼>20)
3. (D(𝛼)=0)	c. Valid for (𝛼\le15)
4. (d_2=30-2𝛼) becomes zero	d. At (𝛼=15)

A 1-c, 2-a, 3-b, 4-d

B 1-a, 2-b, 3-c, 4-d

C 1-b, 2-c, 3-a, 4-d

D 1-c, 2-b, 3-a, 4-d

💡 Short Explanation

Below ₹15, both consumers demand. Between ₹15 and ₹20, only Consumer 1 demands. Above ₹20, market demand becomes zero.

✅ Correct Answer Explanation

For the given demand equations: (D(p)=50-3p) is valid when both consumers demand, i.e., (𝛼\le15). (D(𝛼)=20-𝛼) applies when only Consumer 1 demands, i.e., (15<𝛼\le20). (D(p)=0) when (𝛼>20). Consumer 2's demand becomes zero exactly at (𝛼=15). Thus the correct matching is: 1-c, 2-a, 3-b, 4-d

❓ Why Other Options Are Incorrect

Option B: Assigns incorrect intervals.
Option C: Incorrectly matches the demand equations.
Option D: Incorrectly places the zero-demand interval.

🎯 Strategy

Used

Match the Following

🧠 Memory Trick

Both → One → None

📚 Theory of Consumer Behaviour – Horizontal Summation of Demand Curves

5 A specific food item can act as a normal good at some income levels and an inferior good at others. Which statements correctly reflect this phenomenon?
1. At very low incomes, demand increases as income increases (positive income relation).
2. Beyond a certain income threshold, the consumer switches to better substitutes, reducing demand (negative income relation).
3. The good transforms permanently into a luxury item at high incomes regardless of substitutes.

A 1 and 2

B 2 and 3

C 1 and 3

D 1, 2, and 3

💡 Short Explanation

Demand initially rises with income. At higher income, consumers switch to better substitutes. The good does not automatically become a luxury good.

✅ Correct Answer Explanation

Some goods behave as normal goods at lower income levels because consumers buy more as income rises. Beyond a certain income level, consumers may switch to higher-quality alternatives, causing demand for the original good to decline. Such goods then behave as inferior goods. Statement 3 is incorrect because a good does not automatically become a luxury item simply due to higher income.

❓ Why Other Options Are Incorrect

Option B: Includes the incorrect Statement 3.
Option C: Omits the correct Statement 2.
Option D: Statement 3 is false.

🎯 Strategy

Used

Multi-correct

🧠 Memory Trick

Low Income → Normal; High Income → Inferior (for some goods)

📚 Theory of Consumer Behaviour – Normal and Inferior Goods

6 Assertion (A): For inferior goods, the substitution effect and the income effect always act in the same direction when the price changes.
Reason (R): When the price drops, the substitution effect increases demand, but the resulting increase in purchasing power (income effect) causes the consumer to reduce demand for the inferior good.

A Both A and R are true, and R is the correct explanation of A.

B Both A and R are true, but R is not the correct explanation of A.

C A is true, but R is false.

D A is false, but R is true.

💡 Short Explanation

For inferior goods, substitution and income effects act in opposite directions. The substitution effect increases demand. The income effect reduces demand.

✅ Correct Answer Explanation

For an inferior good, when its price falls: The substitution effect encourages consumers to buy more because the good becomes relatively cheaper. The income effect works in the opposite direction because the increase in purchasing power causes consumers to purchase less of the inferior good and switch to superior alternatives. Thus, the Assertion is false, while the Reason is true.

❓ Why Other Options Are Incorrect

Option A: The Assertion is false.
Option B: The Assertion is false.
Option C: The Reason is true.

🎯 Strategy

Used

Assertion and Reason

🧠 Memory Trick

Inferior Good = Substitution ↑, Income ↓

📚 Theory of Consumer Behaviour – Inferior Goods and Income Effect

7 Complete the statement:
A Giffen good exhibits a positive price relation because it is a highly inferior good where the negative ________ effect is so massive that it mathematically overrides the positive ________ effect.

A substitution, income

B income, substitution

C utility, wealth

D budget, indifference

💡 Short Explanation

Giffen goods are highly inferior goods. The negative income effect dominates. It outweighs the positive substitution effect.

✅ Correct Answer Explanation

A Giffen good is an exceptional inferior good where: The substitution effect still encourages higher consumption when price falls. However, the negative income effect is stronger and dominates the substitution effect. As a result, demand moves in the same direction as price, creating a positive price-demand relationship.

❓ Why Other Options Are Incorrect

Option A: Reverses the two effects.
Option C: Utility and wealth effects are not the relevant concepts.
Option D: Budget and indifference are unrelated here.

🎯 Strategy

Used

Statement Completion

🧠 Memory Trick

Giffen = Income Effect > Substitution Effect

📚 Theory of Consumer Behaviour – Giffen Goods

8 Match the following goods/curves to their theoretical elasticity coefficients:

List I	List II
1. Highly responsive demand (Luxury goods)	a. eD = 1
2. Point-specific midpoint (Linear curve)	b. eD = 0
3. Perfectly inelastic (Vertical Curve)	c. eD > 1
4. Rectangular hyperbola	d. Unitary elastic demand

A 1-c, 2-a, 3-b, 4-d

B 1-a, 2-b, 3-c, 4-d

C 1-b, 2-c, 3-a, 4-d

D 1-c, 2-b, 3-a, 4-d

💡 Short Explanation

Luxury goods are elastic. Midpoint of a linear demand curve has unit elasticity. Vertical demand is perfectly inelastic.

✅ Correct Answer Explanation

Highly responsive (Luxury goods) → eD > 1 Midpoint of a linear demand curve → eD = 1 Perfectly inelastic demand (Vertical curve) → eD = 0 Rectangular hyperbola → Unitary elastic demand Therefore, the correct matching is: 1-c, 2-a, 3-b, 4-d

❓ Why Other Options Are Incorrect

Option B: Incorrectly matches elasticity values.
Option C: Reverses the elasticity categories.
Option D: Incorrectly matches the midpoint and vertical curve.

🎯 Strategy

Used

Match the Following

🧠 Memory Trick

Luxury >1 • Midpoint =1 • Vertical =0 • Hyperbola = Unitary

📚 Theory of Consumer Behaviour – Price Elasticity of Demand

9 Arrange the sequence of events reflecting the substitutes price effect between coffee and tea:
1. The demand curve for coffee shifts leftward.
2. The market price of tea drops significantly.
3. Consumers substitute the now cheaper tea for coffee.
4. The quantity of coffee demanded goes down at a given price.

A 2, 3, 4, 1

B 1, 2, 3, 4

C 3, 4, 1, 2

D 2, 1, 4, 3

💡 Short Explanation

Tea becomes cheaper. Consumers switch from coffee to tea. Coffee demand decreases. Coffee demand curve shifts leftward.

✅ Correct Answer Explanation

When tea becomes cheaper: 1. The price of tea falls. 2. Consumers substitute tea for coffee. 3. Quantity demanded for coffee decreases. 4. This causes the demand curve for coffee to shift leftward. Hence, the correct sequence is 2 → 3 → 4 → 1.

❓ Why Other Options Are Incorrect

Option B: Begins with the final outcome.
Option C: Incorrect sequence.
Option D: Demand cannot shift before substitution occurs.

🎯 Strategy

Used

Sequence

🧠 Memory Trick

Cheaper Substitute → Switch → Lower Demand → Left Shift

📚 Theory of Consumer Behaviour – Substitute Goods

10 Complete the statement:
Because shoes and socks are complementary goods, their consumption is linked, meaning the demand for shoes typically moves in the ________ direction of the price of socks.

A same

B opposite

C parallel

D upward

💡 Short Explanation

Complementary goods are used together. Price increase of one reduces demand for the other. Demand moves opposite to the related good's price.

✅ Correct Answer Explanation

Shoes and socks are complementary goods. If the price of socks increases, fewer socks are purchased, which also reduces the demand for shoes. Likewise, if the price of socks falls, demand for shoes increases. Thus, the demand for shoes moves in the opposite direction of the price of socks.

❓ Why Other Options Are Incorrect

Option A: Applies to substitute goods.
Option C: Consumption is not parallel.
Option D: There is no always-upward relationship.

🎯 Strategy

Used

Statement Completion

🧠 Memory Trick

Complements: Price ↑ of One → Demand ↓ of the Other

📚 Theory of Consumer Behaviour – Complementary Goods

11 Which of the following combinations of non-price factors will simultaneously shift the demand curve for tea (assuming it is a normal good) leftward?
1. A significant decrease in the consumer's income.
2. A sharp decrease in the price of coffee (a known substitute).
3. A significant increase in the consumer's income.

A 1 and 2

B 2 and 3

C 1 and 3

D 1, 2, and 3

💡 Short Explanation

Lower income reduces demand for a normal good. Cheaper substitute reduces demand for tea. Higher income would increase demand for tea.

✅ Correct Answer Explanation

For tea (a normal good): A decrease in income reduces its demand, shifting the demand curve leftward. If the price of coffee (a substitute) falls, consumers switch from tea to coffee, also shifting tea's demand curve leftward. An increase in income shifts the demand curve for a normal good rightward, not leftward. Therefore, Statements 1 and 2 are correct.

❓ Why Other Options Are Incorrect

Option B: Statement 3 causes a rightward shift.
Option C: Statement 3 is incorrect.
Option D: Includes Statement 3, which is false.

🎯 Strategy

Used

Multi-correct

🧠 Memory Trick

Normal Good: Income ↓ → Demand ↓; Substitute Price ↓ → Demand ↓

📚 Theory of Consumer Behaviour – Demand Curve Shifts

12 Match the following variables to how they alter the demand function (X=f(P)):

List I	List II
1. Change in Price of X itself	a. Shifts the demand curve right or left depending on whether goods are substitutes or complements
2. Change in Consumer Income	b. Causes a movement along the existing demand curve
3. Change in Price of related good Y	c. Shifts the demand curve right or left depending on whether the good is normal or inferior
4. Change in Consumer Preferences	d. Shifts the demand curve either rightward or leftward

A 1-b, 2-c, 3-a, 4-d

B 1-a, 2-b, 3-c, 4-d

C 1-c, 2-a, 3-b, 4-d

D 1-b, 2-a, 3-c, 4-d

💡 Short Explanation

Own price causes movement along the curve. Income shifts demand. Related goods shift demand. Preferences also shift demand.

✅ Correct Answer Explanation

Change in Price of X itself → Movement along the existing demand curve. Change in Consumer Income → Shifts demand depending on whether the good is normal or inferior. Change in Price of related goods → Shifts demand depending on substitutes or complements. Change in Consumer Preferences → Shifts the demand curve rightward or leftward. Thus, the correct matching is: 1-b, 2-c, 3-a, 4-d

❓ Why Other Options Are Incorrect

Option B: Incorrectly exchanges own-price effect with related-good effect.
Option C: Incorrectly matches income and price effects.
Option D: Incorrectly matches income changes.

🎯 Strategy

Used

Match the Following

🧠 Memory Trick

Own Price → Move; Income/Preferences/Related Goods → Shift

📚 Theory of Consumer Behaviour – Movements and Shifts of Demand Curve

13 Assertion (A): For a linear demand curve (q=a-bp), the elasticity of demand formula simplifies algebraically to
[
e_D=\frac{bp}{a-bp}
]
Reason (R): The ratio of change (\Delta q/\Delta p) is equal to (-b), and substituting this into the elasticity formula gives (e_D=\frac{bp}{a-bp}).

A Both A and R are true, and R is the correct explanation of A.

B Both A and R are true, but R is not the correct explanation of A.

C A is true, but R is false.

D A is false, but R is true.

💡 Short Explanation

The slope of the linear demand curve is −b. Substituting into the elasticity formula gives the required expression. The reason directly explains the assertion.

✅ Correct Answer Explanation

For the demand function: [ q=a-bp ] the slope is [ \frac{\Delta q}{\Delta p}=-b. ] Substituting into the elasticity formula, [ e_D=-\left(\frac{\Delta q}{\Delta p}\right)\left(\frac{p}{q}\right) ] gives [ e_D=b\left(\frac{p}{a-bp}\right) =\frac{bp}{a-bp}. ] Therefore, both the Assertion and the Reason are correct, and the Reason correctly explains the Assertion.

❓ Why Other Options Are Incorrect

Option B: The Reason directly explains the Assertion.
Option C: The Reason is true.
Option D: Both statements are true.

🎯 Strategy

Used

Assertion and Reason

🧠 Memory Trick

Linear Demand → Replace (q) by (a-bp)

📚 Theory of Consumer Behaviour – Price Elasticity of Demand

14 Complete the statement:
Because price elasticity measures the percentage change ratio, a unitary elastic demand curve ensures that any percentage change in price leads to an ________ percentage change in quantity, rendering the responsiveness pure number as exactly 1.

A equivalent

B inverse

C opposing

D double

💡 Short Explanation

Unitary elasticity means equal percentage changes. Elasticity equals one. Price and quantity change by the same percentage.

✅ Correct Answer Explanation

For unitary elastic demand, the percentage change in quantity demanded is exactly equal to the percentage change in price (ignoring the negative sign indicating opposite directions). Hence, elasticity equals one. Therefore, the missing word is equivalent.

❓ Why Other Options Are Incorrect

Option B: Percentage changes are opposite in direction but equal in magnitude.
Option C: Not the technical definition.
Option D: Quantity does not change by double the percentage.

🎯 Strategy

Used

Statement Completion

🧠 Memory Trick

Unitary = Equal % Change

📚 Theory of Consumer Behaviour – Unitary Price Elasticity

15 Match the following demand curve types to their constant elasticity profiles:

List I	List II
1. Rectangular hyperbola demand curve	a. Perfectly elastic ((e_D=\infty))
2. Vertical demand curve	b. Perfectly inelastic ((e_D=0))
3. Horizontal demand curve	c. Unitary elastic ((e_D=1))
4. Downward-sloping linear demand curve (midpoint)	d. Unitary elasticity at the midpoint

A 1-c, 2-b, 3-a, 4-d

B 1-a, 2-b, 3-c, 4-d

C 1-b, 2-c, 3-a, 4-d

D 1-c, 2-a, 3-b, 4-d

💡 Short Explanation

Rectangular hyperbola is unitary elastic. Vertical demand is perfectly inelastic. Horizontal demand is perfectly elastic.

✅ Correct Answer Explanation

Rectangular hyperbola → Unitary elastic (eD = 1) Vertical demand curve → Perfectly inelastic (eD = 0) Horizontal demand curve → Perfectly elastic (eD = ∞) Midpoint of a linear demand curve → Unitary elasticity Therefore, the correct matching is: 1-c, 2-b, 3-a, 4-d

❓ Why Other Options Are Incorrect

Option B: Incorrectly matches the rectangular hyperbola.
Option C: Incorrectly matches vertical demand.
Option D: Reverses the elasticities of vertical and horizontal curves.

🎯 Strategy

Used

Match the Following

🧠 Memory Trick

Hyperbola = 1 • Vertical = 0 • Horizontal = ∞

📚 Theory of Consumer Behaviour – Types of Price Elasticity of Demand

16 A rectangular hyperbola demand curve given by the mathematical equation pq = c possesses which of the following distinct properties?
1. The total expenditure by the consumer remains constant at c across all prices.
2. The price elasticity of demand |eD| equals exactly 1 at every single point on the curve.
3. The curve is perfectly horizontal.

A 1 and 2

B 2 and 3

C 1 and 3

D 1, 2, and 3

💡 Short Explanation

(pq=c) means total expenditure is constant. Rectangular hyperbola shows unitary elasticity. It is not a perfectly horizontal curve.

✅ Correct Answer Explanation

A rectangular hyperbola demand curve satisfies: [ pq=c ] Here, price × quantity = total expenditure, which remains constant at c. Since expenditure remains unchanged for every price change, the curve represents unitary elastic demand, meaning (|e_D|=1) at every point. Statement 3 is incorrect because a rectangular hyperbola is not perfectly horizontal.

❓ Why Other Options Are Incorrect

Option B: Statement 1 is correct, and Statement 3 is incorrect.
Option C: Statement 2 is correct, and Statement 3 is incorrect.
Option D: Includes Statement 3, which is false.

🎯 Strategy

Used

Multi-correct

🧠 Memory Trick

Rectangular Hyperbola = pq Constant = Elasticity 1

📚 Theory of Consumer Behaviour – Unitary Elastic Demand

17 Assertion (A): On the linear demand curve (q=a-bp), elasticity drops below 1 as price falls below (\frac{a}{2b}).
Reason (R): As price decreases, the value of (p) in the numerator of (e_D=\frac{bp}{a-bp}) becomes smaller, and the quantity (q) in the denominator becomes larger, continuously shrinking the elasticity fraction.

A Both A and R are true, and R is the correct explanation of A.

B Both A and R are true, but R is not the correct explanation of A.

C A is true, but R is false.

D A is false, but R is true.

💡 Short Explanation

Elasticity equals 1 at (p=\frac{a}{2b}). Below this price, elasticity becomes less than 1. The formula explains why elasticity decreases.

✅ Correct Answer Explanation

For the linear demand curve: [ q=a-bp ] Elasticity is: [ e_D=\frac{bp}{a-bp} ] At (p=\frac{a}{2b}), elasticity equals 1. When price falls below this level: (bp) becomes smaller. (a-bp) becomes larger. Therefore, elasticity falls below 1. Thus, both Assertion and Reason are true, and the Reason correctly explains the Assertion.

❓ Why Other Options Are Incorrect

Option B: The Reason directly explains the Assertion.
Option C: The Reason is true.
Option D: The Assertion is also true.

🎯 Strategy

Used

Assertion and Reason

🧠 Memory Trick

Above Midpoint → Elastic | Midpoint → Unitary | Below Midpoint → Inelastic

📚 Theory of Consumer Behaviour – Elasticity on Linear Demand Curve

18 Arrange the geometric proof steps proving that (e_D = \frac{\text{Lower Segment}}{\text{Upper Segment}}) on a linear demand curve using similar triangles.
1. Observe that triangle ECD and Bp₀D are similar, making CD/CE = p₀D/p₀B.
2. Recall the elasticity formula (e_D = (\Delta q/\Delta p) \times (p/q) = (CD/CE) \times (Op₀/Oq₀)).
3. Conclude (e_D = DA/DB) since triangles Bp₀D and BOA are also similar.
4. Substitute to get (e_D = (p₀D/p₀B) \times (Op₀/Oq₀) = q₀D/p₀B).

A 2, 1, 4, 3

B 1, 2, 3, 4

C 2, 4, 1, 3

D 1, 4, 2, 3

💡 Short Explanation

Start with the elasticity formula. Use similar triangles. Substitute ratios. Conclude lower segment divided by upper segment.

✅ Correct Answer Explanation

The proof begins by recalling the point elasticity formula. Then, using similar triangles, the slope ratio is replaced with an equivalent segment ratio. Substituting these values gives the elasticity expression in terms of graph segments. Finally, using another pair of similar triangles, elasticity is shown as: [ e_D=\frac{DA}{DB} ] This represents: [ \frac{\text{Lower Segment}}{\text{Upper Segment}} ] Hence, the correct sequence is 2 → 1 → 4 → 3.

❓ Why Other Options Are Incorrect

Option B: Starts with similar triangles before introducing the formula.
Option C: Substitutes before establishing the triangle relationship.
Option D: Does not follow the proof sequence.

🎯 Strategy

Used

Sequence

🧠 Memory Trick

Formula → Similar Triangles → Substitute → Segment Ratio

📚 Theory of Consumer Behaviour – Geometric Measurement of Elasticity

📄 Passage

"Suppose at price p, the demand for a good is q, and at price p + Δp, the demand for the good is q + Δq. At price p, the total expenditure on the good is pq... If price changes from p to (p + Δp), the change in the expenditure on the good is, (p + Δp)(q + Δq) – pq = qΔp + pΔq + ΔpΔq. For small values of Δp and Δq, the value of the term ΔpΔq is negligible... Approximate change in expenditure = ΔE = qΔp + pΔq = Δp(q + p(Δq/Δp)) = Δp[q(1 + eD)]. Note that if eD < –1, then q(1 + eD) < 0"

Based on the passage equation ΔE = Δp[q(1 + eD)], what mathematically happens to the change in expenditure (ΔE) if the price increases (Δp > 0) and the demand is highly elastic (eD < -1)?

A ΔE becomes positive

B ΔE becomes negative

C ΔE remains zero

D ΔE is exactly equal to Δp

💡 Short Explanation

If e_D<-1, then q(1+e_D)<0. If Δp>0, price increases. Positive × negative = negative.

✅ Correct Answer Explanation

Given: ΔE=Δp[q(1+e_D)] If demand is highly elastic, then: e_D<-1 So, q(1+e_D)<0 Since price increases, Δp>0 Therefore, ΔE=positive×negative=negative So total expenditure decreases.

❓ Why Other Options Are Incorrect

Option A: Would occur if demand were inelastic.
Option C: Occurs only under unitary elasticity.
Option D: Ignores the elasticity term.

🎯 Strategy

Used

Passage-Based

🧠 Memory Trick

Elastic + Price ↑ → Expenditure ↓

📚 Theory of Consumer Behaviour – Price Elasticity and Expenditure Relationship

📄 Passage

Based on the same passage, if the price drops (Δp, 0)and the demand is inelastic (e_D>-1), what is the mathematical nature of the response on total expenditure?

A The term q(1+e_D)is positive, making ΔEnegative, meaning total expenditure falls.

B The term q(1+e_D)is negative, making ΔEpositive, meaning total expenditure rises.

C The term q(1+e_D)is exactly zero, making ΔEzero.

D The mathematical elasticity term completely cancels out Δp.

💡 Short Explanation

Inelastic demand means (e_D>-1). So (q(1+e_D)) is positive. Price drop makes (\Delta E) negative. 2. Price drop makes ΔEnegative.

✅ Correct Answer Explanation

Given: ΔE=Δp[q(1+e_D)] For inelastic demand: e_D>-1 So: 1+e_D>0 Since quantity qis positive: q(1+e_D)>0 If price drops: Δp<0 Therefore: ΔE=negative×positive=negative This means total expenditure decreases.

❓ Why Other Options Are Incorrect

Option B: This reverses the sign of (q(1+e_D)).
Option C: Applies to unitary elasticity.
Option D: Elasticity does not cancel the price change.

🎯 Strategy

Used

Passage-Based

🧠 Memory Trick

Inelastic + Price ↓ → Expenditure ↓

📚 Theory of Consumer Behaviour – Expenditure Method of Elasticity

CUET UG Economics Booster Test 3 - Market Demand and Elasticity

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