Q.1 What is the primary factor that determines the price of a good in a perfectly competitive market?
Government regulation
Supply and demand
Producer's preference
Consumer's income only
Explanation - In a perfectly competitive market, prices are determined by the interaction of supply and demand, where equilibrium price occurs when quantity demanded equals quantity supplied.
Correct answer is: Supply and demand
Q.2 If demand for a product increases while supply remains constant, what happens to its equilibrium price?
Price decreases
Price remains the same
Price increases
Quantity decreases
Explanation - When demand increases and supply is constant, the excess demand pushes the equilibrium price upward until a new equilibrium is reached.
Correct answer is: Price increases
Q.3 Which of the following shifts the supply curve to the right?
Increase in production cost
Technological advancement
Higher taxes on producers
Decrease in consumer income
Explanation - Technological improvements make production more efficient, increasing supply at each price level and shifting the supply curve to the right.
Correct answer is: Technological advancement
Q.4 When the price of a good is above its equilibrium level, there is a:
Shortage
Surplus
Equilibrium
Price ceiling
Explanation - If price is above equilibrium, quantity supplied exceeds quantity demanded, leading to a surplus.
Correct answer is: Surplus
Q.5 Which of the following best defines 'equilibrium price'?
The maximum price a consumer is willing to pay
The price at which quantity demanded equals quantity supplied
The minimum price a producer can accept
Any price set by the government
Explanation - Equilibrium price is the market-clearing price where the quantity demanded equals the quantity supplied, leaving no surplus or shortage.
Correct answer is: The price at which quantity demanded equals quantity supplied
Q.6 If the government imposes a price ceiling below the equilibrium price, it will lead to:
Surplus
Shortage
Equilibrium
Increase in supply
Explanation - A price ceiling below equilibrium prevents the price from rising to its natural level, causing quantity demanded to exceed quantity supplied, creating a shortage.
Correct answer is: Shortage
Q.7 What happens to equilibrium quantity if both demand and supply increase?
Quantity increases, price is indeterminate
Quantity decreases, price decreases
Quantity decreases, price increases
Price decreases, quantity is indeterminate
Explanation - An increase in demand raises price and quantity, while an increase in supply lowers price and raises quantity. Quantity unambiguously rises, but price depends on the relative magnitude of shifts.
Correct answer is: Quantity increases, price is indeterminate
Q.8 Which factor would NOT shift the demand curve?
Change in consumer tastes
Change in price of the good itself
Change in consumer income
Change in price of related goods
Explanation - A change in the price of the good itself causes a movement along the demand curve, not a shift of the curve.
Correct answer is: Change in price of the good itself
Q.9 What is meant by 'market clearing price'?
Price at which there is neither surplus nor shortage
Highest price consumers can afford
Lowest price producers accept
Government-controlled price
Explanation - Market clearing price is another term for equilibrium price, where quantity demanded equals quantity supplied.
Correct answer is: Price at which there is neither surplus nor shortage
Q.10 If the demand for a product decreases while supply remains unchanged, the equilibrium price will:
Increase
Decrease
Remain the same
First increase, then decrease
Explanation - A fall in demand with constant supply creates excess supply, forcing the price down to a new equilibrium.
Correct answer is: Decrease
Q.11 A leftward shift in the supply curve indicates:
Increase in supply
Decrease in supply
Increase in demand
Decrease in demand
Explanation - A leftward shift of the supply curve shows a reduction in supply at all price levels, often due to higher costs or restrictions.
Correct answer is: Decrease in supply
Q.12 Which of the following will increase the equilibrium price?
Increase in supply and increase in demand
Decrease in supply and increase in demand
Increase in supply and decrease in demand
Decrease in supply and decrease in demand
Explanation - When supply decreases, fewer goods are available, pushing prices up. If demand increases simultaneously, the upward pressure on price is reinforced.
Correct answer is: Decrease in supply and increase in demand
Q.13 What happens when a price floor is set above the equilibrium price?
Shortage
Surplus
Equilibrium
Demand decreases to zero
Explanation - A price floor above equilibrium means suppliers want to supply more than consumers are willing to buy, creating a surplus.
Correct answer is: Surplus
Q.14 If two goods are complements, an increase in the price of one will:
Increase demand for the other
Decrease demand for the other
Not affect demand for the other
Increase supply of the other
Explanation - Complementary goods are used together, so if the price of one rises, consumers buy less of both.
Correct answer is: Decrease demand for the other
Q.15 Which scenario demonstrates a surplus in the market?
Supply is less than demand at current price
Supply equals demand at current price
Supply exceeds demand at current price
Government sets the price at equilibrium
Explanation - A surplus occurs when the quantity supplied is greater than quantity demanded at a given price.
Correct answer is: Supply exceeds demand at current price
Q.16 Price determination in a market economy is primarily guided by:
Government planners
Supply and demand interactions
Producer monopolies
Random pricing decisions
Explanation - Market prices are set by the forces of supply and demand, where buyers and sellers interact to reach equilibrium.
Correct answer is: Supply and demand interactions
Q.17 What is the effect on equilibrium price if both demand and supply decrease?
Price increases, quantity decreases
Price decreases, quantity increases
Quantity decreases, price is indeterminate
Quantity increases, price is indeterminate
Explanation - When both curves shift left, quantity unambiguously falls. The price change depends on which curve shifts more, so it is indeterminate without more information.
Correct answer is: Quantity decreases, price is indeterminate
Q.18 A shift to the right in the demand curve indicates:
Decrease in quantity demanded
Increase in quantity demanded at each price
Decrease in price
Increase in supply
Explanation - A rightward shift means consumers want to buy more of the good at every price, representing increased demand.
Correct answer is: Increase in quantity demanded at each price
Q.19 Which of the following is NOT a determinant of supply?
Production technology
Number of sellers
Consumer preferences
Input costs
Explanation - Consumer preferences affect demand, not supply. Supply is determined by factors like technology, input costs, and number of sellers.
Correct answer is: Consumer preferences
Q.20 If price elasticity of demand is high, a small change in price will:
Have little effect on quantity demanded
Cause a large change in quantity demanded
Not affect the market
Increase supply significantly
Explanation - High price elasticity means quantity demanded is very responsive to price changes.
Correct answer is: Cause a large change in quantity demanded
Q.21 In the context of price determination, a shortage occurs when:
Supply exceeds demand
Demand exceeds supply
Price is at equilibrium
Government sets a price floor
Explanation - A shortage happens when the quantity demanded is greater than quantity supplied at the prevailing price, pushing the price upward.
Correct answer is: Demand exceeds supply
Q.22 Which of the following factors can cause the demand curve to shift rightward?
Decrease in consumer income for normal goods
Increase in consumer income for normal goods
Increase in production costs
Imposition of higher taxes on sellers
Explanation - For normal goods, higher income increases demand at all prices, shifting the demand curve to the right.
Correct answer is: Increase in consumer income for normal goods
Q.23 The law of demand states that, ceteris paribus:
Price and quantity demanded move in the same direction
Price and quantity demanded move in opposite directions
Price and quantity supplied move in opposite directions
Price has no effect on quantity demanded
Explanation - According to the law of demand, as price rises, quantity demanded falls, and vice versa, holding other factors constant.
Correct answer is: Price and quantity demanded move in opposite directions
Q.24 Which market scenario is most likely to require government intervention to correct price?
Perfectly competitive market
Market with price ceilings or floors
Market at equilibrium
Market with excess supply only
Explanation - Price controls like ceilings and floors can cause shortages or surpluses, often requiring government intervention.
Correct answer is: Market with price ceilings or floors
Q.25 If supply increases and demand remains unchanged, the equilibrium price:
Increases
Decreases
Remains unchanged
Fluctuates randomly
Explanation - An increase in supply with constant demand creates excess supply at the old price, pushing the price down to a new equilibrium.
Correct answer is: Decreases