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CA Foundation · Business Economics · Theory of Demand and Supply

The demand for a normal good is Q = 200 − 5P. Its price rises from ₹20 to ₹24, and at the same time consumers' incomes fall so that the new demand curve becomes Q = 170 − 5P. What is the actual change in quantity purchased and how much of it is due to the shift?

Quantity purchased falls by 50 units, from 100 to 50. The price rise accounts for 20 units as a movement along the old curve, and the income fall accounts for the other 30 units as a leftward shift of the curve.

  1. AFall of 50 units in total, of which 30 units is due to the shiftCorrect
  2. BFall of 20 units in total, all due to the price rise
  3. CFall of 50 units in total, of which 20 units is due to the shift
  4. DFall of 30 units in total, of which 30 units is due to the shift

Explanation

Initial quantity is 200 − 100 = 100 units. New quantity is 170 − 120 = 50 units, a total fall of 50. The movement along the old curve is 5 × 4 = 20 units. The remaining 30 units, which is the 200 − 170 gap, is due to the leftward shift. Total 20 + 30 = 50.

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