CA Foundation · Business Economics · Theory of Demand and Supply
The demand function for a good is Qd = 200 − 5P + 0.02M, where P is price in rupees and M is consumer income in rupees. At P = ₹20 and M = ₹5,000, what is the quantity demanded, and what happens to it if income rises to ₹6,000 at the same price?
Quantity demanded is 200 units at income ₹5,000 and rises to 220 units when income is ₹6,000. Substituting gives 200 − 100 + 100 = 200, then 200 − 100 + 120 = 220. The positive income coefficient shows the good is normal.
- A200 units, rising to 220 unitsCorrect
- B200 units, rising to 205 units
- C100 units, rising to 120 units
- D200 units, falling to 180 units
Explanation
At M = 5,000: Qd = 200 − 5(20) + 0.02(5,000) = 200 − 100 + 100 = 200. At M = 6,000: Qd = 200 − 100 + 120 = 220. Income rise of 1,000 adds 0.02 × 1,000 = 20 units, so the good is normal and the demand curve shifts right. Omitting the income term gives 100, which is wrong.
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