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CMA Foundation · Fundamentals of Business Economics and Management · Theory of Demand and Supply

The demand function for a good is Qd = 500 − 5P + 2Y, where P is price in ₹ and Y is income in ₹ thousand. At P = 40 and Y = 50, quantity demanded is 400. If income rises to Y = 60 and price rises to P = 50, what is the new quantity demanded, and how much of the change is due to the shift in demand?

The new quantity demanded is 370 units. The price rise from ₹40 to ₹50 causes a contraction of 50 units along the curve, while the income rise of 10 thousand shifts demand by 20 units, so the net change is minus 30 from 400.

  1. AQuantity 370; shift in demand is +20 unitsCorrect
  2. BQuantity 370; shift in demand is +40 units
  3. CQuantity 410; shift in demand is +20 units
  4. DQuantity 330; shift in demand is −20 units

Explanation

Check the base: 500 − 200 + 100 = 400. New Qd = 500 − 250 + 120 = 370. The price rise causes a movement along the curve of −5 × 10 = −50 units (contraction). The income rise shifts the curve by 2 × 10 = +20 units. Net change is −30, so 400 to 370. Option two wrongly doubles the income effect.

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