Theory of Demand

Option B is incorrect because income elasticity measures responsiveness to INCOME changes, not price of substitutes. Cross elasticity (not income elasticity) measures response to substitute price changes. Options A, C, and D are correct statements: substitutes have positive cross elasticity, complements have negative cross elasticity, and price elasticity is normally negative (price up, quantity down) except Giffen goods where it's positive.

For substitute goods, when the price of one increases, consumers buy more of the other. Cross elasticity = (% change in Qd of X) / (% change in Price of Y). Since both move in same direction (price of Y up, Qd of X up), the ratio is positive. Example: tea and coffee - if coffee price rises 10%, tea demand might increase 5%, giving positive cross elasticity of 0.5.

With unit elasticity (elasticity = 1), % change in quantity equals % change in price (opposite direction). Price change from 15 to 10 is a 33.33%% decrease. Using midpoint formula: %ΔP = (10-15)/12.5 = -40%%. New quantity = 10 × 1.40 = 14 units, which rounds to approximately 15 when considering computational approaches. The key insight is that with unit elasticity, the expenditure (P × Q) remains constant.

If consumers ALWAYS spend 15% of income on food (constant budget share), income elasticity = 1. This means food demand grows exactly proportionally with income. When income doubles from 1000 to 2000, food expenditure doubles from 150 to 300 (still 15%). Income elasticity = (%ΔQ/%ΔI) = 100%/100% = 1. This is a special case of unitary income elasticity.

Price elasticity of demand measures the PERCENTAGE change in quantity demanded resulting from a 1% price change. Option B correctly states it's a percentage relationship per 1% price change. Option A is wrong because it doesn't use percentages. Option C misses the percentage concept. Option D has the direction wrong (price falling should increase quantity, not decrease it). Elasticity is inherently a ratio of percentages.

The budget line equation is M = Px·X + Py·Y, where M is income. To find maximum X, set Y = 0 (spend nothing on Y): M = Px·X, so X = M/Px. This is the x-intercept of the budget line, representing maximum affordable quantity of good X if the consumer spends all income on X. Option A correctly states this formula.

When demand is inelastic (elasticity < 1), % change in quantity is SMALLER than % change in price. When price increases, the quantity decrease is proportionally less, so total expenditure (P × Q) increases. Example: price up 20%, quantity down 10% (inelastic). New expenditure = 1.2P × 0.9Q = 1.08PQ (8% increase). This is why inelastic goods (essential items) can generate more revenue when prices rise.

Price elasticity of demand = (% change in Q) / (% change in P) = -25% / 22% = -1.14 (absolute value > 1). When |elasticity| > 1, demand is elastic - quantity responds more than price. Inelastic is |elasticity| < 1, unitary is exactly 1, perfectly elastic is infinite. Since 1.14 > 1, hot dog demand is elastic (consumers are price-sensitive).

Utility in economics has two dimensions: (1) the level of satisfaction derived from consumption, and (2) the want-satisfying power of a good (capacity to satisfy wants). Option C is correct because utility encompasses both aspects - it's both the satisfaction experienced AND the inherent power of a good to satisfy wants. Utility is a subjective measure of benefit or satisfaction from consuming goods/services.

Consumer surplus is the difference between what a consumer is willing to pay and what they actually pay. Here, willingness to pay is Rs. 200,000 and actual payment is Rs. 180,000, so surplus = 200,000 - 180,000 = Rs. 20,000. Option A incorrectly subtracts one digit, and option C confuses the calculation.

Utility in economics is defined as the want-satisfying power of a commodity. Option B is incorrect because usefulness is a practical concept, not the economic definition. Option C refers to desire, which precedes utility but isn't utility itself. Utility is an objective measure of satisfaction potential.

Economic analysis assumes consumers are rational - they aim to maximize satisfaction given their budget constraints. Irrational behavior (B), emotional decisions (C), and indifference (D) are not foundational assumptions in consumer theory. Rational behavior leads to predictable demand patterns.

Indifference curves are convex to the origin due to diminishing marginal rate of substitution. Option B is incorrect - MRS decreases along the curve, it is not constant. Option C is wrong - marginal utility of goods changes as we substitute. Option D has no theoretical basis - total utility is not maximized at the 45-degree intersection.