Zero price elasticity of demand means
- A.whatever the change in price, there is absolutely no change in demand
- B.for a small change in price, there is a small change in demand
- C.for a small change in price, there is a large change in demand
- D.for a large change in price, there is a small change in demand
Correct answer
Explanation
The correct answer is A, whatever the change in price, there is absolutely no change in demand. Elasticity measures how strongly the quantity demanded reacts to price, and zero means no reaction at all. Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. When it is zero, demand is perfectly inelastic and the demand curve is a vertical straight line. Life-saving medicines such as insulin come closest to this, since a patient buys the same dose whatever the price. At the other extreme, perfectly elastic demand, with infinite elasticity, gives a horizontal demand curve. Option B is wrong because any change in demand, however small, means the elasticity is above zero. Option C is wrong because a large response to a small price change means elastic demand, with elasticity greater than one. Option D is wrong because a small response to a large price change is relatively inelastic demand, between zero and one, but still not zero. Exam tip: elasticity zero gives a vertical curve; elasticity infinite gives a horizontal one.
Practice Questions
View allAccording to the law of diminishing marginal utility, as the amount of a good consumed increases, the marginal utility of that good tends to
- A.improve
- B.diminish
- C.remain constant
- D.first diminish and then improve
Show answer
Each extra unit of a good gives a consumer less additional satisfaction than the unit before it, so marginal utility falls as consumption rises.
Read the full explanation →Consider the following statements about impact of tax : 1. A tax is shifted forward to consumers if the demand is inelastic relative to supply. 2. A tax is shifted backward to producers if the supply is relatively more inelastic than demand. Which of the statements given above is/are correct?
- A.1 only
- B.2 only
- C.Both 1 and 2
- D.Neither 1 nor 2
Show answer
The burden of a tax falls more heavily on whichever side of the market is less elastic, the side that cannot easily walk away.
Read the full explanation →UBI, as an alternative for subsidies in poverty alleviation, stands for
- A.Union Basic Income
- B.Undefined Basic Income
- C.Unconditional Basic Income
- D.Universal Basic Income
Show answer
UBI is the idea of paying every citizen a fixed sum of money regularly, without conditions, in place of a large number of separate subsidies and welfare schemes.
Read the full explanation →Who among the following is the Chairman of the Fourteenth Finance Commission?
- A.C. Rangarajan
- B.Vijay Kelkar
- C.Y. V. Reddy
- D.Rakesh Mohan
Show answer
The Fourteenth Finance Commission, set up in 2013 for the award period 2015-2020, was chaired by Y. V. Reddy, a former Governor of the Reserve Bank of India.
Read the full explanation →Why was constitutional amendment needed for introducing GST?
- A.States were not willing to agree with the Union for introduction of GST without amendment in the Constitution.
- B.GST was to be implemented on concurrent base and Article 246 was inadequate for such a case.
- C.The Empowered Committee of Finance Ministers had recommended for constitutional amendment.
- D.The GST Council had recommended for constitutional amendment so that its power enhances.
Show answer
GST is levied by the Union and the States together on the same supply, and Article 246, which splits taxing powers between them through separate lists, did not allow such a concurrent tax.
Read the full explanation →