Advanced Demand Theory: Normal Goods, Inferior Goods, Giffen Goods, Price/Income/Substitution Effects, Consumer Surplus

1. A consumer buys good X. When income rises from $2000 to $2500, quantity demanded of X falls from 40 units to 30 units. What type of good is X?

A normal good
B inferior good
C luxury good
D public good

2. A good has income elasticity of demand of +0.4. Which statement is correct?

A it is an inferior good
B it is a normal necessity
C it is a luxury good
D it is a Giffen good

3. A good has income elasticity of demand of +2.5. Which statement is correct?

A it is a normal luxury
B it is an inferior good
C it is a demerit good
D it has perfectly inelastic demand

4. A good has income elasticity of demand of -0.7. Which statement is correct?

A it is a normal good
B it is an inferior good
C it is a luxury good
D it is a substitute good

5. A consumer’s income rises by 10%. Quantity demanded of good X rises by 25%. What is the income elasticity of demand?

A 0.4
B 1.5
C 2.5
D -2.5

6. A consumer’s income rises by 20%. Quantity demanded of good Y falls by 8%. What is the income elasticity of demand?

A +0.4
B -0.4
C +2.5
D -2.5

7. Which good is most likely to have negative income elasticity of demand?

A private education
B designer clothing
C second-hand cheap clothing
D foreign holidays

8. Which good is most likely to have income elasticity greater than 1?

A salt
B basic bread
C luxury cars
D tap water

9. Which statement is correct about a Giffen good?

A it is a normal good with a positive income effect
B it is an inferior good where the income effect outweighs the substitution effect
C it is any good with elastic demand
D it is any good bought by low-income consumers

10. For a Giffen good, a fall in price causes

A quantity demanded to rise because substitution effect dominates
B quantity demanded to fall because negative income effect dominates
C quantity demanded to stay constant because income and substitution effects cancel exactly
D demand curve to become horizontal

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. For a normal good, a fall in price causes

A substitution effect to reduce quantity demanded and income effect to increase it
B substitution effect and income effect both to increase quantity demanded
C substitution effect to increase quantity demanded and income effect to reduce it
D substitution effect and income effect both to reduce quantity demanded

12. For an inferior but non-Giffen good, a fall in price causes

A substitution effect to increase quantity demanded and income effect to reduce it, with substitution effect stronger
B substitution effect to reduce quantity demanded and income effect to increase it
C both effects to reduce quantity demanded
D income effect to dominate substitution effect

13. For a Giffen good, a rise in price causes

A quantity demanded to fall
B quantity demanded to rise
C quantity supplied to fall
D income elasticity to become positive

14. Which condition is necessary but not sufficient for a good to be Giffen?

A it must be inferior
B it must be luxury
C it must be non-rival
D it must have many substitutes

15. If a price fall increases real income, the income effect for a normal good will

A increase quantity demanded
B reduce quantity demanded
C leave quantity demanded unchanged
D make the good inferior

16. If a price fall increases real income, the income effect for an inferior good will

A increase quantity demanded
B reduce quantity demanded
C always exceed the substitution effect
D make demand perfectly elastic

17. A consumer buys more of X after income rises. This proves X is

A normal
B inferior
C Giffen
D public

18. A consumer buys less of X after income rises. This proves X is

A normal
B inferior
C luxury
D complementary

19. A good has a downward-sloping demand curve despite being inferior. What must be true?

A substitution effect is stronger than the negative income effect
B negative income effect is stronger than substitution effect
C income effect and substitution effect are both negative
D substitution effect is zero

20. A good has an upward-sloping demand curve over part of its range. What is the best explanation?

A it is normal and has a strong positive income effect
B it is inferior and has a negative income effect larger than the substitution effect
C it is a public good
D it has no opportunity cost

21. A consumer’s income rises by 5%. Demand for good A rises by 3%. Demand for good B rises by 12%. Which is correct?

A A is luxury; B is necessity
B A is inferior; B is normal necessity
C A is normal necessity; B is normal luxury
D A is Giffen; B is inferior

22. If income elasticity of demand is zero, demand is

A completely unresponsive to income changes
B completely unresponsive to price changes
C perfectly income elastic
D always negative

23. Which pair is most likely correct?

A inferior good: YED positive; luxury good: YED negative
B normal necessity: 0 < YED < 1; luxury: YED > 1
C Giffen good: YED positive; normal good: YED negative
D public good: YED always zero; private good: YED always positive

24. A fall in the price of X causes a consumer to buy more X because X is now cheaper relative to Y. This is

A income effect
B substitution effect
C external benefit
D consumer surplus

25. A fall in the price of X causes a consumer to feel richer and buy more X. If X is normal, this is

A substitution effect
B income effect
C cross elasticity
D diminishing returns

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

26. A fall in the price of X causes a consumer to feel richer and buy less X. X is

A normal
B inferior
C public
D complementary

27. Which effect always moves quantity demanded in the opposite direction to price?

A substitution effect
B income effect
C external effect
D wealth distribution effect

28. Which effect can move quantity demanded in the same direction as price for an inferior good?

A substitution effect
B income effect
C marginal cost effect
D producer surplus effect

29. A consumer initially buys 20 units of X. After the price of X falls, the substitution effect increases quantity by 6 units and the income effect reduces quantity by 2 units. Final quantity demanded is

A 18
B 22
C 24
D 28

30. A consumer initially buys 20 units of X. After the price of X falls, the substitution effect increases quantity by 5 units and the income effect reduces quantity by 8 units. X is most likely

A normal
B inferior but not Giffen
C Giffen
D luxury

31. Consumer surplus is

A the difference between what consumers are willing to pay and what they actually pay
B the difference between price and average cost
C the difference between total revenue and total cost
D the difference between exports and imports

32. If a consumer is willing to pay $50 for a good but pays $35, consumer surplus is

A $15
B $35
C $50
D $85

33. Four consumers are willing to pay $10, $8, $6 and $4 for one unit of a good. The market price is $6. Total consumer surplus is

A $2
B $4
C $6
D $10

34. A consumer buys 3 units. Willingness to pay for each unit is $12, $9 and $7. Price is $6 per unit. Total consumer surplus is

A $4
B $10
C $18
D $28

35. If market price falls, consumer surplus usually

A rises
B falls
C becomes zero
D becomes producer surplus

36. If market price rises, consumer surplus usually

A rises
B falls
C stays unchanged
D becomes government revenue

37. On a demand and supply diagram, consumer surplus is the area

A below price and above supply
B above price and below demand
C below demand and below price
D above supply and below demand only

38. A maximum price below equilibrium is introduced. For consumers who still obtain the good, consumer surplus may

A rise because they pay a lower price
B fall because they pay a higher price
C become zero for all consumers
D become producer surplus

39. A maximum price below equilibrium may reduce total consumer welfare because

A shortages mean some consumers cannot obtain the good
B supply increases without limit
C price rises above equilibrium
D demand falls to zero

40. A subsidy that lowers market price and increases quantity will usually

A increase consumer surplus
B reduce consumer surplus
C leave consumer surplus unchanged
D remove all opportunity cost

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. An indirect tax that raises market price and reduces quantity will usually

A increase consumer surplus
B reduce consumer surplus
C leave consumer surplus unchanged
D make consumer surplus equal tax revenue

42. A straight-line demand curve has price intercept $100 and equilibrium price $60. Quantity bought is 80 units. Consumer surplus is

A $1600
B $2400
C $3200
D $4800

43. A demand curve is P = 40 – 2Q. If market price is $20, what is consumer surplus?

A $50
B $100
C $200
D $400

44. A demand curve is P = 100 – Q. If price is $70, what is consumer surplus?

A $300
B $450
C $900
D $2100

45. A demand curve shifts right while supply remains unchanged. Consumer surplus is likely to

A rise because more consumers are willing to pay more
B fall because price always falls
C remain unchanged because supply did not shift
D become negative

46. Which situation creates the largest consumer surplus?

A high willingness to pay and low market price
B low willingness to pay and high market price
C high production cost and high market price
D low demand and high price

47. If a consumer’s willingness to pay falls while market price is unchanged, consumer surplus

A rises
B falls
C becomes producer surplus
D becomes total revenue

48. Consumer surplus can be used to measure

A benefit consumers receive beyond what they pay
B cost of producing the last unit
C profit earned by producers
D government budget balance

49. Which statement about consumer surplus is correct?

A all consumers who buy must receive the same consumer surplus
B consumers with higher willingness to pay gain more surplus at a given price
C consumer surplus is always zero in equilibrium
D consumer surplus is impossible in competitive markets

50. Which chain is most accurate?

A fall in price of normal good → substitution effect raises demand → income effect raises demand → consumer surplus rises
B fall in price of normal good → substitution effect lowers demand → income effect lowers demand → consumer surplus falls
C fall in price of Giffen good → substitution effect lowers demand → income effect raises demand → demand rises
D rise in price of inferior good → income effect always lowers demand more than substitution effect → demand always falls

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

1. Answer: B

A wrong: if income rises and demand falls, the good cannot be normal.
B correct: an inferior good is demanded less when income rises.
C wrong: luxury goods have positive YED greater than 1.
D wrong: public goods are defined by non-rivalry and non-excludability, not income response.

2. Answer: B

A wrong: inferior goods have negative YED.
B correct: YED is positive but less than 1, so it is a normal necessity.
C wrong: luxury goods have YED greater than 1.
D wrong: Giffen goods are inferior goods with unusual price-demand behaviour.

3. Answer: A

A correct: YED greater than 1 means demand rises proportionately more than income, so it is a luxury.
B wrong: inferior goods have negative YED.
C wrong: demerit goods are defined by harmful overconsumption, not YED.
D wrong: price elasticity is not being measured here.

4. Answer: B

A wrong: normal goods have positive YED.
B correct: negative YED means demand falls when income rises, so the good is inferior.
C wrong: luxury goods have positive YED greater than 1.
D wrong: substitute goods are identified by positive XED, not YED.

5. Answer: C

A wrong: 0.4 reverses the calculation.
B wrong: 1.5 is not supported.
C correct: YED = 25% / 10% = 2.5.
D wrong: demand rises when income rises, so YED is positive.

6. Answer: B

A wrong: demand falls as income rises, so YED is negative.
B correct: YED = -8% / 20% = -0.4.
C wrong: this reverses the calculation and uses the wrong sign.
D wrong: -2.5 is too large in magnitude.

7. Answer: C

A wrong: private education is usually a normal/luxury good.
B wrong: designer clothing is usually a luxury good.
C correct: second-hand cheap clothing is often bought less as income rises, so it may be inferior.
D wrong: foreign holidays are usually luxury goods.

8. Answer: C

A wrong: salt is a necessity with low positive YED.
B wrong: basic bread is usually a necessity.
C correct: luxury cars are likely to have YED greater than 1.
D wrong: tap water is a necessity with very low income responsiveness.

9. Answer: B

A wrong: Giffen goods are inferior, not normal.
B correct: a Giffen good has a negative income effect that outweighs the substitution effect.
C wrong: elastic demand is unrelated to Giffen classification.
D wrong: not every good bought by low-income consumers is Giffen.

10. Answer: B

A wrong: that describes a normal good or ordinary inferior good.
B correct: for a Giffen good, the price fall raises real income, causing the consumer to buy less of the inferior good by more than the substitution effect adds.
C wrong: if effects cancelled exactly, quantity demanded would stay unchanged, not become Giffen.
D wrong: a horizontal demand curve means perfectly elastic demand.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. Answer: B

A wrong: substitution effect does not reduce demand after a price fall.
B correct: for a normal good, it is cheaper relative to substitutes and real income rises, so both effects increase quantity demanded.
C wrong: income effect does not reduce demand for a normal good.
D wrong: both effects increase, not reduce, quantity demanded.

12. Answer: A

A correct: for an ordinary inferior good, the substitution effect raises demand and the income effect reduces demand, but substitution effect dominates overall.
B wrong: substitution effect after a price fall increases quantity demanded.
C wrong: both do not reduce demand.
D wrong: if income effect dominates, it is Giffen.

13. Answer: B

A wrong: ordinary goods show lower quantity demanded when price rises.
B correct: Giffen goods have upward-sloping demand over a range, so a price rise increases quantity demanded.
C wrong: quantity supplied is not being asked.
D wrong: a Giffen good remains inferior.

14. Answer: A

A correct: all Giffen goods must be inferior, but not all inferior goods are Giffen.
B wrong: luxury goods are normal goods.
C wrong: public-good characteristics are irrelevant.
D wrong: many substitutes would make Giffen behaviour less likely.

15. Answer: A

A correct: for a normal good, higher real income increases quantity demanded.
B wrong: that is the income effect for an inferior good.
C wrong: normal goods have a positive income effect.
D wrong: the good does not become inferior.

16. Answer: B

A wrong: inferior goods are demanded less when real income rises.
B correct: a price fall raises real income, and for an inferior good this income effect reduces demand.
C wrong: it only exceeds the substitution effect for a Giffen good.
D wrong: income effect does not make demand perfectly elastic.

17. Answer: A

A correct: if income rises and demand rises, X is normal.
B wrong: inferior goods are demanded less when income rises.
C wrong: Giffen goods are inferior and are identified by price-demand behaviour.
D wrong: public goods are not identified by income response.

18. Answer: B

A wrong: normal goods are demanded more when income rises.
B correct: if demand falls as income rises, the good is inferior.
C wrong: luxury goods have positive YED greater than 1.
D wrong: complements are identified through cross elasticity.

19. Answer: A

A correct: an inferior good still has a normal downward-sloping demand curve if the substitution effect dominates the negative income effect.
B wrong: if the negative income effect dominates, demand slopes upward and the good is Giffen.
C wrong: substitution effect after a price fall is positive for quantity demanded.
D wrong: substitution effect is not zero.

20. Answer: B

A wrong: normal goods do not create upward-sloping demand through income effect.
B correct: upward-sloping demand can occur when an inferior good has a negative income effect larger than the substitution effect.
C wrong: public goods are not defined by upward-sloping demand.
D wrong: all economic goods have opportunity cost.

21. Answer: C

A wrong: A has YED = 3/5 = 0.6, so it is not luxury; B has YED = 12/5 = 2.4, so it is luxury.
B wrong: A is not inferior because demand rises with income.
C correct: A is a normal necessity; B is a normal luxury.
D wrong: neither has negative income response.

22. Answer: A

A correct: YED = 0 means quantity demanded does not respond to income changes.
B wrong: price responsiveness is PED.
C wrong: perfectly income elastic would mean extreme responsiveness.
D wrong: zero is not negative.

23. Answer: B

A wrong: inferior goods have negative YED, while luxury goods have positive YED greater than 1.
B correct: necessities have 0 < YED < 1; luxuries have YED > 1.
C wrong: Giffen goods are inferior and have negative YED.
D wrong: public/private status does not determine YED automatically.

24. Answer: B

A wrong: income effect is caused by change in real income.
B correct: buying more because X is relatively cheaper is the substitution effect.
C wrong: external benefit affects third parties.
D wrong: consumer surplus is willingness to pay minus price paid.

25. Answer: B

A wrong: substitution effect is due to relative price change.
B correct: feeling richer because price falls is the income effect.
C wrong: cross elasticity measures responsiveness to another good’s price.
D wrong: diminishing returns is production theory.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

26. Answer: B

A wrong: normal goods are bought more when real income rises.
B correct: if higher real income causes less demand for X, X is inferior.
C wrong: public goods are non-rival and non-excludable.
D wrong: complementary goods are jointly demanded.

27. Answer: A

A correct: substitution effect always makes consumers buy more when relative price falls and less when relative price rises.
B wrong: income effect depends on whether the good is normal or inferior.
C wrong: external effect is not part of consumer choice decomposition.
D wrong: wealth distribution effect is not the standard price-effect component.

28. Answer: B

A wrong: substitution effect always works opposite to the price change.
B correct: for inferior goods, the income effect can make quantity move in the same direction as price.
C wrong: marginal cost is producer theory.
D wrong: producer surplus is not part of consumer price effects.

29. Answer: C

A wrong: this subtracts the net effect incorrectly.
B wrong: this ignores part of the substitution effect.
C correct: final quantity = 20 + 6 – 2 = 24.
D wrong: this adds both effects.

30. Answer: C

A wrong: normal goods have positive income effect after a price fall.
B wrong: for inferior but non-Giffen goods, substitution effect would dominate and final demand would rise.
C correct: quantity changes by +5 – 8 = -3, so demand falls after a price fall; this indicates Giffen behaviour.
D wrong: luxury goods are normal goods.

31. Answer: A

A correct: consumer surplus is willingness to pay minus actual payment.
B wrong: price minus average cost relates to profit per unit.
C wrong: total revenue minus total cost is profit.
D wrong: exports minus imports is trade balance.

32. Answer: A

A correct: consumer surplus = $50 – $35 = $15.
B wrong: $35 is the price paid.
C wrong: $50 is willingness to pay.
D wrong: $85 adds willingness to pay and price.

33. Answer: C

A wrong: ignores the first consumer’s surplus.
B wrong: only counts part of total surplus.
C correct: at price $6, buyers with WTP $10, $8 and $6 buy. Surplus = 4 + 2 + 0 = $6.
D wrong: includes the $4 consumer who will not buy at $6.

34. Answer: B

A wrong: too low.
B correct: surplus = (12 – 6) + (9 – 6) + (7 – 6) = 6 + 3 + 1 = $10.
C wrong: $18 is total spending, not surplus.
D wrong: $28 is total willingness to pay.

35. Answer: A

A correct: a lower price increases the gap between willingness to pay and price, and may allow more consumers to buy.
B wrong: this happens when price rises.
C wrong: surplus does not normally become zero after a price fall.
D wrong: producer surplus is separate.

36. Answer: B

A wrong: higher price reduces the gap between willingness to pay and price.
B correct: consumer surplus falls when market price rises.
C wrong: it changes unless demand is highly unusual.
D wrong: government revenue comes from tax, not price rise itself.

37. Answer: B

A wrong: that describes producer surplus.
B correct: consumer surplus is the area above price and below the demand curve.
C wrong: below price is not consumer surplus.
D wrong: area between demand and supply includes total surplus, not just consumer surplus.

38. Answer: A

A correct: consumers who get the good pay a lower price, so their surplus may rise.
B wrong: maximum price below equilibrium lowers legal price.
C wrong: some consumers still gain surplus.
D wrong: it does not become producer surplus.

39. Answer: A

A correct: a binding maximum price creates shortage, so some consumers willing to buy cannot obtain the good.
B wrong: supply contracts, not increases without limit.
C wrong: legal price is below equilibrium.
D wrong: lower price increases quantity demanded.

40. Answer: A

A correct: subsidy lowers price and increases quantity, usually increasing consumer surplus.
B wrong: lower price benefits consumers.
C wrong: surplus changes.
D wrong: opportunity cost remains.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. Answer: B

A wrong: tax raises price and lowers quantity, reducing consumer benefit.
B correct: consumer surplus falls after an indirect tax.
C wrong: it changes.
D wrong: consumer surplus is not the same as tax revenue.

42. Answer: A

A correct: consumer surplus = 1/2 × (100 – 60) × 80 = 1/2 × 40 × 80 = $1600.
B wrong: uses the wrong height.
C wrong: misses the triangle half.
D wrong: uses price × quantity incorrectly.

43. Answer: B

A wrong: too low.
B correct: at P = 20, 20 = 40 – 2Q, so Q = 10. CS = 1/2 × (40 – 20) × 10 = $100.
C wrong: misses the triangle half.
D wrong: uses the full rectangle incorrectly.

44. Answer: B

A wrong: too low.
B correct: at P = 70, 70 = 100 – Q, so Q = 30. CS = 1/2 × (100 – 70) × 30 = $450.
C wrong: misses the half.
D wrong: uses price × quantity.

45. Answer: A

A correct: a rightward demand shift means greater willingness to pay at each quantity, likely increasing consumer surplus, though price may also rise.
B wrong: price usually rises if supply is unchanged.
C wrong: consumer surplus changes because demand changes.
D wrong: consumer surplus cannot be negative for voluntary buyers.

46. Answer: A

A correct: consumer surplus is largest when willingness to pay is high and the actual price is low.
B wrong: low WTP and high price gives little or no surplus.
C wrong: production cost affects supply, not consumer surplus directly.
D wrong: low demand and high price reduce surplus.

47. Answer: B

A wrong: lower willingness to pay reduces the gap above price.
B correct: if price is unchanged but willingness to pay falls, consumer surplus falls.
C wrong: it does not become producer surplus.
D wrong: total revenue is price × quantity sold.

48. Answer: A

A correct: consumer surplus measures extra benefit received above the amount paid.
B wrong: cost of last unit is marginal cost.
C wrong: profit belongs to producers.
D wrong: government budget balance is revenue minus spending.

49. Answer: B

A wrong: consumers have different willingness to pay, so surplus differs.
B correct: at a given price, higher willingness to pay means greater surplus.
C wrong: consumer surplus usually exists in equilibrium.
D wrong: competitive markets can create consumer surplus.

50. Answer: A

A correct: for a normal good, a price fall raises quantity demanded through both effects and increases consumer surplus.
B wrong: both effects do not lower demand for a normal good.
C wrong: for a Giffen good, substitution effect raises demand while income effect lowers demand more.
D wrong: not all inferior goods are Giffen; demand does not always fall after price rises.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.