Question

True Or False

(1) If there is excess DEMAND, the price will rise in a free market.

(2) A change in INCOME will SHIFT the consumer's demand curve.

(3) If price is BELOW the equilibrium price there will be excess SUPPLY.

(4) The SUBSTITUTION effect is caused by a change in price.

(5) If there are NOT many substitutes demand will be inelastic.

Answer 1

Answer : 1) The answer is "True".

In a free market if the market face excess demand then it create an upward pressure on price level. So, if a free market has excess demand then the price rise. Therefore, the given statement is true.

2) The answer is "True".

Consumer's demand depends on consumer's income. If consumer's income increase then consumer's demand increase which shift the demand curve to rightward. If consumer's income decrease then consumer's demand decrease which shift the demand curve to leftward. Therefore, the given statement is true.

3) The answer is "False".

If the price is below the equilibrium price then the quantity demanded become higher than the quantity supplied. So, if the price is below the equilibrium price level then the market face excess demand situation. Therefore, the given statement is false.

4) The answer is "True".

Substitution effect shows the changes in quantity demanded due to changes in price level. So, due to changes in price level the substitution effect occur. Therefore, the given statement is true.

5) The answer is "True".

If a good has many substitutes then people get more options on purchase. As a result, the demand become elastic. But if the good has no many substitutes then people get less options on purchase. As a result, the demand become inelastic.  Therefore, the given statement is true.