Daily Current Affairs Quiz: August 27, 2025

a is incorrect: A decreased relative price leads to increased consumption, not decreased.

b is Correct: The substitution effect examines how consumption changes due to relative price changes, holding real income (or utility) constant. When a normal good’s price decreases, it becomes relatively cheaper, prompting the consumer to substitute away from more expensive goods towards the now-cheaper good. This increases the quantity demanded solely due to the relative price change.

c is incorrect: Even with constant purchasing power, relative price changes induce substitution.

d is incorrect: This describes the income effect, not the substitution effect. The substitution effect isolates the impact of relative price changes while holding real income constant.

Statement 1 is incorrect: In a perfectly competitive market, individual firms are price takers and do not have the power to influence the market price of their product. The market price is determined by the intersection of market demand and market supply.

Statement 2 is correct: The law of demand is a fundamental principle of economics that states that, all else being equal, as the price of a product increases, the quantity demanded of the product decreases, and vice versa.

Statement 3 is correct: Price elasticity of demand is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price.

a: This describes a normal good, where demand increases with income.

b: (Correct Option) This correctly illustrates an inferior good. As consumer income rises, they are more likely to switch to private vehicles, reducing their reliance on cheaper public transport.

c: This describes a good whose demand is income-inelastic – it doesn’t change significantly with income fluctuations. This doesn’t necessarily make it an inferior good.

d: This also represents a normal good, where demand increases with income.

Statement 1 is correct: Indifference curves are convex to the origin due to the diminishing marginal rate of substitution. This means as a consumer consumes more of good X, they are willing to give up less of good Y to maintain the same level of satisfaction.

Statement 2 is correct: Higher indifference curves represent combinations of goods that provide a higher level of utility or satisfaction compared to lower indifference curves.  A consumer always prefers to be on a higher indifference curve.

Statement 3 is incorrect: Indifference curves cannot intersect.  If they were to intersect, it would imply that the same combination of goods could provide two different levels of satisfaction, which violates the principle of transitivity of preferences.

Statement 4 is correct: Indifference curves have a negative slope because to maintain the same level of satisfaction, if the quantity of one good increases, the quantity of the other good must decrease.

Statement 1 is Correct: Total utility (TU) refers to the aggregate satisfaction or benefit derived by a consumer from consuming a certain quantity of a good or service.

Statement 2 is Incorrect: Total utility generally increases as more units are consumed, but at a diminishing rate due to the Law of Diminishing Marginal Utility. It does not decrease immediately; only marginal utility decreases per additional unit. TU decreases only if MU becomes negative.

Statement 3 is Correct: Although “utils” are not used in real-world measurements (they are theoretical), total utility is expressed in terms of utils in microeconomic theory to denote satisfaction units.

Statement 4 is Correct: Total Utility = Σ Marginal Utilities of all units consumed.

Example: If MU of 1st apple = 10, 2nd apple = 8, then TU = 10 + 8 = 18 utils.