Identify the correct statements from below :

(A) When price consumption curve (PCC) for a good is parallel to horizontal axis, the demand function for the good is unitary elastic.

(B) Given $$\log D = \alpha + \beta \log y + \gamma \log p$$​ then elasticity of $$\log D$$​ with respect to $$\log p$$ is $$\gamma$$​.

(C) The condition for stability in simple Keynesian system is 0 < MPC < 1.

(D) The fixed cost curve is a rectangular hyperbola.

Choose the correct answer from the options given below :

Correct option is A

Correct Answer: (a) (A) and (C) only

Explanation:

• Statement (A) is Correct:
  • The Price Consumption Curve (PCC) traces the optimal consumption bundles as the price of one good changes while income and other prices remain fixed.
  • If the PCC is parallel to the horizontal axis (Good X axis), it means the quantity of the other good (Good Y) consumed remains constant.
  • Consequently, the expenditure on Good Y is constant. Since total income is fixed, the expenditure on Good X must also remain constant despite the change in its price.
  • When total expenditure on a good remains constant as its price changes, the Price Elasticity of Demand is Unitary ($$|e_d| = 1$$​).

• Statement (C) is Correct:
  • In a simple Keynesian model (e.g., Y = C + I), the stability of the equilibrium depends on the Marginal Propensity to Consume (MPC).
  • For the dynamic adjustment process to converge to a stable equilibrium (and for the multiplier to be finite and positive), the slope of the Aggregate Demand curve (MPC) must be less than the slope of the Aggregate Supply line ($$45^\circ line,$$​ slope = 1). Thus, the condition is 0 < MPC < 1.

Information Booster:

• PCC and Elasticity:

  • Downward Sloping PCC: Demand is Elastic (e > 1). Expenditure on the good increases as its price falls.

  • Upward Sloping PCC: Demand is Inelastic (e < 1). Expenditure on the good decreases as its price falls.

Additional Information:

• Statement (B) is Incorrect: While $$\gamma$$​ represents the price elasticity of Demand (D), the statement incorrectly claims it is the elasticity of $$\log D$$​ with respect to $$\log p$$​. Mathematically, the elasticity of $$\log D$$​ with respect to $$\log p$$​ would be $$\gamma \times (\frac{\log p}{\log D})$$​, which is not constant. This is a subtle theoretical distinction often tested in exams.

• Statement (D) is Incorrect: The Total Fixed Cost (TFC) curve is a horizontal straight line parallel to the quantity axis (since fixed costs do not change with output). It is the Average Fixed Cost (AFC) curve that is a rectangular hyperbola, because $$AFC \times Q = TFC$$​ (a constant value).