Q1. Define Monopolistic competition.
Monopolistic competition is a market situation when there are many sellers selling similar but differentiated products.
Q2. What do you mean by monotonic preferences?
Out of two given bundle the consumer will prefer the bundle in which more of one good and no less of other good is given.
Q3. What happens to equilibrium price of a good if the demand for this good decrease and supply increases.
The equilibrium price will fall.
Q4. Why is demand curve in monopoly less elastic?
There is no close substitute available so the demand curve is less elastic
Q5. What is the elasticity of a demand of a good if total expenditure on this good increase with rise in price of this good?
Less elastic
Q6. At a given price there is excess supply of a good in the market. Write chain of effect that will take place to attain equilibrium.
At a given price there is excess supply it means Qty supplied is more than qty demanded. It will lead to competition among sellers. Price will fall. At reduced price qty demanded raises leading to equilibrium.
Q7. Calculate total variable cost and marginal cost from the following schedule of a firm whose total fixed cost is Rs 20.
Output TC
1 60
2 70
3 96
4 136
Output TC FC TVC MC
1 60 20 40 40
2 70 20 50 10
3 96 20 76 26
4 136 20 116 40
Q8. Explain the effect of rise in price of related goods on the demand of a good. Use diagram.
Related goods are of two types -: Substitute goods and complementary goods.
If the price of substitute good increases the demand for given good will also increases and demand curve shifts to right.
If the price of complementary good increases the demand for given good will decrease and demand curve shifts to left.
Q9. Explain the law of diminishing marginal utility with the help of a schedule. How does it affect demand curve.
Law of diminishing marginal utility state as a consumer consumes more and more amount of a good the utility diminishes with the consumption of successive units.
Q MU
1 20
2 16
3 10
4 0
5 -4
The demand curve is downward slopping due to law of diminishing MU.
Or
Why does demand curve slope downward.
Demand curve is downward slopping due to law of diminishing marginal utility. As a consumer consumes more and more amount of a good his utility diminishes. so he will pay less for less utility. So he buys more at less price and less at high price.
Q10. What is the likely effect on the supply of a good if there is technological progress in the production of this good takes place.
If there is technological progress in the production of a good takes place, the cost of production of the given good falls and as a result the supply of the given good increases and supply curve shifts to right.
Q11. What do you mean by Marginal Rate of transformation? Show it with the help of a hypothetical schedule. Why does it increase along the Production Possibility Curve?
Marginal rate of transformation is the amount of one good given up in order to produce one more unit of other good.
If there are two goods ,Good x and Good y then marginal rate of transformation can be shown as
MRT= dY/dX
It shows the amount of good y given up in order to produce one more unit of good x.
It always increases along with the PPC because all the resources are not equally efficient in the production of all the goods. The PPC is concave shaped due to this.
Q12. What happens to loss in long run if firms are free to enter and exit in the industry under perfect competition?
Free entry and exit is a feature of perfect competition. If some firms are earning loss in short run,some firms may leave the industry as a result the supply decreases, the supply curve shifts to left. The equilibrium price rises and the existing firms start earning normal profit.
Or
Explain briefly the collusive oligopoly and non collusive oligopoly.
Collusive oligopoly is a situation when oligopolistic firm do not pose completion for each other. These behave like a cartel.
Non collusive oligopoly- When oligopolistic firms compete with each other and there actions are dependent on the rival firms actions.
Q13. If price of a good is increased by 10 % the buyer of that good reduces his demand by 25 %.He buys 60 units of this good at price Rs 6 per unit. How many units of this good will he buy if price is decreased by Rs 2.
Ed = - % change in qty demanded / % change in price
= - 25/10
= - 2.5
Given as
P= 6 Q = 60
P1= 4 Q1 =?
dP= 2 dQ= ?
ed=dQ/dp x p/Q
-2.5 = - dQ/2 x 6/60
2.5x20=dQ
dQ=50 units
New qty demanded at Rs 4= 60+50=110
Q14. Giving reasons state true and false.
(i) When AVC rises MC must rise.
(ii) When MR is Zero AR will be constant
(iii) When MR is constant and not equal to zero TR will increase at increasing rate.
False, When mc rises AVC may be falling as MC intersects AVC at its minimum. So before AVC reaches to its minimum it falls and MC rises.
False, when MR is zero AR is not constant. When MR becomes zero TR becomes constant and average Revenue falls.
False, When MR is constant and not equal to Zero TR will increase at constant rate.
Q15. When does the profit maximizing firm attain equilibrium in competitive market? State the conditions. Determine equilibrium level of output with the help Marginal Revenue and Marginal cost approach using schedules.
A profit maximizing firm is in equilibrium in competitive market when it is maximizing its profit.
The level of output where it maximizes it profit is determined when Marginal cost becomes equal to Marginal Revenue.
(i) MC = MR or MC = Price in perfect competition as MR = AR
(ii) And MC must rise after intersecting MR
Q MC MR
1 20 15
2 15 15
3 10 15
4 15 15
5 22 15
The producer is in equilibrium at 4th unit .At this level of output MC = MR and after this MC is more than MR.
Or
Explain the various stages of Law of variable proportion with the help of Marginal Product and Total Product schedule. Explain the reasons for increasing returns to a factor.
Law of variable proportion is a short run phenomenon in which all the factors are fixed only one factor is variable output increase with the increase in variable input.
When the ratio between fixed factor and variable factor is altered total product first increase at increasing rate then increases at diminishing rate and finally starts falling down.
Q MP TP
1 20 20
2 30 50
3 38 88
4 22 110
5 0 110
6 - 10 100
Up to three unit TP increases at increasing rate and MP increases
From 3 to 5 units TP increases at diminishing rate and MP falls but remains positive
After 5th unit TP starts falling down and MP becomes negative
Increasing returns to factor takes place due ot division of labour and efficient combination between fixed factor and variable factor.
Q16. (i) Why do two indifference curves never intersect each other?
(i) Two indifference can never intersect each other.
Suppose two IC intersect each other at point A. Point A and point B lies on same IC1 so they will yield same level of satisfaction. Point A and point c lie on same IC2 so they will yield same level of satisfaction. It means Bundle at point B and C must also yield same level of satisfaction. But this is false. As bundle c lies on higher IC and bundle B on lower IC.
So our assumption is wrong. Two indifference can never intersect each other.
(ii) A consumer is buying two goods X and Y. The price of Good X is Rs 4 per unit and the price of Good Y is Rs 5 Per unit. Determine all the bundles that will lie on budget line if the income of consumer is Rs 20. (3x2)
(ii) Budget line can be expressed as
Px Qx+PyQy =M
4Qx+5Qy=20 ; 5Qy=20 – 4Qx Now putting values in Qx
Qx Qy
0 4
1 3.2
2 2.4
3 1.6
4 .8
Monopolistic competition is a market situation when there are many sellers selling similar but differentiated products.
Q2. What do you mean by monotonic preferences?
Out of two given bundle the consumer will prefer the bundle in which more of one good and no less of other good is given.
Q3. What happens to equilibrium price of a good if the demand for this good decrease and supply increases.
The equilibrium price will fall.
Q4. Why is demand curve in monopoly less elastic?
There is no close substitute available so the demand curve is less elastic
Q5. What is the elasticity of a demand of a good if total expenditure on this good increase with rise in price of this good?
Less elastic
Q6. At a given price there is excess supply of a good in the market. Write chain of effect that will take place to attain equilibrium.
At a given price there is excess supply it means Qty supplied is more than qty demanded. It will lead to competition among sellers. Price will fall. At reduced price qty demanded raises leading to equilibrium.
Q7. Calculate total variable cost and marginal cost from the following schedule of a firm whose total fixed cost is Rs 20.
Output TC
1 60
2 70
3 96
4 136
Output TC FC TVC MC
1 60 20 40 40
2 70 20 50 10
3 96 20 76 26
4 136 20 116 40
Q8. Explain the effect of rise in price of related goods on the demand of a good. Use diagram.
Related goods are of two types -: Substitute goods and complementary goods.
If the price of substitute good increases the demand for given good will also increases and demand curve shifts to right.
If the price of complementary good increases the demand for given good will decrease and demand curve shifts to left.
Q9. Explain the law of diminishing marginal utility with the help of a schedule. How does it affect demand curve.
Law of diminishing marginal utility state as a consumer consumes more and more amount of a good the utility diminishes with the consumption of successive units.
Q MU
1 20
2 16
3 10
4 0
5 -4
The demand curve is downward slopping due to law of diminishing MU.
Or
Why does demand curve slope downward.
Demand curve is downward slopping due to law of diminishing marginal utility. As a consumer consumes more and more amount of a good his utility diminishes. so he will pay less for less utility. So he buys more at less price and less at high price.
Q10. What is the likely effect on the supply of a good if there is technological progress in the production of this good takes place.
If there is technological progress in the production of a good takes place, the cost of production of the given good falls and as a result the supply of the given good increases and supply curve shifts to right.
Q11. What do you mean by Marginal Rate of transformation? Show it with the help of a hypothetical schedule. Why does it increase along the Production Possibility Curve?
Marginal rate of transformation is the amount of one good given up in order to produce one more unit of other good.
If there are two goods ,Good x and Good y then marginal rate of transformation can be shown as
MRT= dY/dX
It shows the amount of good y given up in order to produce one more unit of good x.
It always increases along with the PPC because all the resources are not equally efficient in the production of all the goods. The PPC is concave shaped due to this.
Q12. What happens to loss in long run if firms are free to enter and exit in the industry under perfect competition?
Free entry and exit is a feature of perfect competition. If some firms are earning loss in short run,some firms may leave the industry as a result the supply decreases, the supply curve shifts to left. The equilibrium price rises and the existing firms start earning normal profit.
Or
Explain briefly the collusive oligopoly and non collusive oligopoly.
Collusive oligopoly is a situation when oligopolistic firm do not pose completion for each other. These behave like a cartel.
Non collusive oligopoly- When oligopolistic firms compete with each other and there actions are dependent on the rival firms actions.
Q13. If price of a good is increased by 10 % the buyer of that good reduces his demand by 25 %.He buys 60 units of this good at price Rs 6 per unit. How many units of this good will he buy if price is decreased by Rs 2.
Ed = - % change in qty demanded / % change in price
= - 25/10
= - 2.5
Given as
P= 6 Q = 60
P1= 4 Q1 =?
dP= 2 dQ= ?
ed=dQ/dp x p/Q
-2.5 = - dQ/2 x 6/60
2.5x20=dQ
dQ=50 units
New qty demanded at Rs 4= 60+50=110
Q14. Giving reasons state true and false.
(i) When AVC rises MC must rise.
(ii) When MR is Zero AR will be constant
(iii) When MR is constant and not equal to zero TR will increase at increasing rate.
False, When mc rises AVC may be falling as MC intersects AVC at its minimum. So before AVC reaches to its minimum it falls and MC rises.
False, when MR is zero AR is not constant. When MR becomes zero TR becomes constant and average Revenue falls.
False, When MR is constant and not equal to Zero TR will increase at constant rate.
Q15. When does the profit maximizing firm attain equilibrium in competitive market? State the conditions. Determine equilibrium level of output with the help Marginal Revenue and Marginal cost approach using schedules.
A profit maximizing firm is in equilibrium in competitive market when it is maximizing its profit.
The level of output where it maximizes it profit is determined when Marginal cost becomes equal to Marginal Revenue.
(i) MC = MR or MC = Price in perfect competition as MR = AR
(ii) And MC must rise after intersecting MR
Q MC MR
1 20 15
2 15 15
3 10 15
4 15 15
5 22 15
The producer is in equilibrium at 4th unit .At this level of output MC = MR and after this MC is more than MR.
Or
Explain the various stages of Law of variable proportion with the help of Marginal Product and Total Product schedule. Explain the reasons for increasing returns to a factor.
Law of variable proportion is a short run phenomenon in which all the factors are fixed only one factor is variable output increase with the increase in variable input.
When the ratio between fixed factor and variable factor is altered total product first increase at increasing rate then increases at diminishing rate and finally starts falling down.
Q MP TP
1 20 20
2 30 50
3 38 88
4 22 110
5 0 110
6 - 10 100
Up to three unit TP increases at increasing rate and MP increases
From 3 to 5 units TP increases at diminishing rate and MP falls but remains positive
After 5th unit TP starts falling down and MP becomes negative
Increasing returns to factor takes place due ot division of labour and efficient combination between fixed factor and variable factor.
Q16. (i) Why do two indifference curves never intersect each other?
(i) Two indifference can never intersect each other.
Suppose two IC intersect each other at point A. Point A and point B lies on same IC1 so they will yield same level of satisfaction. Point A and point c lie on same IC2 so they will yield same level of satisfaction. It means Bundle at point B and C must also yield same level of satisfaction. But this is false. As bundle c lies on higher IC and bundle B on lower IC.
So our assumption is wrong. Two indifference can never intersect each other.
(ii) A consumer is buying two goods X and Y. The price of Good X is Rs 4 per unit and the price of Good Y is Rs 5 Per unit. Determine all the bundles that will lie on budget line if the income of consumer is Rs 20. (3x2)
(ii) Budget line can be expressed as
Px Qx+PyQy =M
4Qx+5Qy=20 ; 5Qy=20 – 4Qx Now putting values in Qx
Qx Qy
0 4
1 3.2
2 2.4
3 1.6
4 .8
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