EONOMICS

IMPORTANT QUESTIONS

CLASS- XI

MICROECONOMICS
UNIT -1
INTRODUCTION (6 MARKS) (2
QUESTIONS OF 3 MARKS EACH)
Meaning of microeconomics and macroeconomics.
What is an economy? Central problems of an economy: what, how and for whom to produce; concepts of
production possibility frontier and opportunity cost.

Q.1 Distinguish between microeconomics and macroeconomics. 3

Basis Microeconomics Macroeconomics
Ans. Definition Microeconomics deals with the decision Macroeconomics deals with the decision
making behaviour of individual making behaviour of economy as a
economic units. whole.
Examples The decision making behaviour of a National income accounting, money and
consumer, a producer, a firm, an banking, determination of income,
industry, a factor of production output and employment, government
budget and the balance of payment
Tools Demand and supply are the main tools of Aggregate demand and aggregate supply
 microeconomics. are the main tools of macroeconomics.
Other Microeconomics is also known as price Macroeconomics is also known as
name theory. national income theory.
Q.2 Discuss the central problems of an economy. Why do they arise? 3
Ans. There are three central problems:
a. What to produce: it means which goods and services are to be produced in the economy.
b. How to produce: it means which technology is to be used in production. (Capital
intensive/labour intensive).
c. For whom to produce: it means how the total production or total income generated is to be
distributed.
These problems arises because of two reasons:
a. Wants are unlimited with respect to scares resources.
b. These resources have alternative uses.
Q.3 Define production possibility curve. Draw a PPC and show the point where: 3
a. All resources are used at optimum level (fuller and efficient utilisation). b.
Under utilisation of resources
c. Unattainable (with given resources and technology)
Ans. Production possibility curve is the locus of various combinations of two goods on which the
economy utilises its resources at optimum level with given resources and given technology.

Q.4 Explain the problem of what to produce with the help of production possibility curve. 3
Ans. ‘What to produce’ means which goods and services are to be produced in the economy with given
resources and given technology. Any economy has to decide whether to produce more of consumer
goods or capital goods. it can be shown with the help of PPC.
Q.5 What will be the impact of “Make in India” appeal to the foreign investors on the production 3
possibilities frontier of India and why?
OR
What will be the impact of “Sarva Shiksha Abhiyan” appeal to the foreign investors on the
production possibilities frontier of India and why?
Ans. “Make in India” appeal will attract foreign producers to invest in the country which will increase
the resource base of the country. In other words it will increase the production possibilities of the
country and PPC will shift to the right.
OR
“Sarva Shiksha Abhiyan” will increase the availability of skilled labour that is the stock of
manpower. This will increase the resource pool as well as the production possibilities of the
country and PPC will shift to the right.

Q.6 What will be the impact of “Clean India Mission” on the production possibilities frontier of India 3
and why?
OR
What will be the impact of “MNREGA” on the production possibilities frontier of India and why?

Ans. “Clean India Mission” will boost the health and working capacity of the people which means
improvement in the efficiency of resources. It will move the economy closer to its full potential
level that is any point inside the PPC towards the point on PPC.
OR
“MNREGA” will increase the employment level in the economy which in turn increase the level of
actual output. So the economy will move closer to its full potential level that is any point inside the
 PPC towards the point on PPC.

Q.7 Why the slope of PPC is concave to the origin? Explain with the help of example. 3
OR
Explain with an example how a PPC can be sloped as convex to the origin.
OR
Explain with an example how a PPC can be sloped a negative sloped straight line.
Ans. The slope of PPC is concave to the origin because of the increasing marginal opportunity cost
(MOC). When the economy shifts some resources from the production of one good to another, in
which they are less specialized then it will result in more loss of output than gain.
Combination: A B C D E F
GUN : 0 1 2 3 4 5
BUTTER : 1500 1400 1200 900 500 0
MOC : - 100 200 300 400 500 (increasing MOC)

OR
The slope of PPC can be convex to the origin if the marginal opportunity cost decreases. When
the economy shifts some resources from the production of one good to another, in which they are
more specialized then it will result in less loss of output than gain.
 Combination: A B C D E
GUN : 0 1 2 3 4
BUTTER : 1500 1400 1325 1275 1250
MOC : - 100 75 50 25 (decreasing MOC)

OR
The slope of PPC can be a negative sloped straight line if the marginal opportunity cost remains
constant. When the economy shifts some resources from the production of one good to another, in
which they are equally specialized then it will result in equal loss of output and gain.
Combination: A B C D E
GUN : 0 1 2 3 4
BUTTER : 1500 1400 1200 1100 1000
MOC : - 100 100 100 100 (constant MOC)

Q.8 Explain the concept of opportunity cost with the help of example. 3
Ans. The next best alternative use of a factor is called its opportunity cost.
For example a person can earn Rs. 10000, 9000 and 8000 at different places then he will be in that
job which will give him Rs. 10000 and its opportunity cost is Rs. 9000.
Q.9 Explain the concept of marginal opportunity cost with the help of example. 3
 The rate of opportunity cost is called marginal opportunity cost. In other words it is the rate of
sacrifice of a good on behalf of the production of an additional unit of another good.
MOC = ΔY/ ΔX
ΔY = Sacrifice of good Y
ΔX = Gain of good X
Example:
Combination: A B C D E F
GUN : 0 1 2 3 4 5
BUTTER : 1500 1400 1200 900 500 0
MOC : - 100 200 300 400 500
Q. 10 What is meant by an economy? State two features of capitalist economy. 3
Ans. A system in which all economic activities takes place to satisfy unlimited wants using scarce
resources.
Capitalist economy:
a. All the decisions regarding what, how and for whom to produce are taken by the market
forces of demand and supply.
b. There is no government interfere in decision making process.

UNIT -2 CONSUMER‟S EQUILIBBRIUM AND DEMAND (16 MARKS)

MCQ/VERY SHORT (ONE MARK EACH) – 2 QUESTIONS
SHORT ANSWER (FOUR MARKS) – 2 QUESTIONS
LONG ANSWER (6 MARKS) – 1 QUESTIONS

Consumer‟s equilibrium – meaning of utility, marginal utility, law of diminishing marginal utility, conditions of consumer‟s
equilibrium using marginal utility analysis.
Indifference curve analysis of consumer‟s equilibrium – the consumer‟s budget (the budget set and budget line), preferences of the
consumer(indifference curve and indifference map) and conditions of consumer‟s equilibrium.
Demand, market demand, determinants of demand, demand schedule, demand curve and its slope, movement along and shift in the
demand curve; price elasticity of demand- (a) percentage method and (b) geometric method (linear demand curve); relationship
between price elasticity of demand and total expenditure.

MULTIPLE CHOICE QUESTIONS

Q .1 Marginal utility of good X is 10, Marginal utility of good Y is 8, price of good X is Rs. 2 then what 1
will be the price of good Y?
a. Rs. 1.5/-
b. Rs. 1.6/-
c. Rs. 1.7/-
d. Rs. 1.8/-
b
Q .2 The marginal rate of substitution between two goods X and Y is 5. Price of good X is Rs 10 per 1
unit then the price of good Y is:
a. Rs. 1
 b. Rs. 2
c. Rs. 3
d. Rs. 4 b

Q .3 When the price of a good decreases by Rs. 10 per unit, the total expenditure increases by Rs.50. 1
The price elasticity of demand is:
a. 5
b. 0.2
c. 2
d. None of the above
d
Q .4 Utility is: 1
a. Want satisfying power of a commodity
b. Available bundles of different goods
c. Excess capacity of the commodity
d. Both a and b a

Q .5 Change in total utility due to the consumption of an additional unit is called: 1

a. Gross utility
b. Extra utility
c. Indifference curve
d. Marginal utility
d
Q .6 Total utility at 4th unit is 25 and at 5th unit is 23. What will be the marginal utility at 5th unit? a. 1
25
b. 23
c. -2
d. 2 c
Q .7 Slope of indifference curve is: 1
a. Concave to the origin
b. Convex to the origin
c. Negative sloped straight line
d. Positive sloped straight line b

Q .8 Which among the following shows total utility? 1

 A

Q .9 Choose the correct option from the following: 1

a. MU = ΔTU/ΔX
b. MU = TUN – TUN-1
c. TU = Σ MU
d. All of above
d
Q .10 Which among the following is not correct: 1
a. When TU is at maximum the MU is zero
b. When MU is positive TU increases
c. When MU is negative TU increases but at decreasing rate.
d. When MU increases the TU increases at increasing rate. c

Q .11 Which among the following is the condition for a consumer to be in equilibrium?
a. MRSXY ˂ PX /PY
b. MRSXY ˃ PX /PY
c. MRSXY = PX /PY
d. None of the above
Q .12 Which among the following is not true?
a. Indifference Curve is negative sloped to the right and convex to the origin
b. Higher IC shows higher level of satisfaction
c. Two IC never intersect each other
d. None of the above
Q .13 Which among the following bundles of two goods X and Y shows the monotonic preference of
the consumer? (each bundle has units of good X and good Y respectively) a. (10,9) = (9,10)
b. (10,9) ˃ (9,10)
c. (10,9) ˂ (9,10)
d. (10,9) ˃ (9,9)
Q .14 Which among the following explain about the slope of IC?
a. Marginal rate of substitution among two goods
b. Ratio of substitution between two goods
c. Price ratio of two goods
d. Both (a) and (b)
Q .15 Which among the following explain about the slope of budget line?
e. Marginal rate of substitution among two goods
f. Ratio of substitution between two goods
g. Price ratio of two goods
h. Both (a) and (b)
Q .16 Which among the following is true statement?
a. Normal goods have positive income effect
b. Inferior goods have negative income effect
c. Law of demand does not work on inferior goods
d. Law of demand does not work on inferior goods
Q .17 When price of good X decreases the demand for good Y rises. Both goods are:

a. Complementary
b. Substitutes
c. Both (a) and (b)
d. None of the above
Q .1 What causes the downward movement along the demand curve?
8
a. Rise in the price of the good
b. Rise in the price of another good
c. Fall in the price of the good
d. Rise in the price of the good
Q 19 Which among the following is the example of increase in demand?
a. Rise in the price of complementary good
b. Rise in the price of substitute good
c. Decrease in income of the consumer
d. Decrease in the price of the commodity itself
Q 20 The centre most point of a linear demand curve shows the price elasticity of demand as:
a. Elastic (Ed ˃1)
b. Inelastic (Ed ˂ 1)
c. Unitary elastic ( Ed = 1)
d. Perfect elastic (Ed = ∞)
Q 21 The price elasticity of the goods having close substitutes tends to be:
a. Elastic (Ed ˃1)
b. Inelastic (Ed ˂ 1)
c. Unitary elastic ( Ed = 1)
d. Perfect elastic (Ed = ∞)
VERY SHORT ANSWER TYPE QUESTIONS
Q1 Define the term price elasticity of demand.
Ans. Percentage change in quantity demanded due to the percentage change in price is known as price
elasticity of demand.
Q2 Define marginal utility?
Ans. The change in total utility due to the consumption of an additional unit is known as marginal utility.
Q3 Define indifference curve.
Ans. The locus of various combination of two goods on which a consumer get same satisfaction.
Q4 Define indifference map.
Ans. A set of indifference curves showing different levels of satisfaction.
Q5 What do you mean by budget set?
Ans. The bundle of different goods a consumer can buy from his/her entire income.
Q6 What is budget line?
Ans. It shows the budgetary constraints or the money income of the consumer.
Q7 State the reason behind the convexity of indifference curve.
Ans. It is because of the decreasing marginal rate of substitution.
Q8 State the Law of demand.
Ans. Other things remaining the same, higher the price lower the quantity demanded and & vice-versa.
Q9 Define Market Demand,
Ans. It shows the amount of commodity purchased by all consumers present in the market at a given
price and at a given time.
Q 10 How will the consumer move along his IC in a situation when MRSxy > Px/Py?
Ans. The consumer should move downward to the right along the IC. Convexity of the IC ensures that as
the consumer moves downward to the right along his IC, MRSxy tends to fall. Implying that the
 consumer should start consuming more of X in place of Y.
SHORT ANSWER TYPE QUESTIONS (3/4 marks)

Q1 Explain the law of diminishing marginal utility with the help of schedule and diagram.

Ans. The law says that other things being equal, as we consume more and more units of a commodity the
marginal utility from additional unit tend to diminish. The law is based on following assumptions:
a. Utility is measurable and we can measure utility in terms of money.

b. Income taste and preference of the consumer should remain constant.

c. Units of a commodity should be of standard size.

This law can be explained with the help of following example:

Sl.no 1 2 3 4 5 6

Total utility 10 18 23 24 24 21

Marginal Utility 10 8 5 1 0 -3

The table shows that the marginal utility is diminishing as we consume more and more units of a commodity.
The law can be explained with the help of following diagram:

above diagram shows that the marginal utility curve is negative slope to
the right showing the marginal utility is diminishing.

Q2 Given the market price of a good, how does a consumer decide as to how many units of that good to
buy? Explain.
OR
Explain the consumer‟s equilibrium in case of single commodity.

Ans. Consumer is said to be in equilibrium when he maximizes satisfaction on utility with given income and
given prices of different commodities. In case of single commodity of consumer awareness fulfill the
following condition
MUX/Px = MUm
Here Mu X is the marginal utility of good x PX is the price of the commodity and m u m is the
marginal utility of money the conditions says that consumer will be in equilibrium when the
expected satisfaction from money is just legal to the actual satisfaction he get from the
consumption of the commodity
It can be explained with the help of following example where the price of the commodity is given
as rupees 10 per unit we can derive the marginal utility schedule and the consumer's equilibrium
Q3 Explain the law of demand with the help of demand schedule?

Ans. Other things being equal when price of a commodity decreases, the demand for that commodity increases and
if the price of that commodity increases the demand increases. The law of demand shows inverse relationship
between price and quantity demanded.
Other things being equal means the law is based on certain assumptions. These are-
a. Prices of related goods should remain constant
b. Income of consumer does not change
c. Taste, fashion and preferences of consumer during the consumption remains constant This law can be
explained with the help of following demand schedule:
Price: 5 4 3 2 1
Demand: 1 2 3 4 5
The demand schedule shows that the price is decreasing by 54321 then the demand is increasing by 1 2 3 4
and 5 showing the inverse relationship between price and quantity demanded

Q4 Why the demand curve is downward sloping?

OR
Why a consumer demands more of a good when the price of that good decreases?

Ans. The demand curve is negative slope to the right because of following reasons
1. Substitution effect
It means when price of a commodity decreases it becomes comparatively cheaper than other commodities so
the consumer substitute cheaper commodity on behalf of dearer commodities. That is why when price
decreases the demand increases. Due to this the demand curve is negative sloped to the right. 2. Income
effect
When price of a commodity decreases, the real income of consumer increases so he will buy more on reduced
prices. That is why the demand curve is negative sloped to the right.
3. Law of diminishing marginal utility:
According to this law as consumer consume more and more units of a commodity the marginal utility
diminishes. That is why he can demand additional units only on reduced prices.
4. New consumers on reduce the prices:
When price of a good decreases those consumers who could not afford the commodity earlier can afford now.
That is why they will increase the demand for the good. This results in the negative slope of demand curve

Q5 Explain the effect of following on the demand elasticity of a commodity:

a. Availability of substitutes of the commodity
b. Uses of that commodity
c. Nature of that commodity
d. Time involvement in the consumption/ postponement of the consumption
Ans. a. Availability of substitutes of the commodity: More the substitute available for a commodity
more will be the elasticity. For example a teacher has many substitutes that is why its demand is elastic on
the other hand an actor has very less substitute that is why its demand is inelastic.
b. Uses of that commodity: More the number of uses more will be the elasticity on the other hand
less the number of uses less will be the elasticity. For example, milk has lots of uses so the demand is elastic.
c. Nature of that commodity: If the commodity is necessity then its demand will be inelastic. For
example: Salt. On the other hand if the commodity is luxury then its demand will be elastic. For example
:home appliances

d. Time involvement in the consumption/ postponement of the consumption: If consumer is

able to postpone his consumption or more time is involved in the consumption process then the demand will
be elastic. On the other hand if consumer is not able to postpone his consumption then the demand will be in
elastic.

Q6 Explain with the help of diagram, what will be the effect on demand for a commodity when:
a. Price of it substitute decreases
b. Price of complementary increases
c. Income of the consumer increases

Ans. A. Price of it substitutes decreases: when price of substitute decreases the demand for our concern
commodity decreases. This result in the leftward shift in demand curve.

Fall in the price of a substitute good will cause fall in the demand of the given commodity from 0q to 0q1.
The demand curve will shift towards left to d1d1.
B. Price of complementary increases: when price of complementary increases the demand for our
concern commodity decreases. This result in the leftward shift in demand curve.
 C. Income of the consumer increases but the commodity is inferior: When income increases the demand for
the inferior commodity will decrease due to which the demand curve will shift towards left.

Q7 Price of a commodity falls from Rs. 4 to Rs. 3 per unit. As a result total expenditure on it rises from Rs. 200
to Rs. 300. Find out price elasticity of demand by percentage method.

Ans. Price Total Exp. Quantity

Rs. 4 Rs. 200 200/4=50
Rs. 3 Rs. 300 300/3=100

Ed:- P / q x ∆q / ∆p
Ed:- (-) 4 / 50 x 100 – 50 / 3-4
Ed:- (-) 4 / 50 x 50 / -1
Ed:- 4

Q8 State the properties of indifference curve.

Ans. a. IC is negative sloped towards right: it is because of limited income. If we want more units of
a good we have to sacrifice another good.
b. Indifference curves are convex to origin: it is because of decrease in marginal rate of
substitution. The MRS diminishes due to the decrease in the intensity of desire of the good which
we have more after regular consumption.
c. Two IC never intersect each other: as this adversely affect the monotonicity of the consumer.
 d. higher IC shows higher level of satisfaction: it is because of the monotonic preference shown
by the consumer.
Q9 Calculate price elasticity of demand by total expenditure method:-

Price Quantity demanded

(Rs) (units)

8 100

10 90

Ans. Price Quantity demand (Q) Total expenditure = P x Q Type of elasticity

(P)
8 100 800 Since the total expenditure is
increasing due to the increase
10 90 900 in price the Ed<1.

Q 10 Distinguish between individual demand and market demand.

Ans. Individual demand: - Demand of a particular commodity by an individual consumer in the market is
known as individual demand. For ex- demand for milk by a person.
Market demand: - Demand of a commodity by all the consumers in the market is termed as market demand.
For ex- Ram, Sohan and Mohan‟s demand for milk will be combined and hence known as market demand.

LONG ANSWER TYPE QUESTIONS (6 marks)

Q1 Identify the effect on demand of the following – 6
(a)Govt enhanced the pay of the government employees. How will this affect the demand curve of
government employees?
(b) A new car factory comes up in Gujarat; many people who previously unemployed, in the area are
now employed .How will this affect demand curve of television.
(c) There are train and bus service between Ahmedabad and New Delhi. Suppose the train fare between
two cities comes down, how will this affect the demand curve for bus travel between two cities?

Ans. a. When government increases the salaries of Government employees then there demand for different
goods will increase and the demand curve shift towards right.

b. New car factory in Gujarat will provide employment to the public so the income will increase and
ultimately will increase the demand for televisions. This will shift the demand curve towards right.

c. Due to the decrease in rail fare between Ahmedabad and New Delhi the demand for Railways will
increase among passengers. This will adversely affect the demand for bus services. That is why the demand
for buses will decrease and the demand curve will shift towards left.

Q2 “If the price of a good increases, a family‟s spending on the product has to increase.” Defend or
refute.
Ans. When the price of a good increases it is not necessary that the family spending on that product has to
increase whether the expenditure increase or decrease depends on the nature of that good commodity is
necessity then the increase in price will certainly increasing spending of that family on the other hand if the
commodity is normal luxury then the increase in price will force the family to shift its consumption on
another commodities so the expenditure will decrease it can be explained with the help of following
diagrams:

In first diagram the demand curve is inelastic. The increase in price from rupees 2 to rupees 10 results in the
increase in expenditure from 6 to 20.
Second diagram shows that the demand is elastic and if the price increases from rupees 25 to 30 then the total
expenditure decreases from rupees 75 to 30.
So we can conclude that in case of Elastic demand the increasing price results in the decrease in expenditure
and in case of inelastic demand increase in price will result in the increase in expenditure also.

Q3 Consumer consumes only two goods X and Y and is in equilibrium. Show that when price of good Y falls
demand for Y Rises. Answer this question with the help of utility analysis. Or
A consumer consumes only two goods. Explain consumer‟s equilibrium with the help of utility analysis.
Or
What changes will take place if the condition of consumer equilibrium is not fulfilled. Use utility analysis.

Ans. A consumer is said to be rational and he will be in equilibrium when he maximizes his satisfaction his
utility. In case of two commodities a consumer have to fulfill the following condition: MUx/Px = MUy/Py
But when the price of good Y falls it means that consumer will get more satisfaction from good Y. it also
means that the condition of equilibrium is not satisfied because now the situation is as following: MUx/Px <
MUy/Py
So he will buy more units of good Y. As per the law of diminishing marginal utility consumption of
additional units of good Y will diminish its marginal utility. The consumer will continue to buy the good Y
till its MU diminishes and becomes equal to MU of good X.
It is hereby proved that when price of good be false its demand increases.

Q4 What changes will take place if the condition of consumer equilibrium is not fulfilled. Use indifference curve
analysis.
OR
A consumer consumes only two goods. Explain consumer‟s equilibrium with the help of indifference curve
analysis.
OR
State the conditions of consumer‟s equilibrium and their rationale
Ans. Consumer‟s Equilibrium: It refers to a situation in which a consumer with given income and given prices
purchases such a combination of goods which gives him maximum satisfaction and he is not willing to make
any change in it. For a consumer to be in equilibrium, two conditions must be fulfilled. These are:

a. Price line/ Budget line should be tangent to the Indifference curve i.e.
MRSxy = Px / Py
b.IC should be convex to the origin.
As per the above conditions the consumer‟s equilibrium can be
shown with the help of following diagram:

In this diagram the LM is budget line. IC1, IC2 and IC3 are different
levels of satisfactions for a consumer (IC Map). Consumer‟s equilibrium is on point Q where both of the
conditions are fulfilled.
What if conditions are not fulfilled:
If MRSxy > Px / Py (point P in above diagram)
It means that consumer is willing to sacrifice more units of good Y to get additional X. Also the point P is on
IC1 the lower IC where the consumer is spending the same amount of money. So he will not be in equilibrium
on point P as he can reach on IC2 by spending the same amount at point Q.
If MRSxy < Px / Py (point R in above diagram)
It means that consumer is willing to sacrifice more units of good X to get additional Y. Also the point R is on
IC1 the lower IC where the consumer is spending the same amount of money. So he will not be in equilibrium
on point R as he can reach on IC2 by spending the same amount at point Q.
If IC is not negative sloped and convex to the origin:

Negative slope of IC is due to the limited income a consumer has. Similarly the convexity is due to the
diminishing marginal rate of substitution implying that the intensity of the desire for good decreases with its
increased consumption (similarly as diminishing marginal utility). If this condition is not fulfilled it means
the law of diminishing marginal utility is not applicable and for every additional unit he get he will get more
satisfaction and equilibrium will never be achieved.

Q5 Price of good X = 8, MUx = 40, Price of good Y = 5, MUy = 50. Find whether the consumer is in equilibrium
or not. Give reason in support of your answer. What should a rational consumer do in such situation?

Ans. For a consumer to be in equilibrium:

MUx/Px = MUy/Py
As per given values: 40/8
= 50/5
5 ≠ 10.
It means consumer is not in equilibrium. He is getting more satisfaction from good Y.
A rational consumer will buy more units of good Y till its utility diminishes and becomes equal to that of
good X.
Q6 Price of good X = 10 per unit, price of good Y = 4 per unit. The ratio of substitution between good X and
good Y (MRSxy ) = 5. Find whether the consumer is in equilibrium or not. Give reason in support of your
answer. What should a rational consumer do in such situation?

Ans. For a consumer to be in equilibrium

MRSxy = Px / Py As
per given values:

5 = 10/4

5 ≠ 2.5 it means that consumer is not in equilibrium because

MRSxy > Px / Py
It also means that consumer is ready to sacrifice more units of good Y for additional X. So a rational
consumer will increase the consumption of good X till the MRSxy diminishes and becomes equal to the price
ratio of two goods.

UNIT -3 PRODUCER‟S BEHAVIOUR AND SUPPLY (16 MARKS)

MCQ/VERY SHORT (ONE MARK EACH) – 1 QUESTION
SHORT ANSWER (THREE MARKS) – 1 QUESTION
LONG ANSWER (6 MARKS) – 2 QUESTIONS
Production function: short run and long run.
Total product average product and marginal product.
Returns to a factor.
Cost, Short run costs - total cost, total fixed cost, total variable cost, average cost, average fixed cost, average variable cost
and marginal cost - meaning and their relationships.
Revenue – total, average and marginal revenue - meaning and their relationships.
Producer‟s equilibrium - meaning and conditions in terms of marginal revenue - marginal cost.
Supply market supply, determination of supply, supply schedule, supply curve and its slope, movements along and shift
in supply curve. Price elasticity of supply; measurement of price elasticity of supply - percentage method and geometric
method.

MULTIPLE CHOICE QUESTIONS

Q .1 The time period in which some factors are variable and some factors are fixed is referred to as:
a. Very long run
b. Long run
c. Short run
d. Very short run
Q2 The technological relation between inputs and output is known to as: a.
Cost function

b. Supply function
c. Utility function
d. Production function
Q3 If the AP is 12 at 4 unit of variable input the value of TP is: a.
6

b. 16
c. 48
d. 8
Q4 Average fixed cost at 3rd unit of output is 10 what will be the total fixed cost at 5th unit of output. a.
10

b. 20

c. 30

d. 40

Q5 The slope of perfect inelastic supply curve is:

a. Horizontal

b. Vertical

c. Negative sloped to the right

d. Positive sloped to the right

Q6 What causes upward movement along the same supply curve?

a. Increase in the price of related goods

b. Increase in the price of the good

c. Decrease in the price of the good

d. Decrease in the price of related goods

Q7 When average production decreases the marginal production curve:

a. Remain above the AP curve

b. Remain below the AP curve

c. Both (a) and (b)

d. None of the above

VERY SHORT ANSWER TYPE QUESTIONS

Q1 Define marginal product.

Ans. The change in total product by employing an additional unit of variable factor.

MP = OR MP = TPn –TPn-1
Q2 As the variable input is increased by one unit, total output falls. What would you say about of marginal
productivity?

Ans. Marginal productivity will be negative.

Q3 What will be the slope of average revenue curve if total revenue increases at constant rate?

Ans. The AR curve will be horizontal to X-axis.

Q4 Give two examples of variable cost.

Ans. Cost of raw material and payment of electricity bills.

Q5 What is meant by revenue in microeconomics?

Ans. The money receipt of a firm from the sale of its output.
Or
Price multiplied by the quantity sold by a firm is known as the revenue.

SHORT ANSWER TYPE QUESTIONS

Q1 Why is average revenue always equal to price?
Ans. Since AR = TR/Q ………. (1)
And TR = P x Q ………… (2)
So AR = P x Q / Q = Price
Q2 From the following table find total product and marginal product.

Labour 1 2 3 4 5
 AP 10 15 20 20 18
Ans. TPP 10 30 60 80 90
MPP 10 20 30 20 10
Q3

Variable input (units) TP (Units)

1 4
2 9
3 13
4 15
5 12
Identify the different phases of the law of variable proportions from the following schedule.
Give reasons for your answer.

Ans. Variable TP MP Phases

Input
1 4 4 Increasing return to a factor
2 9 5
3 13 4 Diminishing return to a factor
4 15 2
5 12 -3 Negative return to a factor
(i) From unit 1 to unit 2, MP is increasing and TP increasing at an increasing rate so it
shows 1 (ii) Unit 2 to unit 3, MP is diminishing and TP increasing at a diminishing rate so it st phase.
shows (iii) Unit 4 onwards, MP is negative and TP falling so it shows 3rd phase. 2nd phase.

Q4 Draw ATC, AVC and AFC curve on the same graph. Explain the relationship between ATC
and AVC. Do they intersect each other? Give reason in support of your answer.
Ans. COST
 OUTPUT
Since ATC is the sum total of AFC and AVC. As output increases the AFC tends to decrease.
That is why ATC & AVC comes closer to each other with the increase in output because of decrease
in AFC.

Q5 At a price of Rs. 8 per unit, the quantity supplied of a commodity is 200 units. Its price elasticity of
supply is 1.5. If its price rises to Rs. 10 per unit, calculate its quantity supplied at new price.

Ans. ES = ΔQ/ΔP ×
P/Q ΔQ = Q1 – Q
= X - 200 ΔP =
P1 – P

= 10 – 8
=2
P =8
Q = 200
ES = 1.5
Then:
ES = ΔQ/ΔP × P/Q 1.5 =
X – 200 /2 × 8/200 X =
275 UNITS.

Q6 What are the total fixed cost, total variable cost and total cost of a firm? How are they related?

Ans. Total Cost (TC) -Total Cost is the total expenditure incurred on the production of a commodity. It is the
sum total of Total Fixed Cost and Total Variable Cost.
TC=TVC+TFC
Total Variable cost (TVC) - Expenditure incurred on the variable factors of production is known as Total
Variable Cost. Variable costs vary with
change in output.
TVC=TC-TFC
Total Fixed Cost (TFC) -Expenditure
incurred on the fixed factors of production
are known as Total fixed costs. Fixed costs
do not vary with change in output.
TFC=TC-TVC
 Since TC = TFC + TVC and TFC remain same at each level of output that is why the TC and
TVC curve remain parallel in short run.

Q7 Differentiate between short run and long run production function.

Ans. Short run production function Long run production function

At least one factor of production is kept All factors of production are variable.
constant and others are variable.

Factor ratio changes. Factor ratio remains constant.

Generates law of variable proportion. Generates returns to scale.

Q8 What is the likely behaviour of the AR and MR curve when a firm is able to sell additional units on: a.
Given price
b. By lowering the price

Ans. a. Given price:

In this situation price or AR remain constant. So MR is equal to AR. Both are

represented by the same horizontal line parallel to X-axis.

b. By lowering the price:

The average revenue curve and marginal revenue curve both slopes downward from left to right. Since
AR falls MR curve lies below the AR curve. Slope of MR curve is just double than the slope of AR in
case of linear AR curve. MR can be positive, negative or zero but AR is always positive.
Q9 Draw supply curves showing :
a. Elastic supply
b. Unitary elastic supply
c. Inelastic supply

Ans. a. Elastic supply

Es > 1 (Supply curve intersects Y axis)

 b. Unitary elastic supply

Es = 1 (Supply curve passes through origin).

c. Inelastic supply

Es < 1 (supply curve intersects X axis)

Q 10 How does a change in per unit tax influence the supply of a good? Explain.
OR
How does a change in technology influence the supply of a good? Explain.

Ans. Increase in per unit tax increases the cost of production which reduces the profits of the producer. So the
producer will decrease the supply and supply curve will shift towards right. Decrease in tax rate will
shift supply curve towards right.
OR
Upgraded technology will increase the supply while degraded technology will shift the curve to left.
 LONG ANSWER TYPE QUESTIONS
Q1 Why is equality between MC and MR necessary for a firm to be in equilibrium? Is it sufficient
to ensure the equilibrium?
OR

Explain why will a producer not be in equilibrium if the conditions of equilibrium are not met?

OR
Explain the rationale behind the conditions of equilibrium of a producer.
Ans. Producer‟s equilibrium refers to a position at which the producer gets maximum profit with minimum
cost. For a producer/firm to be in equilibrium two conditions must be fulfilled:
a. MC = MR and
b. MC should be rising at the point of equilibrium.
Producer‟s equilibrium can be explained with the help of following diagram:

Two things to be noted:

1. Area under MC curve is TVC
2. Area under MR curve (=AR curve) is TR.
Equilibrium is at point E where the level of output is OQe. Here both the conditions are fulfilled. That is:
a. MC = MR and
b. MC is rising at the point of equilibrium.
What if MC = MR but MC is falling:
At OQ1 output:
Where the MR = MC but the MC is falling:
Total revenue = OPBQ1 (area under MR = AR curve)
Total Variable Cost = OABQ1 (area under MC curve)
Since OABQ1 > OPBQ1 by ABC which is loss for the firm.
What if MC < MR
At OQ2 output:
Where the MR > MC
Firm could get additional profits of CDE area by producing OQe output but it will have to sacrifice the
profit if it continues to produce OQ2 output. What if MC > MR
At OQ3 output:
Where the MC > MR the loss for the firm will be the area of EFG.
Q2 Price of the commodity is given at Rs. 8 per unit. From the following table; find out the level of
Output (in units) Marginal Revenue (Rs.) Total cost (Rs.) output at which
the producer will
1 8 10 be in equilibrium.
2 8 18 Give reasons for
your answer.
3 8 25
4 8 33
5 8 42

Ans.

Output (in units) Marginal Revenue Total cost Marginal Cost

1 8 10 10

2 8 18 8

3 8 25 7

4 8 33 8

5 8 42 9

Equilibrium

Producer‟s equilibrium is at 4th unit of output.

Here both the conditions are fulfilled. That is:
a. MC = MR and
b. MC is rising at the point of equilibrium.
Q3 What are the different phases in the law of variable proportion in terms of marginal product? Give reason
behind each phase.
OR
What are the different phases in the law of variable proportion in terms of total product? Give reason behind
each phase.
OR
State the different phases of changes in total and marginal product in the law of variable proportions. Use
diagram.

Ans. The law of variable proportion states that other factors of production remain constant, as more and
more units of variable factor is employed in the beginning total product (TP) increases at increasing
rate, then increases at a decreasing rate and ultimately decline.
In short, the effect on total production/ marginal production in short run when variable factor is increased is
called the law of variable proportion.

I phase: MP increases, due to which TP increases at increasing rate. AP also increases. The
stage lasts where the MP is maximum.
Reasons:
a. better utilization of the fixed input with increase in variable input,
b. Benefits of division and specialization of the variable input used, say, labour, c. Indivisibility of fixed
input.
II phase: MP decreases, due to which TP increases but at decreasing rate. AP also reaches at
maximum and start decreasing. The stage lasts where the TP is maximum and MP is zero. Reasons:
a. Optimum combination between fixed and variable inputs is disturbed with increasing use of the

variable input,
b. After a certain level of employment of the variable input, the benefits from the division of labour
will diminish leading to diminishing return.
c. Imperfect substitutes between fixed input and variable input

Q AFC at 4th unit of output is 25. Find TFC, TC, AFC, AVC ATC and MC from the following table:
4
Units: 0 1 2 3 4 5
TVC : 0 10 15 18 25 35
An OUTPUT TF TV TC AFC=TF AVC=TVC AC= MC= TCn-
s. ( CA C A+B C / TC/Q TCn-1
Q) B /Q Q

0 100 0 100 - - - -

1 100 10 110 100 10 110 10

2 100 15 115 50 7.5 57.5 5

3 100 18 118 33.33 6 39.33 3

4 25x4=10 25 125 25 6.25 31.25 7

0

5 100 35 135 20 7 27 10
 UNIT -4 FORMS OF MARKET AND PRICE DETERMINATION UNDER PERFECT COMPETITION
WITH SIMPLE APPLICATION (12 MARKS)
MCQ/VERY SHORT (ONE MARK EACH) – 2 QUESTIONS
SHORT ANSWER (FOUR MARKS) – 1 QUESTION
LONG ANSWER (6 MARKS) – 1 QUESTION
Perfect competition – features, determination of market equilibrium and effects of shift in demand and supply.
Other market forms – monopoly, monopolistic competition, oligopoly – their meaning and features. Simple applications
of demand and supply: price ceiling, price floor.

MULTIPLE CHOICE QUESTIONS

Q1 The market form in which there are a few big firm is called:

a. Monopoly

b. Oligopoly

c. Perfect competition

d. Monopolistic competition

Q2 Under which market condition the demand curve is inelastic?

a. Monopoly

b. Oligopoly

c. Perfect competition

d. Monopolistic competition

Q3 Which among the following market has the firm which is price taker?

a. Monopoly

b. Oligopoly

c. Perfect competition

d. Monopolistic competition

Q4 Which among the following market has the firm which discriminates price? a.
Monopoly
b. Oligopoly

c. Perfect competition

d. Monopolistic competition

Q5 Which among the following market has cut throat competition and high degree of interdependency among firms? a.
Monopoly
b. Collusive Oligopoly

c. Perfect competition

d. Non collusive oligopoly

Q6 Which among the following market sell differentiated products?

a. Monopoly

b. Oligopoly

c. Perfect competition
 d. Monopolistic competition

Q7 The demand curve for a firm operating under oligopoly is:

a. Negative sloped

b. Positive sloped horizontal to X – axis

c. Indeterminate

d. Straight line positive sloped

Q8 For which type of the goods government adopts price ceiling?

a. Necessities

b. Agricultural

c. Luxuries

d. Inferior

Q9 For which type of the goods government adopts floor price policy? a.
Necessities
b. Agricultural

c. Luxuries

d. Inferior

Q 10 When both demand and supply curve shifts rightwards the equilibrium price will: a.
Increase
b. Decrease

c. Remain same

d. All of above

VERY SHORT ANSWER TYPE QUESTIONS

Q1 When a firm is said to be “price maker”?
Ans. When it can determine its own price for its product.
Q2 What is imperfect oligopoly?
Ans. When firms under oligopoly firms sells differentiated products.
Q3 Define Monopoly.
Ans. Monopoly refers to a Market situation in which there is a single seller and there are no close substitutes of the
commodity.
Q4 In which market Form the goods are sold at uniform price?

Ans. Under perfect competition.

Q5 What will happen to the equilibrium price if the price of substitute good increases?
Ans. Increase in price of substitute will increase the demand for concerned good which result in increase in
equilibrium price.
Q6 What will happen to the equilibrium price if the government imposes per unit tax on the good?
Ans. Increase in tax decreases the profit of producer which results in the decrease in supply of good. This increases
the equilibrium price.

SHORT ANSWER TYPE QUESTIONS

Q1 What is the significance of:
a. Single seller in the monopoly
b. Differentiated product in monopolistic competition
Ans. a. Single seller: It means the monopolist has full control over the supply and price of commodity. So the
monopolist firm becomes price maker.
b. Differentiated product: These differentiated products enable the firms to have control on their own
output, & thus the firms are partially price makers and their products have highly elastic demand.
Q2 Comment on the shape of MR curve when TR curve is
a. Positively sloped straight line passing through the point of origin. b.
Horizontal line
Ans. When TR is Positively sloped straight line: the MR curve will be the horizontal to X-axis.
When TR is horizontal line: the MR will be zero and the MR curve will coincides the X-axis.
Q3 Explain the significance of the feature “free entry and exit under perfect competitive market.
Ans. Under perfect competition there are no barrier to entry and exit of firms in industry. So new firms will enter in
the market if the existing firms are earning supernormal profits. On the other hand loss making firm will quit
the market. This freedom ensures that firms earn just the normal profits in the long run.
Q4 Explain the implication of non-price competition in an oligopoly market.
Ans. Under oligopoly firms generally avoid the competition based on the price as it may result them loss.
So they indulge themselves in non-price competition and spends heavily on providing after sale
services, warranty on the product, advertising etc. Overall it increases the cost of production and put
adverse effects on public welfare.
Q5 What are the effects of floor price/ceiling price on the market of a good? Use diagram.
Ans. The minimum price, over and above the equilibrium price, fixed by the government for a good is
called floor price. This price helps producers (mainly farmers) to continue to produce as they will get
assured price of their product. It also ensures the stability in the market by regular supply.

LONG ANSWER TYPE QUESTIONS

Q1 What will be the effect on the equilibrium price of a good when:
a. price of related goods decreases
b. govt. decreases per unit tax on the good
c. factor prices decreases
Ans. In all above cases the supply of the concerned good will increase due to which the supply curve will shift
towards right and the equilibrium price will decrease. Explain the chain of effects of this change.

Chain of effects:
1. Due to above reasons the supply will increase.
2. This generates excess supply by ef on existing price op.
3. Due to excess supply the price tends to decrease in the market.
4. Due to decrease in price the demand will expand from point e to e1.
5. Decrease in price also contracts the supply from point f to e1.
6. Finally the equilibrium attains at point e1.
Q2 What will be the effect on the equilibrium price of a good when:
a. price of substitute goods increases
b. income of the consumer increases
c. price of complementary goods decreases
Ans. In all above cases the demand for the concerned good will increase due to which the demand curve will shift
towards right and the equilibrium price will increase.

Chain of effects:
1. Due to above reasons the demand will increase.
2. This generates excess demand by Ef on existing price OP.
3. Due to excess demand the price tends to increase in the market.
4. Due to increase in price the supply will expand from point E to E1.
5. Increase in price also contracts the demand from point F to E1.
6. Finally the equilibrium attains at point E1.
Q3 Define collusive and non-collusive oligopoly. Explain the features of oligopoly.
Ans. Collusive oligopoly is one in which the firms cooperate with each other in deciding price and output.
Non collusive oligopoly is one in which firms compete with each other.

Features of oligopoly

1. Few firms - Few firms mean either only a few firms in number or a few big firms producing most of the
output of the industry. The exact number of firms is not defined. The word „few‟ signifies that the
number of firms is manageable enough to make a guess of the likely reactions of rival by a firm.
2. Firms are interdependent in taking price and output decisions -When there are only a limited number
of firms, it is likely that rivals have some knowledge as to how these firms operate. It one firm does
something about the price and quantity of the product it produces, the rivals are likely to take quick note
of it and react by changing their own price and output plans- It makes each firm dependent on other firms
in the industry.
3. Barriers to the entry of firms- The main reason why the number of firms is small is that there are
barriers which prevent entry of firms into industry. Patents, large capital, control over the crucial raw
materials etc. prevent new firms from entering into industry. Only those who are able to cross these
barriers are able to enter.
4. Non-price competition- Firms try to avoid price competition for the fear of price war. They use other
methods like advertising, better services to customers, etc. to compete with each other.

Q4 Define perfect competition? Explain the features of perfectly competitive market.

Ans. Perfect competition is a form of the Market in which large number of buyers and sellers, selling homogeneous
products at a uniform price.
Features:
1. Large number of buyers and sellers – There are large number of buyers and sellers in perfect
competitive market it means no single buyer or seller can influence the market It is because each seller
sells a very small portion of the market supply, similarly the demand of each buyer is also very small
in the market.
2. Homogeneous product - The product sold in the market is homogeneous or identical in all respect i.e.
shape, size, colour, composition, etc.
3. Free entry and exit of firms -Under perfect competition there are no barrier to entry and exit of firms
in industry. But entry and exit may take time so it happens only in long runs. This freedom ensures that
firms earn just the normal profits in the long run.
4. Perfect knowledge of market-In these markets all the sellers as well as buyers have the complete
information about the market situation. It means they are well aware about the product and its price.
Thus the price remains same.
5. Perfect mobility– The factors of production i.e. land, labour, capital and entrepreneur are perfectly
mobile. There is no geographical and occupational restriction on their movement. It means factors of
production are free to move from one place to another place and one job to another job in which they
get better price.
6. No selling and transportation cost- It assumes that there is no selling and transportation cost. Thus
the price remains same everywhere.

Q6 Explain the features of Monopoly market.

Ans. Monopoly – It‟s a market situation where there is a single seller of a commodity which has no close
substitutes.
Main features of a monopoly market are-
1. Single seller- Under monopoly there is an only seller of commodity in the industry, so the difference
between firm and industry get vanished. It means the monopolist has full control over the supply and
price of commodity.
2. No close substitute- The monopolist produces a distinct product which has no close substitute in the
market. Therefore the monopoly firm has no fear of competition from any other commodity.
3. Barriers on entry- There are strong or significant barrier to the entry of new firms. These barriers
may be legal barriers like patent right or licensing etc.; as a result monopolist firm can earn abnormal
profit in the long run.
4. Price discrimination-When a monopolist charge different prices from different buyers for the same
product is called price discrimination. It‟s a distinct feature of monopoly market. E.g. railways charge

different fare for senior citizens, children and others for same journey.
5. Independent price policy - In monopoly, firm and industry are same so the firm has complete control
over the output and it fixes its price by itself. Thus firm is price marker in monopoly.

Q7 Explain the features of Monopolistic competition.

Ans. Monopolistic Competition- It refers to such a market structure where there are large number of buyers and
sellers and the firms produce & sell differentiated product which has many close substitute available.
1. In this kind of market situation, there exist a fairly large number of firms which have a greater
competition among themselves. Due to this, the firms do not have total control over the market
supply of the product.
2. The firms produce & sell heterogeneous (differentiated) products, in this kind of markets, which
enable the firms to have control on their own output, & thus the firms are price makers.
3. There is a freedom of entry & exit of firms in the market, to a considerable extent, due to which the
number of firms always remain fairly large. As a result, the firms can earn only the normal profits in
the long run.
4. The unique feature of this type of market situation is prevalence of selling cost, i.e. the expenditure
made by the firms to promote the sales of their products viz. sale exhibition, discount offer,
showroom demonstration, advertisement & wide campaigning cost etc.
5. The firms, in this type of markets, are price makers, as all these firms have distinct consumers of
their product. As the firms produce & sell differentiated product, the price of products of each firm is
different, irrespective of their similarity. Because of this, the AR (demand) curve slopes negatively at
gradual rate.

Q8 Demand and Supply equation for a product are given below:

Yd =100-P and
Ys =70+2P
Determine equilibrium price and quantity.

Ans. . Under equilibrium:

Yd = Y s
100-P = 70+2P
30 = 3P
P = Rs. 10
Putting the value of P in the equation
Yd =100-10 = 90 units
Ys =70+2(10) = 90 units
Therefore, equilibrium quantity = 90units