INTRODUCTION TO MICRO ECONOMICS

. Choose The Correct Answer.

Question 1.
The scarce resources of an economy have
(a) Competing usages
(b) Single usages
© Unlimited usages
(d) None of the above
Answer:
(a) Competing usages

Question 2.
Which of the following is an example of micro economic study?
(a) National Income
(b) Consumer behaviour
© Unemployment
(d) Foreign trade
Answer:
(b) Consumer behaviour

Question 3.
Which of the following is a macro economic variable?
(a) Individual demand
(b) Aggregate demand
© Firms output
(c) Price of a good
Answer:
(b) Aggregate demand

Question 4.
Central problems of an economy includes.
(a) What to produce
(b) How to produce
© For whom to produce
(d) All of the above
Answer:
(e) All of the above

2nd PUC Economics Question Bank Chapter 1 Introduction to Micro Economics

Question 5.
Traditionally, the subject matter of economics has been studied under the following broad
branches.
(a) Micro & Macro Economics
(b) Positive & Normative
© Deductive&Inductive
(d) None of the above
Answers:
(a) Micro & Macro Economics

Question 6.
PPC curve is also known as:
(a) Demand curve
(b) Supply Curve
© Transformation curve
(d) Indifference curve
Answer:
© Transformation curve

Question 7.
Scarcity is a situation in which:
(a) People are poor
(b) People are rich
© Wants exceed the resources available to satisfy them.
(d) Something is wasted
Answer:
© Wants exceed the resources available to satisfy them.

Question 8.
Which of the following is not a subject matter of microeconomics?
(a) Pricing theory
(b) Monetary policy
© Market structure
(d) Consumer behavior
Answer:
(b) Monetary policy

2nd PUC Economics Question Bank Chapter 1 Introduction to Micro Economics

Question 9.
The various combinations of good that can be produced in an economy when it uses its
available resources and technology efficiently are depicted by:
(a) Demand curve
(b) Production Possibility Curve
© Supply curve
(c) Product curve
Answer:
(b) Production Possibility Curve

Question 10.
Labour Intensive technology is chosen in a_______economy.
(a) Developed economy
(b) Devoloping economy
© Underdeveloped economy
(d) Lobour surplus economy
Answer:
(e) Lobour surplus economy

Question 11.
Capital intensive technology is chosen in a ______economy.
(a) Underdeveloped economy
(b) Developed economy
© Capital surplus economy
(d) Labour surplus economy
Answer:
© Capital surplus economy
Question 12.
Which of the following is not one of the three central problems that the study of economics is
supposed to answer?
(a) Who produces what?
(b) Who consumes what?
© When are goods produced?
(d) How are goods produced?
Answer:
© When are goods produced?

Question 13.
Which of the following is a reason for the concave shape of PPF?
(a) Diminishing MOC
(b) Constant MOC
© Increasing MOC
(d) All of the above
Answer:
© Increasing MOC

2nd PUC Economics Question Bank Chapter 1 Introduction to Micro Economics

Question 14.
Raja: My sugarcane harvest this year is poor.
Krishna: Don’t worry. Price increases will compensate for fall in quantity supplied.
Vijay: Climate affects crop yields. Some years bad, others are good.
Mayur: The government ought to guarantee that our income will not fall.
In this conversation, the normative statement is made by
(a) Raja
(b) Krishna
© Vijay
(d) Mayur
Answer:
(d) Mayur

Question 15.
With an advancement in technology, the PPC will
(a) Shift rightwards
(b) Shift leftwards
© Rotate on X-axis
(d) Rotate on Y-axis
Answer:
(a) Shift rightwards

Question 16.
What to produce means
(a) Types of goods to be produced
(b) Quantity of goods to be produced
© both (a) and (b)
(d) neither (a) nor (b)
Answer:
© both (a) and (b)

Question 17.
Identify the correct statement
(a) In deductive method, logic proceeds from particular to the general
(b) Micro and Macro-Economics are interdependent.
© In a capitalist economy, the economic problems are solved by Planning Commission
(d) Higher the prices, lower is the quantity demanded of a product is a normative statement.
Answer:
(b) Micro and Macro-Economics are interdependent.

Question 18.
Economic goods are considered scarce resources because they
(a) cannot be increased in quantity
(b) do not exist in adequate quantity to satisfy social requirements
© are of primary importance in satisfying social requirements
(c) Are limited to man made goods.
Answer:
(b) do not exist in adequate quantity to satisfy social requirements

Question 19.
From the national point of view which of the following indicates micro approach?
(a) Per capita income of India.
(b) Underemployment in agricultural sector
© Lock out in TELCO
(d) Total savings in India.
Answer:
© Lock out in TELCO

2nd PUC Economics Question Bank Chapter 1 Introduction to Micro Economics

Question 20.
In a free market economy the allocation or resources is determined by
(a) votes taken by consumers
(b) a central planning authority
© consumer preference
(e) The level of profits of firms
Answer:
© consumer preference

Question 21.
Which of the following bundles of goods cannot be produced with the resources the economy
currently has?
(a) a
(b) b
©c
(d) d
Answer:
(d) d

Question 22.
An economy achieves “productive efficiency” when
(a) resources are employed in their most highly valued uses.
(b) the best resources are employed
© the total number of goods produced is greatest.
(d) goods and services are produced at least cost and no resources are wasted.
Answer:
(d) goods and services are produced at least cost and no resources are wasted.
Question 23.
Which point on the PPF shows a “productively efficient” level of output?
(a) A
(b) B
©C
(d) All of the above
Answer:
(d) All of the above

Question 24.
Which of the following clearly represents a movement toward greater productive efficiency
(a) A movement from point A to point B
(b) A movement from point C to point D
© A movement from point F to point C
(d) A movement from point E to point B
Answer:
© A movement from point F to point C

2nd PUC Economics Question Bank Chapter 1 Introduction to Micro Economics

Question 25.
Which of the following illustrates a decrease in unemployment using the PPF?
(a) A movement down along the PPF
(b) A rightward shift of the PPF
© A movement from a point on the PPF to a point inside the PPF.
(d) A movement from a point inside the PPF to a point on the PPF.
Answer:
(d) A movement from a point inside the PPF to a point on the PPF.

Question 26.
Choice is created by the
(a) abundance of resources
(b) urgency of needs
© non-availability of resources
(d) scarcity of resources
Answer:
(d) scarcity of resources

Question 27.
The branch of economic theory that deals with the problem of allocation of resources is
(a) micro-economic theory
(b) macro-economic theory
© econometrics.
(d) none of the above.
Answer:
(a) Micro-economic theory

Question 28.
Which of the following is related to microeconomics?
(a) inflation in the economy
(b) problem of unemployment
© National income
(d) Income from the railways
Answer:
(d) Income from the railways

Question 29.
In free market economy, the allocation of resources is determined by
(a) votes taken by consumers
(b) a central planning authority
© consumer preference
(d) the level of profits of firms
Answer:
© consumer preference

2nd PUC Economics Question Bank Chapter 1 Introduction to Micro Economics

Question 30.
Central economic problems are the problems of a_________ .
(a) market economy
(b) socialist economy
© mixed economy
(d) All of these
Answer:
(d) All of these

Question 31.
Best shape of PPC reflects
(a) diminishing opportunity cost
(b) constant opportunity cost
© increasing opportunity cost
(d) None of these
Answer:
(a) Diminishing opportunity cost

Question 32.
According to economic growth, production possibility curve will show
(a) a downward shift
(b) an inward shift
© an outward shift
(d) No effect
Answer:
© an outward shift

II. Fill in the Blanks

1. Scarcity of resources gives raise to ________

Answer:
The Problem of Choice

2. In a centrally planned economy all important decisions are made by ______

Answer:
The Government

2nd PUC Economics Question Bank Chapter 1 Introduction to Micro Economics

3. In reality, all economies are ________

Answers:
Mixed Economies

1. Economic problem arise due to _______of resources and alternative uses of means.
Answers:
Scarcity

2. _______cost is the cost of next best alternative foregone.

Answers:
Opportunity

3. When Marginal rate of transformation is constant the PPC would be_______line.

Answers:
Straight

4. Moving from one point on PPC to another point of PPC is known as _______
Answers:
Tradeoff

5. The usual shape of PPC is_______towards the origin.

Answers:
Concave

6. Cotton textile industry in an economy is an example of_______study.

Answers:
Microeconomic

7. _______is a schedule that shows various combinations of two goods which can be
produced by an economy with given resources and technology.
Answers:
Production Possibility Schedule

8. A mechanism through which the scarce resources are prioritized and organized for the
production of goods and services with the intervention of government is called as
_______.
Answers:
Economy.

9. An economy where the economic decisions are taken through the market mechanism i.
e., demand and supply is called as_______.
Answers:
Market economy.

2nd PUC Economics Question Bank Chapter 1 Introduction to Micro Economics

10. A _______ economy is one where there is co-existence of both public and private sector
enterprises.
Answers:
Mixed

11. The study of‘what is’ and ‘what was’ under the given circumstances is
called_______economics
Answers:
Positive

12. The study of ‘what should be’ or ‘what ought to be’ is called _______economics
Answers:
Normative
 13. Study of consumer behavior is an example of_______
Answers:
Microeconomics studies

14. Study of price determination in the market is an example of _______

Answers:
Microeconomics studies

15. The basic functions of an economy are _______, _______, _______, and _______.
Answers:
Production, distribution, consumption and exchange.

III. Match the following

Question 1.

A B
1. Market economy a. Government
2. Service of a Teacher b. Private
3. Centrally planned economy c. Skill
4. Positive economics d. Evaluate the Mechanism
5. Normative economics e. Functioning of Mechanism
Answers:
1. (b) Private
2. © Skill
3. (a) Government
4. € Functioning of Mechanism
5. (d) Evaluate the Mechanism

2nd PUC Economics Question Bank Chapter 1 Introduction to Micro Economics

Question 2.

A B
1. PPF a. ‘What is’
2. Opportunity Cost b. USA
3. Centrally Planned Economy c. What ought to be
4. Market Economy d. PPC
5. Positive Economics e. Next best alternative
6. Normative Economics f. China
Answer:
1. (d) PPC
2. € Next best Alternative
3. (f) China
4. (b) USA
5. (a) ‘What is’
6. © What ought to be

IV. Answer the following questions in a sentence/word.

Question 1.
Why does the problem of choice arise?
Answer:
Every society has to face scarcity of resources and it is the scarcity of resources that gives rise to
the problem of choice.

Question 2.
What is market economy?
Answer:
An economy where the economic decisions are taken through the market mechanism i.e.,
demand and supply is called as market economy.

2nd PUC Economics Question Bank Chapter 1 Introduction to Micro Economics

Question 3.
What do you mean by centrally planned economy?
Answer:
In a centrally planned economy, the government or the central authority plans all the important
activities in the economy. All important decisions regarding production, exchange and
consumption of goods and services are made by the government.

Question 4.
Give the meaning of micro economics.
Answer:
Micro economics studies the behaviour of individual economic agents in the markets for
different goods and services and try to figure out how prices and quantities of goods and
services are determined through the interaction of individuals in these markets.

Question 5.
What do you mean by positive economics?
Answer:
The study of ‘what is’ and ‘what was’ under the given circumstances is called positive
economics.
Question 6.
What is normative economics?
Answer:
The study of ‘what should be’ or ‘what ought to be’ is called normative economics.

2nd PUC Economics Introduction to Micro Economics Two Marks Questions and Answers
V. Answer the following Questions in 4 Sentences.

Question 1.
Mention the central problems of an economy.
Answer:
The central problems of an economy are

What is produced and in what quantities?

How are these goods produced?
For whom are these goods produced?
2nd PUC Economics Question Bank Chapter 1 Introduction to Micro Economics

Question 2.
Distinguish between Micro and Macro economics.
Answer:

Basis Micro Economics Macro Economics

Meaning Microeconomics is that part of economics which studies the behaviors of
individual units of an economy Macroeconomics studies the behavior of aggregates of the
economy as a whole.
Tools Demand and supply are main tools Aggregate demand and aggregate supply are main
tools.
Objective Objective It aims to determine price of commodity or factors of production.
It aims to determine income and employment level of the economy.
Theory Related theories are
(a) Theory of price
(b) Theory of consumer behavior Related theories are
(a) Theory of consumption and investment
[b] Theory related to employment.
Question 3.
Distinguish between positive and normative economics.
Answer:
Positive Economics

Here we study ‘what is’ and ‘what was’ under given circumstances.
Here we study how different mechanism function.
Normative Economics

Here we study ‘what ought to be’ or ‘what should be done and what is good and bad’ under
given circumstances.
Here we try to understand whether these mechanisms are desirable or not.
Question 4.
What do you mean by production posibility set?
Answer:
The collection of all possible combinations of the goods and services that can be produced from
a given amount of resources and a given stock of technological knowledge is called the
production possibility set.

Question 5.
What is opportunity cost?
Answer:
Opportunity cost can be defined as, “the cost of next best alternative scarcified in order to
produce that good”.

2nd PUC Economics Question Bank Chapter 1 Introduction to Micro Economics

Question 6.
What is production possibility frontier?
Answer:
It is a curve which depicts all possible combinations of two goods which an economy can
produce with the available resources and given technology.

2nd PUC Economics Introduction to Micro Economics Four Marks Questions and Answers
VI. Answer the following Questions in 12 Sentences.

Question 1.
Briefly explain the production possibility frontier.
Answer:
It is a curve which depicts all possible combinations of two goods which an economy can
produce with the available resources and given technology.

Properties of PPF:

PPC is downward sloping curve because in a full employment economy, the production of one
good can be increased only by sacrificing the other good.
PPC is concave to the origin because of increasing marginal opportunity cost.
PPC can shift leftwards or rightwards.
Question 2.
Briefly explain the central problems of an economy.
Answer:
Introduction:
Human wants are unlimited and the resources to satisfy these wants are very limited. Hence
there is a gap between our wants and resources and hence the problem of choice arises and it
is called as economic problem.

There are three fundamental problems in every economy:

What to produce (problem of choice).

How to produce (problem of technology).
For whom to produce (problem of distribution).
What to produce (problem of choice): As resources are scarce, an economy cannot produce
everything in infinite quantity, say food or clothing, more food or little clothing or vice versa.
What shall be produced today and tomorrow? All these questions arise because of limited
resources. Thus the problem of choice arises. The economy must choose the commodity, its
quantity and quality.

How to produce (problem of technology): This problem is relating to choice of technology.

There are two techniques of production:

Labour intensive technique – More labour is used in production than capital.

Capital intensive technique – More capital is used in production than labour.
The choice between these two techniques arises because the former technique generates
employment opportunities and the latter rises efficiency. Thus the society has to choose the
right technique of production between these two techniques depending on resources and
requirement.

For whom to produce (problem of distribution): For whom shall goods be produced that is who
is to enjoy and get the benefit of the goods and services produced? Human wants and
resources vary from region to region. The individuals may belong to economically weaker
section or rich. Therefore, the problem of distribution arises.
2nd PUC Economics Question Bank Chapter 1 Introduction to Micro Economics

Question 3.
Write a short note on a centrally planned economy.
Answer:

In a centrally planned economy the government or the central authority plans all the important
activities in the economy All important decisions regarding production, exchange and
consumption of goods and services are made by the government.
The central authority may try to achieve a particular allocation of resources and a consequent
distribution of the final consumption of goods and services which is thought to be desirable for
society as a whole.
The government concentrates on the well-being and prosperity of the economy as a whole, e.g.
education or health service, is not produced in adequate amount by the individuals on their
own, the government might try to induce the individuals to produce adequate amount of such a
good or service.
Whenever it is necessary the government may intervene in few situations and try to achieve an
equitable distribution of goods and services.
Question 4.
Write a short note on market economy.
Answer:

In a market economy, all economic activities are organized through the market. A Market is an
institution which organizes the free interaction of individuals pursuing their respective
economic activities.
In a market system, all goods and services come with a price at which the exchanges take place.
Prices serve as indicator to producer and consumers.
In a market system, the central problems regarding how much and what to produce are solved
through the coordination of economic activities brought about by the price signals.
This type of economy exists in the USA, Japan, Australia and other countries.
Question 5.
State the assumptions of Production Possibility analysis.
Answer:
The four key assumptions underlying production possibilities are:

The resources available are fixed.

The technology remains constant.
The resources are fully and efficiently employed.
The resources are not equally efficient in the production of one good to another. The cost of
production increases (i.e., Marginal Opportunity Cost increases).
Question 6.
Giving reason comment on the shape of PPC based on the following schedule.
2nd PUC Economics Question Bank Chapter 1 Introduction to Micro Economics – 1
Answer:
2nd PUC Economics Question Bank Chapter 1 Introduction to Micro Economics – 3
2nd PUC Economics Question Bank Chapter 1 Introduction to Micro Economics – 2
The PPC is downward sloping concave because of increasing marginal opportunity cost.

2nd PUC Economics Question Bank Chapter 1 Introduction to Micro Economics

Question 7.
Explain the uses of micro economics
Answer:
Microeconomics plays a significant role in economic analysis. It has both theoretical and
practical validity. In the words of Keynes, “Micro economics is a necessary part of one’s
apparatus of thought”.

1. Allocation of resources: Microeconomics studies the behaviour of an individual

consumer or firm in a particular situation. Resources are scarce and therefore it needs
 to be allocated properly. Microeconomics helps in proper allocation and optimum
utilization of these resources to produce various goods and services.

2. To understand the working of the economy: Microeconomics helps in understanding the

working of free enterprise economy. It gives an idea about how major economic
decisions are taken in a market economy.

3. Price determination: Microeconomics also helps to determine the relative prices of

various goods and services based on demand and supply.

4. Optimum utilization of resources: Microeconomics explains the conditions of efficiency

in both production and consumption and departure from the optimum level. With this
the resources can be optimally utilized.

5. Economic policy: Microeconomics helps in formulating various economic policies and

economic plans to promote all round economic development.

6. International trade: Microeconomics is useful to explain gains from international trade,

balance of payments and determination of exchange rate.

7. Market structure: Microeconomics not only analyses economic conditions but also
studies the social needs under different market conditions like monopoly, duopoly,
oligopoly etc.

8. Analysis of tax policy: Microeconomics helps the government in fixing the rate and type
of tax as well as the amount of tax to be charged to the buyer and the seller. It is also
helpful to understand the consequences of taxation
 THEORY of CONSUMER BEHAVIOUR

1. Choose The Correct Answer.

Question 1.
Utility is …………….
(a) Objective
(b) Subjective
(c) Both a & b
(d) None of the above
Answer:
(b) Subjective

Question 2.
The shape of an indifference curve is normaly…………….
(a) Convex to the origin
(b) Concave to the origin
(c) Horizontal
(d) Vertical
Answer:
(b) Concave to the origin

Question 3.
The consumption bundles that are available to the consumer depend on…………….
(a) Colour & Shape
(b) Price & Income
(c) Income & Quality
(d) None of the above
Answer:
(b) Price & Income

Question 4.
The equation of budget line is…………….
(a) Px + P1x1 = M
(b) M = P0x0 + Px
(c) P1x1 + P2x2 = M
(d) Y = Mx+C
Answer:
(c) P1x1 + P2x2 = M

Question 5.
The demand for these goods increases as income increases…………….
(a) Inferior goods
(b) Giffen goods
(c) Normal goods
(d) None of the above
Answer:
(c) Normal goods

Question 6.
A vertical demand curve is…………….
(a) Perfectly Elastic
(b) Perfectly inelastic
(c) Unitary Elastic
(d) None of the above
Answer:
(b) Perfectly inelastic

Question 7.
Ordinal Utility analysis expresses utility in …………….
(a) Numbers
(b) Returns
(c) Ranks
(d) Awards
Answer:
(c) Ranks

Question 8.
Any statement about demand for a good is considered complete only when the
following is/are mentioned in it
(a) Price of the good
(b) Quantity of the good
(c) Period of time
(d) All of the above.
Answer:
(d) All of the above.

Question 9.
A situation of excess demand prevails at a :
(a) price lower than the equilibrium price.
(b) price higher than the equilibrium price.
(c) price equal than the equilibrium price.
(d) none of the above.
Answer:
(a)price lower than the equilibrium price.

Question 10.
When there is a rise in the price of a substitute good, the demand for the given good:
(a) increases
(b) decreases
(c) remains constant
(d) none of the above
Answer:
(a)increases

Question 11.
If Marginal rate of substitution is constant throughout, the indifference curve will be:
(a) Parallel to the x-axis
(b) Downward sloping concave
(c) Downward sloping convex
(d) Downward sloping straight line.
Answer:
(d) Downward sloping straight line.

Question 12.
The slope of indifference curve is measured by
(a) Marginal rate of transformation
(b) Marginal rate of substitution
(c) Marginal Opportunity cost
(d) None of the above
Answer:
(b) Marginal rate of substitution

Question 13.
When demand for one commodity does not change even if its price changes then its
demand curve is
(a) flatter
(b) steeper
(c) parallel to Y-axis
(d) parallel to X-axis
Answer:
(c) parallel to Y-axis

Question 14.
Utility approach is ________.
(a) Cardinal
(b) Ordinal
(c) Both cardinal and ordinal
(d) None of the above
Answer:
(c) Both cardinal and ordinal

Question 15.
If price of sugar increases, the demand for tea will _______
(a) Decrease
(b) Increase
(c) not affected
(d) none of these
Answer:
(a) Decrease

Question 16.
Expansion and contraction in demand are caused by
(a) Change in the income of buyer
(b) Change in the taste and preference of the buyer
(c) Change in the price of the commodity
(d) Change in the prices of related goods.
Answer:
(c) Change n the price of the commodity

Question 17.
The consumer is in equilibrium at a point where the budget line
(a) Is above an IC
(b) Is below an IC
(c) Is tangent to an 1C
(d) Cuts an IC
Answer:
(c) Is tangent to an IC

Question 18.
The second apple gives lesser satisfaction to a hungry boy. this is a clear case of
(a) Law of Demand
(b) Law of Supply
(c) Law of Diminishing Marginal Utility
(d) Law of variable proportions
Answer:
(c) Law of Diminishing Marginal Utility

Question 19.
Which of the following pairs of goods is an example of substitutes?
(a) Tea and sugar
(b) Tea and coffee
(c) Pen and Ink
(d) Shirt and trousers.
Answer:
(b) Tea and coffee

Question 20.
All of the following items are determinants of demand except:
(a) Tastes and preference
(b) Quantity supplied
(c) Income
(d) Price of related goods.
Answer:
(b) Quantity supplied
Question 21.
Demand for a commodity refers to
(a) desire for the commodity
(b) need for the commodity
(c) quantity demanded of that commodity
(d) quantity of the commodity demanded at a certain price during any particular period
of time
Answer:
(d) quantity of the commodity demanded at a certain price during any particular period
of time

Question 22.
Which of the following pairs of goods is an example of substitutes?
(a) Tea and sugar.
(b) Tea and coffee
(c) Pen and ink
(d) Shirt and trousers.
Answer:
(b) price of a good and the quantity demanded

Question 23.
The law of demand, assuming other things to remain constant, establishes the
relationship between
(a) income of the consumer and the quantity of a good demanded by him
(b) price of a good and the quantity demanded
(c) price of a good and the demand for its substitute.
(d) quantity demanded of a good and the relative prices of its complementary goods.
Answer:
(b) Tea and coffee

Question 24.
Suppose the price of Pepsi increases, we will expect the demand curve of coca cola to
(a) shift towards left
(b) shift towards right
(c) initially shift towards left and then to right
(d) remain at the same level.
Answer:
(b) shift towards right

Question 25.
The price elasticity of demand is defined as the responsiveness of
(a) price to change in quantity demanded.
(b) quantity demanded to a change in price
(c) price to a change in income.
(d) quantity demanded to a change in income.
Answer:
(b) quantity demanded to a change in price

Question 26.
The consumer is in equilibrium at a point where the budget line
(a) is above an indifference curve
(b) is below an indifference curve
(c) is tangent to an indifference curve
(d) cuts an indifference curve
Answer:
(c) is tangent to an indifference curve

Question 27.
The second glass of water gives lesser satisfaction to a thirsty boy. This is a clear case of
(a) a law of demand
(b) Law of diminishing returns
(c) Law of diminishing marginal utility
(d) Law of supply
Answer:
(c) Law of diminishing marginal utility

Question 28.
If, as people’s income increases, the quantity demanded of a good decreases, the good
is called
(a) a substitute
(b) a normal good
(c) an inferior good
(d) a complement
Answer:
(c) an inferior good
Question 29.
Potato chips and popcorn are substitutes. A rise in the price of potato chips will _________
the demand for popcorn and the quantity of popcorn will_________
(a) increase; increase
(b) increase; decrease
(c) decrease; decrease
(d) decrease; increase
Answer:
(a) increase; increase

Question 30.
Total Utility derived from consumption of commodity will begin to fall_________.
(a) with every additional unit consumed
(b) when total utility curve becomes fiat
(c) when Marginal Utility starts falling
(d) when Marginal utility becomes negative
Answer:
(d)When Marginal Utility becomes negative

Question 31.
_________ curve is a downward sloping curve cutting the x-axis.
(a] Marginal Utility
(b) Total Utility
(c) Average Utility
(d) Both (a) and (c)
Answer:
(a) Marginal Utility

Question 32.
A consumer buys two commodities X and Y, he would be in equilibrium when _________.

Answer:
(a) MU = MU

Question 33.
The ratio of exchange between two goods on an indifference curve analysis is shown by
the
(a) constant Marginal Rate of Substitution
(b) Indifference Curve
(c) increasing return to scale
(d) income consumption curve
Answer:
(a) MRS

Question 34.
Indifference curves can be a straight line at
(a) constant Marginal Rate of Substiruuon
(b) increasing Marginal Rate olSubstitutlon
(c) increasing return to scale
(d) None nf the above
Answer:
(a) constant Marginal Rate of Substitution

Question 35.
If the price of any complementary good rises,then
(a) demand curve shifts to left
(b) demand curve shifts to right
(c) demind curve moves downward
(d) demand curve moves upward
Answer:
(a) demand curve shifts to left

Question 36.
The demand function of a product x is given as Dx = 30-4P, where P is the price of the
product. The demand at price of ₹ 4 will be
(a) 20
(b) 12
(c) 14
(d) 10
Answer:
(c) 14

Question 37.
If demand is parallel to X-axis, what will be the nature of elasticity?
(a) perfectly elastic
(b) inelastic
(c) Elastic
(d) Highly elastic
Answer:
(a) Perfectly elastic

II. Fill in the Blanks

1. Want satisfying capacity of a commodity is ______.
Answer:
Utility

2. Two indifference curves never ______ each other

Answer:
Intersects

3. As income increases, the demand curve for normal goods shifts towards ______
Answer:
Rightward

4. The demand for a good moves in the ______ direction of its price.
Answer:
Opposite

5. Method of adding two individual demand curve is called ______

Answer:
Horizontal summation

6. An equation xy = C gives us ______ hyperbola

Answer:
Rectangular

7. When demand for one commodity falls due to fall in price of the other good, the two
goods are called as ____________ goods.
Answer:
Substitute

8. The vertical demand curve will show the good is ____________

Answer:
Perfectly Inelastic.
9. The relationship between price of commodity and demand of its substitute good is
____________
Answer:
Direct

10. ____________ Curve is a downward sloping curve cutting the X-axis.

Answer:
MarginaI Utility

11. Higher Indifference curve indicates ____________ level of satisfaction.

Answer:
Higher

12. Total utility is maximum when marginal utility is ____________

Answer:
Zero

13. If due to fall in the price of good X, demand for good Y rises, the two goods are
____________
Answer:
Complements

14. A ____________ set is a collection of all bundles available to a consumer at the

prevailing market price at
a given level of income.
Answer:
Budget

15. ____________ is a locus of different combinations of two commodities which the

consumer consumes
and whose cost is exactly equals to his income.
Answer:
Budget line

16. “A rational consumer prefers more of the commodity that offers him a higher level
of satisfaction” hence it is called ____________
Answer:
Monotonic preferences.
17. As the consumer’s income increases, the quantity demanded for good increases and
as the consumer’s income decreases, the quantity demanded decreases for a good,
these goods are called as ____________ .
Answer:
Normal goods.

18. ____________ refers to the quantity of a good that a consumer purchases in a market
at a particular price,
at a particular time.
Answer:
Demand

19. ____________ is the aggregate of quantities demanded by all individuals’ consumers in

the market at different prices during a given period of time,
Answer:
Market Demand

20. ____________ means the want-satisfying power of a good or a service.

Answer:
Utility

21. A group of indifference curves for two commodities showing different levels of
satisfaction is called ____________.
Answer:
Indifference Map

22. The Law of Diminishing Marginal Utility was introduced by the ____________ .
Answer:
German Economist Gossen.

23. ____________ refers to the quantity of a good that a consumer purchases in a market
at a particular price, at a particular time.
Answer:
Demand
24. ____________ is the method of adding two individual demand curves horizontally.
Answer:
Market Demand

25. The responsiveness of demand to a change in one of its determinants, while other
determinants remain
constant is called as ____________
Answer:
Elasticity of demand

26. When the price of a good decreases and the quantity demanded increases then it is
called as ____________ .
Answer:
Expansion of demand.

27. When the price of a good increases and the quantity demanded decreases then it is
called as ____________.
Answer:
Contraction of demand.

III. Match the following

Question 1.

Answer:
1. (b) Down ward sloping
2. (a) d(P) = a – bp
3. (e) |ed| = 1
4. (c) Pen & ink
5. (d) A family of indifference curve
Question 2.

A B

a. 1f Consumers
income increases,
Demand for goods
1. MRS decrease

2. Utility b. Tea and Sugar

3. Law of c. Marginal Rate of

Demand Substitution

4. Normal goods d. Tea and Coffee

5. Inferior goods e. Ceteris Paribus

f. If consumers
income increases,
demand for good
6. Substitutes also decreases

7. g. Want satisfying
Complementary power

Answer:

1. (c) Marginal Rate of Substitution

2. (g) Want satisfying power
3. (e) Ceteris Paribus
4. (f) If consumers income increases, demand for good also decreases
5. (a) If Consumers income increases, Demand for goods decrease
6. (d) Tea and Coffee
 7. (b) Tea and Sugar
IV. Answer the following questions in a sentence/word.
Question 1.
What is budget line?
Answer:
Budget line is a locus of different combinations of two commodities which the consumer
consumes and whose cost is exactly equals to his income.

Question 2.
What do you mean by cardinal Utility Analysis?
Answer:
It refers to the method where the utility can be measured with the help of cardinal
numbers such as 1, 2, 3, etc. Cardinal numbers refer to those numbers that can be
added, subtracted or multiplied.

Question 3.
Give the meaning of marginal utility?
Answer:
Marginal utility is the change in total utility due to consumption of one additional unit
of a commodity.

Question 4.
What, is utility?
Answer:
Utility means the want-satisfying power of a good or a service.

Question 5.
Expand MRS.
Answer:
Marginal rate of substitution

Question 6.
What do you mean by Indifference curve?
Answer:
“Indifference cure shows the different combinations of two commodities in which
consumers get equal level of satisfaction “.
Question 7.
What is demand?
Answer:
Demand refers to the quantity of a good that a consumer purchases in a market at a
particular price, at a particular time.

2nd PUC Economics Theory of Consumer Behaviour Two Marks Questions and Answers

V. Answer the following Questions in 4 Sentences.

Question 1.
What is MRS?
Answer:
Marginal Rate of Substitution is the rate at which the consumer will substitute bananas
for mangoes, so that his/her total utility remains constant. So, MRS = | ∆Y / ∆X |.

Question 2.
What are the differences between budget line & budget set?
Answer:
Budget Set :
The budget set is the collection of all bundles that the consumer can buy with her
income at the prevailing market prices.

Budget Line :
The line consists of all bundles which cost exactly equal to money. This line is called the
budget line.

Question 3.
What do you mean by inferior goods? Give example?
Answer:
These are the goods for which the demand is inversely related to consumer’s income.
The demand for inferior goods decreases in response to increase in income and vice-
versa, e.g. Cereals, toned milk, etc

Question 4.
What is monotonic preference?
Answer:
“A rational consumer prefers more of the commodity that offers him a higher level of
satisfaction” hence it is called Monotonic preferences.

Question 5.
State the law of demand.
Answer:
The law of demand states that, “Other things remaining constant (Ceteris Paribus), when
the price of a good decreases, the quantity demanded increases for the good, and when
the price of a good increases, the quantity demanded decreases for the good.

Question 6.
Mention two different approaches which explain consumer behaviour.
Answer:
The two approaches which explains about consumer behaviour are

1. Cardinal Utility Analysis

2. Ordinal Utility Analysis
Question 7.
What do you mean by price elasticity of demand?
Answer:
It is a measure of the responsiveness of the demand for a good to change in its price,
that is, changes in the quantity demanded with respect to changes in the price.

Where, p = actual price, q = actual quantity, ∆p = change in price, ∆q = change in

quantity

2nd PUC Economics Theory of Consumer Behaviour Four Marks Questions and Answers

VI. Answer the following Questions in 12 Sentences.

Question 1.
Write the differences between Total utility & Marginal utility.
Answer:
Total Utility :
 1. Total utility of a fixed quantity of a commodity is the total
satisfaction derived from consuming the given amount of some
commodity x.
2. TU depends on the quantity of the commodity consumed.
3. TUx = ΣMUx
Where, TU = Total Utility, MU = Marginal Utility and x = commodity
Marginal Utility

1. Marginal utility is the change in total utility due to consumption of

one additional unit of a commodity.
2. MU depends on the additional units of the commodity consumed.
3. MUn = TUn -TUn-1
Where, n refers to the nth unity of the commodity.
Question 2.
Briefly explain the budget set with the help of a diagram.
Answer:
Suppose the income of the consumer is M and the prices of bananas and mangoes are
p1 and p2 respectively. If the consumer wants to buy x1 quantities of bananas then he /
she will have to spend P1X1 amount of money.
Similarly, if the consumer wants to buy x2 quantities of mangoes, he/she have to spend
p2 x2 amount of money.
Therefore, if the consumer wants to buy the bundle consisting of x 1 quantities of
bananas and x2 quantities of mangoes, he/she will have to spend p1 x1+ p2 x2 amount of
money.
The set of bundles available to the consumer is called budget set. The budget set is thus
the collection of all bundles that the consumer can buy with his/her income at the
prevailing market prices. Example: Suppose, a consumer who has Rs. 20, and suppose,
both the goods are prices at Rs. 5 and are available only in integral units. The bundles
that this consumer can afford to buy are:

In the above diagram, on OX axis we measure Bananas and on OY axis we measure

Mangoes. Any point in the diagram represents a bundle of the two goods. The budget
set consists of all points on or below the straight line having the equation p 1 x1 + p2 x2 =
M

Question 3.
Explain the derivation of slope of the budget line
Answer:
The slope of the budget line measures the amount of change in mangoes required per
unit of change in bananas along the budget line.
Consider any two points (x1, x2) and (x1 + ∆x1 x2 + ∆x2 on the budget line.
It must be the case that P1x1 + p2x2 = M and, P1(x1 + ∆x1) + p2 x2 + ∆x2) = M by
subtracting both the equation, we get p1∆X1 + P2 + p2∆X2= 0
By rearranging terms in the above equation, we get
∆X2 / ∆X1 = -P1/P2

Question 4.
Explain the indifference map with a diagram
Answer:
The consumer’s preferences over all the bundles can be represented by a family of
indifference curves as showing the diagram. This is called an indifference map of the
consumer.
All the points on an indifference curve represent bundles which are considered
indifferent by the consumer.

A rational consumer always prefers more of the commodity that offers him a higher
level of satisfaction. It is called ‘Monotonic Preferences’.

In the above diagram, on OX axis we measure Bananas and on OY axis we measure

Mangoes. IC1 IC2, IC3 are indifference curves of a consumer where it shows different
levels of satisfaction.
The arrow indicates that bundles on the higher indifference curves are preferred by the
consumer to
to the bundles on lower indifference curves

Question 5.
Write the difference between substitutes and complements.
Substitutes

1. Goods which are used as alternatives to satisfy a particular need are

called substitute goods.
2. Examples: Goods like tea and coffee are not consumed together.
But, they are substitutes for each other.
3. The demand for a good moves in the opposite direction of the
price of its complementary goods.
4. When the price of a good increases, the demand for its
complementary good decreases.
Complements

1. Goods which are consumed together are called complementary

goods.
2. Examples: tea and sugar, shoes and socks, pen and ink, bike and
petrol, etc.
3. The demand for a good usually moves in the direction of the price
of its substitutes.
4. When the price of a good increases, the demand for its substitute
good also increases.
Question 6.
Explain the differences between normal and inferior goods with examples.
Answer:
Normal Goods

1. Goods for which the consumer’s demand increases, as his/her

income increases and demand decreases as the income decreases. Such
goods are called normal goods.
2. Examples: Most of the daily-use goods such as vegetables, fruits,
cloth etc.
3. A consumer’s demand for a normal good moves in the same
direction as the income of the consumer.
Inferior Goods

1. Goods for which the consumer’s demand decreases, as his / her

income increases, and demand increases as the income decreases. Such
goods are called inferior goods.
2. Example: Pearl millet (sajje), finger millet [ragi], fox tail millet
(navane), etc.
3. A consumer’s demand for a inferior good moves in the opposite
direction as the income of the consumer.
Question 7.
Consider a market where there are just two consumers and suppose their demands for
the good are given as follows
Answer:

Question 8.
Explain with the help of a numerical example, the meaning of diminishing marginal rate
of substitution (MRS).
Answer:
The law of diminishing marginal rate of substitution states that as good 1 is substituted
for good 2, the marginal rate of substitution of good 1 for good 2 goes on diminishing,
for e.g.

The example shows the different combination of good 1 and good 2 that gives equal
satisfaction to the consumer. Now in order to procure an additional unit of good 1 he is
prepared to give up 4 units of good 2, hence MRS will be 4:1.

2nd PUC Economics Theory of Consumer Behaviour Six Marks Questions and Answers

VI. Answer the following questions in 20 Sentences.

Question 1.
Explain the law of diminishing marginal utility with the help of a table and diagram.
Answer:
Statement of Law: According to this law, “as consumer increases the consumption of any
one commodity keeping constant consumption of all other commodities, the marginal
utility of the variable commodity must eventually decline.”

Explanation of the law:

The law can be explained with the help of an example. A college girl comes home and
she started drinking water to quench her thirst. First glass of water gives her a great
utility. When she drinks second glass of water, the extent of her thirst should have
reduced. Therefore, she will derive less utility from the second glass of water. If she takes
the third glass the utility will be less than that of second glass. In this way, the additional
utility from the extra glass of water will go on decreasing.

If she continues to take more glass of water, the marginal utility falls to zero and then
becomes negative.
The above example can be illustrated with the help of schedule and diagram.

Table of total utility and marginal utility:

The above table represents, the consumer derives 12 units of utility from the first glass
of water, when water is consumed continuously, the marginal utility falls to 4 units for
the fourth glass of water and becomes zero for the fifth glass of water. The marginal
utility becomes negative for the sixth glass.

The total utility goes on increasing at a decreasing rate and after a stage, begins to
decline. When the marginal utility is zero, the total utility is constant and reachers the
maximum. When the marginal utility becomes negative the total utility declines from 30
units to 28 units.

The above diagram depicts that, on OX axis we measure quantity of water, and on OY
axis we ‘ measure utility. TU is total utility curve and MU is marginal utility curve. The TU
curve rises upwards from left to right and later slopes downwards. The MU curve slopes
downwards and goes to negative.

Conclusion :
The above explanation of this law clearly depicts that as the consumer goes on
consuming the units of a commodity, the total utility increases and reaches saturation
point and decreases. The marginal utility decreases and becomes zero and becomes
negative.

Question 2.
Explain the features of indifference curves with the help of diagrams.
Answer:
1. A higher indifference curve represents a higher level of satisfaction than a lower
indifference curve.
As the consumers income increase and the prices of the good permit him to buy more
commodities, he moves to a higher indifference curve. In the diagram, the point R is
preferable to the point S as it gives more satisfaction than point S.

2. The indifference curves are downward sloping from left to right.

The IC has a negative slope. The reason is, if the consumer has to stay at same level of
satisfaction, the quantity of one commodity must decrease when the quantity of the
other commodity increases.
3. Indifference curve cannot intersect each other.
Two 1C never intersects each other because they represent two different sets of
combinations of two goods providing unequal level of satisfaction.

4. An indifference curve must always be convex to the origin and not concave.

If the IC is concave, the MRS will be increasing, which is unrealistic. As the stock of
commodity falls, our preferences for the remaining units must increase. The MRS must
always diminish. Then the IC will be convex to the origin.

Question 3.
Explain the derivation of demand curve in the case of a single commodity.
Answer:
The law of demand shows the relationship between the price of a good and the quantity
de-manded for the same good. The law can be explained with help of statement and
schedule and diagram.

Statement: The law of demand states that, “Other things remaining constant (Ceteris
Paribus), when the price of a good decreases, the quantity demanded increases for the
good, and when the price of a good increases, the quantity demanded decreases for the
good.”

In the above statement, other things refers to the prices of related goods, the
consumer’s income, tastes and preferences etc. when all these factors are constant, the
demand for a good depends on price of a good. Therefore, according to the law of
demand, the price and the quantity demanded move in opposite direction.

Individual Demand Schedule

The law of demand can be explained with an example. Suppose a consumer wants to
purchase Apple in the market. The demand of an individual consumer depends on its
price. As the price varies, the quantity demanded also varies. The individual’s demand
for Apple is shown in the demand schedule.
The individual demand schedule

Price of Apple per Demand for

kg (₹) Apple(in Kgs)

4 12

5 10

6 8

7 6

8 4

The above demand schedule shows that, as the price varies the individual’s quantity
demanded also varies. When the price of apple is ₹ 4 per kg, the quantity demanded is
12 kgs. If the price increases to ₹ 5 per kg, the quantity demanded is 10 kgs and finally
when the price increases to ₹ 8 per kg, the quantity demanded decreases to 4 kgs.
As per the law of demand, as when the price increases on apple the quantity demanded
decreases for apple and vice-versa.
With the help of individual demand schedule, an individual demand curve can be drawn
to show how the quantity demanded varies as the increase/ decrease in the price of
apple.

The individual demand curve :

With the help of demand schedule, the law of demand can be obtained with the help of
a graph. The graphical presentation of the demand schedule helps us to draw the
demand curve.
Individual Demand Curve

In the above diagram, on ‘OX’ axis we measure quantity demanded on ‘OY’ axis we
measure price. ‘DD’ is the demand curve. Various points on the curve (e,f,g,h,i] show
different price levels and respective quantities demanded.
At the point ‘e’ the price is ₹ 4 and quantity demanded is 12 kgs and point f shows that
the price is ₹ 5 and quantity demanded is 10 kgs and so on.
Thus, as the price of a good decrease the quantity demanded increases, and as the price
of a good increases, the quantity demanded decreases and hence the demand curve
slopes downward from left to right which is shown in the above diagram.

Conclusion :

With the help of the demand schedule and demand curve it has been made clear that
the demand and price are inversely related. And when the price of a good increase, the
quantity demanded decreases and when the price of a good decreases the quantity
demanded increases, helping other things remaining constant.

Question 4.
Explain the optimal choice of consumer with the help of a diagram.
Answer:
The indifference curve depicts the choice and priority of a consumer. The budget line
shows the
ability to pay. Choice and priority can be achieved only when there is affordability.
There¬fore, in order to achieve consumer’s equilibrium that maximizes utility, the
indifference curves have to be combined with the budget line to determine the
combination of goods that can be purchases within a certain amount of budget.

Assumptions: The following are the assumptions of consumer equilibrium under

indifference curve analysis.

1. Income of the consumer is given

2. Consumer is rational and wants to maximize her/his satisfaction
from her/his limited income.
3. Prices of goods and services are constant.
4. Consumer is aware of the indifference map.
5. All goods are homogeneous and divisible.
6. The condition of transitivity is satisfied. If combination A>B and
B>C, then A>C.
7. The condition of non-satiety holds. The consumer prefers more of
one commodity or of the other or of both equally.
The consumer’s equilibrium is shown in the diagram below.

In the diagram, there are four indifference curves – IC 1 , IC2, IC3 and IC4 and a budget
line PQ. Which of the points from A to D is an optimal, utility maximizing, optimum
choice?
Point B is not optimal. A is better than B since A is on a higher indifference curve. The
consumer has to choose A, since A is on the budget line.
Similarly point C is also not optimal, because both B and C are on the same indifference
curve. Therefore, B is as good as C. However, A is better than B and consequently, A
must be better than C.

Point D can also not be optimal. D is on a higher indifference curve than any of the
other baskets, A to C. it, therefore produces the highest level of utility. However, the
consum it lies outside the budget line. Therefore, D is not an optimal choice.

Point A can be optimal. A is the only combinations that gives the maximum utility. All
other points that lie on or below the budget line give higher or lower levels of utility. At
point A, the indifference curve just touches the budget line and equilibrium is achieved
at that point. Point A has an interesting property. At that point m the budget line and
the indifference curve have exactly the same slope. This can be expressed as
PxPy=MUxMUy
This rule states that the willingness to substitute (MUxMUy) equivalent to the ability to
pay PxPy
Thus we can say that the consumer is in equilibrium position when the price line is
tangent to the indifference curve or when the marginal rate of substitution of goods X
and Y is equal to the price ratio between the prices of the two goods.

The indifference curve theory is an ordinal theory which explains the consumer’s
preference between alternative bundles of goods by means of indifference curves. A
single curve joins all those combinations of goods which give the consumer equal
satisfaction of utility and between which the consumer is thus indifferent. The consumer
reaches equilibrium for a given money income and gives market price when he reaches
the highest attainable level of satisfaction. At such a point, the budget line is tangent to
the indifference

Question 5.
Explain the movement along the demand curve and shift in demand curve with the help
of two diagrams.
Answer:
Movement along the demand curve: We know that the amount of a good that the
consumer chooses depends on the price of the good, the prices of related goods,
income of the consumer and tastes and preferences. The demand function is the
relation between the amount of the good and its price when other things remain
constant. The demand curve is graphical repre¬sentation of the demand function. At
higher prices, the demand is less, and at lower prices, the demand is more. Thus any
change in the price leads to movements along the demand curve.
Shifts in the demand curve:
Meaning: Shift in the demand curve occurs because, except price, change in any of the
other things leads to shift in the demand curve.
The shift in the demand curve can be explained clearly with the help of diagram and
with the changes in the determinants of demand.

1. Let us see what happens to the demand curve if there is change in consumer’s income
keeping no change in price, with the help of diagram,

In the above diagram, on OX axis we measure quantity demanded and on OY axis we

measure price.

Other things remaining constant, if the income of a consumer increases, the demand for
the good increases and hence there is shift in the demand curve to right and these
goods are normal goods, because when income increases demand also increases. It is
shown in the above diagram, that is, when income increases, keeping price as constant,
the quantity demanded also increases from DD to D1D1 and Q to Q1
And for the inferior goods, the demand curve shifts to left from DD to D 2D2 and Q to Q2,
because as the income increases, the demand for inferior good decreases. Hence the
demand curve shifts to left.
Note: For Normal goods the demand curve shifts to right For Inferior goods the demand
curve shifts to left.

2. Let us see what happens to the demand curve if there is change in price of related
goods. If the price of a related good changes, the demand for the goods which the
consumer wants to. buy, changes at each level of its price, and hence, there is a shift in
the demand curve.
If there is an increase in the price of a substitute good, the demand curve shifts to the
right. For example, if the price of coffee increases, consumer can shift to tea, and
therefore demand for tea increases. Hence the demand curve of tea shifts to the right.

On the other hand, if there is an increase in the price of complementary good, the
demand curve shifts to left.
For example, the demand for the petrol may increase if there is an increase in the price
of bikes. Therefore, the demand curve of petrol shifts to left.

Note: For Substitutes demand curve shifts to right

For complementary goods demand curve shifts to left.

Conclusion: With the help of above examples we can conclude that Expect price, if other
determinants of demand change the demand curve shifts to right and left.

Question 6.
Give the meaning and formula of price elasticity of demand and explain the elasticity
along a linear demand curve.
Answer:
Price Elasticity of Demand: It is a measure of the responsiveness of the demand for a
good to change in its price, that is, changes in the quantity demanded with respect to
changes in the price.
eD = percentage change in demand for the good /percentage change in the price of the
good
eD = ∆Q/Q x P/∆P
Elasticity along a Linear Demand Curve

Let us consider a linear demand curve q=a – bp. Note that at any point on the demand
curve, the change in demand per unit change in the price ∆q/∆p = – b.
It is clear that the elasticity of demand is different at different points on a linear demand
curve, which is shown in the diagram.
In the above diagram, at p=0, the elasticity is 0, at q = 0, elasticity is oo. At p = a/2b, the
elasticity is 1, at any price greater than 0 and less than a/2b, elasticity is less than 1 and
at any price greater than a/2b, elasticity is greater than 1.

Question 7.
Explain the derivation of the demand curve from indifference curve and budget
constraints.
Answer:
Consider an individual consuming bananas (X1)and mangoes (X2), whose income is M
and market prices of X1 and X2 are P’1 and P’2 respectively. Figure (a) depicts her
consumption equilibrium at point C, where she buys X’ 1 and X’2 quantities of bananas
and mangoes respectively. In panel (b) of figure 2.14. we plot P’1 against X’1 which is the
first point on the demand curve of X1.

Suppose the price of X1 drops to P1 . with P’2 and M remaining constant. The budget set
in pane! (a), expands and new consumption equilibrium is on a higher indifference curve
at point D, where she buys more of bananas (X1 > X’1 ). Thus, demand for bananas
increases as its price drops. We plot X1 against X1 in panel (b) of figure 2,14 to get the
second point on the demand curve for X1 . Likewise the price of bananas can be
dropped further to P1 , resulting in further increase in consumption of bananas to
X1 .P1 plotted against X1 > gives us the third point on the demand curve. Therefore, we
observe that a drop in price of bananas results in an increase in quality of bananas
purchased by an individual who maximises his utility, The demand curve for bananas is
thus negatively sloped.

PRODUCTION AND COST

1. Choose The Correct Answer.

Question 1.
The Formula of production function is
(a) q=f(L, K)
(b) q = d (p)
(c) y = f (x)
(d) None of the above
Answer:
1. (a) q = f (L, K)

Question 2.
In the short run, a firm
(a) Can change all the inputs
(b) Cannot vary all the inputs
(c) Can keep the inputs fixed
(d) None of the above
Answer:
(b) Cannot vary all the inputs

Question 3.
The change in output per unit of change in the input is called.
(a) Marginal product
(b) Average product
(c) Total product
(d) Product
Answer:
(b) Average product

Question 4.
Cobb – Douglas production function is
(a) q = (x, x)
(b) q = (x1, x2)
(c) q = (xt, x/)
(d) q=(0)
Answer:
(c) q = (xt, x/)
Question 5.
TC =
(a) TVC
(b) TFC
(c) TFC + TVC
(d) AC + MC
Answer:
(c) TFC + TVC

Question 6.
Let TR be total revenue, Q be quantity of output, and ‘n’ the number of units, then
marginal revenue equals:
(a) TR_n – TR_n-1 only
(b) Change in TR/Change in Q only
(c) Both (a) and (b)
(d) none of the above
Answer:
(c) Both (a) and (b)

Question 7.
In phase I of the law of variable proportions, total product:
(a) Falls
(b) Becomes negative
(c) Increases at an increasing rate
(d) Decreases at a diminishing rate.
Answer:
(c) Increases at an increasing rate

Question 8.
The total cost of 5 units of output is ₹ 40. The fixed cost is ₹ 5. The average variable cost
at 5 units of output is:
(a) ₹ 35
(b) ₹ 7
(c) ₹ 5
(d) ₹ 1
Answer:
(b) ₹ 7

Question 9.
Which of the following curve is not ‘U’ shaped?
(a) AFC
(b) AVC
(c) MC
(d) AC
Answer:
(a) AFC

Question 10.
The short run, as economists use the phrase, is characterized by
(a) at least one fixed factor of production and firms neither leaving nor entering the
industry.
(b) a period where the law of diminishing returns does not hold
(c) no variable inputs – that is all of factors of production are fixed
(d) all inputs being variable.
Answer:
(a) at least one fixed factor of production and firms neither leaving nor entering the
industry.

Question 11.
The economists, the main difference between the short run and the long run is that
(a) in the short run all inputs are fixed, while in the long run all inputs are variable.
(b) in the short run the firm varies all of its inputs to find the least-cost combination of
inputs.
(c) in the short run, at least one of the firm’s input levels is fixed.
(d) in the long run, the firm is making a constrained decision about how to use existing
plant and equipment efficiently.
Answer:
(b) in the short run the firm varies all of its inputs to find the least-cost combination of
inputs.
Question 12.
Which of the following is the best definition of “production function”?
(a) The relationship between market price and quantity supplied.
(b) The relationship between the firm’s total revenue and the cost of production.
(c) The relationship between the quantities of inputs needed to produce a given level of
output.
(d) The relationship between the quantity of inputs and the firm’s marginal cost of
production.
Answer:
(c) The relationship between the quantities of inputs needed to produce a given level of
output.

Question 13.
Which of the following cost curves is never U’ shaped?
(a) Average cost curve
(b) Marginal cost curve
(c) Average variable cost curve
(d) Average fixed cost curve
Answer:
(d) Average fixed cost curve

Question 14.
Marginal cost is defined as
(a) the change in total cost due to a one unit change in output
(b) total cost divided by output
(c) the change in output due to a one unit change in an input
(d) total product divided by the quantity of input
Answer:
(a) the change in total cost due to a one unit change in output

Question 15.
Identify the fixed cost from the following
(a) Labour cost
(b) Electricity bill
(c) Salary of watchman
(d) Cost of raw materials
Answer:
(c) Salary of watchman
Question 16.
Which of the following is not an assumption of the law of variable proportions
(a) only one factor is variable
(b) Technique of production remains constant
(c) Proportion of factors of production remains same.
(d) Units of variable factor are homogeneous.
Answer:
(c) Proportion of factors of production remains same.

Question 17.
In the long run
(a) all inputs are fixed
(b) all inputs are variable
(c) at least one input is variable and one input is fixed
(d) at most one input is variable and one input is fixed
Answer:
(b) all inputs are variable

Question 18.
Marginal cost changes due to changes In
(a) Total cost
(b) Average cost
(c) Variable cost
(d) Quantity oíoutput
Answer:
(c) Variable cost

Question 19.
When Total Product falls, then
(a) Average Product is equal to zero
(b) Marginal Product is equal to zero
(c) Marginal Product is negative
(d) Average Product continues to rise
Answer:
(c) Marginal Product is negative
Question 20.
Increasing returns is applicable because of
(a) Increased efficiency of variable factor
(b) fuller utilisation of fixed factor
(c) indivisibility of factors
(d) Both (a) and (b)
Answer:
(d) Both (a) and (b)

Question 21.
At the point of inflexion, the Marginal product Is
(a) increasing
(b) decreasing
(c) maximum
(d) negative
Answer:
(c) maximum

Question 22.
When Average cost curve is rising, the marginal cost
(a) must be decreasing
(b) must be constant
(c) must be rising
(d) Any of these
Answer:
(c) must be rising

Question 23.
As output increases, Average fixed cost
(a) remains constant
(b) starts falling
(c) starts rising
(d) None of these
Answer:
(b) starts falling

II. Fill in the Blanks

1. In the long run, all inputs are ______
Answer:
Variable

2. ______is defined as the out put per unit of variable input.

Answer:
Average Product

3. Marginal product and Average product curves are ______in shape.

Answer:
Inverse ‘U’

4. SMC curve cuts the AVC curve at the ______below point of AVC curve from
Answer:
Minimum

5. ______ is the set of all possible combinations of the two inputs that yield the same
maximum possible level of out put.
Answers:
Iso-quanks

6. Function showing relationship between inputs and output is known

as_________function.
Answer:
Production

7. When Total Product falls, then Marginal product is_________ .

Answer:
Negative

8. When MP = 0, TP is _________
Answer:
Maximum

9._________cost increases continuously with the increase in production.

Answer:
Variable
10. The _________ indicates the total volume of goods and services produced during a
given period of time
generally a year
Answer:
Total product

11._________is defined as the output per unit of variable input.

Answer:
Average product

12. _________refers to additional good produced by addition unit of a variable factor.

Answer:
Marginal Product

13. An_________is the set of all possible combinations of two inputs (labour & capital)
which yield same
maximum possible level of output.
Answer:
Isoquant

14. The costs involved in the long run are _________and _________.
Answer:
Long Run Average Cost (LAC) and Long Run Marginal Cost (LMC)

15. The point where the TP curve changes its direction from convex to concave is called
the _________
Answer:
Point of inflexion.

III. Match the following

Question 1.

A B

1. CRS a. ∆TC/∆C
 b. Long Run Average
2. SAC Cost

c. Short Run Average

3. LRAC Cost

4. TFC + TVC d. Constant Returns to

= scale

5. SMC e. TC

Answers:

1. (d) Constant Returns to scale

2. (c) Short Run Average Cost
3. (b) Long Run Average Cost
4. (e) TC
5. (a) ∆TC/∆C
Question 2.

A B

a. Diminishing
1. Short-run Returns to Scale

2. Long-run b. TPn-TPn-1

3. Marginal c. Fixed inputs and

product Variable inputs

4. DRS d. ‘U’ shaped

5. Marginal cost
and AVC curves e. Variable inputs

Answer:
 1. c. Fixed inputs and Variable inputs
2. e. Variable inputs
3. b. TPn-TPn-1
4. a. Diminishing Returns to Scale
5. d. ‘U’ shaped

IV. Answer the following questions in a sentence/word.

Question 1.
What do you meant by Total product?
Answer:
This relationship between the variable input and output, keeping all other inputs
constant, is often referred to as Total Product of the variable input. OR
The total product indicates the total volume of goods and services produced during a
given period of time generally a year

Question 2.
What is Average product?
Answer:
Average product is defined as the output per unit of variable input. We can calculate it
as follows: AP= Total Product/No, of units of a variable factor (or)
TP / L

Question 3.
Give the meaning of Marginal product.
Answer:
Marginal product of an input is defined as the change in output per unit of change in
the i^iput when all other inputs are held constant.
OR
Marginal Product refers to additional good produced by addition unit of a variable
factor. We obtain marginal product by using the following formula. MP = TP n– TPn-1
Question 4.
Write the meaning of cost function of the firm.
Answer:
Cost function shows the relationship between output and the cost of production. Cost
function is expressed as:
C = f(Qx)
C = production cost, f= functional relationship, Qx = quantity produced of x goods
The cost function depicts the least cost combination of inputs associated with different
output levels.
The cost function depicts the least cost combination of inputs associated with different
output levels.
Question 5.
What is total fixed cost.
Answer:
The cost that a firm incurs to employ fixed inputs is called the total fixed cost (TFC).

Question 6.
What is average fixed cost?
Answer:
The average variable cost (AVC) is defined as the total variable cost per unit of output.
AVC = TVC/q

2nd PUC Economics Production and Costs Two Marks Questions and Answers

V. Answer the following Questions in 4 Sentences.

Question 1.
What is Isoquant?
Answer:
An Isoquant is the set of all possible combinations of two inputs (labour & capital) which
yield
same maximum possible level of output.

Question 2.
Give the meaning of the concepts of short run and long run.
Answer:
Short Run: In the short run, a firm cannot vary all the inputs. One of the factors – factor 1
or factor 2 – cannot be varied, and therefore, remain fixed in the short run. In order to
vary the output level, the firm can vary only the other factor. The factor that remains
fixed is called fixed input whereas the other factor which the firm can vary is called the
variable input.

Long Run: In the long run, all factors of production can be varied. A firm in order to
produce different levels of output in the long run may vary both the inputs
simultaneously. So, in the long run, there is no fixed input.
Question 3.
Mention the types of Returns to scale.
Answer:
The three types of returns to scale are:
Increasing returns to scale; Constant returns to scale; Diminishing returns to scale

Question 4.
Name the short run costs.
Answer:
The costs involved in the short-run are:
Total fixed cost; Total variable cost; Average fixed cost; Average variable cost

Question 5.
What are long run costs?
Answer:
The costs involved in the long run are:
Long Run Average Cost (LAC); Long Run Marginal Cost (LMC)

2nd PUC Economics Production and Costs Four Marks Questions and Answers

VI. Answer the following Questions in 12 Sentences.

Question 1.
Explain Isoquant with the help of the diagram.
Answer:
An isoquant is the set of all possible combinations of the two inputs that yield the same
maximum possible level of output. Each isoquant represents a particular level of output
and is labeled with the amount of output.
In the above diagram, on OX axis we measure Labour and on OY axis we measure
Capital. We have three isoquants for the three output levels, namely q = q 1,
q = q2, q = q3.

Two input sombinations (L1, K2) and (L2, K1) give us the same level of output q1. If we fix
capital at K1 and increase labour to L3, output increases and we reach a higher isoquant,
q=q2.
When marginal products are positive, with greater amount of one input, the same level
of output can be produced only using lesser amount of the other. Therefore, isoquants
are negatively sloped.

Question 2.
Explain TP, MP and AP with the examples.
Answer:
The concept of total product, marginal product and average product can be explained
with the help of table,
Total Product: The relation between the variable input and output, keeping all other
inputs constant, is often referred to as Total Product (TP) of the variable input. As
illustrated in the table, total product by 4 units of labour are 50 units.

Marginal Product: Marginal product of an input is defined as the change in output per
unit of change in the input! when all other inputs are held constant. When capital is held
constant, the marginal product of labour is
For example, when L changes from 1 to 2, AT changes from 10 to 24.
MPL =(TPL – TPL-1
Here, Change in TP = 24-10=14
Change in L = 1
Marginal product of the 2nd unit of labour = 14/1=14
Average Product: Average product is defined as the output per unit of variable input.
We calculate it as
APL = TPLL
As illustrated in the table, Average product produced by 4 units of labour is 12.5 which
is calculated by
APL = TPLL
Hence , AP = 50/4 = 17.5

Question 3.
Write a brief note on returns to scale.
Answer
Meaning: Laws of returns to scale explain the physical relationship between input and
output in the long run. It explains the behavior of output when quantities of all input are
changed in same proportion.
This law is dependent of Long run production analysis where all the factors of
production are variable in nature.

Stages of returns to scale: The law operates in three stages when the output changes in
same proportion.

1. Increasing returns to scale

2. Constant returns to scale
3. Diminishing returns to scale
1. Increasing returns to scale: When the output increases by a greater proportion than
the proportion on increase in all the factors, increasing returns to scale operates.
For example, if 100% increase in the inputs by firm results in 100% increase in outputs, it
is a case of increasing returns to scale.

2. Constant returns to scale: It happens when output increases by the same proportion
as that of increase in inputs.
3. Diminishing returns to scale: this stage operates when output increases less than the
proportion of inputs. For example 100% increase in all factor inputs results in only 80%
increase in output.

Question 4.
Explain the long run costs.
Answer:
All factors are variable in the long run. Hence, there is no total fixed cost or average
fixed cost curves in the long run. Long run average cost (LRAC] is defined as cost per
unit of output, LRAC = TC/q-
Long run marginal cost (LRMC) is the change in total cost per unit of change in output.
LRAC and LRMC curves are ‘U’ shaped and LRMC curve cuts the LRAC from below at its
minimum point. The operation of law of returns to scale is the reason for TJ’ shape of
LRAC curve.
LRAC and LRMC curves are represented in diagram.

The diagram shows the shapes of the long run marginal cost and the long run average
cost curves for a typical firm. LRAC reaches its minimum at q₁ . To the left
of q₁ , LRAC is falling and LRMS is less than the LRAC curve. TO the right
of q₁, LRAC is rising and LRMC is higher than LRAC.

Question 5.
The following table gives the TP schedule ofiabour. Find the corresponding aver age
product and marginal product schedules.
Answer:

Question 6.
Mention any four short-run costs.
Answer:
The costs involved in the short-run are:
Total fixed cost
Total variable cost
Average fixed cost
Average variable cost

Question 7.
The following table gives the total product schedule of labour. Find the corresponding
average product and marginal product schedules of labour.

Answer:
Question 8.
The following table gives the average product schedule of labour. Find the total product
and marginal product schedules. It is given that total product is zero at zero level of
labour employment.|

Answer:

Question 9.
The following table gives the marginal product schedule of labour. It is also given that
product of labour is zero at zero level of employment. Calculate the total and average
product schedules of labour.

Answer:

Question 10.
From the following information about a firm, calculate average product and Marginal
product.

Answer:

Question 11.
Calculate Total Product and Marginal product of a firm, if its average product is as
under:

Answer:

Question 12.
Complete the following table:
Answer:
HINTS: (1) First find out TFC and TVC and apply the formula to find out the missing costs
(2) TFC is 30 (3) Formula to find out TVC is TVC = TC – TFC

Question 13.
The following table shows the total cost schedule of a firm. What is the total fixed cost
schedule of this firm? Calculate the TVC, AFC, AVC, SAC and SMC Schedules of the firm.

Answer:

Question 14.
The following table gives the total cost schedule of a firm. It is also given that the aver
age fixed cost at 4 units of output is ₹ 5. Find the TVC, TFC, AVC, AFC, SAC and SMC
schedules of the firm for the corresponding values of output.
Answer:

Question 15.
A firm’s SMC schedule is shown in the following table. The total fixed cost of the firm is ?
100. Find the TVC, TC, AVC and SAC schedules of the firm.

Answer:

Question 16.
The following table shows the total cost schedule of a firm. Calculate TVC, TC, AFC, AVC,
AC and MC. (FOR PRACTICE ONLY)
Answer:

Question 17.
Complete the following table:

Answer:
First find out TFC, TVC and TC. if AFC is 60 then TFC will be 60.

At output level 1 MC = TVC = AVC so TVC for output level 1 is 20

Question 18.
Complete the cost schedule given below:
Answer:
HINTS has been provided for calculating the missing costs.

At output level 1 MC = TVC = AVC so TVC for output level 1 is 20

2nd PUC Economics Production and Costs Six Marks Questions and Answers

VI. Answer the following questions in 20 Sentences.

Question 1.
Explain the various short run costs with the help of a table.
Answer:
The following are the short run costs

1. Total Fixed Cost: In the short run, some of the factors of production cannot be varied,
and therefore, remain fixed. The cost that a firm incurs to employ these fixed inputs is
called the total fixed cost (TFC). It does not change with the change in the level of
output.

2. Total Variable Cost: To produce any required level of output, the firm, in the short run,
can adjust only variable inputs. Accordingly, the cost that a firm incurs to employ these
variable inputs is called the total variable cost (TVC).
3. Total Cost: Total cost includes both total fixed and total variable costs.
Total cost can be written as TC=TFC +TVC.

4. In order to increase production of output, the firms must employ more of the variable
inputs. As a result, total variable cost and total cost will increase. 4. Average Fixed Cost:
It refers to the per unit fixed cost of production of a commodity. It can be obtained as
follows: AFC = TFC / q

5. Average Variable Cost: It is defined as the total variable cost per unit of output. We
calculate it as AVC = TVC / q

6. Short Run Average Cost: It is the per unit total cost of production. It can be obtained
by dividing the total cost by the number of units produced. So, SAC = TC/q or SAC =
AVC + AFC.

7. Short Run Marginal Cost: It refers to the cost incurred on production one more unit of
a commodity. It can be obtained as follows:

MC = TCn – TCn-1
Various Concepts of Costs

It is important to note that, in the short run, fixed cost cannot be changed. When we
change the level of output, whatever change occurs to the total cost is entirely due to
the change in TVC.
So, in the short run, MC is the increase in TVC due to increase in production of one extra
unit of output.
Question 2.
Explain the shapes of long run cost curves.
Answer:
The long run cost curves shapes can be explained as follows:
Increasing returns to scale (IRS) implies that if we increase all the inputs by a certain
proportion, output increases by more than that proportion. With the input prices given,
cost also increases by a lesser proportion. As long as IRS operates, the LRAC and LRMC
decrease initially. Constant returns to scale (CRS) implies a proportional increase in
inputs resulting in a proportional increase in output. So the LRAC remains constant as
long as CRS operates. Diminishing returns to scale (DRS) implies that if we want to
increase the output by a certain proportion, inputs need to be increases by more than
that proportion. As a result, cost also increases by more than that proportion. So, as
long as DRS operates, the LRAC increases.

LRAC and LRMC curves are ‘U’ shaped and LRMC curve cuts the LRAC from below at its
minimum point.
The operation of law of returns to scale is the reason for TJ’ shape of LRAC curve.
LRAC and LRMC curves will be more flat than SAC and SMC. LRAC, LRMC and SMC
decreases initially and later increases. Again their centre would be more flat.
LRAC and LRMC curves are represented in diagram.

The diagram shows the shapes of the long run marginal cost and the long run average
cost curves for a typical firm.
LRAC reaches its minimum at qr To the left of qt, LRAC is falling and LRMS is less than
the LRAC curve. TO the right of qx, LRAC is rising and LRMC is higher than LRAC.

Question 3.
Explain the shapes of TP, MP and AP curves.
Answer:
Total Product: An increase in the amount of one of the inputs keeping all other inputs
constant results in an increase in output. The total product curve in the input-output
plane is a positively sloped curve.

In the above diagram on OX axis we measure Labour and on OY axis we measure

Output. With L units of labour, the firm can at most produce units of output.
According to the law of Variable proportions, the marginal product of an input initially
rises and then after a certain level of employment, it starts falling. The MP curve
therefore, looks like an inverse ‘U’ – shaped curve which is shown in the below diagram.

Let us now see what the AP curve looks like. For the first unit of the variable input, one
can 1 easily check that the MP and the AP are same. Now as we increase the amount of
input, the MP rises, and AP also rises but less than the MP. Then, after a point, the MP
starts falling. So AP curve is also inverse ‘IT- shaped curve which is shown in the below
diagram.
The above diagram shows the shapes of AP and MP curves for a firm. The AP of factor 1
is ‘ maximum at L. to the left of L, AP is rising and MP is greater than AP. to the right of
L, AP is falling and MP is less than AP.
A Firms SMC schedule is shown in the following table. TFC is ? 100. Find TVC, TC, AVC &
SAC schedules of the firm.

Answer:

Question 5.
Explain the law of variable proportions with the help of a diagram.
Answer:
Law of Variable Proportions :
Meaning: The law of variable proportion explains the relationship between proportion of
fixed input and variable input on the one hand and output on the other.

Explanation: In the short period, if a firm wants to expand its production, it can do so by
increasing its variable factors and keeping the fixed factor as constant. As a result, the
proportion between fixed and variable factors gets changed. Such a situation is called
the law of variable proportions.
Diagrammatical Representation:

In the above diagram on OX axis we measure Labour and on OY axis we measure

Output. Notice that TP increases as labour input increases. But the rate at which it
increases is not constant. An increase in labour from 1 to 2, TP increases by 10 units. An
increase in labour from 2 to 3, TP increases by 12 units. The rate at which TP increases,
as explained above, is shown by the MP. Notice that the MP first increases upto 3 units
and then begins to fall. This tendency of the MP is called Law of Variable Proportions.

As we hold one factor fixed and keep increasing the other, the factor proportions
change. Initially, if we increase the variable input, the factor proportions become more
and more suitable for the production and MP increases. But after a certain level of
employment, the production process becomes too crowded with the variable input so
the output added by each additional worker will be less and MP will start falling.

THEORY Of FIRM UNDER PERFECT COMPETITION

1. Choose The Correct Answer.
Question 1.
In a perfect competition each firm produces and sells
(a) Hetrogenous products
(b) Homogeneous Products
(c) Luxury goods
(d) Neccessary goods
Answer:
(b) Homogeneous Products

Question 2.
The increase in total revenue for a unit increase in the output is
(a) Marginal Revenue
(b) Average Revenue
(c) Total Revenue
(d) Fixed Revenue
Answer:
(a) Marginal Revenue

Question 3.
The firm’s profit is denoted by
(a) 1
(b) li
(c) 0
(d) n
Answer:
(d) n

Question 4.
When the supply curve is verticle the elasticity of supply is
(a) es = 1
(b) es > 1
(c) es = 0
(d) ex = oo
Answer:
(c) es = 0

Question 5.
The revenue per unit of output of a firm is called as
(a) TR
(b) MR
(c) AR
(d) None of these
Answers:
(c) AR

Question 6.
A seller cannot influence the market price under
(a) Perfect competition
(b) Monopoly
(c) Monopolistic Competition
(d) All of the above
Answer:
(a) Perfect competition

Question 7.
Marginal revenue (MR) curve is a straight horizontal line in
(a) Oligopoly market
(b) Monopoly market
(c) Perfectly competitive market
(d) Monopolistic competitive market
Answer:
(c) Perfectly competitive market

Question 8.
In the long run, a firm in a perfectly competitive market earns
(a) Abnormal profit
(b) normal profit
(c) Loss
(d) Supernormal profit
Answer:
(b) normal profit

Question 9.
Supply of a commodity is a concept.
(a) stock
(b) flow
(c) both (a) and
(b) (d) none
Answer:
(b) flow
Question 10.
The claim that other things remain constant, if the price increases for a good leads to increase in
the quantity supplied of the good is known as
(a) Law of Demand
(b) Law of Economics
(c) Law of supply
(d) all of these
Answer:
(c) Law of supply

Question 11.
When supply is perfectly inelastic, Elasticity of Supply is equal to
(a) -1
(b) Zero
(c) 1
(d) Infinity
Answer:
(b) Zero

Question 12.
A perfectly inelastic supply curve will be
(a) parallel to X-axis
(b) parallel to Y-axis
(c) Downward sloping
(d) None of these
Answer:
(b) parallel to Y-axis

Question 13.
The supply of a good refers to:
(a) Actual production of the good
(b) total existing stock of good
(c) stock available for sale
(d) Amount of goods offered for sale at a particular place and time.
Answer:
(d) Amount of goods offered for sale at a particular place and time.

Question 14.
AR is also known as
(a) Price
(b) Income
(c) Revenue
(d) cost
Answer:
(a) Price
Question 15.
The term market refers to a ________
(a) Place where seller does not bargain
(b) Place where buyers does not bargain.
(c) Place where buyers and sellers bargain a product or service for a price.
(d) None of these
Answer:
(c) Place where buyers and sellers bargain a product or service for a price.

Question 16.
Suppose a firm is producing a level of output such that MR > MC, What should be firm do to
maximize itso profits?
(a) The firm should do nothing
(b) The firm should hire less labour
(c) Place where buyers and sellers bargain a product or service for a price.
(d) The firm should increase output
Answer:
(d) The firm should increase output

Question 17.
Marginal Revenue is equal to
(a) The change in price divided by the change in output
(b) the change in quantity divided by the change in price
(c) the change P x Q due to a one unit change in output.
(d) price, but only if the firm is a price searcher
Answer:
(c) the change P x Q due to a one unit change in output.

Question 18.
Which of the following is not an essential condition of pure competition?
(a) Large number of buyers and sellers
(b) Homogeneous product
(c) Freedom of entry
(d) Absence of transport cost
Answer:
(d) Absence of transport cost

Question 19.
What is the shape of the demand curve faced by a firm under perfect competition?
(a) Horizontal
(b) Vertical
(c) Positively sloped
(d) Negatively sloped
Answer:
(a) Horizontal

Question 20.
Which is the first order condition for the profit of a firm to be maximum?
(a) AC = MR
(b) MC = MR
(c) MR = AR
(d) AC = AR
Answer:
(b) MC = MR

Question 21.
Which of the following is not a condition of perfect competition?
(a) A large number of firms
(b) Perfect mobility of factors
(c) Informative advertising to ensure that consumers have good information
(d) Freedom of entry and exit into and out of the market
Answer:
(c) Informative advertising to ensure that consumers have good information

Question 22.
Average revenue curve is also known as
(a) Profit curve
(b) Demand Curve
(c) Average Cost curve
(d) Indifference Curve
Answer:
(b) Demand Curve

Question 23.
Under which of the following forms of market structure does a firm have no control over the
price of its product?
(a) Monopoly
(b) Monopolistic competition
(c) Oligopoly
(d) Perfect competition
Answer:
(d) Perfect competition

Question 24.
Under perfect competition, in the long run, there will be no
(a) Normal profits
(b) supernormal profits
(c) production
(d) costs
Answer:
(b) supernormal profits

Question 25.
When , we know that the firms are earning just normal profits.
(a) AC = AR
(b) MC = MR
(c) MC = AC
(d) AR = MR
Answer:
(a) AC = AR

Question 16.
Agricultural goods markets depict characteristics close to
(a) perfect competition
(b) oligopoly
(c) monopoly
(d) monopolistic competition
Answer:
(a) perfect competition

Question 27.
Total Revenue =
(a) price x quantity
(c) income x quantity
(b) price x income
(d) none of the above
Answer:
(a) price x quantity

Question 28.
Average revenue is the revenue earned
(a) per unit of input
(b) per unit of output
(c) different units of input
(d) different units of output
Answer:
(b) per unit of output

Question 29.
AR can be symbolically written as
(b) price x quantity
(c) TR/Q
(d) none of the above
(a) MR/Q
Answer:
(c) TR/Q

Question30
AR is also known as
(a) price
(b) income
(c) revenue
(d) none of the above
Answer:
(a) price

Question 31
Marginal revenue can be defined as the change in total revenue resulting from the
(a) purchase of an additional unit of a commodity
(b) sales of an additional unit of a commodity
(c) sale of subsequent units of a product
(d) none of the above
Answer:
(b) sales of an additional unit of a commodity

Question 32.
Average Revenue is equal to

Answer:
(a)  Total Revenue  Quantity Sold 
Question 33.
When the firm is producing 3 tonnes of sugar, it receives total Revenue of ₹ 24 Marginal
Revenue is
(a) ₹ 4
(b) ₹ 8
(c) ₹ 28
(d] ₹ 52
Answer:
(a) ₹ 4
Question 34.
When Marginal Revenue is zero
(a) Total Revenue is also zero
(b) Total Revenue is the maximum
(c) Total Revenue is the minimum
(d) Total Revenue starts increasing sharply
Answer:
(b) Total Revenue is the maximum

Question 34.
A perfectly competitive firm attains equilibrium at a point where
(a) MR is equal to MC and MC curve intersects MR curve from below
(b) MC is equal to MR
(c) MC is falling but is equal to AC
(d) Both (a) and (b)
Answer:
(a) MR is equal to MC and MC curve intersects MR curve from below

Question 35.
Supply is the
(a) limited resources that are available with the seller
(b) cost of producing a good
(c) entire relationship between the quantity supplied and the price of good
(d) Willingness to produce a good if the technology to produce it becomes available.
Answer:
(c) entire relationship between the quantity supplied and the price of good

Question 36.
The elasticity of supply is defined as the
(a) responsiveness of the quantity supplied of a good to a change in its price
(b) responsiveness of the quantity supplied of a good without change in its price
(c) responsiveness of the quantity demanded of a good to a change in its price
(d) responsiveness of the quantity demanded of a good without change in its price
Answer:
(a) responsiveness of the quantity supplied of a good to a change in its price

Question 37.
Elasticity of supply is zero means
(a) perfectly inelastic supply
(b) perfectly elastic supply
(c) imperfectly elastic supply
(d) none of the above
Answer:
(a) perfectly inelastic supply
Question 38.
Elasticity of supply is greater than one when
(a) proportionate change in quantity supplied is more than the proportionate change in price
(b) proportionate change in price is greater than the proportionate change in quantity supplied
(c) change in price and quantity supplied are equal
(d) None of the above
Answer:
(a) proportionate change in quantity supplied is more than the proportionate change in price

Question 39.
The supply curve shifts to the right because of
(a) improved technology
(b) increased price of factors of production
(c) increasec excise duty
(d) all of the above
Answer:
(a) improved technology

II. Fill in the Blanks

1. Price taking behahaviour is the single most distinguishing characteristic of _____ Market
Answer:
Perfect Competition

2______is a tax that the government imposes per unit sale of output .
Answer:
Unit Tax

3. For a price taking firm marginal revenue is equal to _____

Answer:
The Market Price

4. The point of minimum AVC where the SMC curves cuts the AVC curves is called_____
Shut Down point

5. _____ Cost of some activity is the gain forgone from the second best activity.
Answer:
Opportunity

6. ______ is a price taker in perfect competition market.

Answer:
Each Firm
7. Profit = TR – _____
Answer:
TC

8. When supply curve shifts to the right, there is_____in supply.

Answer:
An Increase

9. _____is the shape of the demand curve faced by a firm under perfect competition.
Answer:
Horizontal

10. The process of determination of price by supply and demand forces is called as _____
Answer:
Price Mechanism

11. Equilibrium price is where the quantity of demand and supply will be _____.
Answer:
Equal.

12. _____refers to ratio of proportionate change in the supply to that of proportionate change in
Answer:
Price elasticity of supply

13. The point on the supply curve at which a firm earns normal profit is called_____of the firm
Answer:
Break-even point

III. Match the following

Question 1.

A B

a) Perfect
1. TR information

2. π b) Zero profit

3. AR = c) P x Q
 4. Normal Profit d) TR – TC

5. Perfect
information e) TR/Q

Answers:
1. (c) P x Q
2. (d) TR-TC
3. (e) TR/Q
4. (b) Zero profit
5. (a) Perfect information

Question 2.

A B

a. Tax imposed on
1. Perfect per unit sale of
Competition output

b. Difference
2. Price Line between TR and TC

c. Price remains ≥ to
4. Shut down point minimum of AVC

d. Homogeneous
3.Profit product

e. Average Revenue
5. Unit Tax (AR)

Answers:
1. (d) Homogeneous product
2. (e) Average Revenue (AR)
3. (b) Difference between TR and TC
4. (c) Price remains ≥ to minimum of AVC
5. (a) Tax imposed on per unit sale of output

IV. Answer the following questions in a sentence/word.

Question 1.
Define marginal revenue.
Answer:
Marginal revenue of a firm is defined as the increase in total revenue for a unit increase in the
firm’s output.

Question 2.
To which side does supply curve shift due to the technological progress?
Answer:
Supply curve will shift to Right

Question 3.
Write the formula to calculate average revenue.
Answer:
The average revenue is calculated as follows,
AR = TR/Q

Question 4.
What is normal profit?
Answer:
A firm will be earning normal profits, if its revenue is sufficient to cover all its costs. Normal
profit is a situation where the revenue will be equal to its costs.
Normal Profit = TR – TC. It is a situation of Zero profit.

Question 5.
Give the meaning of super normal profit.
Answer:
Profit that a firm earns over and above the normal profit is called the super-normal profit.

Question 6.
What does market supply curve show?
Answer:
The market supply curve shows the output levels(plotted on the x-axis] that firms in the market
produce in aggregate corresponding to different values of the market price [plotted on the y-
axis).
2nd PUC Economics The Theory of the Firm Under Perfect Competition Two Marks Questions
and Answers

V. Answer the following Questions in 4 Sentences.

Question 1.
Mention the conditions needed for profit by a firm under perfect competition.
Answer:
For profits to be maximum, three conditions must hold at q0
(a) The price, p, must be equal to MC.
(b) MC must be non-decreasing at q0.
(c) For the firm to continue to produce, in the short run, price must be greater than the average
variable cost [p>AVC); in the long run, price must be greater than the average cost [p>AC].
Question 2.
Give the meaning of shut down point.
Answer:
A firm continues to produce as long as the price remains greater than or equal to the minimum of
AVC. Below the minimum point of AVC there will be no production, so the point where SMC
curve cuts AVC curve at the minimum is called the shut down point of the firm.

Question 3.
Write the meaning of opportunity cost with an example.
Answer:
Opportunity cost of some activity is the gain foregone from the second best activity. For
example, if a person is having 2 acre of land he can cultivate paddy or wheat. By cultivating
paddy he earns ₹ 40,000. If he cultivates wheat, he may earn ₹ 35,000. In the process of
cultivating paddy, he has to sacrifice ₹ 35,000. So the opportunity cost of cultivating paddy is ₹
35, 000.

Question 4.
Mention the two determinants of a firm’s supply curve.
Answer:
The following are the determinants of supply:

1. Technological Progress
2. Input Prices
3. Tax policy of the Government
4. Goals of the Firm
Question 5.
Give the meaning of price elasticity of supply and write its formula.
Answer:
Price elasticity of supply is defined as the ratio of proportionate change in the supply of a com-
modity to that of proportionate change in the price of the commodity.
∆q = change is quantity supply
∆p = change in price
p = initial price;
q = initial quantity supplied

2nd PUC Economics The Theory of the Firm Under Perfect Competition Four Marks Questions
and Answers

VI. Answer the following Questions in 12 Sentences.

Question 1.
Write a short note on profit maximisation of a firm under the following conditions (a) P = MC
(b) MC must be non-decreasing at q0.
Answer:
A firm attains profit under the following conditions
(a) When P = MC
As long as MR is greater than MC, profits are increasing. As long as marginal revenue is less
than marginal cost, profits will fall. It follows that for profits to be maximum, marginal revenue
should equal marginal cost. Profits are maximum at the level of output (which we have called q0)
for which MR = MC
For the perfectly competitive firm, we have established that MR = p. So the firm’s profit
maximizing output becomes the level of output at which P = MC.
For the perfectly competitive firm, we have established that MR = p. So the firm’s profit
maximizing output becomes the level of output at which P = MC.
(b) MC must be non-decreasing at q0.

Note that at output level q1 and q4, the market price is equal to the marginal cost. However, at
output level q1, the MC curve is downward sloping. We claim that q1 cannot be a profit
maximizing output level because all output levels slightly to the left of q1 , the market price is
lower than MC.
Question 2.
Explain the determinants of a firm’s supply curve.
Answer:
The determinants of a firm’s supply curve are:
(a) Technological Progress: With every improvement in technology, some specialized tools,
capital equipment, raw materials, etc, become available. This may reduce the total cost and the
marginal cost. Accordingly, producers are willing to supply more at the existing price, as a result
supply of producer increases.

(b) Input Prices: Prices of input are another important determinant of the supply curve. In case of
increase in input price, cost of production increase. Accordingly, producers will supply less of
the commodity as its existing price, as there is a decrease in producer’s profit.
On the other hand, if input prices decreases, the cost of production also decreases, leading to
increase in producer’s profit, this results in increase in his supply.

(c) Imposition of Unit Tax: A unit tax is the tax imposed by the government on per unit sale of
output. If the government increases the unit tax, marginal cost of production increases and the
supply curve moves upwards to the left and the firm supplies fewer units of output. If the
government reduces the tax, then the supply curve may shift downwards and the firm may supply
more units of output.

Question 3.
Explain the features of perfect competition.
Answer:
The characteristics of perfectly competitive market are:

1. There will be large number of buyers and sellers of a product.

2. There is freedom of entry and exit for the firms.
3. Products of all firms will be homogeneous or identical.
4. Prevalence of single price.
5. Perfect market information is available for buyers and sellers.
6. There is absence of transport costs.
7. There is free mobility of factors of production.
8. Each firm is a price maker in perfect competition market.

Question 4.
Explain the average revenue or price line of a firm under perfect competition with the help of a
diagram.
Answer:
The average revenue of a firm is defined as total revenue per unit of output. If a firms’s output is
q and the market price is p, then TR equals pxq. Hence, AR = TR / q = p x q / q = p.
In other words, for a price-taking firm, average revenue equals the market price.

In the above diagram on the OX axis we measure output and OY axis we measure revenue/
market price. Since the market price is fixed at p, we obtain a horizontal straight line that cuts the
y-axis at a height equal to p. The horizontal line is called Price Line. It is also called the firm’s
AR curve under perfect competition.

The price line also depicts the demand curve facing a firm. Observe that the demand curve is
perfectly elastic. This means that a firm can sell as many units of the good as it wants to sell at
price p.

Question 5.
Compute the total revenue, marginal revenue and average revenue schedules in the following
table. Market price of each unit of the good is ₹ 10.

Quality TR MR AR

4
 5

Answer:

Question 6.
Consider a market with two firms. The following table shows the supply schedules of the two
firms: the SS1 column gives the supply schedule of firm 1 and the SS2 column gives the supply
schedule of firm 2. Compute the market supply schedule.
Price ₹ SS1 (Unit) SS2 (Unit)

0 0 0

1 0 0

2 0 0

3 1 1

4 2 2

5 3 3

6 4 4
Answer:

Question 7.
Consider a market with two firms. In the following table, columns labelled as SS1  and SS2 give
the supply schedules of firm 1 and firm 2 respectively. Compute the market supply schedule.
table
Answer:

Question 8.
Complete the following table (For Practice only)
Answer:

Question 9.
Complete the following table (For Practice only)

Answer:

Question 10.
From the following schedule, calculate TR, AR and MR (For Practice only)
Answer:

Question 11.
Calculate TR and MR (for practice only)

Units sold (Q) AR

1 20

2 36

3 48

4 56

5 60

6 60

7 56

Answer:
HINT : AR = TR / Q and MR= TRn =- Tn-1
Question 12.
Calculate TR and MR ( for practice only )

Units sold (Q) AR

 1 25

2 23

3 21

4 19

5 18

6 15

Answer:
HINT : TR = P x Q = TRn =- Tn-1
Question 13.
The following table shows the total revenue and total cost schedules of a competitive firm.
Calculate the profit at each output level. Determine also the market price of the good.
Answer:

Question 14.
The following table shows the total cost schedules of a competitive firm. It is given that the price
of the good is ₹ 10. Calculate the profit at each output level. Find the profit maximising level of
output.

Answer:

2nd PUC Economics The Theory of the Firm Under Perfect Competition Six Marks Questions
and Answers

VI. Answer the following questions in 20 Sentences.

Question 1.
Explain the short run supply curve of a firm with the help of a diagram
Answer:
(a) We first determine a firm’s profit-maximising output level when the market price greater than
or equal to the minimum of AVC.
Suppose the market price is p1 , which exceeds the minimum AVC. We start out by equating
P1 with SMC on the rising part of the SMC curve; this leads to the output level q1 Note also that
the AVC at qt does not exceed the market price, p1 Thus the conditions P= SMC, SMC is not
decreasing and P≥ AVC are fulfilled. Hence, when the market price is p1, the firm’s output level
in the short run is equal to q1

The diagram shows the output levels chosen by a profit-maximising firm in the short run for two
values of the market price p1 and p2. When the market price is p1 , the output level of the firm is
q 1: when the market price is p2, the firm produces zero output.
(b) We determine the firm’s profit-maximising output level when market price is less than the
minimum of AVC.
Suppose the market price is p2, which is less than the minimum of AVC. We have argued that if
a profit-maximising firm produces a positive output in the short run, then the market price is p2,
must be greater than or equal to the AVC at that output level. But in the diagram it shows that for
all positive output levels, AVC strictly exceeds p2. So, if the market price is p2, the firm produces
zero output.
Combining both the cases, we can come to the conclusion that, a firm’s short run supply curve is
the rising part of the SMC curve from and above the minimum of AVC together with zero output
for all prices strictly less than the minimum of AVC. In the below diagram the bold line
represents the short run supply curve of the firm.

Question 2.
Explain market supply curve with the help of diagram.
Answer:
The market supply curve shows the output levels that firms in the market produce in aggregate
corresponding to different values of the market price.
The market supply curve is derived by adding up of the supplies of individual firms at a given set
of price (p).

Construction of market supply curve with just two firms in the market: Firm 1 and Firm 2 and
these two firms have different cost structures. Firm 1 will not produce anything if the market
price is less than p: and Firm will not produce anything if the market price is less than p2.
In the above diagram S1 curve is the supply curve of Firm 1 and S2 is the supply curve of Firm 2
and Sm is the market supply curve.
Suppose when the market price is less than p1, both the firms will not produce the goods and
hence market supply curve will also be zero.
If the price is greater than or equal to p1 and less than p2, only Firm 1 will produce more goods.
Therefore, in this range, the market supply curve coincides with the supply curve of Firm 1.
If the price is greater than or equal to p2, both the firms will produce more goods. For example,
consider a situation where the market price assumes the value p3 where it is greater than p2 Given
p3, Firm 1 supplies q3 units of output while Firm 2 supplies q4 units of output. So, the market
supply at price p3 is q5, where q5 = q3 +q4.
We obtain the market supply curve Sm by taking a horizontal summation of the supply curves of
the two firms in the market, S1 and S2.
Question 3.
Explain the long run supply curve of a firm with the help of diagram.
Answer:
(a) We first determine the firm’s profit – maximising output level when the market price is
greater than or equal to the minimum of AC.

Suppose the market price is px, which is more than the minimum of LRAC. Upon equating
p1 with LRMC on the rising part of the LRMC curve, we obtain output level q1 Note also that the
LRAC at q1does not exceed the market price, p1 Thus the conditions P= SMC, SMC is not
decreasing and P ≥ AVC are fulfilled at q1 Hence, the price is p1, the firm’s supplies in the long
run become an output equal to q1

The diagram shows the output levels chosen by a profit – maximising firm in the long run for
two values of the market price p1 and p2. When the market price is p1 the output level of the firm
is q1: when the market price is p2 the firm produces zero output.
(b) If the price is less than minimum of LRAC, We have argued that if a profit-maximising firm
produces a positive output in the long run, then the market price is p2, must be greater than or
equal to the LRAC at that output level. But in the diagram it shows that for all positive output
levels, LRAC strictly exceeds p2. So, if the market price is p2 the firm produces zero output.
Combining both the cases, we can come to the conclusion that, a firm’s long run supply curve is
the rising part of the LRMC curve from and above the minimum of LRAC together with zero
output for all prices strictly less than the minimum of LRAC, In the below diagram the bold line
represents the long run supply curve of the firm.

MARKET EQUILIBRIUM

1. Choose The Correct Answer.

Question 1.
In perfect competition, buyers & sellers are
(a) Price makers
(b) Price takers
(c) Price analysts
(d] None of the above
Answer:
(b) Price takers

Question 2.
A situation where the plans of all consumers and firms in the market match.
(a) Inequilibrium situation
(b) Equilibrium situation
(c) Maximisation situation
(d) Partial Equilibrium situation
Answer:
(b) Equilibrium situation

Question 3.
As a result of increase in the number of firms there is an increase in supply, then supply curve
(a) Shifts towards left
(b) Shifts towards Right
(c) Shifts towards Both sides
(d) None of the above
Answer:
(b) Shifts towards Right

Question 4.
The firms earn super normal profit as long as the price is greater than the mini mum of
(a) Manginal cost
(b) Average cost
(c) Total cost
(d) Fixed cost
Answer:
(c) Average cost

Question 5.
The government imposing upper limit on the price of goods and services is called
(a) Price celling
(b) Selling price
(c) Price floor
(d) None of the above
Answer:
(a) Price ceiling

Question 6.
The government imposed lower limit on the price of goods and service is called
(a) Goods floor Price floor
(b) Service floor
(c) Price floor
(d) None of these
Answer:
(c) Price floor

Question 7.
Equilibrium price may be determined through
(a) Only demand
(b) Only supply
(c) Both demand and supply
(d) none of these
Answer:
(c) Both demand and supply

Question 8.
When there is increase in demand and decrease in supply, equilibrium price
(a) Falls
(b) rises
(c) Constant
(d) None of these
Answer:
(b) rises

II. Fill in the Blanks

1. In a perfectly competitive market, equilibrium occurs when market demand _____ market
supply.
Answer:
Is equal to

2. If the supply curve shifts rightward and demand curve shifts leftward equilibrium price will
be _____
Answer:
Decreasing

3. _____ is determined at the point where the demand for labour and supply of labour curves
intersect.
Answer:
Wage Rate

4. In labour market _____ are the suppliers of labour.

Answer:
Households

5. Due to rightward shifts in both demand and supply curves the equilibrium price remains _____
.
Answer:
Same

6. It is assumed that, in a perfectly competitive market an is _____ at play.

Answer:
Equilibrium Price
7. _____ is a situation where market demand is equal to market supply.
Answer:
Market equilibrium

8. _____ means the minimum price fixed by the government for a commodity in the market
to protect the interest of the producers.
Answer:
Price floor

III. Match the following

Question 1.
Table
1. Adam smith a. Attraction of new firms
2. Price ceiling b. Operation of invisible hand
3. Market equilibrium c. Lower limit on price
4. Possibility of supernormal profit d. Upper limit on price
5. Price floor e. QD = QS
Answers:
1. (b) Operation of invisible hand
2. (d) Upper limit on price
3. (e) QD = QS
4. (a) Attraction of new firms
5. to Lower limit on price

Question 2.
1. Equilibrium
2. Excess Supply
3. Adam Smith
4. Price ceiling
5. Excess Demand
6. Market equilibrium
7. Wage rate
8. Price Floor
a. Invisible Hand
b. DD = SS
c. D1 = S
d. State of Rest
e. Lower limit on the price ola good and service
f. tipper limit on the price of a good and service
g. Market supply > Market demand
h. Market Demand > market supply
Answers:
1. (d) State of Rest
3. (a) Invisible Hand
5. (h) Market Demand > market supply
7. (c) DL=SL
2. (g) Market supply> Market demand
4. (f) Upper limit on the price ola good and service
6. (b)DD=SS
8. (e) Lower limit on the price of a good and service

IV. Answer the following questions in a sentence/word.

Question 1.
Define market equilibrium.
Answer:
Market equilibrium is a situation where market demand is equal to market supply.

Question 2.
What is equilibrium price?
Answer:
The price at which equilibrium is reached is called equilibrium price.
Score More Series : II PUC Economics

Question 3.
When do we say that, there is an excess demand in the market?
Answer:
When market demand exceeds market supply at a price, it is said that excess demand exists in the
market at that price.

Question 4.
What is price ceiling?
Answer:
The government-imposed upper limit on the price of a good or service is called price ceiling.

Question 5.
What is price floor?
Answer:
Price floor means the minimum price fixed by the government for a commodity in the market to
protect the interest of the producers.

Question 6.
Through which legislation, the government ensures that the wage rate of the labourers does not
fall below a perticular level?
Answer:
Through the minimum wage legislation, the government ensures that the wage rate of the
labourers does not fall below a particular level

2nd PUC Economics Market Equilibrium Two Marks Questions and Answers

V. Answer the following Questions in 4 Sentences.

Question 1.
Define equilibrium price and Quantity.
Answer:
The price at which equilibrium is reached is called equilibrium price. Whereas, the quantity
bought and sold at the equilibrium price is called equilibrium quantity.

Question 2.
How price is determind, when fixed number of firms exist in perfect competition.
Answer:
Price is determined with the help of supply and demand forces when the number of firms is fixed
in perfect competition.

Question 3.
Write any two possible ways in which simultaneous shift of both demand and supply curves.
Answer:
The two possible ways are:

1. Both supply and demand curves shift rightwards.

2. Both supply and demand curves shift leftwards.
Question 4.
What is marginal Revenue product of labour (MRPJ.
Answer:
For each extra unit of labour, she gets an additional benefit equal to marginal revenue times
marginal product which is called Marginal Revenue Product of labour (MRPJ.

Question 5.
Distinguish between excess demand and excess supply.
Answer:
If at a price, market supply is greater than market demand, we say that there is an excess supply
in the market at that price. If market demand exceeds market supply at a price, it is said that
excess demand exists in the market at that price.

Question 6.
How wage is determined in the labour market?
Answer:
The wage rate is determined at the intersection of the demand and supply curves of labour where
the demand for and supply of labour balance.

In the diagram, on OX axis we measure Labour and on OY axis we measure Wage. DLDL is
Demand curve of labour and SLSL is supply curve of labour. Point ‘E’ is equilibrium point where
the demand and supply intersects each other and therefore OW is the wage rate in a perfectly
competitive market.

2nd PUC Economics Market Equilibrium Four Marks Questions and Answers

VI. Answer the following Questions in 12 Sentences.

Question 1.
What is the implication of free entry and exit of firm on market equilibrium. Briefly explain.
Answer:
In the long run, equilibrium price will always be equal to minimum of AC because of free entry
and exit of firms in a perfect competitive market and hence all the firms earn zero profit or
normal profit.
The equilibrium is determined by the intersection of consumers’ demand curve and the ‘P = min
AC’ line. At equilibrium point ‘E’, quantity supplied by each firm is ‘X’ at the price ‘P’.

In the above diagram, on OX axis quantity is measured and on OY axis price is measured. Point
‘E’ is the equilibrium point where Price will be equal to min of AC.
Question2.
Write a table to show the impact of simultaneous shifts on equilibrium.
Answer:
Impact pf simultaneous Shifts on Equilibrium

Question 3.
Write a note on price ceiling and price floor.
Answer:
Price Ceiling: The government-imposed upper limit on the price of a good or service is called
price ceiling.
(a) It is generally imposed on necessary items like wheat, rice, kerosene, sugar and it is fixed
below the market-determined price since at the market-determined price some section of the
population will not be able to afford to buy these goods.
Let us examine the effect of price ceiling on the market equilibrium through the example of
market for wheat.

In the above diagram SS is the market supply curve and DD is the market demand curve for
wheat. The equilibrium price and quantity of wheat are P1 and q respectively. When the
government imposes price ceiling at P0 which is lower than the equilibrium price level, there will
be more demand for wheat in the market. The consumers will demand q2 quantity of wheat
where as the firms supply q1 quantity of wheat.
Though the government’s intention was to help the consumer, it could end up creating shortage
of wheat.
Price Floor: The government-imposed lower limit on the price that may be charged for a
particular good or service is called Price floor. Most well-known examples of imposition of price
floor are agricultural price support programmes and the minimum wage legislation.

(b) The government imposes a lower limit on the purchase price for some of the agricultural
goods and the floor is normally set at a higher level than the market price.

In the above diagram, it shows market supply curve and market demand curve for a commodity
on which price floor is imposed. The equilibrium is determined at price P1 and quantity q. But
when the government imposes a floor higher than the equilibrium price at P2, the demand is qt
whereas the firms want to supply q2, thereby leading to an excess supply in the market equal to
q1q2
2nd PUC Economics Market Equilibrium Six Marks Questions and Answers

VI. Answer the following questions in 20 Sentences.

Question 1.
Explain the simultaneous shifts of demand and supply curve in perfect competition with
the help of diagrams.
Answer:
There can be three situations in this respect which are as follows: (a) Increase in demand is
greater than increase in supply:

In the diagram, on OX axis we measure quantity and on OY axis we measure price. DD is the
demand curve and SS is the supply curve.

In the diagram, on OX axis we measure quantity and on OY axis we measure price. DD

is the demand curve and SS is the supply curve.
It is clear that the rightward shift in demand curve from DD to D1D1 is proportionately more than
the right ward shift in supply curve from SS to S1S1. The new equilibrium point is E1.
Equilibrium price rises from OP1 to OP1 and equilibrium quantity increases from OQ to OQ1. It
is to be noted that increase in quantity is great r than increase in price.

(b) Increase in demand is exactly equal to increase in supply :

In the diagram, on OX axis we measure quantity A and on OY axis we measure price. DD is the
T D, demand curve and SS is the supply curve.

It is clear that rightward shift in demand curve from DD to D1D1 is proportionately equal to the
rightward shift in supply curve from S1S1
The new equilibrium point is Er Equilibrium price remains the same but equilibrium quantity
increases from OQ to OQ1

(c) Increase in demand is lesser than increase in supply :

In the above diagram, on OX axis we measure quantity and on OY axis we measure price. DD is
the demand curve and SS is the supply curve.

It is clear that the rightward shift in demand curve from DD to D1D1 is proportionately less than
the right ward shift in supply curve from SS to S1 S1. The new equilibrium point is Er
Equilibrium price falls from OP to OP1 and equilibrium quantity increases from OQ to OQ1 It is
to be noted that increase in quantity is greater than decrease in price.

Question 2
Explain the market equilibrium with the fixed number of firms with the help of diagram.
Answer:
Equilibrium Under Perfect Competition
In perfect competition both buyers and sellers are price takers. Hence the price of a product is
determined by its supply and demand forces.
Equilibrium means a state of rest. It is a position from which there will not be a tendency to
move or change is either direction.
At equilibrium price, quantity demanded and supplied will be equal. Both the buyers’ and sellers
objectives are satisfied.
Market equilibrium is determined by the forces of market demand and market supply. Market
demand refers to the aggregate demand and market supply refers to aggregate supply.
The market supply curve slopes upwards from left to right and market demand curve slopes
downwards from left to right. These two curves intersect at a point. This point shows that
demand is equal to supply i.e. QD = QS.
This can be shown with the help of demand and supply schedule

Price of Market Market

Commodity (in Demand (in Supply (in
Rs.) units) units)

10 100 20

20 80 40

30 60 60
 40 40 80

50 20 100

It is very clear in the table that, when price of commodity is ₹ 10, the Market demand is 100 and
Market supply is 20. When the price increases to ₹ 30, market demanded is 60 and market
supply is also 60. Therefore, ₹ 30 is the equilibrium price and 60 is market demand and market
supply. Any other price more than Rs. 30 leads to excess supply and less than ₹ 30 leads to
excess demand.

Diagrammatic representation.

In the above diagram, on OX axis Quantity demanded and supplied is measured and on OY axis
Price is measured, SS is the supply curve and DD is the demand curve. E is the intersection
point, where demand is OM and supply is also OM. This is the equilibrium quantity. OP is the
equilibrium price.

If price falls to 0P1 ; D> S. Demand is excess by KL, the seller want to supply only OM1 quantity
of supply but demand will be OM2. The buyers now compete with each other in order to obtain
the goods and are ready to pay a higher price than OP1 So, price starts rising till OP level is
reached, where both demand and supply are equal.
If price rises to OP2 then, demand will be less than supply. That is supply is excess of demand by
NM. Now in order to dispose this excess supply the sellers will compete with each other and in
doing so, they will bring down the price to OP.
Conclusion: Thus if price is above or below the equilibrium price, the invisible hand will operate
to bring the price to the level at which the quantity supplied will be equal to quantity demanded.

Question 3.
Suppose the demand and supply curves of wheat are given by qD = 200 – P and qs = 120 + P
(a) Find the equilibrium price
(b) Find the equilibrium quantity of demand and supply
(c) Find the quantity of demand and supply when P > equilibrium price
(d) Find the quantity of demand and supply when P < equilibrium price
Answer:
QD = 200 – P & Qs = 120 + P
QD = QS
then, 200 – p = 120 + P 200 – 120 = P + P
80 = 2P
P = 40
∴ Equilibrium price is 40.
Now substituting this value of price we can get the equilibrium quantity of demand and supply.
QD
QD = 120 – P
= 200 – 40
QD = 160
QS = 120 +P
= 120 + 40
QS = 160
So at equilibrium price ’40’ QD = 160 & QD = 160
If Price is greater than equilibrium price, then there will be excess supply.
Suppose P = 42
then,
QD = 200 – 42
QD = 158
QD < Qs or Qs > QD
Qs = 120 + 42
QS = 162
If price is less than equilibrium price, then will be excess demand. Suppose p = 38 then,

QD = 200 – 38
QD = 162
QD > Qs or Qs < QD
QS = 120 + 38
QS = 158

Question 1.
Suppose the demand and supply curve of salt are given by:
QD = 1000 – p
QD = 700 + 2p
(a) Find the equilibrium price and quantity
(b) Now suppose that the price oían input used to produce salt has increased so that the new
supply curve is QS = 400 + p
How does the equilibrium price and quantity change? Does the change conform to your
expectation?
(c) Suppose the government has imposed a tax oí3 per unit of sale of salt. How does it affect
the equilibrium price and quantity?
Answer:
(a) At equilibrium, QD = QS
QD = 1000 – p
QD = QS
QS = 700 + 2p
1000 – p= 700 +
-p -2p= 700 -1000
-3p = -300
p = -300/-3
p = 100
When p = 100
QD = 1000 – P QD = 1000-100 QD = 900
So, equilibrium price is 100 and the equilibrium quantity is 900 units.
(b) New quantity supplied QS = 400 + 2P
At equilibrium, QD = QS
QD = 1000—p
QS = 700 + 2p
QD = QS
1000 – p= 400 + 2p
-p – 2p= 400 – 1000
-3p = -600
p = -600/-3
p = 200
Earlier to the increase in the price of input, the equilibrium price was ₹ 100, and after the rise in
input’s price, the equilibrium price is ₹ 200.
So the change In the equilibrium price in Rs 100 (200 – 100).
When p = 200
QD =1000-p
QD = 1000-200
QD = 200
The change in the equilibrium quantity Is 100 units (i.e. 900 – 800 units).
Yes, this change is obvious, as due to the change in the input’s price, the cost of producing salt
has Increased that will shift the marginal cost curve leftward and move the supply curve to the
left. A leftward shift in the supply curve results in a rise in the equilibrium price and a fall in the
equilibrium quantity

(a) The imposition of tax of ₹ 3 per unit of salt sold will raise the cost of producing salt. This
will shift
 the supply curve leftwards and the quantity supplied equation will become
QS = 700 + 2(p – 3)
At equilibrium,
QD = QS
QD = 100 – P
QS = 7oo + 2(p – 3)
1000 – P = 700 + 2(p-3)
l000 – p = 700 + 2p-6
1000 – 700 – 6 = 3p
306 = 3P
p = 306/3
P = 102
When p = 102,
QD = 1000 – p QD = 1000 – 102 QD = 898 units
Thus, the imposition of tax of ₹ 3 per unit of salt sold will result in an increase in the
price of salt from ₹ 100 to ₹ 102. The equilibrium quantity falls from 900 units to 898
units.

NON COMPETITIVE MARKET

1. Choose The Correct Answer.

Question 1.
A Market structure which produces heterogeneous products is called
(a) Monopoly
(b) Monopolistic competition
(c) Perfect competition
(d) None of the above
Answer:
(b) Monopolistic competition

Question 2.
The change in TR due to the sale of an additional unit is called
(a) Total Revenue
(b) Average Revenue
(c) Marginal Revenue
(d) Revenue
Answer:
(c) Marginal Revenue

Question 3.
When the price elasticity of demand is more than one, MR has a
(a) Negative value
(b)Decreasing value
(c) Constant value
(d) Positive value
Answer:
(d) Positive value

Question 4.
Profit =
(a) P x Q
(b) TR – TC
(c) TFC + TVC
(d) TR/Q
Answer:
(d) TR – TC

Question 5.
In which form of market there is product differentiation?
(a) Monopoly
(b) Oligopoly
(c) Monopolistic Competition
(d) Perfect Competition
Answer:
(c) Monopolistic Competition

Question 6.
Which one of the following statement is not a characteristic of monopolistic
competition?
(a) ease of entry into the industry.
(b) product differentiation
(c) a relatively large number of sellers
(d) homogeneous product.
Answer:
(d) homogeneous product.

Question 7.
All of the following are characteristics of a monopoly, except……………..
(a) there is a single firm.
(b) The firm is a price-taker
(c) the firm produces a unique product
(d) the existing of some advertising
Answer:
(b) The firm is a price-taker

Question 8.
A monopolist is a price……………..
(a) Maker
(b) Taker
(c) Adjuster
(d) none of these
Answer:
(a) Maker

Question 9.
Market which has a few large firms is……………..
(a) Monopsony
(b) Duoploy
(c) Oligopoly
(d) Monopoly
Answer:
(c) Oligopoly

Question 10.
Monopolist can determine……………..
(a) Price
(b) output
(c) a only
(d) both a and b
Answer:
(d) both a and b

Question 11.
Which of the following is not a characteristic of monopolistic competition?
(a) Ease of entry into the industry
(b) Product differentiation
(c) A relatively large number of sellers
(d) A homogenous product
Answer:
(a) Ease of entry into the industry

Question 12.
All of the following are characteristics of a monopoly except…………………
(a) there is a single firm
(b) the firm is a price taker
(c) the firm produces a unique product
(d) the existence of some advertising
Answer:
(b) the firm is a price taker

Question 13.
Oligopolistic industries are characterized by …………………
(a) a few dominant firms and substantial barriers to entry
(b) a few large firms and no entry barriers
(c) a large number of small firms and no entry barriers
(d) one dominant firm and low entry barriers
Answer:
(a) a few dominant firms and substantial barriers to entry

Question 14.
For price-taking firm
(a) marginal revenue is less than price
(b) marginal revenue is equal to price
(c) marginal revenue is greater than price
(d) the relationship between marginal revenue and price is indeterminate
Answer:
(b) marginal revenue is equal to price

Question 15.
Monopolistic competition differs from perfect competition primarily because
(a) in monopolistic competition, firms can differentiate their products.
(b) in perfect competition, firms can differentiate their products.
(c) in monopolistic competition, entry into the industry is blocked
(d) in monopolistic competition, there are relatively few barriers to entry
Answer:
(a) in monopolistic competition, firms can differentiate their products.

Question 16.
In which form of the market structure is the degree of control over the price of its
product by a firm very large?
(a) Monopoly
(b) Imperfect Competition
(c) Oligopoly
(d) Perfect competition
Answer:
(a) Monopoly

Question 17.
A market structure in which many firms sell products that are similar but not identical is
known as ……………..
(a) Monopolistic competition
(b) monopoly
(c) perfect competition
(d) Oligopoly
Answer:
(a) Monopolistic competition

Question 18.
Which of the following is not a characteristic of a monopolistically competitive market?
(a) Free entry and exit
(b) Abnormal profits in the longrun
(c) Many sellers
(d) Differentiated products
Answer:
(b) Abnormal profits in the longrun

Question 19.
Price discrimination is one of the features of……………..
(a) monopolistic competition
(b) monopoly
(c) perfect competition
(d) oligopoly
Answer:
(b) monopoly

Question 20.
The firm and the industry are one and the same in…………………
(a) Perfect competition
(b) Monopolistic competition
(c) Duopoly
(d) Monopoly
Answer:
(d) Monopoly

Question 21.
The demand curve of a monopoly firm will be…………………
(a) Upward sloping
(b) Downward sloping
(c) Horizontal
(d) Vertical
Answer:
(b) Downward sloping

II. Fill in the Blanks

1. The monopoly firm’s decision to sell a larger quantity Is possible only at …………..
Answer:
Lower Price
2. Competitivebehaviorand competitive market structure are m general ………….. related.
Answer:
Inversily

3. In monopoly market, the goods which are sold have no…………..

Answer:
Substitutes

4. TR =…………..
Answer:
PxQ

5. The Revenue received by the firm per unit of commodity sold is called…………..
Answer:
Average Revenue

6. With the zero production cost, when the total revenue of monopoly firm is maximum,
the profit is…………..
Answer:
Maximum

7. …………..is the founding founder of Modern Economics.

Answer:
Downward

8. Great Depression took place in the …………..year.

Answer:
Monopoly

9. …………..published the book ” The General Theory of Employment, Income and

Money”.
Answer:
One

10. The expenses which raise productive capacity are examples of ………….. expenditure.
Answer:
Zero
11. …………..is considered as the fourth important sector in an economy.
Answer:
Monopoly

12. SEBI stands for…………..

Answer:
Monopolistic Competition

13. …………..economy is an economy where production activities are mainly carried out
by capitalist
enterprises of private enterprises.
Answer:
Oligopoly

14. Theory of Multiplier employment is an example of……………

Answer:
Price rigidity

III. Answer the following questions in a sentence/word.

Question 1.
What is monopoly
Answer:
Monopoly market refers to a market where a single seller or a firm controls the supply
of the commodity.

Question 2.
Write the equation of a demand function.
Answer:
The equation of a demand function is q= a – bp or q = 20 – 2p.

Question 3.
Give the meaning monopolistic competition.
Answer:
Monopolistic Competition is a type of imperfect competition, in which there are many
sellers selling differentiated products but not perfect substitutes.
Question 4.
Give the meaning of oligopoly market.
Answer:
Oligopoly is a market structure in which there are a few firms or sellers in the market
produc¬ing or selling a product.

Question 5.
What is duopoly?
Answer:
Duopoly is the market situation where there are only two firms operating in the market.

2nd PUC Economics Non-Competitive Markets Two Marks Questions and Answers

V. Answer the following Questions in 4 Sentences.

Question 1.
Mention the requirements of a monopoly market structure.
Answer:
A monopoly market structure requires thatthere is a single producer of a particular
commodity; no other commodity works as a substitute for this commodity and for this
situation to persist over time, entry into the industry by another firm is prevented.

Question 2.
State the meaning of average revenue and marginal revenue.
Answer:
Average revenue is the revenue received by the firm per unit of commodity sold.
Marginal revenue refers to the additional revenue received by selling one more unit of a
commodity.

Question 3.
State the relationship between marginal revenue and price elasticity of demand.
Answer:
The relationship between MR and price elasticity of demand is sufficient to notice only
one aspect that is price elasticity of demand is more than 1 when the MR has a positive
value, and _ becomes less than the unity when MR has a negative value.

Question 4.
Write the meaning of monopolistic competition and give an example.
Answer:
Monopolistic competition is a market structure where the number of firms is large, there
is free entry and exit of firms, but the goods produced by them are not homogeneous.
The example is biscuit producing firms

Question 5.
Write the features of monopoly.
Answer:
The features of monopoly are,
(a) Single Seller
(b) No close substitutes
(c) High barriers to entry
(d) Price Maker
(e) No difference between firm and industry
(f) Price Discrimination or uniform price

2nd PUC Economics Non-Competitive Markets Four Marks Questions and Answers

V. Answer the following Questions in 12 Sentences.

Question 1.
What is market demand curve? Draw a market demand curve for a monopoly firm.
Answer:
The market demand curve is the diagram shows the quantities that consumers as a
whole are
willing to purchase at different prices.
If the market price is at p0, consumers are willing to purchase the quantity q 0. On the
other hand, if the market price is at the lower level p 1 , consumers are willing to buy a
higher quantity q1.
That is, price in the market affects the quantity demanded by the consumers. The
monopoly firm’s decision to sell a larger quantity is possible only at a lower price.
For the monopoly firm, the market demand curve expresses the price that consumers
are willing to pay for different quantities supplied.

Question 2.
Calculate TR and MR from the following table.

Answer:

Question 3.
Briefly explain the monopolistic competitive market.
Answer:
Meaning: Monopolistic Competition is a type of imperfect competition, in which there
are many sellers selling differentiated products but not perfect substitutes.

Features of Monopolistic Competition:

1. Existence of large number of buyers and sellers: There is existence of large number of
firms in this market. Each firm decides its own price output policy without considering
the reactions of rival firms. Similarly, the number of buyers is fairly large in this market.

2. Product differentiation: Product differentiation may be real or imaginary. Real

differentiation is done through differences in the materials used, design, colour, etc.
imaginary differences maybe created through advertisement, brand name, etc.
Therefore, products sold in such a market are heterogeneous in nature.

3. Selling Costs: In this market the firms tries to make differences in their products. This
is done through advertisement, propaganda, attracting packaging, etc, for which cost is
included. Such cost is known as selling cost. Selling costs are those expenses of the
producer incurred on marketing of goods produced.

4. Free entry and free exit of firms: In this market there are no restrictions on entry or
exit from the market. Product differentiation increases entry of new firms into the
industry. Entry of new firms leads to production of goods which are very close
substitutes for the existing brands of the product.

5. Downward Sloping demand curve: The demand curve of a firm under monopolistic
competition slopes downwards to the right. A reduction in price leads to increase in
sales and vice-versa.

6. Price Maker: In this market a firm fixes its own price of its product. He firms are
differentiated on their brand names; therefore each monopolistic firm enjoys a
monopolist position. This is because no other firm can produce and sell its products
under the same brand.

Question 4.
Show the relationship between average revenue and marginal revenue of a monopoly
market with the help of diagrams.
Answer:
The relationship between AR and MR can be explained with the help of following
diagrams.

The diagram shows that the MR curve lies below the AR curve it is because the values of
MR at any level of output are lower than the corresponding values of AR.

We can conclude that if the AR curve is falling steeply, the MR curve is far below the AR
curve. On the other hand, if the AR curve is less steep, the vertical distance between the
AR and MR curves is smaller.

Diagram (a) shows a flatter AR curve while Diagram (b) shows a steeper AR curve. For
the same units of the commodity, the difference between AR and MR in diagram (a) is
smaller than the difference in diagram (b).

Question 5.
Mention the three forms of imperfectly competitive market.
Answer:
The three forms of imperfectly competitive market are,
(a) Monopoly (b) Monopolistic Competition (c) Oligopoly

Question 6.
What is selling cost? What is its main objective?
Answer:
Selling costs are those expenses of the produces incurred on marketing of goods
produces. The objective is to attach a particular consumer to a particular product.
Question 7.
A monopoly firm has a total fixed cost of ₹ 100 and has the following demand schedule:

Find the short run equilibrium quantity, price and total profit. What would be the
equilibrium in the long run? In case the total cost was ₹ 1000, describe the equilibrium
in the short run and in the long run.
Answer:

The total cost of the monopolist firm is zero, the profit will be maximum where TR is
maximum. As, in the above case, TR is maximum at the 6th unit of output.

Profit of the firm = 300, and Short-run equilibrium price = ₹ 50

Profit = TR – TC, Profit = 300 – 0 = 300
As per the case if the total cost is ₹ 1000, then 300-1000 = -700
Therefore firm is earning loss in the short run and it will stop its production in the long
run.

Question 8.
The market demand curve for a commodity and the total cost for a monopoly firm
producing the commodity is given by the schedules below. Use the information to
calculate the following.
(a) The MR and MC schedules
(b) The quantities for which the MR and MC are equal]
(c) The equilibrium quantity of output and the equilibrium price of the commodity
(d) The total revenue, total cost and total profit in equilibrium.

(b) The quantities for which MR and MC equal are 6

(c) The equilibrium quantity of output is 6 and the equilibrium price of the commodity is
₹ 19
(d) The total revenue is 114, total cost is 109 and total profit is TR -TC i.e. 114-109 = ₹ 5
in equilibrium.

Question 9.
Make a difference between perfect competition, monopoly and monopolistic
competition
Answer:
Difference among perfect competition, monopoly and monopolistic competition
2nd PUC Economics Non-Competitive Markets Six Marks Questions and Answers

VI. Answer the following Questions in 20 Sentences.

Question 1.
Explain the short run equilibrium of a monopoly firm with the help of the simple case of
zero cost
Answer:
Here we analyse the profit maximizing behaviour to determine the quantity produced by
a monopoly firm and price at which it is sold.
We shall analyse the simple case of a monopolist bearing Zero costs to determine the
amount of a good sold and price at which it is sold.

In the above diagram there are TR, AR and MR curves and on OX axis we measure
output and on OY axis we measure revenues.

The profit received by the firm equals the revenue received by the firm minus the cost
incurred, that is, Profit = TR – TC.

Since in this case TC is zero, profit is maximum when TR is maximum. This, as we seen
earlier, occurs when output is of 10 units. This is also the level when MR equals zero. The
amount of profits is given by the length of the vertical line segment from ‘a’ to the
horizontal axis.

The price at which this output will be sold id the price that the consumers as a whole are
willing to pay. This is given by the market demand curve ‘D’. At output level of 10 units,
the price is ₹ 5 Since the market demand curve is AR curve for the monopolist firm, ₹ 5
is the AR received by the firm. The total revenue is given by the product of AR and
quantity sold, i.e. ₹ 5 x 10 units = ₹ 50. This is depicted by the area of the shaded
rectangle.
Question 2.
Explain the short run equilibrium of a monopolist firm, when the cost of production is
positive by using TR & TC curves with the help of a diagram.
Answer:
Monopolist, like a perfect competitive firm, tries to maximize his profit by not holding
any stock of output produced.
The short run equilibrium of a monopoly market can be analysed under the following
two different situations:

1. Simple situation when the cost of production is zero.

2. A situation when the cost of production is positive.
When the cost of production is positive {cost is greater than zero}:
Generally production cost is positive in a monopoly market situation. This can be studies
using the following two approaches:

Total Revenue and Total Cost Approach:

According to this approach, a monopoly firm attains its equilibrium at the point here the
difference between the TR and TC is maximum. At this point monopoly firm reaches
equilibrium with the maximum profit.

Diagrammatic representation,

In the above diagram, on OX axis we measure Quantity and on OY axis we measure TR,
TC and Profit. TC curve represents Total Cost. TR curve represents Total Revenue, n curve
represents profit curve.
In the diagram we find bd distance is maximum. Thus, the firm attains equilibrium at
point ‘b’. The profit earned by the monopolist at this point equals vertical distance
between bd and equilibrium level of output is OQ.

At the quantity Q1 and Q2, TR = TC. Here a and c are Breakeven Points. TR curve and TC
curve intersect at points a and c, and at this level of output Q and Q 2 profit is zero,
where profit curve intersects the x-axis at Q1 and Q2 points. Before Q1 and Q2 the firm
suffers losses, because TC > TR. Therefore, profit curve If is in negative zone.
Between product level Q1 and Q2, TR > TC. Then profit curve difference between TR and
TC is at maximum. This is the equilibrium of a firm in short run.
Question 3.
Explain how the firms behave in oligopoly.
Answer:
Oligopoly is a market in which there are a few firms or sellers in the market producing or
selling a product.

(a) Given that there are a few firms, each firm is relatively large when compared to the
size of the market. As a result each firm is in a position to affect the total supply in the
market and thus influence the market price.

(b) Firms in oligopoly could decide to ‘collude’ with each other to maximize collective
profits. The quantity supplied collectively by the industry and the price charged are the
same as a single monopolist would have done.

(c) Firms in oligopoly could decide to compete with each other. For example, a firm may
lower its price a little below the other firms, in order to attract their customers.
Obviously, the other firms would react by doing the same. So the market price keeps
falling as long as firms keep undercutting each other’s prices.

Question 4.
The market demand curve for a commodity and the total cost for a monopoly firm
producing the commodity is given by the schedules below. Use the information to
calculate the following
(a) The MR & MC schedules.
(b) The quantity for which the MR & MC are equal.
(c) The equilibrium quantity of output and the equilibrium price of the commodity.
(d) The total revenue, Total cost and Total profit in equilibrium.
Answer:

(b) The quantities for which MR and MC equal are 6

(c) The equilibrium quantity of output is 6 and the equilibrium price of the commodity is
₹19
(d) The total revenue is 114, total cost is 109 and total profit is TR -TC i.e. 114-109 = ₹5
equilibrium