Question Paper

Economics – I (121) : January 2004

Section A : Basic Concepts (40 Marks)

• • This section consists of questions with serial number 1 - 40.

• • Answer all questions.
• • Each question carries one mark.
1. < Answer
The difference between, the price an individual is willing to pay and the price he or she actually pays is >

a. Producer cost b. Monopolist profit c. Economic profit d. Producer surplus

e. Consumer surplus.
2. < Answer
Which of the following statements are false? >

I. Elasticity of demand is graphically represented by the slope of the demand curve.

II. Elasticity of demand increases as one goes down along the demand curve.
III. If the demand is inelastic, a decrease in price increases the total revenue of the firm.
IV. Elasticity of demand is measured by dividing change in quantity demanded with the
change in the price of the good.

a. Both (I) and (II) above b. Both (II) and (III) above c. (I), (II) and (III) above
d. (I), (II) and (IV) above e. All (I), (II), (III) and (IV) above.
3. < Answer
The demand for most products varies directly with the change in consumer income. Such products are >
known as
a. Normal goods b. Prestigious goods c. Complementary goods
d. Inferior goods e. Substitute goods.
4. < Answer
A combination of Capital (K) and Labor (L) lies to the right of the firm’s cost line; it means that the >
combination is
a. Undesirable b. Efficient, given the budget
c. Inefficient, given the budget d. Unattainable, given the budget
e. Inferior to the points within the constraint in terms of production.
5. < Answer
The horizontal demand curve for a firm is one of the characteristic features of >

a. Oligopoly b. Monopoly c. Monopolistic competition

d. Perfect competition e. Duopoly.
6. < Answer
Increasing marginal costs with increase of output implies >

a. Decreasing average returns b. Decreasing average fixed costs

c. Decreasing average variable costs d. Decreasing total costs
e. Decreasing average costs.
7. < Answer
In which of the following market structures the entry is least difficult? >
a. Pure monopoly b. Oligopoly c. Duopoly d. Regulated monopoly
e. Monopolistic competition.
8. < Answer
A perfectly competitive firm attains break-even point when the firm’s >

a. AR < AC b. AR > AC c. AR = AC d. MR > MC e. MR =

MC.
9. < Answer
The vertical distance between the Total Cost (TC) curve and the Total Variable Cost (TVC) curve
 >
reflects
a. The law of diminishing returns b. The average fixed cost at each level of output
c. Marginal cost at each level of output d. Average variable cost at each level of output
e. Total fixed cost at each level of output.
10. Which of the following does not cause a shift in the demand curve? < Answer
>
a. Change in the price of the good b. Change in the income of the buyers
c. Change in the personal preferences d. Change in the price of the related goods
e. Change in the consumer patterns.
11. Which of the following is a common feature in both a monopolistically competitive market and an < Answer
>
oligopoly market?
a. Product differentiation b. Interdependence among member firms
c. Kinked demand curve d. Limited number of sellers
e. Entry is blocked.
12. The frequent formation of cartels by firms in the cement industry in India indicates that the cement < Answer
>
industry in the country is
a. A monopoly b. Perfectly competitivec. An oligopoly
d. A monopsony e. An oligopsony.
13. If the purchase of a good can be postponed, it implies that the < Answer
>

a. Demand for the good is perfectly inelastic

b. Demand for the good is relatively inelastic
c. Demand for the good is relatively elastic
d. Demand for the good is unitary elastic
e. Demand curve for the good is vertical.
14. Which of the following is/are true if the long run average cost is increasing? < Answer
>

a. A rising marginal cost curve

b. Operation of law of diminishing marginal productivity
c. Economies of scale
d. Both (a) and (c) above
e. (a), (b) and (c) above.
15. The supply curve of a monopolist < Answer
>

a. Is the portion of MC curve that lies above the AVC curve

b. Is the portion of MC curve that lies above the AC curve
c. Is vertical
d. Is horizontal
e. Is absent.
16. An entrepreneur in order to maximize the profits, without affecting the price, should produce an output < Answer
>
where
a. Average cost is minimum b. Average variable cost is minimum
c. Average fixed cost is minimum d. Marginal cost is equal to the average variable
cost
e. Marginal cost is minimum.
17. The cost curve(s) that depends on the level of output in the long run is/are < Answer
>
a. Total costs b. Total variable costs c. Average fixed costs
d. Both (a) and (b) above e. Both (a) and (c) above.
18. Through more advertising, a monopolistically competitive firm has successfully created more demand < Answer
>
for its product. It would have resulted in shifting of
a. AC curve upward
b. MR curve to the left
c. AC curve upward and MR curve to the left
d. AC curve upward and MR curve to the right
e. AC curve downward and MR curve to the right.
19. A consumer consumes two products, A and B. If the marginal rate of substitution (MRS ) remains < Answer
AB
>
constant, the shape of the indifference curve is
a. Concave to origin b. Convex to origin
c. Straight line with negative slope d. Straight line with positive slope
e. L-shaped.
20. If marginal product is negative, it means that the < Answer
>
a. Total product is at maximum b. Average product is at maximum
c. Average product is falling d. Total product is increasing
e. Average product is negative.
21. A firm realizes least-cost in production, if it substitutes the factors until their < Answer
>
a. Prices are equal
b. Marginal physical products are equal
c. Marginal physical products are equal to their factor prices
d. Marginal physical products are equal to zero
e. Marginal physical product to the factor price ratio is equal for all factor inputs.
22. The intersection of marginal product curve and average product curve characterizes the point of < Answer
>
a. Maximum profit b. Maximum total product
c. Maximum average product d. Maximum marginal product
e. Zero marginal product.
23. Because of product differentiation, a monopolistically competitive firm faces a (an) < Answer
>
a. Horizontal demand curve b. Vertical demand curve
c. Downward sloping demand curve d. Upward sloping supply curve
e. Horizontal supply curve.
24. In perfect competition, the long run equilibrium price is equal to < Answer
>
I. Marginal Revenue.
II. Average Cost.
III. Marginal Cost.
IV Average Revenue.

a. Both (I) and (III) above b. (I), (II) and (III) above
c. (I), (III) and (IV) above d. (II), (III) and (IV) above
e. All (I), (II), (III) and (IV) above.
25. Which of the following cost curves is not ‘U’ shaped? < Answer
>
a. Long run average cost curve b. Long run marginal cost curve
c. Short run average cost curve d. Average variable cost curve
e. Average fixed cost curve.
26. A curve drawn indicating the slope of the total utility curve closely resembles the < Answer
>
a. Demand curve b. Supply curve c. Average utility curve
d. Marginal revenue curve e. Indifference curve.
27. < Answer
A kinked demand curve occurs in an oligopoly when a firm >

a. Increases its price and others follow it

b. Increases its price and others do not follow it
c. Decreases its price and others follow it
d. Decreases its price and others do not follow it
e. Both (b) and (c) of the above.
28. < Answer
The difference between economic profit and accounting profit is >

a. Selling and administrative expenses

b. Depreciation
c. Explicit costs
d. Implicit costs
e. There is no difference between economic profit and accounting profit.
29. < Answer
If the firm operates in such a way that the additional revenue from selling an additional unit equals the >
cost of producing an additional unit, it reaches the

I. Profit maximization point.

II. Price maximization point.
III. Cost minimization point.
IV. Revenue maximization point.

a. Only (I) above b. Both (I) and (III) above

c. (I), (II) and (III) above d. (I), (III) and (IV) above
e. All (I), (II), (III) and (IV) above.
30. Which of the following is not true? < Answer
>
a. If the demand for wheat is highly inelastic, bumper crop may reduce farm incomes
b. Supply and demand curves tend to be more elastic in the long run
c. In general, elasticity of demand for necessities is less than luxury goods
d. A producer can always increase his total revenue by increasing the price when the demand is
elastic
e. A Giffen good is always an inferior good.
31. In the long run, which of the following is true of a firm in a perfectly competitive industry? < Answer
>
a. It operates at its minimum average cost
b. The price is more than the average fixed cost
c. The marginal cost is greater than marginal revenue
d. The fixed cost is lower than the total variable cost
e. The price is equal to minimum of AVC.
32. < Answer
One of the reasons for the existence of natural monopoly is >

a. Economies of scale b. Diminishing marginal rate of productivity

c. Downward sloping demand curve d. Formation of cartels
e. Lower fixed cost requirement.
33. < Answer
A firm operating in a monopolistically competitive market earns only normal profits in the long run >
because of

a. Economies of scale b. Relative freedom to enter and exit the industry

c. Product differentiation d. Large number of buyers
e. Downward sloping demand curve.
34. < Answer
When one firm in the health drinks market started advertising campaign that stressed the nutritional >
 value of its health drinks, all the remaining 10 health drink majors started similar advertising campaigns
to withhold their customers. It suggests that the health drinks industry is a/an

a. Oligopoly b. Oligopsony c. Monopolistically competitive market

d. Perfectly competitive market e. Bilateral monopoly.
35. < Answer
The demand for which of the following goods best illustrates derived demand? >

a. Rice b. Motor car c. Machinery d. Book e. Pen.

36. < Answer
Which of the following statements pertaining to indifference curve is true? >

I. The slope of the indifference curve represents the marginal rate of substitution between two
goods.
II. Indifference curve in case of perfect substitutes is a straight line with positive slope.
III. Two indifference curves intersect with each other in case of perfectly complementary
goods.
IV. A higher level of indifference curve connotes higher level of output.

a. Only (I) above b. Both (I) and (II) above

c. Both (II) and (III) above d. Both (I) and (IV) above
e. (I), (II) and (IV) above.
37. The consumers bear more tax burden than the producer, when the < Answer
>
a. Cost of producing the good is too high
b. Supply remains constant irrespective of the price of the good
c. Good is a necessary good
d. Total utility is greater than total cost
e. Price elasticity of supply is greater than the price elasticity of demand.
38. Which of the following statements is true? < Answer
>
a. An increase in producer surplus that results from a tax is referred to as deadweight loss
b. Deadweight loss would be higher, if the producer follows first degree price discrimination
c. Price discrimination is possible in a monopolistically competitive market
d. A price discriminating monopolist charges a higher price in a market where there are close
substitutes
e. Both (c) and (d) above.
39. In a monopoly, price is < Answer
>
a. Lesser than the marginal revenue b. Greater than the average revenue
c. Greater than the marginal revenue d. Equal to the total revenue
e. Both (b) and (c) above.
40. What would be the shape of the supply curve of a perfectly competitive industry, if the increased < Answer
industry demands for inputs results in increasing market price of the product in the long run? >

a. Horizontal b. Vertical c. Upward sloping

d. Downward sloping e. Supply curve is absent in the long run.

END OF SECTION A
 Section B : Problems (60 Marks)

• • This section consists of questions with serial number 41 -76 .

• • Answer all questions.
• • Marks are indicated against each question.
41. For a firm, the average cost function is estimated as < Answer
>
100
AC = Q + 20 + 4Q
What is total variable cost for the firm at an output of 15 units?
a. Rs.100 b. Rs.750 c. Rs.1,200 d. Rs.1,340 e.
Rs.2,100.
(1 mark)
0.3 0.3
42. If the production function is Q = 20K L , what is the marginal rate of technical substitution < Answer
of labor for capital? >

L K L K
a. 0.3 K b. 0.3 L c. K d. L e. K –L.
(2 marks)
43. Suppose the price of movie tickets at a theater increases from Rs.12 per couple to Rs.20 per < Answer
couple. The theater manager observed that the increase in price caused attendance at a given >
movie to fall from 300 persons to 200 persons. What is the price elasticity of demand for the
movie?
a. 0.5 b. 1.0 c. 0.8 d. 1.2 e. 5.0.
(1 mark)
44. Which of the following cost functions signifies a long-run cost function? < Answer
a. TC = 250 + 3Q b. TC = 300 >
c. TC = 50 + 100Q + 2Q2 d. Both (b) and (c) above
e. None of the above.
(1 mark)
45. The total revenue and total cost functions of Nike Shoe Company are < Answer
2 >
Q
TR = 400Q – 2 ,TC = 600 +70Q + Q2
What is the profit maximizing output for the firm?
a. 100 units b. 110 units c. 140 units d. 180 units e. 200
units.
(2 marks)
46. Demand and supply functions of cigarettes are given by the following functions: < Answer
QD = 5,800 – 80P , QS = 1,000 + 40P >
If the government imposes a tax of Rs.12 on each unit to discourage smoking, what would be
the new equilibrium price?
a. Rs.40.0 b. Rs.44.0 c. Rs.48.0 d. Rs.52.0 e.
Rs.42.5.
(3 marks)
47. Mr. Subba Rao, owner of Billow Garments & Brothers, employs labor and knitting machines < Answer
as inputs to produce woolen garments. The following are the marginal productivity functions >
of labor and capital for the firm:
L0.75 K 0.75
0.25 0.25
MPK = 0.75 K , MPL = 0.75 L
If the wage paid to the laborers is Rs.8 and the cost of capital is Rs.5 each, the cost minimizing
proportion of L to K is
a. L = (8/5) K b. L = (5/8) K c. L = (5 + 8) K d. L = (5 – 8) K e. L = (8 ×
5) K.
(2 marks)
48. The demand function for a firm is P = 30 – 3Q. If the average cost (AC) is Rs.6, what is the < Answer
>
output at which the firm earns normal profits?
a. 3 units b. 30 units c. 10 units d. 6 units e. 8
units.
(1 mark)
49. In Hyderabad city, there are eight popular construction companies. Data pertaining to the sale < Answer
proceeds (no. of flats sold) of eight construction companies in the year 2003 is given below : >
 Name of the construction company No. of flats sold in the year 2003
Modi Constructions 500
Legend Constructions 300
Hima Sai constructions 450
Kartikeya Constructions 120
Aditya constructions 100
Ranga Prasad Constructions 80
Happy Home constructions 125
Jayabheri constructions 580 The four-
firm concentration ratio of the construction industry is
a. 0.711 b. 0.811 c. 0.611 d. 0.511 e. 0.411.
(2 marks)
50. If the average product of labor (APL) is 30L – L2, the maximum possible total product (TPL) is < Answer
>
a. 2,000 units b. 4,000 units c. 6,000 units d. 8,000 units e. 12,000
units.
(2 marks)
51. A perfectly competitive industry comprises of 150 firms. Of which, 50 are located in Chennai, < Answer
>
while remaining 100 are in Hosur. All the output is sold only at Hyderabad. The cost of
transporting one unit of output from Hosur to Hyderabad is Rs.8 and Rs.12 from Chennai to
Hyderabad. The cost function of all the firms in the industry (excluding transportation cost) is
identical and is estimated as
C = 100 + Q2
If the industry demand function is Qd = 2,020 – 10P, what is the equilibrium output for the
industry?
a. 1,450 units b. 1,528 units c. 2,720 units d. 1,700 units e. 1,620
units.
(3 marks)
52. The market demand function for a good is < Answer
P = 1,000 – Q >
If the marginal cost remains constant at Rs.25, the industry output in a Cournot’s duopoly is
a. 750 units b. 650 units c. 675 units d. 725 units e. 700
units.
(3 marks)
53. If the equilibrium output in a perfectly competitive industry is 2,100 units, what could be the < Answer
equilibrium output for the industry in a duopoly market? >

a. 1,500 units b. 1,400 units c. 1,800 units d. 2,100 units e. 1,750

units.
(1
mark)
54. The long run cost function of a firm is < Answer
TC = Q3 – 40Q2 – 480Q >
Beyond what output do diseconomies of scale exists?
a. 20 units b. 30 units c. 40 units d. 35 units e. 45
units.
 (2 marks)
55. Which of the following production functions represents decreasing returns to scale? < Answer
>
KL
I. Q = 250 + 3K + 4L + 5R, II. Q = 100K0.3L0.5R0.2, III. Q= R
Where, K = Units of capital
L = Units of labor
R = Units of Raw materials
a. Only (I) above b. Both (I) and (II) above
c. Both (II) and (III) above d. Both (I) and (III) above
e. (I), (II) and (III) above.
(2 marks)
56. The demand function of a monopolist is estimated to be < Answer
>
Q = 100 – 10P
If the marginal revenue is Rs.4, what is the price elasticity of demand for the good?
a. 6.33 b. 2.33 c. 4.44 d. 5.12 e. 6.12.
(2 marks)
57. The demand function for a good is estimated to be Q = 100 – 2P. The total cost function of the < Answer
>
firm is given by TC = 50 + 2Q. If the firm produces 12 units, profits made by the firm are
a. Rs. 352 b. Rs. 426 c. Rs. 454 d. Rs .472 e. Rs. 502.
(2 marks)
58. The profit function of a firm, operating in a monopolistic market, is given by < Answer
>
Q3
∏ = 3 – 5Q2 + 24Q
What is the profit maximizing output for the firm?
a. 4 units b. 5 units c. 8 units d. 9 units e. 12
units.
(2 marks)
1.5
59. The utility function of a consumer is U = 12X . If the price of the good is Rs.63 per unit, the < Answer
consumer would consume >
a. 8.00 units b. 9.50 units c. 12.25 units d. 14.75 units e. 15.00
units.
(2 marks)
60. The demand function for Rollex pens is estimated as < Answer
>
QR = 10,000 – 1,500PR + 2Y + 200PC
Where,
QR = Quantity of Rollex pens demanded
PR = Price of Rollex pen
PC = Price of Competitor’s product
Y = Per capita income of the consumer
If the current price of Rollex pen is Rs.5, the price of the competitor’s product is Rs.8 and per
capita income is Rs.5,000, the income elasticity of demand is
a. 0.521 b. 1.222 c. 0.827 d. 0.709 e. 1.052.
 (2 marks)
61. A consumer consumes only good X and good Y. The budget constraint of the consumer is Rs.720. < Answer
>
The market price of good X and good Y are Rs.4 and Rs.6 respectively. If good X is taken on
horizontal axis and good Y on vertical axis, the slope of the budget line of the consumer is
a. 0.33 b. 0.66 c. 0.75 d. 1.50 e. 30.0.
(1 mark)
62. Total cost of production for a firm to produce 200 units is Rs.12,500 and Rs.13,500 for 250 < Answer
>
units. What would be the fixed cost for the firm, if the average variable cost is constant?
a. Rs. 7,500 b. Rs. 8,000 c. Rs. 8,500 d. Rs. 7,750 e. Rs.
8,150.
(1 mark)
63. Marginal Product schedule of a firm at various levels of inputs is given below: < Answer
>
No. of units 1 2 3 4 5 6
Labor 144 96 60 48 36 24
Capital 120 84 60 30 20 10 The wage rate is
Rs.12 and cost of capital is Rs.6. If budget of the firm is Rs.60, optimum labor and capital to
be employed by the firm are
a. L = 3 units and K = 4 units b. L = 4 units and K = 4 units
c. L = 5 units and K = 3 units d. L = 5 units and K = 5 units
e. None of the above.
(1 mark)
0.5
64. The production function of a firm is Q = 250L . The quantity of labor that the firm should < Answer
hire to maximize total profits, when price of the good is Rs.2 and wage rate is Rs.25, is >
a. 50 units b. 25 units c. 75 units d. 100 units e. 125
units.
(2 marks)
65. Quantity demanded of a product decreases from 4,000 units to 3,000 units when price of the < Answer
product increases from Rs.40 to Rs.45. If income effect is estimated to be 900, substitution >
effect of the price change is
a. 100 b. 133 c. 1,000 d. 4,500 e. None of the
above.
(1 mark)
2
66. If the total cost function is TC = 200 – 4Q + 6Q and the output is 4 units, the marginal cost is < Answer
a. Rs.24 b. Rs.32 c. Rs.44 d. Rs.35 e. Rs.41. >

(1 mark)
67. Mr. Sachin can earn money from various activities. His hourly earnings from cricket is < Answer
Rs.5,000, acting Rs.30,000, coaching Rs.10,000 and ceremonies Rs.15,000. The opportunity >
cost of an hour of coaching for Sachin is
a. Rs.5,000 b. Rs.10,000 c. Rs.15,000 d. Rs.30,000 e. None of the above.
(1 mark)
68. The demand and supply functions of a good are < Answer
Qs = 400 + 15P >
Qd = 600 – 10P
If the government fixes a price ceiling of Rs.12 for the product, there would be
 a. No supply of the good b. Shortage of the good
c. Excess supply of the good d. Excess demand for the good
e. No effect on demand and supply.
(1 mark)
69. Marginal utility of good X is 300 utils and its price is Rs.12. If price of good Y is Rs.30, the < Answer
marginal utility of good Y at equilibrium is >
a. 350 utils b. 700 utils c. 750 utils d. 550 utils e. 600
utils.
(1 mark)
70. A firm operating in a monopolistic competition has the following demand function: < Answer
P = 1,000 – Q >
If the marginal cost of the firm is constant at Rs.10, the equilibrium output in the long run is
a. 720 units b. 990 units c. 525 units d. 495 units e. 690
units.
(2 marks)
71. When the price is Rs.75, demand for a good is 10 units and when the price is Rs.70, demand is < Answer
>
12 units. Assuming that the demand function for the good is linear, the theoretical maximum
possible quantity of the good that can be demanded is
a. 100 units b. 25 units c. 5 units d. 40 units e. 76
units.
(2 marks)
72. A monopolist effectively segmented the market into two sub markets – X and Y. The total < Answer
revenue functions in two sub markets are given by: >
TRX = 20QX – 0.01Q2X ; TRY = 32QY – 0.02Q2Y
The marginal cost of the monopolist is constant at Rs.6.
If the monopolist practices price discrimination, profit-maximizing prices are
a. PX= Rs. 700 and PY = Rs. 650 b. PX= Rs. 650 and PY = Rs. 700
c. PX= Rs. 19 and PY = Rs. 13 d. PX= Rs. 13 and PY = Rs. 19
e. PX= Rs. 500 and PY = Rs. 525.
(3 marks)
73. The production function for a firm is given by Q = 50K 0.5 0.5
L . The efficient input combination < Answer
>
ratio is estimated to be K = 4L. If the firm has to produce an output of 2,000 units, the efficient
input combination is
a. L = 30 units and K = 120 units b. L = 20 units and K = 80 units
c. L = 15 units and K = 60 units d. L = 30 units and K = 60 units
e. L = 30 units and K = 30 units.
(1
mark)
74.
A firm operating under perfect competition has the following cost functions: < Answer
>
MC = 75 – 20Q + 1.5Q2, AVC = 75 – 10Q + 0.5Q2
The price below which the firm shut down its operation in the short-run is
a. Rs.20 b. Rs.25 c. Rs.40 d. Rs.50 e. Rs.75.
(2 marks)
75.
Refer to the graph below. If price of good Y is Rs.2, income of the consumer is < Answer
>
 a. Rs.10 b. Rs.20 c. Rs.30 d. Rs.40.
e. Insufficient information.
(1
mark)
76.
The total cost (TC) schedule of a firm is < Answer
>
Output TC
(in units) (in Rs.)
1 100
2 150
3 190
4 250
5 340
Marginal cost of the third unit is
a. Rs.30 b. Rs.40 c. Rs.150 d. Rs.60 e. Rs.190.
(1 mark)

END OF SECTION B
 Suggested Answers
Economics –I (121) : January 2004
1. Answer : (e) <
Reason :Consumer surplus is the difference between the willingness price and TO
actual price for a consumer. P
>
a. Producer costs represent the cost incurred by the producer in
producing the good.
b. Monopolist Profit: Economic profit generated as a result of a firm’s
market control. It’s termed monopoly profit as a reflection of the most
prominent market structure with market control—monopoly.
c. Economic Profit: The difference between business revenue and total
economic cost. This is the revenue received by a business over and
above the minimum needed to produce a good.
d. Producers Surplus: The revenue that producers obtain from selling a
good over and above the opportunity cost of production. This is the
difference between the minimum supply price that sellers would be
willing to accept and the price that is actually received.
e. Consumer Surplus is the satisfaction that consumers obtain from a
good over and above the price paid. This is the difference between the
maximum demand price that the consumer would be willing to pay
and the price that he actually pays.
The correct answer is (e).
2. Answer : (e) <
Reason :Elasticity of demand is defined as percentage change in the quantity TO
demanded due to the percentage change in the price; price elasticity of P
demand = percentage change in the quantity demanded / percentage >
change in the price of the commodity.
I. The slope of the demand curve represents the change in the price of
the good to the change in the quantity demanded of the good.
II. As one goes down the demand curve the price elasticity of demand
decreases.
III. When the demand for the good is inelastic, a fall in the price of the
good does not result in a greater increase in the quantity demanded.
Hence, there would be no increase in the total revenue of the firm.
IV. Elasticity of demand is measured by dividing the percentage change
in the quantity demanded by percentage change in the price and not
by dividing the change in quantity demanded by change in the price.
(Note: ED = Percentage change in the quantity demanded/Percentage
change in price).
The correct answer is (e).
3. Answer : (a) <
 Reason :In case of normal goods, a given increase in income results in increase of TO
demand. Normal goods can be further classified into luxury good or P
necessary goods based on the value of the income elasticity of demand. If >
the value of income elasticity is more than one, it signifies that the good is
a luxury item. Since, the value of the income elasticity of demand is not
known; we can classify the good to be normal goods.
a. In case of normal goods the quantity demanded increases/decreases
with the increase/decrease in the income levels of the consumers.
b. In case of necessities, though there would be positive change in the
quantity demanded of the good for a given change in the income, the
percentage change in the quantity demanded would be less than the
percentage change in the income. Since, we do not know the value of
the income elasticity of demand; we cannot classify the good as
luxury or necessary good.
c. Complementary goods are those which are jointly used to satisfy a
want. Cross elasticity of demand, and not income elasticity of
demand, is used to determine the relationship between the two goods.
d. In case of inferior goods percentage change in the quantity demanded
is negative with the change in the income. Hence, (d) is not the
correct answer.
e. In case of Luxury goods, the percentage change in quantity demanded
is greater than the percentage change in the income. Since, we do not
know whether the percentage change in quantity demanded is greater
than the percentage change in the income, we cannot classify the good
to be luxury good.
4. Answer : (d) <
TOP
Reason :A combination of inputs to the right of the cost line indicates that it is a >
point above the cost function which cannot be reached with the given
budget. Hence, the correct answer is (d).
5. Answer : (d) <
Reason :Perfect competition is a form of market structure which represents a TO
market without rivalry among the individual firms. When the product is P
similar and identical, given all other conditions, a perfectly competitive >
firm can only be a price taker. The price of the good is determined by the
market forces. The demand curve is horizontal to x-axis implying that the
producers can produce as much as quantity of output to the given level of
price.
a. Oligopoly is a form of market structure where there are few sellers.
The demand curve is indeterminable because of the interdependence
between the firms and it depends on the reaction curves of the
competitor.
b. Monopoly is a form of market structure where there is only one
producer of the good. The demand curve is downward sloping
 implying that the producer is a price-maker. The distinguishing
feature of this form of market structure is that the average costs of
production continually decline with increased output as a result of
which average costs of production will be lowest when a single large
firm produces the entire output demanded.
c. Monopolistic competition is a market structure where there are many
firms selling closely related but non-identical goods. The demand
curve is downward sloping because of product differentiation.
d. The demand curve in the perfect competition is horizontal to x-axis
implying that producer can produce as much as the quantity of output
for a given level of price.
e. The demand curve of a duopolist is indeterminate because of high
degree of interdependence between the firms.
Hence, the correct answer is (d).
6. Answer : (b) <
Reason :a. When marginal cost is increasing with the increase of output, average TO
returns may be increasing or decreasing. P
b. When output is increasing, average fixed costs decreases whether or >
not marginal cost is increasing or decreasing.
c. When marginal cost is increasing with the increase of output, average
variable costs may be increasing or decreasing.
d. When MC is rising, TC also increases
e. When marginal cost is increasing with the increase of output, average
costs may or may not increasing.
7. Answer : (e) <
Reason :Monopolistic competition is a type of market structure which is TO
characterized by many firms selling closely related but unidentical goods. P
The features of the monopolistic competition may be summarized as >
follows:
a. In case of monopoly, the entry is blocked.
b. In case of oligopoly, the presence of few players restricts the entry of
new firms.
c. In case of duopoly, there exist only two firms. The entry of new firms
is restricted because of actions of the two firms.
d. In case of monopoly, the entry is blocked..
e. In case of monopolistic competition, there is relatively free entry and
exit of the firms.
The correct answer is (e).
8. Answer : (c) <
Reason :The firm is said to attain break even point implies that the firm is earning TO
zero economic profit i.e., TR = TC or AR = AC. P
 a. a. It is not appropriate in this instance because it is not indicating >
break-even point but representing economic losses as total revenue is
less than total cost.
b. It is not appropriate in this instance because it is not indicating break-
even point but representing that the firm is getting economic
profits.
c. It is appropriate in this instance because when average revenue
(TR/Q) is equal to average cost (TC/Q) implies that the firm is
earning zero economic profits.
d. It is not appropriate in this instance because it is not indicating break
even point but is representing that marginal revenue is more than
marginal cost.
e. It is not appropriate in this instance because it is not indicating break
even point but is representing that marginal revenue is equal to
marginal cost.
Hence, the correct answer is (c).
9. Answer : (e) <
Reason :The vertical distance between TC and TVC shows the fixed cost of the TO
firm. P
a. The law of diminishing returns states that as more and more units of a >
variable resource are combined with a fixed amount of other
resources, employment of additional units of the variable resource
will eventually increase output only at a decreasing rate. But, it does
not reflect the vertical distance between TC and TVC.
b. AFC is given by TFC/Q.
c. MC is given by dTC/dQ or dTVC/dQ. Thus, only slope of TC and
TVC reflect the MC.
d. AVC is given by TVC/Q. It has no significance with respect to
vertical distance between TC and TVC.
e. The vertical distance between TC and TVC shows the fixed cost of
the firm.
The correct answer is (e).
10 Answer : (a) <
. Reason :Movement of the demand curve implies that the change in the price of the TO
good will lead to change in the demand for the good. For instance, fall in P
the price leads to extension in the demand curve. Similarly increase in the >
price of good leads to contraction in the demand for the good. A shift in
the demand curve is caused by a change in any non-price determinant of
demand. The curve can shift to the right or left. The factors that are
responsible for shift in the demand curve may be listed out as follows:
• Income of the consumers
• prices of other goods (substitutes or complements)
 • Tastes and preferences of consumers.
a. It is appropriate in this instance because it is not the factor that is
responsible for the shift in the demand curve but it represents the
movement along the demand curve.
b. It is not appropriate in this instance because it is one of the factors
that is responsible for shift in the demand curve.
c. It is not appropriate in this instance because it is one of the factors
that is responsible for shift in the demand curve.
d. It is not appropriate in this instance because it is one of the factors
that is responsible for shift in the demand curve.
e. It is not appropriate in this instance because it is one of the factors
that is responsible for shift in the demand curve. The correct answer is
(a).
11. Answer : (a) <
Reason :Monopolistic competition is a type of market structure characterized by TO
many firms selling closely related but un-identical goods. The features of P
the monopolistic competition may be summarized as follows: >
Features of Monopolistic competition
• Relatively large number of firms
• Differentiated products
• Some control over price in a narrow range
• Relatively easy entry and exit
a. It is appropriate in this instance because both the markets indicate
product differentiation.
b. It is not appropriate in this instance because, it is not a common
feature but one of the features of Oligopoly.
c. It is not appropriate in this instance because, it is not a common
feature but one of the features of Oligopoly.
d. It is not appropriate in this instance because, it is not a common
feature but one of the features of Oligopoly.
e. It is not appropriate in this instance because, it is not a common
feature but one of the features of Oligopoly. The correct answer is (a).
12 Answer : (c) <
. Reason :In an oligopoly market there are few sellers so that there is TO
interdependence among the sellers and the sellers are aware of it. This P
encourages them to form cartels for their mutual benefits. Oligopsony is >
a complementary form of oligopoly, where there exists a few
buyers and a large number of sellers. Cartels imply direct agreement among
competing oligopolists with the aim of reducing uncertainty. Hence,
(c) is the correct answer.
13 Answer : (c) <
. Reason :Demand for a commodity is the quantity of that commodity demanded at a TO
particular period for certain price. If a good is durable, that is if its P
purchase can be postponed, then it exhibits an elastic demand because >
consumers can postpone their purchases when they feel the price is high.
a. It is not appropriate in this instance because it indicates a situation
where the elasticity of demand or the coefficient of elasticity is equal
to zero.
b. It is not appropriate in this instance because, it is indicating that there
is no impact or consumers are not responding to the changes in the
prices of the goods and therefore the demand for that good is perfectly
inelastic and therefore the demand curve will be vertical to the X-axis.
c. It is appropriate in this instance because it is indicating a situation
where the consumers are sensitive to the changes in the prices of the
goods and therefore the demand for that good is elastic and therefore
the demand curve will be flatter.
d. It is not appropriate in this instance because it is indicating a situation
where the percentage change in the quantity demanded is equal to the
percentage change in the price and the coefficient of elasticity is equal
to one.
e. It is appropriate in this instance because it is indicating a situation
where the demand for the commodity is perfectly inelastic.
The correct answer is (c).
14 Answer : (a) <
. Reason :Long run average cost curve is a U shaped curve indicating initially there TO
exists economies of scale followed by diseconomies of scale. P
a. When AC is increasing, MC must be increasing >
b. Operation of law of diminishing marginal productivity is not the cause of the
upward rising long run average cost curve.
c. Only diseconomies of scale lead to increase in AC, while economies
of scale reduce the AC.
Hence, the correct answer is (a).
15 Answer : (e) <
. Reason : a. The supply curve of a perfectly competitive firm is that portion of TO
its marginal-cost curve lying above average variable costs. P
b. The supply curve of a perfectly competitive firm is that portion of >
its marginal-cost curve lying above average variable costs
because of unique relationship between price and quantity
supplied.
c. Supply curve will be vertical when amount quantity can be
delivered, whatever be the price. It is possible in case of
perishable goods.
d. Horizontal supply curve indicates that at a given price, any
 amount of goods can be delivered.
e. Unlike in perfect competition, there is no unique relationship between price
and quantity supplied. Hence, in case of a monopolist, the supply curve is
absent.
16 Answer : (a)
. Reason : When an entrepreneur wants to maximize the profits without affecting the price, the best
way is to reduce the average cost to its minimum possible level. When MC curve cuts AC
curve, AC will be at its minimum possible. Hence, a firm to maximize the profits,
without affecting the price should produce at a level where MC = AC.
a. When MC curve cuts AC curve, AC will be at its minimum possible.
Hence, a firm to maximize the profits, without affecting the price
should produce at a level where MC = AC.
b. It is appropriate to minimize the total average cost instead of average
variable cost.
c. MC = P signifies only equilibrium condition in a perfectly
competitive market.
d. When MC = AVC, AVC will be at minimum. It is appropriate to
minimize the total average cost instead of average variable cost.
e. It is appropriate to minimize the total average cost instead of marginal
cost to maximize profits without changing the price.
Hence, the correct answer is (a).
17 Answer : (d) <
. Reason :When the level of output changes, the total cost as well as total variable TO
costs also changes. Since there would be no fixed cost in the long run, P
AFC remains at 0 in the long run. Hence, the correct answer is (d). >
18 Answer : (d) <
. Reason :Monopolistic competition is a type of market structure which is TO
characterized by many firms selling closely related but unidentical goods. P
The features of the monopolistic competition may be summarized as >
follows:
Features of Monopolistic competition
• Many firms: There is relatively large number of firms, each satisfying
a small, but not microscopic, share of the market demand for similar,
but not identical products.
• Differentiated products: The product of each firm is not a perfect
substitute for the products of competitive firms. The product is
differentiated from any other product. A product group represents
several closely related, but not identical products that serve the same
general purpose for consumers. The sellers in each product group can
be considered competing firms within the industry.
• Some control over price in a narrow range: The firms in the market
do not consider the reactions of their rivals when choosing their
 product prices or annual sales targets.
• Relatively easy entry: Relative freedom of entry and exit of firms
exists in monopolistically competitive markets.
a. It is not appropriate in this instance because if the marginal cost
curve to the right implies increasing cost of expenditure.
b. It is not appropriate in this instance because increase in the demand
for the product will shift the marginal revenue curve to the right and
not the left.
c. It is not appropriate in this instance because with the increase in the
demand for the product average cost curve will decrease and therefore
the marginal revenue curve will not shift to the right.
d. It is appropriate in this instance because it is indicating that with
increase in the demand for the product average cost curve will move
upwards (advertising expenses) and marginal revenue will shift to
the right.
e. In anticipation of increased demand for the commodity through
advertisement it increases the average cost and therefore it is not
appropriate in this instance. The correct answer is (d).
19 Answer : (c) <
. Reason :The slope of the indifference curve is represented by the marginal rate of TO
substitution between the two goods. P
a. It is not appropriate in this instance because, marginal rate of >
substitution between two imperfect substitutes cannot be an
increasing factor, and hence the indifference curve cannot be concave.
b. It is not appropriate in this instance because, marginal rate of
substitution between two imperfect substitutes is decreasing in
accordance with the law of diminishing marginal utility and hence the
indifference curve will be convex.
c. It is appropriate in this instance because, it is representing a situation
where the products A &B are perfect substitutes. In case of perfect
substitutes, the marginal rate of substitution remains constant. Hence,
the indifference curve would be downward sloping straight line.
d. A upward sloping straight line indicates positive slope.
e. In case of perfect complementary goods, the indifference curve would
be L shaped.
The correct answer is (c).
20 Answer : (c) <
. Reason :Marginal product is the increase in the total product resulting from a unit TO
increase in the employment of a variable input. When marginal product is P
negative, TP decreases. When TP is falling and output is increasing, AP >
also starts falling.
a. TP will be maximum, when MP = 0
 b. AP will be maximum, when MP = AP
c. When marginal product is negative, TP decreases. When TP is falling
and output is increasing, AP also starts falling.
d. When MP is negative, TP falls.
e. AP cannot be negative.
The correct answer is (c).
21 Answer : (e) <
. Reason :Least-cost production implies that the producer produces a given level of TO
output where the marginal physical product to the factor price ratio is P
equal to the factor inputs. >
a. It is not appropriate in this instance because it is indicating that all
factor prices are equal indicates the demand and supply of that factor.
b. It is not appropriate in this instance because it indicates the addition to
total output by the employment of an additional unit of a factor of
production all else equal.
c. It is not appropriate in this instance because marginal physical
product is the slope of the total output curve and therefore will not
indicate the least cost production.
d. It is not appropriate in this instance because it is not indicating the
least-cost-production.
e. It is appropriate in this instance because, it is the change in the total
revenue of the firm that results from the employment of one
additional unit of a factor of production. Therefore the marginal
physical product to factor price ratio equal to the factor inputs
indicates the least-cost production.
The correct answer is (e).
22 Answer : (c) <
. Reason :The relationship between marginal product curve and average product TO
curve is such that when marginal product curve cuts average product P
curve, the average product will be at its maximum point. >
(a) Maximum point is reached when MR = MC.
(b) Total product reaches maximum when MP = 0.
(c) When MP = AP, AP will be maximum.
(d) Marginal product will be maximum, when ∂ MP/ ∂ L = 0.
(e) Marginal product will be zero, when employing of an additional labor
does not result in increase of total product.
23 Answer : (c) <
. Reason :Monopolistic competition is a market structure where there are many TO
firms selling closely related but non-identical goods. The characteristic P
features of this market are: >
 • Large number of buyers and sellers
• Differentiated products but they are close substitutes
• No barriers to entry.
The demand curve is downward sloping because of product differentiation
as the firms will have some amount of liberty in deciding the price of the
good, unlike in perfect competition.
a. It is not appropriate in this instance because it is representing the
demand curve in perfect competition.
b. It is not appropriate in this instance because it is not representing the
demand curve in monopolistic competition. A vertical demand curve
indicates that the demand is inelastic.
c. It is appropriate in this instance because it is representing the demand
curve in monopolistic competition..
d. & e. Supply curve depends on the cost functions of the firm.
Hence, the correct answer is (c).
24 Answer : (e) <
. Reason :The demand curve is horizontal to x-axis implies that the producers can TO
produce as much as quantity of output to the given level of price. P
Therefore, the producer under perfect competition is a price-taker. The >
long-run equilibrium, all the existing firms get normal profits because of
free entry and exit of firms. Hence the equilibrium condition in the long
run for a firm would be P = AR = MR = MC.
Hence, the correct answer is (e).
25 Answer : (e) <
. Reason :a. Long run average cost (LAC = LTC/Q) is U-shaped because of TO
economies of scale initially and diseconomies of scale at later stages P
of production. >
b. Long run marginal cost (LMC = ∂LTC/∂Q) is U-shaped as cost of
producing additional units reduces at the beginning because of
economies of scale, but raises later due to diseconomies of scale.
c & d. Short run average cost (SAC = STC/Q) and AVC (= TVC/Q) falls
and raises due to operation of ‘law of diminishing marginal
productivity’.
e. Average fixed cost (AFC = TFC/Q) falls at a decreasing rate with the
increase of output because of constant total fixed cost.
26 Answer : (a) <
. Reason :A curve drawn indicating the slope of the total utility curve represents the TO
marginal utility curve. MU curve closely resembles the demand curve. P
The only difference between MU curve and demand curve is that demand >
curve does not go below 0, while MU can be negative.
27 Answer : (e) <
. Reason :The kinked demand curve model is based on the assumption that when a TO
firm increase price other firms in the industry do not follow and if the firm P
decrease price other firms also decrease the price. Therefore, the answer is (e). >
28 Answer : (d) <
. Reason :Economic profit = Accounting profit – Implicit costs. TO
P
>
29 Answer : (a) <
. Reason :a. When MR = MC, the firm maximizes its profits. Thus, MR = MC TO
represents only profit maximization position. P
b. When MR = MC, price may not be at its maximum position. >
c. When MR = MC, cost may not be at its minimum position
d. When MR = MC, revenue may not be at its maximum position.
Hence, the correct answer is (a).
30 Answer : (e) <
. Reason :(a) If the demand for wheat is highly inelastic, bumper crop will lead to a TO
sharp decline in price thereby reducing farm incomes. P
>
(b) In the long run both supply and demand curves tend to be more elastic
since the responsiveness of producers and consumers to a price
change will be more in the long run than in the short run.
(c) Demand for necessities is not as responsive to price change as the
case with luxuries.
(d) If the demand is elastic, % change in Q > % change in P. For a
given increase in price, decrease in Q will be more than
proportionate to the increase in price thereby leading to decrease
in total revenue.
(e) Price effect is the sum of income and substitution effects. For a Giffen
good, the income effect is negative and more than the substitution
effect thereby leading to a direct relation between price and
quantity. If the negative income effect is less than the
substitution effect, the good is inferior but not a Giffen good..
31 Answer : (a) <
. Reason :A perfectly competitive firm cannot earn abnormal profits in the long run TO
because new firms enter into the industry and competition reduces the P
price of the good. Conversely, when the firm gets losses in the long run, it >
would move out of the industry. Thus, an existing firm only gets normal
profits in the long run. In perfect competition, normal profit is possible
only when the firm operates at its minimum average cost.
a. In perfect competition, normal profit is possible only when the firm
operates at its minimum average cost.
 b. It is not appropriate in this instance because in the long-run all inputs
are variable and there are no fixed costs.
c. It is not appropriate in this instance because marginal cost greater than
marginal revenue is not a desirable situation for a firm to continue in
the industry.
d. It is not appropriate in this instance because fixed cost lower than
total variable cost does not indicate any thing. Further, there would be
no fixed costs in the long-run.
e. It is not appropriate because P = Min. AVC only indicates shut down
point in the short run.
Hence, the correct answer is (a).
32 Answer : (a) <
. Reason :Natural monopoly is situation where the size of the market may not allow TO
the existence of more than a single large plant. In these conditions it is P
said that the market creates a natural monopoly, and it is usually the case >
that the government undertakes the production of the commodity or of the
service so as to avoid exploitation of the customers. Large scale
economies are one of the main causes of natural monopoly.
a. It is appropriate in this instance because a firm can take up the
responsibility of producing the total output of the market in a situation
when it experiences economies of scale. Economies of scale imply
reduction in the firm’s per unit costs that are associated with the use
of large plants to produce a large volume of output.
b. It is not appropriate in this instance because diminishing marginal
productivity does not guarantee formation of a natural monopoly.
c. Downward sloping demand curve only shows the inverse relationship
between price and output. It is not the cause that helps in the
formation of natural monopoly.
d. It is not appropriate in this instance because it is representing one of
the features of oligopoly.
e. Low fixed cost in fact reduces the entry barriers and helps in breaking
monopoly.
Hence, the correct answer is (a).
33 Answer : (b) <
. Reason :A firm operating in a monopolistically competitive market earns only TO
normal profits in the long run because new firms enter into the industry P
and competition reduces the price of the good. Conversely, when the firm >
gets losses in the long run, it would move out of the industry.
34 Answer : (a) <
. Reason :When there are only 11 firms in the industry, it better represents the TO
oligopoly market. P
a. The presence of 11 firms in the industry connotes the market to be an >
 oligopoly market.
b. Oligopsony refers a market with few buyers. Hence, it is not the
answer.
c. Monopolistically competitive market consists of relatively large
number of buyers and sellers. The member firms in the monopolistic
competition are not highly interdependent as in oligopoly market.
d. Perfect competition consists of large number of buyers and sellers.
e. Bilateral monopoly represents single buyer and single seller.
Hence, the correct answer is (a).
35 Answer : (c) <
. Reason : Derived demand refers to demand for goods whose demand depends on TO
the demand of other goods. Generally demand for producers’ goods like P
industrial raw materials, machine tools and equipments are derived >
demand because their demand depends on the demand of other goods. By
contrast, direct demand refers to the demand for goods meant for final
consumption; it is the demand for consumer goods like food items, ready-
made garments and houses.
a. a. Rice is a necessary good and has more of direct demand than
derived demand.
b. b. Motorcar is a luxury good and a consumer good. Hence it has
higher amount of direct demand.
c. c. Machinery is a producer good and hence has higher derived
demand than any consumer good.
d. d. & (e) Book and pen are consumer goods and have lower
derived demand than machinery
36 Answer : (a) <
. Reason :Indifference curve shows different combinations of goods that give same TO
level of satisfaction. P
I. It is appropriate because the slope of the indifference curve represents >
the marginal rate of substitution.
II. It is not appropriate in this instance because in case of substitutes the
indifference curve is a negatively sloped straight line.
III. It is not appropriate in this instance because indifference curves will
never intercept each other.
IV. It is not appropriate in this instance because indifference curves
represent higher level of satisfaction and not the higher level of
output.
Hence, the correct answer is (a).
37 Answer : (e) <
. Reason :When a specific tax is imposed, the burden of tax would be shared TO
between buyer and seller based on their elasticities. If the elasticity of P
 demand is higher than the elasticity of supply, the supplier would borne >
more tax burden. In fact, who ever is more inelastic will bear more
amount of tax.
a. It is not appropriate in this instance because it is not indicating
increase in the price of a good due to increase in the demand for the
good.
b. It is not appropriate in this instance because it is indicating an
inelastic supply of good. When the price elasticity of supply is
inelastic, ceteris paribus, the supplier would bear more tax burden
than the consumer.
c. The price elasticity of demand is low in case of necessary goods, but
since we do not know the price elasticity of supply, we cannot be
precisely say who will share higher tax burden.
d. It is not appropriate in this instance because it is indicating a
relationship between total utility and total cost, and not the price
elasticity.
e. Since the buyer is more inelastic, the consumer would share more tax
burden.
Hence, the correct answer is (e)
38 Answer : (c) <
. Reason :a. Dead weight loss refers to the loss to the society because of increase TO
in the price of the good. P
b. When the producer follows first degree price discrimination, there >
exists no deadweight loss because price = willingness price of the
consumer.
c. First degree price discrimination is possible in a monopolistically competitive
market.
d. A price discriminating monopolist charges a lesser price in a market
where there are close substitutes because the demand for the good
would be more elastic.
Hence, the correct answer is (c).
39 Answer : (c) <
. Reason :Monopoly is a market structure in which there is one seller of the product TO
implying that the producer has complete control over market supply of the P
commodity. The monopolist must decrease the price he receives for every >
unit in order to sell an additional unit. Hence, the marginal revenue of the
monopolist would be lesser than price. Hence, the correct answer is (c).
40 Answer : (c) <
. Reason :In case on increasing cost industry as market demand increases, new firms TO
enter into the industry, and the prices of the factors of production P
increases. As a result, the long run average cost curve of all the firms, >
including the new firms shifts upward. The new equilibrium will now be
 achieved only at a higher price. However all firms earn normal profit at a
higher price. Since the long run average cost curve has now shifted in the
upward direction, the long run supply curve of the industry is upward
sloping.
a. It is not appropriate in this instance because it is indicating the supply
curve of constant cost industry.
b. It is not appropriate in this instance because it is not indicating supply
curve of a perfectly competitive industry.
c. It is appropriate because it is representing the supply curve of
increasing cost industry.
d. It is not appropriate in this instance because it is representing the
supply curve of the decreasing cost industry.
e. The supply curve is not absent in the long run.
Hence, the correct answer is (c).
41 Answer : (c) <
. Reason :AC = 100/Q + 20 + 4Q TO
TC = 100 + 20Q + 4Q2 P
>
TVC = 20Q + 4Q2
At output 15, TVC = 20(15) + 4(15)2
= 300 + 900 =Rs. 1200
42 Answer : (d) <
. Reason :The MRTS is equal to the ratio of the marginal productivities of the two TO
products – MPL/MPK P
6K0.3L-0.7/6K-0.7L0.3 >
K0.3L-0.7/K-0.7L0.3
K/L
43 Answer : (a) <
. Reason :Price- elasticity of demand = ∆Q/∆P × P/Q = (200 – 300)/(20 – 12) × TO
12/300 = –0.5 P
>
44 Answer : (e) <
. Reason :All the cost functions represent short run since we have fixed cost TO
components in all the cost functions. P
>
45 Answer : (b) <
. Reason :Profit maximizing output is determined where MR = MC. TO
MR= 400 – Q P
>
MC = 70 + 2Q
∴400 – Q = 70 + 2Q
 – 3Q = – 330
Q = 110 units.
46 Answer : (b) <
. Reason :When tax is imposed, buyer and seller share the tax based on the opposite TO
ratios of their elasticities. Thus, P
Ed = -80P/Q >
Es = 40P/Q
Ratio of Es: Ed = 1: 2
Burden on consumer = 12 x 1/3 = 4
Earlier equilibrium price: 5,800 – 80P = 1,000 + 40P
4800 = 120P
P = 40
Thus, new price = 40 + 4 = Rs.44.
47 Answer : (b) <
. Reason :Efficient allocation of L & K: TO
MPL/w = MPK/r P
>
0.75K0.75/(L0.25 × 8) = 0.75L0.75/(K0.25 × 5)
5K = 8L
Or, L = 5/8K.
48 Answer : (e) <
. Reason :A firm earns normal profits, when TR = TC TO
P
TR = P × Q = 30Q – 3Q2
>
TC = 6Q
30Q – 3Q2 = 6Q
24Q = 3Q2
Or, Q = 8 units.
49 Answer : (b) <
. Reason :The four firm concentration ratio for the construction company in TO
Hyderabad city = sale of flats of popular 4 construction companies/ total P
sale of flats by the construction companies in the Hyderabad city. >
(580 + 500 + 450 + 300)/ (500 + 300 + 450 + 120 + 100 + 80 + 125 +
580)
1830/2255 = 0.811.
50 Answer : (b) <
. Reason :APL= 30L – L2 TO
P
TPL = APL × L = 30L2 – L3
>
TPL can be maximized when MPL = 0
 Therefore, ∂ TPL / ∂ L = 60L – 3L2 = 0
L (60 – 3L) = 0
L =0 or L = 20.
∴Output can be maximized by employing 20 labors.
∴ Maximum possible TPL = 30(20)2 – (20)3 = 12,000 – 8,000 = 4,000
units.
51 Answer : (d) <
. Reason :Each firm would maximize profit by equating MC and price. TO
Cost function for a firm located at Chennai P
>
Cc = 100 + Qc2 + 12Qc
MCc = 2Qc + 12
Cost function for a firm located at Hosur
Ch = 100 + Qh2 + 8Qh
MCh = 2Qh + 8
To maximize profits, P = MC
Thus, P = MCc = 2Qc + 12 or, Qc = 0.5P – 6
P = MCh = 2Qh + 8 or, Qh = 0.5P – 4
Industry supply, Qs = 50Qc + 100Qh (50 firms in Chennai and 100 firms
in Hosur)
Qs = 50(0.5P – 6) + 100(0.5P – 4)
Qs = 25P – 300 + 50P – 400 = 75P – 700
At equilibrium, Qd = Qs
75P – 700 = 2020 – 10P
85P = 2720
Or, P = 32.
Or, Q = 2020 – 10(32) = 1700 units.
52 Answer : (b) <
. Reason :At equilibrium, MR1 = MC and MR2 = MC TO
P = 1000 – Q1 – Q2 P
>
TR1 = (1000 – Q1 – Q2) Q1 = 1000Q1 – Q12 – Q1Q2
MR1 = 1000 – 2Q1 – Q2
Similarly,
MR2 = 1000 – 2Q2 – Q1
At equilibrium, 1000 – 2Q1 – Q2 = 25
1000 – 2Q2 – Q1 = 25
Or,
1000 – 2Q1 – Q2 = 25
2000 – 2Q1 – 4Q2 = 50
 (–) (–) (–)
________________________
–1000 + 3Q2 = –25
Or, 3Q2 = 975
Or, Q2 = 325
Thus, Q1 = 325
Thus, Q = Q1 + Q2 = 325 × 2 = 650 units.
53 Answer : (b) <
. Reason : Qn = Qp{n/(n + 1)} TO
P
= 2100 x 2/3 = 1400 units.
>
54 Answer : (a) <
. Reason :AC = Q2 – 40Q – 480 TO
dAC/dQ = 2Q – 40 = 0 P
>
2Q = 40
Or, Q = 20 units.
55 Answer : (a) <
. Reason : TO
P
When L, K and When L, K and R Nature of returns to
R =1 =2 scale >
262 274 Decreasing returns to
scale
100 200 Constant returns to
scale
1 2 Constant returns to
scale
56 Answer : (b) <
. Reason :10P = 100 – Q TO
Or, P = 10 – 0.1Q P
>
TR = 10Q – 0.1Q2
MR = ∂TR/∂Q = 10 – 0.2Q = 4
Or, 0.2Q = 6
Or, Q = 30
When Q = 30, P = 10 – 0.1(3) = 7.
When P = 7,
Elasticity of demand = ∂Q/∂P × P/Q = –10 × 7/30 = (2.33)
57 Answer : (c) <
. Reason :TR = P × Q TO
P
Or, (50 – 0.5Q) Q
 Or, 50Q – 0.5Q2 >
Thus, profit at output 12 units is 50 × 12 – 0.5 × 12 × 12 – 50 – 2 × 12 =
454.
58 Answer : (a) <
. 2
Reason :d∏/dQ = Q – 10Q + 24 = 0 TO
P
Or, Q = 6 or 4
>
Since booth the values are positive, we need to check for the second order
condition for maximizing profits,
d2∏/dQ2 = 2Q - 10
If Q = 6, d2∏/dQ2 > 0
If Q = 4, d2∏/dQ2 < 0
Therefore, profit maximizing output is 4.
59 Answer : (c) <
. Reason :The consumer would consume the good up to a point where MU = P. TO
TU = 12X1.5 P
>
MU = 18X0.5 = 63
X0.5 = 3.5
Or, X = 12.25
60 Answer : (d) <
. Reason :Q = 10,000 – 1500(5) + 2(5000) + 200(8) TO
= 21,600 – 7,500 P
>
= 14,100
Income elasticity of demand: dQ/dY × Y/Q = 2 × 5000/14100 = 0.709.
61 Answer : (b) <
. Reason :Slope of the budget is equal to Px/Py = 4/6 = 0.6666. TO
P
>
62 Answer : (c) <
. Reason :Average variable cost = (3500 – 2500)/(250 – 200) = 20 TO
P
Fixed cost = 12500 – 200 × 20 = 8,500
>
Or,
Fixed cost = 13500 – 250 × 20 =Rs. 8,500.
63 Answer : (a) <
. Reason :The maximum product rule is given by MPL/w = MPK/r. This equation TO
stands true only when the firm employs 3 units of labor and 4 units of P
capital. Budget: 12 × 3 + 6 × 4 >
= Rs.60.
64 Answer : (d) <
. Reason :Q = 250L 0.5 TO
To maximize profits, the firm should hire labor until MRPL = wage, where P
>
MRPL = MPL × MR = 125/L0.5 × 2
250/L0.5 = 25
Or, 10 = L0.5
Or, L = 100 units.
65 Answer : (a) <
. Reason :Price effect = Income effect + Substitution effect TO
P
1000 = 900 + Substitution effect
>
Thus, substitution effect = 100.
66 Answer : (c) <
. Reason : When Q = 4, MC = 12Q – 4 = 12(4) – 4 = 44. TO
P
>
67 Answer : (d) <
. Reason :Opportunity cost of an hour of coaching for Sachin Tendulkar is equal to TO
the best opportunity forgone because of coaching i.e. acting Rs.30,000. P
>
68 Answer : (e) <
. Reason :At equilibrium, Qs = Qd TO
400 + 15P = 600 – 10P P
>
25P = 200
Or, P = 8
Since, price ceiling is above the equilibrium price of Rs.8, there would not
have any affect on demand and supply of the good.
69 Answer : (c) <
. Reason :MUx/Px = MUy/Py TO
300/12 = MUy/30 P
>
9000/12 = 750.
70 Answer : (b) <
. Reason :The equilibrium output in the long run is determined where P=AC TO
Note that when MC is constant at Rs.10, AC would also be Rs.10. P
>
1,000 – Q =10
Q = 1000 – 10 = 990 units.

71 Answer : (d) <

. Reason :When price is Rs.75, demand is 10 units TO
P
 When price is Rs.70, demand is 12 units >
If the demand is linear, then Q = a + bP
Where, b = Change in quantity demanded/Change in price = (12 –
10)/(70 – 75) = 2/(-5) = -0.4. Thus, Q = a – 0.4P
At Rs.75, 10 = a – 0.4(75)
Or, a = 40
Thus, demand function = Q = 40 – 0.4P
The maximum quantity can be demanded when the price is zero.
Hence, maximum quantity demanded = 40 – 0.4(0) = 40 units.

72 Answer : (d) <

. Reason :The profit maximizing output can be determined when MR = MC. TO
In market X, P
>
TR = 20 QX – 0.01Q2X
∴ MR = 20 – 0.02QX
∴ Profit maximizing output can be determined when MR = MC.
20 – 0.02QX = 6
QX = 700
When QX = 700, PX = 20 – 0.01(700) = Rs.13.
In market Y,
TR = 32QY – 0.02Q2Y
∴ MR = 32 – 0.04QY
∴ Profit maximizing output can be determined when MR = MC.
32– 0.04QY = 6
QY = 650
When QY = 650, PY = 32 – 0.02(650) = Rs.19.
73 Answer : (b) <
. Reason : Q = 50K0.5 L0.5 TO
K = 4L P
>
∴ Q = 50(4L) 0.5 L0.5
2000 = 50 x 2L
Or, L= 20
Hence, K = 20 x 4 = 80.
74 Answer : (b) <
. Reason :The minimum price below which the firm is shut down its operation is the TO
minimum average variable cost. P
The average variable cost will be equal to price or marginal revenue at the >
minimum point on average variable cost curve.
 ∴MC = AVC.
75 – 20Q + 1.5Q2 = 75 – 10Q + 0.5Q2
1.5Q2 – 0.5Q2 – 20Q + 10Q = 0.
Q2 –10Q = 0
Q(Q–10) = 0
Q=10.
At Q = 10, AVC = 75 – 10(10) + 0.5 (10)2
= 75 – 100 +50 = Rs.25.
75 Answer : (b) <
. Reason :Budget =Px x Qx + Py x Qy = 0 + 2Qy = 20 TO
P
>
76 Answer : (b) <
. Reason :Marginal cost = Change in the total cost as a result of producing one TO
additional unit of output. Thus, marginal cost of producing third unit is P
equal to total cost of producing three units ‘minus’ total cost of producing >
two units = 190 – 150 =Rs. 40.
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