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Posted By: Kenny Member Level: Gold Posted Date: 21 May 2008
|
2006 ICFAI University M.B.A Suggested Answers Economics – I (MB141): April 2006 Question paper
Suggested Answers Economics – I (MB141): April 2006
1. Answer : (a)
Reason : Break even point by definition is the point where the total revenue equals total cost. < TOP >
2. Answer : (a)
Reason : MRSXY = . < TOP >
3. Answer : (e)
Reason : a. Long run average cost (LAC = LTC/Q) is U-shaped because of economies of scale initially and diseconomies of scale at later stages 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. < TOP >
4. Answer : (c)
Reason : TC = 250 + 200 Q – 10 Q2 +2 Q3
Shut down price is the price where AVC is minimum
i.e AVC = MC;
MC = 200 – 20 Q + 6Q2 ;
AVC = = 200 – 10 Q +2 Q2 ;
AVC = MC
or 200 – 20Q + 6Q 2 = 200 – 10Q + 2Q 2
or Q = 2.5 units; AVC = 200 – 10(2.5) + 2(6.25) = 187.5. < TOP >
5. Answer : (b)
Reason : Here the formula to be used is MUx/PX = MUy/Py
That gives 175/25 = MUy/40 or MUy = 280
Is the correct answer
Hence the correct answer is (b). < TOP >
6. Answer : (d)
Reason : Marginal Utility is change in Total Utility when additional unit of the good is consumed. If MU is negative, Total Utility will be decreasing.
a. As long as marginal utility is positive, total utility will be increasing.
b. Total utility will be at its minimum point when marginal utility is zero and the derivative of marginal utility (second derivative of total utility) is positive.
c. Total utility will be at its maximum point when marginal utility is zero and the derivative of marginal utility (second derivative of total utility) is negative.
d. When marginal utility falls below zero, the total utility starts falling. Hence (d) is the answer.
e. Marginal utility can be negative; which implies that a consumer is deriving negative satisfaction by consuming one additional unit. < TOP >
7. Answer : (d)
Reason : When price is Rs.75, demand is 10 units
When price is Rs.70, demand is 12 units
If the demand is linear, then Q = a + bP < TOP >
12
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.
8. Answer : (e)
Reason : a. The supply curve of a perfectly competitive firm is that portion of its marginal-cost curve lying above average variable costs.
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. < TOP >
9. Answer : (d)
Reason : The monopolist is able to make profits if he charges a high price in the inelastic regions and low price in the elastic regions. This is because if he increases the price in the in the elastic region, the demand will not fall and if he lowers the price I the elastic region, the demand will increase more than the fall in price. < TOP >
10 Answer : (c)
Reason : Long run average cost curve (LAC)
I, II and IV are true and hence the answer is (c). < TOP >
11. Answer : (d)
Reason : I. Q = K1/2 + L1/2
When K = 1 and L = 1, Q = (1)1/2 + (1)1/2 = 2
When K = 2 and L = 2, Q = (2)1/2 + (2)1/2 = 2.82
When inputs are doubled, output are less than doubled. It is a case for decreasing returns to scale.
II. Q = 2K + 3L
When K = 1 and L = 1, Q = 2 + 3 = 5
When K = 2 and L = 2, Q = 4 + 6 = 10
When inputs are doubled, output are also doubled.
? It is a case of constant return to scale.
III. Q = 3K1/2 L1/2
When K = 1 and L = 1, Q = 3 (1)1/2 (1)1/2 = 3
When K = 2 and L = 2, Q = 3 (2)1/2 (2)1/2 = 6
? It is a constant return to scale. < TOP >
13
IV. Q = K1/2 L2/3
When K = 1 and L = 1, Q = (1)1/2. (1)2/3 = 1 × 1 = 1
When K = 2 and L = 2, Q = (2)1/2 (2)2/3 = 1.41 × 1.58 = 2.23
? It is an increasing return to scale.
Hence, the answer is (d).
12. Answer : (d)
Reason : Marginal costs are addition to total costs by an additional unit of output. They depend on the level of output
Hence the correct answer is (d). < TOP >
13. Answer : (b)
Reason : Given, P = 10,000 – 20Q
TC =300,000 + 2197Q –20Q2 + Q3
TR = P.Q = 100,00Q – 20Q2
MR =10,000 –40Q
MC = 2,197 – 40Q +3Q2
MR = MC gives
10,000 – 40Q = 2,197 – 40Q + 3Q2
or 7803 = 3Q2
Q 2 = 2601 which gives Q = = 51
Hence the correct answer is 51 units. < TOP >
14. Answer : (c)
Reason : The slope of the isoquant represents the Marginal Rate of Technical Substitution (MRTS) between labor (L) and capital (K). MRTS is equal to the ratio of the marginal productivities of two factors.
a. The slope of the isocost curve represents ratio of wages (w) and interest (r).
b. The slope of the indifference curve signifies marginal rate of substitution of goods (MRS).
c. The slope of the isoquant curve signifies the marginal rate of technical substitution (MRTS) between labor and capital.
d. The slope of the budget line represents ratio of price of good X and good Y.
e. The slope of the average cost curve only shows the rate of change in average cost curve with respect change in output. < TOP >
15. Answer : (c)
Reason : (a) True. Indifference curve is various combinations of two goods which give the same level of total utility
(b) True. Total utility is the sum of marginal utilities of all the goods consumed.
(c) False. When price of a product increases demand for the product decreases. As complimentary goods are consumed together, demand for the compliment also decreases.
(d) True. Utility is subjective and varies from individual to individual and from time to time for the same individual, hence cannot be measured precisely.
(e) True. Consumer surplus is the difference between what the consumer is willing to pay and what he actually pays. Economic value is the market value of a good. < TOP >
16. Answer : (c)
Reason : Diseconomies of scale refer to the forces causing the average cost of production to increase as the output increases. Therefore the answer is (c). < TOP >
17. Answer : (d)
Reason : I. It is true that if the firm reduces the price, competitive firms also reduce the price
II. It is a false statement that if the firm increases the price, competitive firms also increase the price
III. It is a false statement that if the firm reduces the price, competitive firms do not reduce < TOP >
14
the price
IV. It is true that if the firm increases the price, competitive firms do not increase the price.
(a) Is not the answer because I above is true and II above is not true in a kinked demand curve model of oligopoly.
(b) Is the answer because (I) and (IV) above are true in a kinked demand curve model of oligopoly.
(c) Is not the answer because (II) above is not true, while (IV) above is true in a kinked demand curve model of oligopoly.
(d) Is not the answer because (II) and (III) above are not true in a kinked demand curve model of oligopoly.
(e) Is not the answer because only (I) above does not reflect the behavior of a kinked demand curve model of oligopoly.
18. Answer : (a)
Reason : When price discrimination is not practiced by the monopolist,
PK = PA.
PK = 40 – 2.QK
2.QK = 40 – PK :
QK = 20 – 0.5PK;
PA = 100 – 10QA;
10QA = 100 – PA;QA = 10 – 0.1PA
Total output sold by the monopolist = Q = QA + QK
Thus, Q = 20 – 0.5PK + 10 – 0.1PA;
Q = 30 – 0.6P;
TR = P x Q = P(30 – 0.6P) = 30P – 0.6P2
Maximum TR: TR/?Q = 0;
30 – 1.2P = 0
Or, P = 25
When P = 25, Q = 30 – 0.6(25) = 15 units. < TOP >
19. Answer : (e)
Reason : The profit of a firm refers to the difference between total revenue and total cost. Hence, to maximize the profits, the firm should maximize the difference between total revenue and total cost. The difference between average revenue (AR) and average cost (AC) represents the average profit of the firm. Hence maximization of difference between average revenue and average cost also indicates profit maximization. A firm maximizes its profit when it produces and sells an output at which marginal revenue (MR) is equal to marginal cost (MC). < TOP >
20. Answer : (c)
Reason : A monopolist maximizes its profits when MR = MC.
TR = 3,200Q – 40Q2
MR = 3,200 – 80Q
MR = MC
3200 – 80Q = 80
80Q = 3120
Q = 39 units. < TOP >
21. Answer : (c)
Reason : % Change in total revenue = % Change in quantity + % Change in price. With law of demand in operation, the percentage change in total revenue will be positive (negative) if the percentage change in quantity sold is more (less) than the percentage change in price.
(a) If the demand for a productis unit elastic, any given percentage change in the price will resulting an equal but opposite percentage in quantity demanded. The net effect would be no change in total revenue because the downward force would exactly offset the upward force on revenue. < TOP >
15
(b) Suppose the demand for a product is inelastic, the percentage increase in quantity demanded caused by price cut would be smaller than the percentage fall in price that caused it. Under such circumstances, the upward influence on the price cut on revenue would be stronger than the effect of the increase in quantity demanded on revenue.
(c) Suppose the demand for a product is elastic, the percentage increase in quantity demanded caused by price cut would be larger than the percentage fall in price thatcaused it. Under such circumstances, the depressing effect of the price cut on revenue would be lower than the effect of the increase in quantity demanded on revenue and hence the revenue will increase.
(d) A horizontal demand curve represents the perfectly elasticity of demand for the good. It also implies that the firm can sell any amount of good at a given price. When at given price he can sell whatever quantity he wants, he finds no incentive to reduce the price of the good. Hence, (d) is not correct.
(e) If the demand for a product is inelastic, then the percentage increase in quantity demanded caused by price cut would be zero. Under such circumstances, it is advisable to increase/maintain the price at the same level than to lower the price.
22. Answer : (b)
Reason : In the long run if a firm earns abnormal profits, new firms will enter the industry. If the existing firms get losses, the firms leave the industry. So, in the long run, a perfectly competitive firm earns only normal profit because of free entry and exit of firms in the industry. So (b) is the correct answer. < TOP >
23. Answer : (e)
Reason : (a) Is not the answer because it is a false statement that elasticity remains constant throughout the demand curve. Elasticity takes different values at different point on the demand curve.
(b) Is not the answer because it is a false statement that elasticity increases with increase in quantity demanded.
(c) Is not the answer because it is a false statement that elasticity increases as the price decreases.
(d) Is not the answer because it is a false statement that elasticity is equal to the slope of the demand curve. If the demand function is represented by P = f (Q), then the slope of the demand curve is given by ?P/ ?Q and its elasticity is given by ep = P/Q. ?Q/ ?P.
(e) Is the answer because higherthe elasticity, more responsive the demand is for a given change in price. Higher the elasticity, higher is the percentage in quantity demanded than the percentage change in price. < TOP >
24. Answer : (e)
Reason : Qs = 1000P + 500
Qd = 5000 – 500p
? The equilibrium price can be determined by equating
Qs = Qd
? 1000p + 500 = 5000 – 500p
or, 1500p = 4500
or, P = 3 = MR.
Variable cost of the firm is given as 103Q – 0.5Q2
? MC = 103 – Q
? Probit maximizing output for the firm is determined where,
MR = MC
or, 3 = 103 – Q
or, Q = 103 – 3 = 100. < TOP >
25. Answer : (e)
Reason : Consumer surplus is the difference between the willingness price and actual price for a consumer.
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 < TOP >
16
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).
26. Answer : (c)
Reason : A rational consumer would consume upto the point where the Marginal utility = price
Marginal utility is given by Derivative of total utility i.e. 18X 0.5
Given 15X 0.5 = 60 or x 0.5 = 4 or X = 16
Hence the correct answer is (c). < TOP >
27. Answer : (d)
Reason : Perfect competition is a form of market structure which represents a market without rivalry among the individual firms. When the product is 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). < TOP >
28. Answer : (a)
Reason : The firm operating in a perfectly competitive industry earns only normal profits in the long run because of free entry and exit of the firms. The firm operating at its minimum average cost can only prevail in the market. Thus, the equilibrium condition in the long run is when the firm is operating at Min. LAC.
If AC = 50 - 625Q + 25Q2 LTC = 50Q - 625Q2 + 25Q3
LMC = = 50 – 1250Q + 75Q2
LAC is minimum, when LMC =LAC
Thus, 50 - 1250Q + 75Q2 = 50 - 625Q + 25Q2
Or, 625Q = 50Q2
Or, 50Q = 625
Or, Q = 12.5. < TOP >
29. Answer : (e) < TOP >
17
Reason : When a specific tax is imposed, the burden of tax would be shared between buyer and seller based on their elasticities. If the elasticity of 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).
30. Answer : (b)
Reason : AC = 500/Q + 10 + 5Q + 25Q2
TC = 500 + 10Q + 5Q2 + 25Q3; where, 500 = fixed cost and 10Q + 5Q2 + 25Q3 = TVC. < TOP >
31. Answer : (b)
Reason : APL= 60L – L2
TPL = APL × L = 60L2 – L3
TPL can be maximized when MPL = 0
Therefore, ? TPL / ? L = 120L – 3L2 = 0
L (120 – 3L) = 0
L =0 or L = 40.
?Output can be maximized by employing 40 labors.
? Maximum possible TPL = 60(40)2 – (40)3 = 96,000 – 64,000 = 32,000 units. < TOP >
32. Answer : (c)
Reason : A rational firm always employs labor up to the point when the marginal product of labor is zero. If the firm employs beyond that point, it reduces the efficiency of the fixed factors, which results in a fall in the total product instead of rising.
(a) Is not the answer because a rational firm will employ labor when the average product of labor is equal to marginal product of labor.
(b) Is not the answer because a rational firm will employ labor when the marginal product of labor is maximum.
(c) Is the answer because no rational firm would employ labor when the marginal product of labor is zero.
(d) Is not the answer because when the labor is zero, the total product of labor will be zero.
(e) Is not the answer because when the labor is zero, the average product of labor will be zero. < TOP >
33. Answer : (d)
Reason : Mr. Raj could have earned Rs.700/hr by consulting. If he choose acting instead, the best alternative foregone is consulting. Hence the opportunity cost of acting is Rs.700/hr. < TOP >
34. Answer : (c)
Reason : Monopolistic competition is a market structure where there are many firms selling closely related but non-identical goods. The characteristic 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. < TOP >
18
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).
35. Answer : (c)
Reason : Average productivity = < TOP >
36. Answer : (a)
Reason : Movement of the demand curve implies that the change in the price of the good will lead to change in the demand for the good. For instance, fall in 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). < TOP >
37. Answer : (d)
Reason : The marginal cost of production equals the reciprocal of the marginal product of a variable factor multiplied by the price of that factor here, the marginal cost of production s given by (1/50) ×200 = 4
Hence the correct answer is (d). < TOP >
38. Answer : (c)
Reason : Demand for a commodity is the quantity of that commodity demanded at a particular period for certain price. If a good is durable, that is if its 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. < TOP >
19
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).
39. Answer : (c)
Reason : At equilibrium, Qs = Qd
1000 – 200P = 800P – 2000
3000 = 1000P
P = 3.
Elasticity of supply = Q/P x P/Q = 800 x 3/400 = 6. ?
Hence the correct answer is (c). < TOP >
40. Answer : (b)
Reason : The shape of a short run total product curve reflects the operation of the law of diminishing returns. < TOP >
41. Answer : (d)
Reason : AFC = TFC/Q
Average Fixed Cost of Producing 4 units
= 100/4 =Rs.25. < TOP >
42. Answer: (c)
Reason: To maximize profits, a perfectly competitive firm produces an output where P = MC
MC = ?TC/?Q = 300 – 80Q + 3Q2
P = 300 – 80Q + 3Q2, where Q = 50 units (given)Hence, P = 300 – 80(50) + 3(50)2 = 300 –4000 + 7500 = 3800
Thus, total industrial production is equal to (100 + 2 x 3800) = 7700. < TOP >
43. Answer : (d)
Reason : (a) True. Under first degree price discrimination, the monopolist charges the maximum possible price for each unit of output. That is, the consumer actually pays the price what he is willing to pay. Hence, the monopolist would extract the entire consumer’s surplus.
(b) True. Since each unit is charged the maximum possible price, price for each unit will be different.
(c) True. As the monopolist is extracting the entire consumer surplus, profit of the discriminating monopolist would be more than the monopolist charging a single price.
(d) False. Since each unit is charged the maximum possible price, price for each unit will be different and subsequent units are charged less and less price.
(e) True. Under first degree price discrimination, the monopolist charges the maximum possible price for each unit of output. Hence it is also called perfect price discrimination. < TOP >
44. Answer : (e)
Reason : (a) True. MRS is
(b) True. For perfectly substitutable goods the MRS is constant and the indifference curve si a straight line.
(c) True. At any point slope of an indifference curve is MRS at that point
(d) True. MRS is nothing but the rate at which goods can be substituted keeping the utility constant.
(e) False. Only at equilibrium MRS is equal to the price ratio of the goods. < TOP >
45. Answer : (d)
Reason : : 100 – P = - 20 + 3P
or P = Rs.30
Q = 100 – P = 100 – 30 = 70 units. < TOP >
46. Answer : (d) < TOP >
20
Reason : The assumption of supply of factors of production is inelastic is not an assumption of marginal productivity theory.
47. Answer : (c)
Reason : TR = P × Q
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. < TOP >
48. Answer : (e)
Reason : Full employment, demand for capital only for productive uses, disregard for monetary factors and fixed income level are the limitations of the classical theory of interest rate. < TOP >
49. Answer : (b)
Reason: Equilibrium price = Rs.120
Being a perfectly competitive market, MR = price = 120
MC = 20 + 10Q;
Equating MC and MR, we get 120 = 20 + 10Q or Q = 10 units. < TOP >
50. Answer : (e)
Reason : According to Clark, the dynamics in demand and supply conditionscould be a result of changes in quality and quantity of human wants, changes in governmental rules and regulations regarding trade, changes in technology that effect the production process, rise in population and adjustment with regard to amount of capital stock in the economy. < TOP >
51. Answer : (d)
Reason : LTC = Q3 – 40Q2 + 450Q
LAC = = Q2 – 40Q + 450
LAC will be minimum, where
Or,
or, 2Q – 40 = 0
or, 2Q = 40
or, Q =
When Q = 20, LAC = (20)2 – 40 (20) + 450
= 400 – 800 + 450
= 50. < TOP >
52. Answer : (e)
Reason : Non-insurable risks given by Knight are risk of competition, risk arising out of changes in technology, market conditions risk and government policy risk. < TOP >
53. Answer : (e)
Reason : Time series analysis is divided into four categories such as Trends, Seasonal variations, Cyclical variations and Random fluctuations. < TOP >
54. Answer : (e)
Reason : TC = 500 + 5Q
VC = 5Q; FC = 500
AVC = = 5
BEP = = = 250 < TOP >
21
? BE Sales revenue = 250 x 7
= Rs.1750.
55. Answer : (c)
Reason : Qualitative techniques for demand forecasting are Expert opinion, Survey and Market experiments. < TOP >
56. Answer : (e)
Reason : Land, labor, capital and organization are called the four factor of production. < TOP >
57. Answer : (b)
Reason : Cartels are aimed at increasing profits. But for any individual firm the incentive of huge profits by breaking away from or cheating the Cartel and charging a price less than the Cartel price make Cartels unstable.
a. Cartels tend to maximize profits by avoiding competition.
b. Cartels agreements tend to be unstable because the member firms wants to maximize their profits by cheating on the agreement.
c. When the number of firms increases cartel become unstable, but it does not mean that they are unnecessary.
d. It is true that cutting output and raising prices benefit each firm in the cartel. But this will not lead to instability of cartels.
e. Not all cartels are legally restricted. < TOP >
58. Answer : (b)
Reason : When tax is imposed, buyer and seller share the tax based on the opposite ratios of their elasticities. Thus,
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. < TOP >
59. Answer : (d)
Reason : A monopolistically competitive industry is characterized by ‘excess supply’. A monopolistic firm can reduce its average cost if it produces a higher output, but it produces an output just equal to average cost curve in the long run because of its downward sloping demand curve.
a. Although there is relative no entry barriers in monopolistically competitive industry, this will not result in market efficiency.
b. A monopolistically competitive firm produces an output where LMC = LAC, but it does not produce at minimum average total cost.
c. Presence of normal profits may not result in market efficiency.
d. A monopolistic firm can reduce its average cost if it produces a higher output, but it produces an output just equal to average cost curve in the long run because of its downward sloping demand curve. Hence, the market is not efficient because the equilibrium output is less than the optimum output.
e. In a monopolistically competitive market, equilibrium output is less than the optimum output. Hence the statement is not correct. < TOP >
60. Answer : (e)
Reason : The supply function can be represented by
Q = a + bP : differentiating w.r.t P we get
?Q/? P = b
When price changes from 50 –100,?P = 50 and ?Q is 25 (from the question)
So b = 25/50 = 0.5 < TOP >
22
When P is 50, Q is 25
So, we get 25 = a+(0.5×50)
Or a = 0
Therefore the supply function is Q = 0.5P. So (e) is the answer
Hence the correct answer is (e).
61. Answer : (a)
Reason : When there are only 11 firms in the industry, it better represents the oligopoly market.
(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). < TOP >
62. Answer : (a)
Reason : The average cost is given by TC/Q or Q 2 – 20Q – 240;
MC is given by derivative of TC or 3Q 2 –40Q – 240.
AC is minimum when AC =MC
or Q 2 – 20Q –240 = 3Q2 –40Q-240
or 2Q = 20
or Q = = 10
Hence the correct answer is (a). < TOP >
63. Answer : (c)
Reason : The relationship between marginal product curve and average product curve is such that when marginal product curve cuts average product 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. < TOP >
64. Answer : (b)
Reason : Elasticity of demand = % change in Gd / % change in price. So % change in price = % change in quantity demanded / elasticity of demand = 5/-2.5 = -2, i.e., a 2% decrease in price. < TOP >
65. Answer : (c)
Reason : In the third stage of the production function Marginal Productivity (MP) is negative and decreasing.
a. False. As MP is negative, slope of the total product curve is negative and decreasing.
b. False. Slope of the MP curve is negative as MP decreasing
c. True. In the first stage MP>AP. Inthe second stage MP0. In the third stage MPd. False. As MP<0, total productivity decreases in the third stage.
e. False. MP is negative in the third stage. < TOP >
66. Answer : (c)
Reason : A large economy of scale leading to existence of a single firm in an industry is defined as a natural monopoly. Government regulation, ownership of critical raw materials and licenses < TOP >
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are sources of monopoly, but not result in natural monopoly.
67. Answer : (c)
Reason : The average variable cost curve is U shaped reflecting the law of diminishing returns. AVC= w / AP where W is the price of the variable factor and AP is the average product of the variable factor. Since W is assumed constant, it follows that average variable cost is the mirror image of the average product curve. < TOP >
68. Answer : (b)
Reason : (a) True. In perfect competition there are many sellers and buyers
(b) Not true. In perfect competition firms do not have any price making power as there are many sellers and the product is homogeneous.
(c) True. In perfect competition productsold by all the firms is assumed to be homogeneous.
(d) True. In perfect competition entry and exit of firms is free.
(e) True. In perfect competition buyers and sellers have access unlimited information. < TOP >
69. Answer : (d)
Reason : Economic profit = Accounting profit – Implicit costs. < TOP >
70. Answer : (c)
Reason : Indifference curve represents all those combination of goods which give satisfaction to the consumer. Since all the combinations on an indifference curve give equal satisfaction to the consumer, he will be indifferent between them, that is it will matter to him which one he gets. < TOP >
71. Answer : (c)
Reason : When the price elasticity of demand for a good is inelastic consumers are not very responsive to price change. That is, a change in price does not result in much change in quantity demanded. Therefore, if there is a decrease in price consumers are not very responsive to that price change. They do not increase quantity demanded all that much. With the lower price multiplied by a relatively small increased quantity, the total revenue falls.
(a) Is not the answer because if the price elasticity of demand for a good is inelastic, a decrease in its price leads to change in demand.
(b) Is not the answer because if the price elasticity of demand for a good is inelastic, a decrease in its price does not lead to a decrease in demand
(c) Is the answer because if the price elasticity of demand for a good is inelastic, a decrease in its price results in a decrease in total revenue
(d) Is not the answer because if the price elasticity of demand for a good is inelastic, a decrease in its price does not result in an increase in total revenue
Is not the answer because if the price elasticity of demand for a good is unitary elastic, a decrease in its price result in no change in total revenue. < TOP >
72. Answer : (c)
Reason : The reward for capital is known as interest. < TOP >
73. Answer : (e)
Reason : The factors such as purchasing power of money, chance of extra income and condition at work determine the real wage. < TOP >
74. Answer : (a)
Reason : Profit can be defined as the difference between the total value of output (total revenues received by the businessman) and the total value of inputs (total costs incurred by the businessman) of a business. < TOP >
75. Answer : (d)
Reason : The MRTS is equal to the ratio of the marginal productivities of the two products –MPL/MPK
20K0.5L-0.5/20K-0.5L0.5
K0.5L-0.5/K-0.5L0.5
K/L. < TOP >
76. Answer : (c) < TOP >
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Reason : When the variable costs of the firm exceed its revenue, it can reduce the losses by shutting down its operations. Even if its fixed costs exceed its revenue, the firm may not shut down its operations because the firm can reduce its fixed cost loss through sales.
a. In the short run, the firms will continue their operations even though they incur losses.
b. If the revenue is more than variable costs, it can reduce the losses caused by fixed costs.
c. When the variable costs of the firm exceed its revenue, it can reduce the losses by shutting down its operations
d. If total revenue is more than total costs it signifies losses. In the short run, the firms will continue their operations even though they incur losses.
e. Revenue is more important to take a decision on continuation of operation.
77. Answer : (d)
Reason : Any firm produces an output where MR = MC to maximize profits. In case of a perfectly competitive firm, P = AR = MR. Hence, the profit maximization condition of a firm operating in a perfectly competitive market is P = AR = MR = MC.
a. As P = MR = AR, the profit maximization can be written as P = MC.
b. For any firm operating in any industry, the profit maximization condition is MR = MC.
c. As P = MR = AR, the profit maximization condition can be written as P = AR = MR = MC.
d. Profit maximizing condition for a firm operating in a perfectly competitive market is P = MR = AR = MC. Only in the long run the firm gets normal profits and the condition is P = AR = MR = AC = MC.
e. Since (d) is not correct, (e) cannot be the answer. < TOP >
78. Answer : (c)
Reason : Monopoly is a market structure in which there is one seller of the product implying that the producer has complete control over market supplyof the 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). < TOP >
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