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Question Paper

Economics – I (121) : October 2003


Section A : Basic Concepts (40 Points)
• • This section consists of questions with serial number 1 - 40.
• • Answer all questions.
• • Each question carries one point.
< Answer
1. Which of the following results in surplus in a market? >

I. If a local rent control ordinance establishes a ceiling of Rs.3500 per room, which is much higher
than the equilibrium rent.
II. If the government announces a minimum support price of Rs.9 which is more than the equilibrium
price of wheat.
III. When a minimum wage is enforced which is below the prevailing market equilibrium wage of
Rs.100 per day.

a. Only (I) above


b. Only (II) above
c. Both (I) and (II) above
d. Both (I) and (III) above
e. Both (II) and (III) above.
< Answer
2. Which of the following better resembles the demand curve of a consumer? >

a. Indifference curve
b. Marginal utility curve
c. Budget line
d. Total utility curve
e. Average utility curve.
< Answer
3. Law of diminishing returns is not relevant when >

a. All labors are equally efficient


b. The time period is short
c. All factor inputs are increased by the same proportion
d. Technology remains constant
e. Capital is held constant.
< Answer
4. Which of the following variables decreases if the marginal cost is increasing as the output increases? >

a. Average variable cost


b. Average cost
c. Average fixed cost
d. Total variable cost
e. Total cost.
< Answer
5. Which of the following are not true if fixed cost of a firm is Rs.10,000? >

I. Average Fixed Cost (AFC) never reaches zero.


II. Average Fixed Cost reaches minimum when MC intersects AFC.
III. The shape of Average Fixed Cost curve is linear.
IV. Average Fixed Cost is maximum when output is zero.

a. Both (I) and (II) above


b. Both (II) and (III) above
c. Both (II) and (IV) above
d. (I), (II) and (III) above
e. (II), (III) and (IV) above.
< Answer
6. Engineers working at a car manufacturing plant have determined that a 15% increase in all inputs will >
increase the output by 15%. Assuming that the prices of inputs remain constant, which of the following
costs will change as the output increases?
a. Average variable cost
b. Fixed cost
c. Marginal cost
d. None of the above
e. Both (a) and (c) above.
< Answer
7. Which of the following market structures best describes the toilet soap industry in India, if the market >
shares of firms in the industry are:
Company Market share
HLL 20%
P&G 15%
Nirma 25%
Karnataka Soaps Ltd. 15%
Others 25% a. Perfect competition
b. Monopoly
c. Monopolistic competition
d. Oligopoly
e. Duopoly.
< Answer
8. If the demand for electric cars remains the same, ceteris peribus, even after an increase in the price of >
diesel cars, electric cars and diesel cars are considered to be
a. Substitute goods
b. Complementary goods
c. Independent goods
d. Luxury goods
e. Inferior goods.
< Answer
9. What would be the shape of the total cost curve when a manufacturing unit is experiencing economies >
of scale?
a. Upward sloping
b. Rectangular hyperbola
c. U-shaped
d. Inverted U-shaped
e. Horizontal straight line.
< Answer
10. The management of a company has finally agreed to increase the salaries of the staff by 10% after hard >
negotiations with labor union. Which of the following would not be affected by this decision?
a. Economic costs
b. Accounting profits
c. Direct costs
d. Implicit costs
e. Fixed costs.
< Answer
11. Which of the following statements best reflects the consumer surplus? >

a. Padma who is willing to accept a job at Rs.50 per hour is offered Rs.45 per hour
b. Raju pays the sales price of Rs.150 for the same shirt that he refused to buy earlier at Rs.180
c. Tendulkar gets Pepsi for free when he was ready to pay Rs.8, to quench his thirst
d. Dolly finds that the price of burgers, a food she dislikes, has been reduced by 50 percent
e. Rajesh, carpenter by profession, has a marginal cost of Rs.500 for a unit of output and sells that
unit at Rs.600.
< Answer
12. Which of the following is true of a perfectly competitive firm in equilibrium? >

a. P = MR = MC
b. P = MR, but MR > MC
c. P = MC, but MR < MC
d. MR = MC and P < MR
e. MR = MC and P > MR.
< Answer
13. Market research conducted by Swati Electronics Ltd. indicated that the prices of consumer electronic >
goods have dropped, while consumer spending on these electronic goods has increased. It means the
demand for consumer electronic goods is
a. Perfectly inelastic
b. Relatively inelastic
c. Relatively elastic
d. Unitary elastic
e. Perfectly elastic.
< Answer
14. Which of the following indicates the same level of total output for any combination of inputs? >

a. Indifference curve
b. Isoquant
c. Production possibility frontier
d. Isocost line
e. Marginal product curve.
< Answer
15. In which of the following markets the consumer surplus will be high? >

a. Monopoly
b. Monopolistic competition
c. Pure oligopoly
d. Differentiated oligopoly
e. Perfect competition.
< Answer
16. In which of the following demand functions are the goods X and Y substitutes? >

I. Q x = 1000 – 2.5P + 5P x y

II. Q x = 250 – 0.5P – 0.5P


x y

III. Q x = 150 – 3P – P
x y

IV. Q x = 300 – P – P
x y

a. Only (I) above


b. Only (IV) above
c. Both (I) and (IV) above
d. Both (II) and (III) above
e. (II), (III) and (IV) above.
< Answer
17. Which of the following assumptions is/are necessary for a market to be perfectly competitive? >

I. Products are homogenous


II. Cost structure of every firm is identical
III. Buyers have no preferences towards any seller
IV. Buyers have perfect knowledge about prices in the market

a. Only (I) above


b. Only (II) above
c. Both (I) and (III) above
d. (I), (III) and (IV) above
e. (II), (III) and (IV) above.
< Answer
18. A firm will break-even when >

a. TR = MC
b. MR = MC
c. AR = AC
d. P = MC
e. P = AR = MC
< Answer
19. Which of the following statements is true with regard to price elasticity of demand? >

a. Elasticity remains constant throughout the demand curve


b. Elasticity increases with increase in quantity demanded
c. Elasticity increases as the price decreases
d. Elasticity is equal to the slope of the demand curve
e. Higher the elasticity, more responsive the demand is for a given change in price.
< Answer
20. Which of the following curves is called planning curve? >

a. Long run average total cost curve


b. Long run marginal cost curve
c. Long run total cost curve
d. Long run average fixed cost curve
e. Long run average variable cost curve.
< Answer
21. Because of product differentiation, the demand curve faced by a monopolistically competitive firm is >

a. A horizontal straight line


b. A downward sloping curve
c. A vertical straight line
d. An upward sloping curve
e. Indeterminable.
< Answer
22. In India, which of the following industries best illustrates monopoly? >

a. Agriculture
b. Automobile industry
c. Atomic energy
d. Cola drinks
e. Television industry.
< Answer
23. Which of the following causes the average cost to increase in the long run? >

a. Economies of scale
b. Diminishing marginal returns
c. Diseconomies of scale
d. Diminishing marginal utility
e. None of the above.
< Answer
24. The point beyond which no rational firm would employ labor is >

a. When the average product of labor is equal to marginal product of labor


b. When the marginal product of labor is maximum
c. When the marginal product of labor is zero
d. When the total product of labor is zero
e. When the average product of labor is zero.
< Answer
25. A perfectly competitive firm can increase its sales revenue by >

a. Reducing the price


b. Increasing the price
c. Increasing the production
d. Increasing the expenditure on advertising
e. Increasing the sales force.
< Answer
26. Marginal product of labor is the >

a. Cost of employing labor for producing one more unit of output


b. Change in output from using one more unit of labor
c. Change in revenue from selling one more unit of output
d. Change in revenue from using one more unit of labor
e. None of the above.
< Answer
27. When income is allocated between two fruits, apples and oranges, the consumer reaches equilibrium >
only when
a. Marginal utility of apples is equal to marginal utility of oranges
b. Marginal utility of apples is equal to marginal utility of oranges, and the income is exhausted
c. Every rupee spent on apples and oranges gives him the same level of marginal utility
d. Last rupee spent on apples and oranges gives him the same level of marginal utility
e. Both (b) and (c) above.
< Answer
28. If a perfectly competitive industry is an increasing cost industry, the demand curve faced by a firm will >
be
a. Upward sloping
b. Downward sloping
c. A horizontal straight line
d. A vertical straight line
e. A rectangular hyperbola.
< Answer
29. In which of the following markets the demand curve faced by a firm would be more elastic? >

a. Pure monopoly
b. Duopoly
c. Differentiated oligopoly
d. Monopolistic competition
e. Natural monopoly.
< Answer
30. Which of the following is not a legal barrier to entry? >

a. Patents
b. Economies of scale
c. Branding
d. Franchise
e. Copy rights.
< Answer
31. The main feature of Monopsony is >

a. Single buyer and single seller


b. Single buyer, but many sellers
c. Many buyers, but one seller
d. Two buyers, but one seller
e. Single buyer, but two sellers.
< Answer
32. A perfectly competitive firm earns abnormal profits when its >

a. Average cost curve lies above its demand curve


b. Average revenue curve is tangent to average cost curve
c. Demand curve lies above the average cost curve
d. Marginal revenue curve lies above the average cost curve
e. Both (c) and (d) above.
< Answer
33. When the Government increases tax on cigarettes, cigarette manufacturers pass much of the additional >
tax on to consumers in the form of higher prices. This implies that the demand for cigarettes is
a. Relatively less elastic than supply
b. Relatively more elastic than supply
c. As elastic as the supply
d. Perfectly inelastic
e. Perfectly elastic.
< Answer
34. For Ramesh, both Coke and Pepsi are perfect substitutes. The price of each bottle of Coke and Pepsi is >
Rs.10. Which of the following is true if Pepsi increases the price to Rs.20 per bottle?
a. Ramesh will buy twice as much Pepsi as Coke
b. Ramesh will buy twice as much Coke as Pepsi
c. Ramesh will buy equal amounts of Pepsi and Coke
d. Ramesh will buy only Coke
e. No conclusion can be drawn unless utility function of Ramesh is known.
< Answer
35. A firm having a kinked demand curve indicates that >

I. If the firm reduces the price, competitive firms also reduce the price
II. If the firm increases the price, competitive firms also increase the price
III. If the firm reduces the price, competitive firms do not reduce the price
IV. If the firm increases the price, competitive firms do not increase the price
a. Both (I) and (II) above
b. Both (I) and (IV) above
c. Both (II) and (IV) above
d. Both (II) and (III) above
e. Only (I) above.
< Answer
36. In a pure oligopoly, a price war refers to >

a. Continuous price cuts by firms to increase revenues and profits


b. Unexpected price cut by a firm to improve its sales volumes
c. A decrease in quantity supplied by the competitive firms to raise prices in order to maximize
profits
d. Entry of a new firm in the industry who charges a lower price
e. Successive and continued price cuts by competitive firms with an aim to increase market share.
< Answer
37. In the long-run, a perfectly competitive firm earns only normal profits because of >

a. Product homogeneity in the industry


b. Large number of sellers and buyers in the industry
c. Free entry and exit of firms in the industry
d. Both (a) and (b) above
e. Both (b) and (c) above.
< Answer
38. The supply curve of a monopolist >

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.
< Answer
39. Which of the following statements is true? >

a. If 10% decrease in the inputs leads to 15% decrease in the output, increasing returns to scale are
said to be in operation
b. If the output remains constant in spite of 10% reduction in the quantities of inputs, constant returns
to scale are said to be in operation
c. The slope of isoquant is price ratio of the factor inputs
d. Isoquants are concave to the origin
e. The slope of the Isocost line increases as we move from Y-axis to X-axis.
< Answer
40. In the diagram below, the point that indicates normal profit for a monopolist is >

a. A
b. B
c. C
d. D
e. E.

END OF SECTION A
Section B : Problems (60 Points)
• • This section consists of questions with serial number 41 - 72.
• • Answer all questions.
• • Points are indicated against each question.
< Answer
41. A monopolist can sell 5 units of a product when the price is Rs.87.50. If the price is decreased to Rs.75, >
he can sell 6 units. Marginal revenue of the monopolist if the price decrease is affected is
a. Rs.15.00
b. Rs.14.00
c. Rs.12.50
d. Rs.17.50
e. Rs.20.00.
(1 point)
< Answer
42. Demand and supply schedule for a product is given below: >
Price (Rs. Per unit) Demand Supply
10 500 320
12 450 360
14 400 400
16 350 440
18 300 480
20 250 520 Equilibrium price for the product is
a. Rs.10
b. Rs.12
c. Rs.14
d. Rs.16
e. Rs.18.
(1 point)
< Answer
43. Production function for a firm is Q = 100L – 0.02L2. If 10 units of labor are used, average productivity >
of labor is
a. 100.0 units
b. 20.0 units
c. 99.8 units
d. 200.0 units
e. 0.20 unit.
(1 point)
Answer questions 44 to 46 based on the following information:
Supply and demand functions for a product are:
Qs = 400P – 500
Qd = 1500 – 100P
< Answer
44. Equilibrium output for the product is >

a. 1000 units
b. 1100 units
c. 1200 units
d. 1300 units
e. 1400 units.
(1 point)
< Answer
45. At the current output, price elasticity of demand is >

a. 0.16
b. 0.25
c. 0.50
d. 0.36
e. 0.40.
(2 points)
< Answer
46. At the current output, price elasticity of supply is >

a. 1.45
b. 1.60
c. 1.80
d. 2.00
e. 2.50.
(2 points)
< Answer
47. In a monopoly, the price is Rs.20. If the marginal revenue is Rs.10, the value of Lerner Index is >

a. 50
b. 0.20
c. 0.50
d. 20
e. 10.
(1 point)
< Answer
48. Which of the following production functions exhibit constant returns to scale? >

I. Q = K 1/2+L 1/2
II. Q = 2K+3L
III. Q = 3K 1/2 L 1/2
IV. Q = K 1/2 L 2/3

a. (I), (II) and (III) above


b. (II), (III) and (IV) above
c. (I), (III) and (IV) above
d. Both (II) and (III) above
e. Both (I) and (II) above.
(2 points)
< Answer
49. Which of the following statements is true, if demand for mobile phones increases by 12% when income >
increases by 5%?
a. Income elasticity of demand for mobile phones is 2.4 and mobile phones are inferior goods
b. Income elasticity of demand for mobile phones is 0.42 and mobile phones are normal goods
c. Income elasticity of demand for mobile phones is 2.4 and mobile phones are necessary goods
d. Income elasticity of demand for mobile phones is 0.42 and mobile phones are inferior goods
e. Income elasticity of demand for mobile phones is 2.4 and mobile phones are luxury goods.
(1 point)
< Answer
50. Cost function of a firm is TC = 500 + 10Q – 0.25Q 3. If the current output is 100 units, average fixed >
cost is
a. Rs.500
b. Rs.10
c. Rs.5
d. Rs.100
e. Re.0.25.
(1 point)
< Answer
51. Long run cost function of a firm is TC = Q3 – 40Q2 + 450Q. >

What is the minimum possible average cost?


a. Rs.20
b. Rs.60
c. Rs.10
d. Rs.50
e. Rs.30.
(2 points)
< Answer
52. MRTSL,K for the production function, Q = 10K0.5L0.5 is >

a. 0.5 K/L
b. 0.5 L/K
c. K/L
d. L/K
e. 0.5+K/L.
(2 points)
< Answer
53. A firm in a perfectly competitive industry is producing 100 units, its profit-maximizing quantity. The >
market price of the good is Rs.2, and total fixed costs and total variable costs are Rs.50 and Rs.40
respectively. The firm's economic profit is
a. Rs.200
b. Rs.80
c. Rs.100
d. Rs.110
e. Rs.90.
(1 point)
< Answer
54. If the short-run cost function of a firm is TC = 300 + 10Q, the marginal cost is >

a. 10Q
b. 10
c. 300
d. 360
e. 36.
(1 point)
< Answer
55. Long run average cost function of a firm under perfect competition is >

LAC = 100 – 20Q + 2Q2. If this is a constant cost industry and the industry demand function is P = 100
– 0.1Q, how many firms are there in the industry when the industry is at equilibrium?
a. Infinite
b. 50
c. 100
d. 500
e. 10.
(3 points)
< Answer
56. The industry demand function for a product in a duopoly is P = 500 – 2Q. The reaction functions of the >
two firms are:
Q1 = 380 – 2Q2
Q2 = 200 – Q1

Equilibrium price of the product is

a. Rs.100
b. Rs.180
c. Rs.200
d. Rs.380
e. Rs.400.
(2 points)
< Answer
57. Market demand for a good under the oligopoly market is estimated to be Qd = 100 – P. Firm X is a >
dominant firm in the industry and the supply function of all other firms is Qso = P – 20. If the dominant
firm has a constant marginal cost of Rs.20, what will be the market price of the good?
a. Rs.80
b. Rs.60
c. Rs.40
d. Rs.20
e. Rs.10.
(3 points)
< Answer
58. A consumer is willing to buy 100 units of a product at a price of Rs.10. If the current market price of the >
product is Rs.9, consumer surplus is
a. Re.1
b. Rs.50
c. Rs.100
d. Rs.900
e. Rs.1000.
(1 point)
< Answer
59. Demand for a product at two levels of advertising is given below: >

Expenditure on advertising (Rs.) Demand (units)


1,00,000 25,000
1,50,000 30,000 Using arc method,
promotional elasticity of demand for the product is
a. 1.00
b. 0.40
c. 0.45
d. 0.50
e. 2.00.
(2 points)
< Answer
60. Demand and supply functions for a product are: >

Qd = 10,000 – 4P
Qs = 2,000 + 6P
If the government imposes a sales tax of Rs.100 per unit, the price will
a. Increase by Rs.100
b. Increase by Rs.50
c. Increase by Rs.60
d. Increase by Rs.40
e. Increase by Rs.80.
(2 points)
< Answer
61. Current demand for apples in a city is 1000 boxes per week. In the city, price elasticity of demand for >
apples is –1.25 and income elasticity of demand is 2.00. For the next period, if per capita income is
expected to increase by 7% and price of apples is expected to increase by 10%, demand for apples is
expected to be
a. 875 boxes per week
b. 1000 boxes per week
c. 1250 boxes per week
d. 1140 boxes per week
e. 1015 boxes per week.
(2 points)
< Answer
62. A consumer with an income of Rs.100 can buy 10 units of good X and 15 units of good Y. If price of >
both the goods is same, absolute value of slope of the budget line for the consumer is
a. 0.67
b. 1.00
c. 1.50
d. 6.67
e. 10.00.
(1 point)
< Answer
63. A consumer consumes only two products, A and B. Utility function of the consumer is >

U = 10A0.5B0.5
If price of good A is Rs.10 per unit and price of good B is Rs.5 per unit, optimum combination of the
goods for the consumer is
a. 1 unit of good B for every unit of good A
b. 2 units of good B for every unit of good A
c. 0.5 unit of good B for every unit of good A
d. 3 units of good B for every unit of good A
e. Insufficient data.
(3 points)
< Answer
64. For a firm production function, budget constraint and expansion path are >

Production function: Q = 50K0.4L0.4


Budget constraint: 1000 = 40L + 50K
Expansion path: L = 1.25K
The maximum possible output for the firm is
a. 50 units
b. 90 units
c. 230 units
d. 345 units
e. 1000 units.
(3 points)
2 3 < Answer
65. Production function of a firm is Q = 10L -0.5L . The market going wage rate is Rs.50. If the labor input >
is 10 units, marginal cost of production is
a. Rs.10
b. Rs.50
c. Re.1
d. Re.0.5
e. Rs.150.
(2 points)
< Answer
66. In a perfectly competitive market supply and demand functions are >

Qs = 1000P + 500
Qd = 5000 – 500P
If variable cost function of a firm is VC = 103Q – 0.5Q2 , profit maximizing output for the firm is
a. 2,500 units
b. 500 units
c. 4,000 units
d. 1,000 units
e. 100 units.
(2 points)
< Answer
67. Demand and cost functions of a monopolist are >
P = 800 – 10Q
TC = 300Q + 2.5Q2
Profit maximizing price for the monopolist is
a. Rs.300
b. Rs.20
c. Rs.600
d. Rs.800
e. Rs.400.
(3 points)
Answer questions 68 and 69 based on the following information:
Demand functions of a monopolist in two effectively segmented markets are:
Qa = 1,000 – 50Pa
Qb = 800 – 25Pb
Total cost function of the monopolist is TC = 500 + 10Q.
< Answer
68. If the monopolist does not practice price discrimination, sales maximizing price is >

a. Rs.17
b. Rs.900
c. Rs.12
d. Rs.525
e. Rs.15.
(3 points)
< Answer
69. If the monopolist practices price discrimination, profit maximizing prices are >

a. Rs.15 in both the markets


b. Pa = Rs.250 and Pb = Rs.275
c. Pa = Rs.275 and Pb = Rs. 250
d. Pa = Rs. 21 and Pb = Rs. 15
e. Pa = Rs.15 and Pb = Rs.21
(3 points)
< Answer
70. In an oligopoly industry, market shares of four firms are 30%, 30%, 25% and 15% respectively. Eight- >
firm concentration ratio for the industry is
a. 15
b. 16
c. 40
d. 60
e. 100.
(1 point)
< Answer
71. Demand function faced by a monopolistically competitive firm is Q = 1500 – 0.20P. >
Long run cost curve for the firm is TC = 7500Q – 3Q2 – 0.02Q3. If the firm is in long run equilibrium,
the output is
a. 1500 units
b. 7500 units
c. 100 units
d. 250 units
e. 750 units.
(2 points)
< Answer
72. Fixed cost for a firm is Rs.100 and variable cost is VC = 2Q 2 – 5Q. The demand function faced by the >
firm is P = 100 – Q. If average profit at the current output is Rs.40, price charged by the firm is
a. Rs.100
b. Rs.40
c. Rs.80
d. Rs.60
e. Rs.50.
(3 points)

END OF SECTION B
Suggested Answers
Economics – I (121) : October 2003
1. Answer : (b) < TOP
>
Reason : I. When a local rent control ordinance establishes a ceiling of Rs.3500 per room,
which is much higher than the equilibrium rent, it will not affect the equilibrium rent
and quantity of rooms available.
II. If the government announces a minimum support price of Rs.9, which is more than
the equilibrium price of wheat, the support price reduces quantity demanded and
increases quantity supplied. This will result in a surplus in the market.
III. When a minimum wage is enforced which is below the prevailing market
equilibrium wage of Rs.100 per day, it will have no effect on labor hours.
(a) Is not the answer because in I above.
(b) Is the answer because there is a surplus in the market in II above.
(c) Is not the answer because there is a surplus in II, but no surplus in I above.
(d) Is not the answer because there is no surplus in I and III above.
(e) Is not the answer because there is a surplus in the market II but no surplus in III
above.
2. Answer : (b) < TOP
>
Reason : The law of demand is directly derived from the law of diminishing marginal utility. When
the price of the good falls, the consumer buys more of the good so as to equate the
marginal utility to the lower price. The downward sloping marginal utility curve can be
converted into the downward sloping demand curve.
(a) Is not the answer because indifference curve doesn’t resemble the demand curve of a
consumer. An indifference curve depicts the various alternative combinations of the
goods, which provide same level of satisfaction to the consumer.
(b) Is the answer because marginal utility curve resembles the demand curve of a
consumer.
(c) Is not the answer because budget line is not same as the demand curve of a
consumer. Budget line represents all the combinations of the two commodities,
which the consumer can buy by spending his entire income for the given prices of
the two commodities.
(d) Is not the answer because total utility curve is not same as the demand curve of a
consumer. Total utility curve is a curve representing the sum of all the utilities
derived from the total number of units consumed.
(e) Is not the answer because average utility curve is not same as the demand curve of a
consumer.
3. Answer : (c) < TOP
>
Reason : The law of diminishing returns states that by employing more units of some factors of
production to work with one or more fixed factors, the total product will increase at an
increasing rate, then at a constant rate and finally at a diminishing rate.
(a) Is not the answer because the law of diminishing returns holds good when all labors
are equally efficient i.e. labor are homogeneous.
(b) Is not the answer because the law of diminishing returns is relevant only when the
time period is short because in long run all factors are variable.
(c) Is the answer because the law of diminishing returns is not applicable when the two
inputs are used in same proportion. When all factor inputs are increased by the same
proportion, this law is not relevant.
(d) Is not the answer because the law of diminishing returns assumes that the state of
technology is given and remains constant.
(e) Is not the answer because according to the law of diminishing returns, one factor of
production must always be kept constant at a given level. So if capital is held
constant, with varying labor, this law of diminishing returns holds good.
4. Answer : (c) < TOP
>
Reason : As the output increases, the total fixed cost spreads over more and more units and
therefore average fixed cost becomes less and less. As output increases, Average Fixed
Cost (AFC) decreases continuously; whatever may be the marginal cost.
(a) Is not the answer because as the output increases, if the marginal cost is increasing,
average variable cost increases.
(b) Is not the answer because as the output increases, if the marginal cost is increasing,
average cost increases.
(c) Is the answer because as the output increases, if the marginal cost is increasing,
average fixed cost decreases.
(d) Is not the answer because as the output increases, if the marginal cost is increasing,
total variable cost increases.
(e) Is not the answer because as the output increases, if the marginal cost is increasing,
total cost increases.
5. Answer : (b) < TOP
>
Reason : I. When output becomes very large, average fixed cost approaches zero, but it never
reaches zero, if there is a certain amount of fixed costs.
II. It is not true that AFC reaches minimum when MC interests AFC. AFC does not
reach minimum when MC cuts AFC. There is no minimum point of AFC
III. It is not true that the shape of AFC curve is linear. The shape of average fixed cost
curve is rectangular hyperbola indicating that when the output increases by a certain
percentage, the average fixed cost decreases by the same percentage such that their
product representing total fixed cost remains constant thoughtout.
IV. Average fixed cost is maximum when output is zero.

(a) Is not the answer because I above is true and II above is not true if the fixed cost of a
firm is Rs.10,000
(b) Is the answer because both II and III are not true if the fixed cost of a firm is
Rs.10,000.
(c) Is not the answer because II above is not true, while IV above is true if the fixed cost
of a firm is Rs.10,000
(d) Is not the answer because I above is true, while II and III above are not true if the
fixed cost of a firm is Rs.10,000
(e) Is not the answer because II and III above are not true, while IV above are true if the
fixed cost of a firm is Rs.10,000.
6. Answer : (d) < TOP
>
Reason : The prices of inputs remain constant; a 15% increase in all inputs will increase the output
by 15% results in no change in average variable cost, fixed cost and marginal cost.
(a) Is not the answer because average variable cost will not change as the output
increases.
(b) Is not the answer because fixed cost will not change as the output increases. Fixed
cost remains same at different level of output, even if the output is zero.
(c) Is not the answer because marginal cost will not change as the output increases.
(d) Is the answer because average variable cost, fixed cost and marginal cost will not
change as the output increases.
7. Answer : (d) < TOP
>
Reason : In India, the total 100% market share of toilet soap industry is dominated by only few
numbers of firms. So this is a case of oligopoly industry.
(a) Is not the answer because toilet soap industry is not a perfectly competitive industry.
In a perfectly competitive industry, there are large numbers of firms.
(b) Is not the answer because toilet soap industry is not a monopoly industry. In a
monopoly, there is only one firm.
(c) Is not the answer because toilet soap industry is not a monopolistically competitive
industry. In a monopolistically competitive industry, there are relatively large
numbers of firms.
(d) Is the answer because toilet soap industry is an oligopoly competitive industry. In an
oligopoly industry, there are few number of firms.
(e) Is not the answer because toilet soap industry is not a duopoly. In a duopoly, there
are only two firms in the industry.
8. Answer : (c) < TOP
>
Reason : Ceteris peribus, when the demand for electric cars remains the same even after an
increase in the price of diesel cars, electric cars and diesel cars are said to be independent.
In this case the cross elasticity of demand will be zero. This means that the quantity
demanded of one good remains constant regardless of the change in price of the other
good.
(a) Is not the answer because in case of substitute goods, if the price of one good
increases (decreases) the quantity demanded of other good also increases
(decreases).
(b) Is not the answer because in case of complementary goods, if the price of one good
decreases (increases) the quantity demanded of other good also increases
(decreases).
(c) Is the answer because in case of independent goods the quantity demanded of one
good remains constant regardless of the price of the other good.
(d) Is not the answer because ceteris peribus, when the demand for electric cars remains
the same even after an increase in the price of diesel cars, it cannot be inferred that
electric cars and diesel cars are luxury goods. The classification of goods like
inferior, normal and luxurious goods can be done only when the income elasticity of
demand for the good is known.
(e) Is not the answer because ceteris peribus, when the demand for electric cars remains
the same even after an increase in the price of diesel cars, it cannot be inferred that
electric cars and diesel cars are inferior goods.
9. Answer : (a) < TOP
>
Reason : When a firm expands in the long run, it tends to reap the benefits of economies of scale.
On account of these advantages; the firm’s long run total cost increases slowly with the
output. The shape of the total cost curve will be an upward sloping curve.
(a) Is the answer because the shape of the total cost curve is an upward sloping curve.
(b) Is not the answer because the shape of the total cost curve is not rectangular
hyperbola.
(c) Is not the answer because the shape of the total cost curve is not U-shaped curve.
(d) Is not the answer because the shape of the total cost curve is not inverted U-shaped
curve.
(e) Is not the answer because the shape of the total cost curve is not horizontal curve.
10. Answer : (d) < TOP
>
Reason : When the management of a company has increased the salary of the staff by 10%, it will
not affect the implicit cost. Implicit cost incurred by a firm is actually the opportunity
cost of the factor owned by him. Opportunity cost of any input is the next best alternative
use that is sacrificed by its present use. It indicates what a factor can earn in the next best
use.
(a) Is not answer because when there is an increase in salaryof the staff by 10%,
economic cost increases.
(b) Is not answer because when there is an increase in salary of the staff by 10%,
accounting profit decreases. Because accounting profits is the firm’s total revenue
less its economic cost. So when the economic cost increases, accounting profits
decreases.
(c) Is not answer because when there is an increase in salary of the staff by 10%, direct
cost increases. Because direct costs are costs which can be directly contributed to
production of a given product.
(d) Is the answer because when there is an increase in salary of the staff by 10%,
implicit cost will not be affected.
(e) Is not answer because when there is an increase in salary of the staff by 10%, fixed
cost is affected, since salary paid to administrative staff is fixed in nature.
11. Answer : (c) < TOP
>
Reason : Consumer surplus is the excess of the price that a consumer is willing to pay for the
commodity over and above what he actually pays for it.
(a) Is not the answer because Parma is offered a job below the price what she expected.
So, this doesn’t reflect the consumer surplus.
(b) Is not the answer because Raju refused to buy the same shirt at Rs.180,but he pays
for the same shirt a sale price of Rs.150. So, this doesn’t reflect the consumer
surplus.
(c) Is the answer because Tendulkar is ready to pay Rs.8 for a pepsi, but he gets it free.
This is a case of consumer surplus.
(d) Is not the answer because the price of the burgers has reduced by 50 percent. This is
not a case of consumer surplus.
(e) Is not the answer because Rajesh has a marginal cost of Rs. 500 for a unit of output
and sells that unit at Rs.600.This is not the excess of the price that a consumer is
willing to pay for the commodity over and above, what he actually pays for it. So
this is not a case for a consumer surplus.
12. Answer : (a) < TOP
>
Reason : A perfectly competitive firm is in equilibrium only when P = MR =MC because in perfect
competition, MR = P.
(a) Is the answer because a perfectly competitive firm is in equilibrium only when P =
MR =MC.
(b) Is not the answer because a perfectly competitive firm is not in equilibrium when P
= MR, but MR > MC.
(c) Is not the answer because a perfectly competitive firm is not in equilibrium when P
= MC, but MR < MC.
(d) Is not the answer because a perfectly competitive firm is not in equilibrium when
MR = MC, but P < MR.
(e) Is not the answer because a perfectly competitive firm is not in equilibrium when
MR= MC, but P > MR.
13. Answer : (c) < TOP
>
Reason : When the prices of consumer electronics have dropped, while consumer spending on
these electronic goods has increased, the demand for consumer electronic goods is
relatively elastic. In this case the percentage change in quantity demanded is greater than
the percentage change in price and the value of price elasticity of demand will be greater
than one.
(a) Is not the answer because in case of a perfectly inelastic demand, if the price of a
good decreases, consumer spending on these goods has to be decreased.
(b) Is not the answer because in case of a relatively inelastic demand, if the price of a
good decreases, consumer spending on these goods has to be decreased.
(c) Is the answer because in case of a relatively elastic demand, if the price of a good
decreases, consumer spending on these goods has to be increased.
(d) Is not the answer because in case of a unitary inelastic demand, if the price of a good
decreases, consumer spending on these goods remain constant.
(e) Is not the answer because in case of a perfectly elastic demand, if the price of a good
decreases, consumer spending on these goods undetermined.
14. Answer : (b) < TOP
>
Reason : Isoquant represents all the alternative combinations of two factors that can produce a
given level of output.
(a) Is not the answer because an indifference curve shows all the various combinations
of two goods that give equal amount of satisfaction or utility to a consumer.
(b) Is the answer because isoquant shows all combination of inputs that can produce a
given output.
(c) Is not the answer because production possibility frontier represents all possible
combinations of total output that can be produced with a fixed amount of productive
resources.
(d) Is not the answer because isocost line shows all the combinations of the two factors
(e.g. labor and capital) that the firm can buy with a given set of prices of the two
factors.
(e) Is not the answer because marginal product curve is the curve, which represents the
marginal product of a factor i.e. the addition to the total production by the
employment of an extra unit of a variable factor.
15. Answer : (e) < TOP
>
Reason : Consumer surplus is the excess of the price that a consumer is willing to pay for the
commodity over and above what he actually pays for it. In perfect competition, the price
is lower as compared to monopoly, monopolistic competition, pure oligopoly or
differentiated oligopoly because of high competition. So the answer is (e).
16. Answer : (a) < TOP
>
Reason : I. Qx = 1000 – 2.5 Px + 5Py.
In this case, if the Py increases, Qx also increases and vice versa. So good X and Y
are substitutes.
II. Qx = 250 – 0.5 Px – 0.5Py.
In this case, if the Py increases, Qx decreases and vice versa. So good X and Y are
complements.
III. Qx = 150 – 3Px – Py.
In this case, if the Py increases, Qx decreases and vice versa. So good X and Y are
complements.
IV. Qx = 300 – Px – Py.
In this case, if the Py increases, Qx decreases and vice versa. So good X and Y are
complements.
(a) Is the answer because good X and Y are substitutes in I above.
(b) Is not the answer because good X and Y are not substitutes in IV above.
(c) Is not the answer because good X and Y are substitutes in I above, but complements
in IV above.
(d) Is not the answer because good X and Y are complements in II and III above.
(e) Is not the answer because good X and Y are complements in II, III and IV above.
17. Answer : (d) < TOP
>
Reason : I. In a perfectly competitive market, the products produced by all the firms in the
industry are homogeneous. The technical characteristics of the product as well as the
services associated with its sale and delivery are identical.
II. In a perfectly competitive market cost structure of every firm is not identical. The
cost conditions of the industry are reflected in the change in factor prices, as the
industry expands. With the expansion of the industry in the long run, cost curves of
the firms shift on account of external economies and diseconomies.
III. In a perfectly competitive market, there are large number of buyers and sellers in the
industry. No individual seller has any economic or market power to influence the
market price in his favor through his own individual behavior or action. Buyers have
no preferences towards any seller.
IV. In a perfectly competitive market, buyers have perfect knowledge about prices in the
market. The information regarding price is assumed to be available free of costs.
(a) Is not the answer because I above is one of the necessary assumption for a market to
be perfectly competitive.
(b) Is not the answer because II above is one of the necessary assumption for a market
to be perfectly competitive.
(c) Is not the answer because both I and III above are not all necessary assumptions for
a market to be perfectly competitive.
(d) Is the answer because both I, III and IV above are all necessary assumptions for a
market to be perfectly competitive.
(e) Is not the answer because II above is not the assumption of a perfectly competitive
market where as III and IV above are necessary assumptions for a market to be
perfectly competitive.
18. Answer : (c) < TOP
>
Reason : Break even point of a firm occurs when there is a no profit no loss situation happens. This
can be only possible when AR = AC.
(a) Is not the answer because a firm will not break-even when TR = MC.
(b) Is not the answer because a firm will not break-even when MR = MC.Rather a firm
is said to be in equilibrium when MR = MC.
(c) Is the answer because a firm will break-even when AR = AC.
(d) Is not the answer because a firm will not break-even when P = MC.
(e) Is not the answer because a firm will not break-even when P = AR = MC.
19. Answer : (e) < TOP
>
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 higher the 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.
20. Answer : (a) < TOP
>
Reason : The long run average total cost curve is known as the planning curve. It helps the firm in
the decision making for the future expansion of output.
(a) Is the answer because long run average total cost curve is called planning curve.
(b) Is not the answer because long run marginal cost curve is not the planning curve.
(c) Is not the answer because long run total cost curve is not the planning curve.
(d) Is not the answer because long run average fixed cost curve is not the planning
curve.
(e) Is not the answer because long run average variable cost curve is not the planning
curve.
21. Answer : (b) < TOP
>
Reason : The demand curve faced by a monopolistically competitive firm is downward sloping
because of product differentiation.
(a) Is not the answer because the demand curve faced by a monopolistically competitive
firm is not a horizontal line.
(b) Is the answer because the demand curve faced by a monopolistically competitive
firm is a downward sloping curve because of product differentiation.
(c) Is not the answer because the demand curve faced by a monopolistically competitive
firm is not a vertical straight line.
(d) Is not the answer because the demand curve faced by a monopolistically competitive
firm is not an upward sloping curve.
(e) Is not the answer because the demand curve faced by a monopolistically competitive
firm is not indeterminable.
< TOP
22. Answer : (c) >
Reason : Monopoly is a market structure in which there exists a only a single seller. There are no
close substitutes for the product and there are barriers to entry in to the industry. In India,
the Government of India is the only producer of atomic energy and there are barriers to
entry for the private entrepreneurs. So, atomic energy best illustrates a monopoly.
(a) Is not the answer because agriculture is not a monopoly in India, rather it is a
perfectly competitive market.
(b) Is not the answer because automobile industry is not a monopoly in India, rather it is
an oligopoly.
(c) Is the answer because atomic energy is a monopoly in India.
(d) Is not the answer because cola drinks is not a monopoly in India.
(e) Is not the answer because television industry is not a monopoly in India.
< TOP
23. Answer : (c) >
Reason : When a firm continues to expand beyond the optimum capacity, economies of scale will
disappear and will give place to diseconomies. A given percentage increases in all the
factors will be followed by less than a proportionate increase in the total output. As a
result average cost will increase in the long run.
(a) Is not the answer because economies of scale cause the average cost to decrease in
the long run.
(b) Is not the answer because diminishing marginal returns don’t cause the average cost
to increase in the long run.
(c) Is the answer because diseconomies of scale cause the average cost to increase in the
long run.
(d) Is not the answer because diminishing marginal utility doesn’t cause the average
cost to increase in the long run.
(e) Is not the answer because none of the above is not the answer.
24. Answer : (c) < TOP
>
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.
25. Answer : (c) < TOP
>
Reason : An individual firm in perfect competition is a price taker. The level of market price is
determined by the market supply and demand. A perfectly competitive firm has control
over only on quantity. So sales revenue can be increased by increasing the production
only.
(a) Is not the answer because a perfectly competitive firm cannot increase its sales
revenue by reducing the prices.
(b) Is not the answer because a perfectly competitive firm cannot increase its sales
revenue by increasing the prices.
(c) Is the answer because a perfectly competitive firm can increase its sales revenue by
increasing the production.
(d) Is not the answer because a perfectly competitive firm cannot increase its sales
revenue by increasing the expenditure on advertising. Because all firms produce a
homogeneous product. The technical characteristics of the product as well as the
services associated with its sale and delivery are same. A buyer can’t differentiate
among products of differentiate firms.
(e) Is not the answer because a perfectly competitive firm cannot increase its sales
revenue by increasing the sale force.
26. Answer : (b) < TOP
>
Reason : Marginal product of labor is the addition to the total production by employment of an
extra unit of a variable factor.
(a) Is not the answer because marginal product of labor is not the cost of employing
labor for producing one more unit of output.
(b) Is the answer because marginal product of labor is the change in output from using
one more unit of labor.
(c) Is not the answer because marginal product of labor is not the change in revenue
from selling one more unit of output.
(d) Is not the answer because marginal product of labor is not the change in revenue
from using one more unit of output.
(e) Is not the answer because none of the above is not the answer.
27. Answer : (d) < TOP
>
Reason : When consumer pays price for the commodity he is consuming, he compares the utility
he derives from the additional unit of a commodity with the utility he sacrifices in terms
of the price paid for that unit of a commodity. The consumer is in equilibrium when
marginal utility and price are equal. Therefore, the consumer reaches equilibrium only
when last rupee spent on apples and oranges give him the same level of marginal utility.
(a) Is not the answer because the consumer doesn’t reach equilibrium when marginal
utility of apples is equal to the marginal utility of oranges.
(b) Is not the answer because the consumer doesn’t reach equilibrium when marginal
utility of apples is equal to the marginal utility of oranges and the income is
exhausted.
(c) Is not the answer because the consumer doesn’t reach equilibrium when every rupee
spent on apples and oranges give him the same level of marginal utility.
(d) Is the answer because the consumer reaches equilibrium when last rupee spent on
apples and oranges give him the same level of marginal utility.
(e) Is not the answer because on (b) and (c) above, the consumer doesn’t reach
equilibrium.
28. Answer : (c) < TOP
>
Reason : For a perfectly competitive firm, the demand curve is horizontal. A firm in a perfectly
competitive industry is a price taker. Its demand curve is infinitely elastic, indicating that
the firm can sell any output at the prevailing market price. So, the demand curve faced by
a firm will be a horizontal straight line.
(a) Is not the answer because if a perfectly competitive industry is an increasing cost
industry, the demand curve faced by a firm is not upward sloping.
(b) Is not the answer because if a perfectly competitive industry is an increasing cost
industry, the demand curve faced by a firm is not downward sloping.
(c) Is the answer because, the demand curve faced by a firm operating in perfect
competition is a horizontal straight line.
(d) Is not the answer because the demand curve faced by a firm operating in perfect
competition is not a vertical straight line.
(e) Is not the answer because if a perfectly competitive industry is an increasing cost
industry, the demand curve faced by a firm is not a rectangular hyperbola.
29. Answer : (d) < TOP
>
Reason : The demand curve faced by a monopolistically competitive firm will be more elastic.
Because there are close substitutes available for the product of a firm as compared to pure
monopoly, duopoly, differentiated oligopoly and natural monopoly.
(a) Is not the answer because in pure monopoly the demand curve faced by a firm will
be less elastic, as there is no close substitute available for the product.
(b) Is not the answer because in duopoly, the demand curve faced by a firm will be less
elastic, as there are only two firms in the industry.
(c) Is not the answer because in differentiated oligopoly, the demand curve faced by a
firm will be less elastic, as there are only few firms in the industry .
(d) Is the answer because in a monopolistically competitive market, the demand curve
faced by a firm will be less elastic, as there are close substitute available for the
product.
(e) Is not the answer because in natural monopoly the demand curve faced by a firm
will be less elastic, as there is no close substitute available for the product. There is
only one firm exists in a natural monopoly. There are substantial economies, which
can be realized only at large scales of output. The size of the market may not allow
the existence of more than a single large firm.
30. Answer : (b) < TOP
>
Reason : Legal barrier to entry is a feature of monopoly. Legal backing provided by the
government to produce a particular product trough granting of patent, copy rights,
branding and franchise may create and perpetuate monopoly. These rights are protected
by law against imitation by rival producers. But economies of scale is not a legal barrier
to entry. Economies of scale occur to a firm in the course of expansion of its scale of
operation by increasing all the factors or by increase in the number of firms in the
industry.
(a) Is not the answer because patent is a legal barrier to entry.
(b) Is the answer because economies of scale is not a legal barrier to entry.
(c) Is not the answer because branding is a legal barrier to entry
(d) Is not the answer because franchise is a legal barrier to entry
(e) Is not the answer because copy rights is a legal barrier to entry.
31. Answer : (b) < TOP
>
Reason : Monopsony is a market structures in which there exists a single buyer, but many sellers.
(a) Is not the answer because when there is single buyer and single seller, it is a case of
bilateral monopoly.
(b) Is the answer because monopsony consists of single buyer and many sellers.
(c) Is not the answer because when there is many buyers and single seller, it is a case of
monopoly.
(d) Is not the answer because monopsony doesn’t consist of two buyers and one seller.
(e) Is not the answer because monopsony doesn’t consist of single buyer and two
sellers.
32. Answer : (e) < TOP
>
Reason : A perfectly competitive firm earns abnormal profits when its demand curve and marginal
revenue curve lies above the average cost curve as the demand curve and marginal
revenue curve is the same for a perfectly competitive firm.
(a) Is not the answer because a perfectly competitive firm earns negative profits when
average cost curve lies above its demand curve.
(b) Is not the answer because a perfectly competitive firm earns normal profits when
average revenue curve is tangent to average cost curve.
(c) It is true that a perfectly competitive firm earns abnormal profits when its demand
curve lies above the average cost curve.
(d) It is true that a perfectly competitive firm earns abnormal profits when its marginal
revenue curve lies above the average cost curve.
(e) Is the answer because in (c) and (d) above, a perfectly competitive firm earns
abnormal profits.
33. Answer : (a) < TOP
>
Reason : When the demand for a product is relatively less elastic than supply, much of the tax
burden is borne by the customers.
(a) Is the answer because when the demand is relatively less elastic than supply,
cigarettes manufacturers pass much of the additional tax on to the consumers in the
form of higher prices.
(b) Is not the answer because when the demand for cigarettes is relatively more elastic
than supply, cigarettes manufacturers do not pass much of the additional tax on to
the consumers in the form of higher prices.Here the tax burden is more on the
cigarettes manufacturers.
(c) Is not the answer because when the demand for cigarettes is as elastic as the supply,
cigarettes manufacturers do not pass much of the additional tax on to the consumers
in the form of higher prices. Inthis case the tax burden is shared equally by the
cigarettes manufacturers and consumers.
(d) Is not the answer because when the demand for cigarettes is perfectly inelastic, the
entire tax burden is borne by the cigarettes consumers.
(e) Is not the answer because when the demand for cigarettes is perfectly elastic, the
entire tax burden is borne by the cigarettes manufacturers.
34. Answer : (d) < TOP
>
Reason : As coke and pepsi are perfect substitutes, if the price of pepsi increases to Rs.20 while the
coke price is Rs.10, Ramesh will buy only coke.
(a) Is not the answer because Ramesh will not buy as much pepsi as coke.
(b) Is not the answer because Ramesh will not buy twice as much coke as pepsi.
(c) Is not the answer because Ramesh will not buy equal amount of pepsi and coke,
because the price of pepsi increases to Rs. 20 while the coke price is Rs.10,
(d) Is the answer because Ramesh will buy only coke because coke price is Rs. 10,
while pepsi price is Rs.20.
(e) Is not the answer because conclusion can be drawn unless utility function of Ramesh
is known.
< TOP
35. Answer : (b) >
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 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 IVabove is true in a kinked
demand curve model of oligopoly.
(d) Is not the answer because II and IIIabove 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.
36. Answer : (e) < TOP
>
Reason : In an oligopoly, a price war refers to successive and continued price cuts by the
competitive firms to increase sales and revenues. A price war aims at increasing market
share, but not profits.
(a) Is not the answer because a price war doesn’t mean a continuous price cuts by firms
to increase revenues and profits.
(b) Is not the answer because a price war doesn’t mean an unexpected price cut by a
firm to improve its sales volumes
(c) Is not the answer because a price war doesn’t mean a decrease in quantity supplied
by the competitive firms to raise prices in order to maximize profits.
(d) Is not the answer because a price war doesn’t mean an entry of a new firm in the
industry who charges a lower price
(e) Is the answer because a price war means a successive and continued price cuts by
competitive firms with an aim to increase market share.
37. Answer : (c) < TOP
>
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.
(a) Is not the answer because product homogeneity in the industry does not result in
normal profits.
(b) Is not the answer because presence of large number of sellers and buyers in the
industry indicates that no individual buyer or seller can influence the price by
changing the purchase or output.
(c) Is the answer because a firms earn normal profit because of free entry and exit of
firms in an industry
(d) Is not the answer because due to (a) and (b) , a firm cannot earn normal profits.
(e) Is not the answer because due to (b) a firm cannot earn normal profits. But due to
(c) a firm can earn normal profits.
38. Answer : (e) < TOP
>
Reason : For a monopolist, there is no unique relationship between price and quantity supplied.
Therefore, the supply curve of a monopolist is irrelevant.
(a) Is not the answer because the supply curve of a perfectly competitive firm is the
portion of its marginal-cost curve that lies above the average variable costs.
(b) Is not the answer because the supply curve of a monopolist is not the portion of its
marginal-cost curve that lies above the average cost curve.
(c) Is not the answer because the supply curve of a monopolist is not vertical.
(d) Is not the answer because the supply curve of a monopolist is not horizontal.
(e) Is the answer because a monopolist has no supply curve.
39. Answer : (a) < TOP
>
Reason : (a) Is the answer because it is a true statement that a10% decrease in the inputs leads to
15% decrease in the output, increasing returns to scale are said to be in
operation.When change in output is more than proportionate to the change in inputs,
increasing returns to scale are in operation.
(b) Is not the answer because a constant returns to scale are in operation when the
change in output is proportionate to the change in inputs.
(c) Is not the answer because the slope of the isoquant is not price ratio of factor
ratio, rather the MRTS.
(d) Is not the answer because Isoquants are convex to the origin.
(e) Is not the answer because t he slope of isocost line is constant.
40. Answer : (e) < TOP
>
Reason : Normal profit is the profit which is necessary for the existence of a firm in the industry.
When the firm is earning normal profit, Average Cost will be equal to Average Revenue.
(a) Is not the answer because point A indicates the price at which the monopolist can
maximize the profit.
(b) is not the answer because point B indicates the Average Cost at the profit
maximizing output.
(c) Is not the answer because point C indicates the equilibrium point of the profit-
maximizing monopolist
(d) Is not the answer because point D indicates the point at which Marginal Cost is equal to
Average Revenue.
(e) Is the answer because point E indicates the point where Average Cost is equal to
Average Revenue.
41. Answer : (c) < TOP
>
Reason : When price is Rs.87.50 and Q = 5 units, the total revenue of the monopolist = P × Q =
Rs.87.50 × 5 = Rs.437.50
When P = Rs.75 and Q = 6 units, TR = Rs.450.00
If the price decrease is affected, the MR = 450 – 437.50 = Rs.12.50.
42. Answer : (c) < TOP
>
Reason : Equilibrium price is determined, when Demand = Supply D = S = 400, when the price is
Rs. 14.00
So, the answer is (c).
43. Answer : (c) < TOP
>
Reason : The production function for a firm Q = 100L – 0.02L2
Q 100L − 0.02L2
=
L L
APL = = 100 – 0.02L.
When L = 10, APL = 100 – 0.02 (10) = 100 – 0.2 = 99.8.
44. Answer : (b) < TOP
>
Reason : Qs = 400P – 500
Qd = 1500 – 100P
Equilibrium price is determined when Qs = Qd.
∴ 400P – 500 = 1500 – 100P
or, 500P = 2000
or, P = 4
When P = 4, Qs = 400(4) – 500 = 1600 – 500 = 1100.
45. Answer : (d) < TOP
>
∂ Qd P
.
∂p Q
Reason : Elasticity of demand, ed =
∂ Qd
∂p
From the demand function, = – 100
4
1100 0.36
∴ ed = – 100 × = – 0.36 =
46. Answer : (a) < TOP
>
∂ Qs P
.
∂p Q
Reason : Elasticity of supply, es =
∂Q s
= 400
∂p
From the supply function, we get,
4
1100
∴es = 400 × = 1.45.
47. Answer : (c) < TOP
>
P − MR
P
Reason : In monopoly, the learner Index = (∴MR = MC)
20 − 10 10
20 20
When P = 20 and MR = 10, Learner Index = = = 0.50.
48. Answer : (d) < TOP
>
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.
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).
49. Answer : (e) < TOP
>
% change in demand
% demand in income
Reason : Income elasticity of demand = ey =
12
5
= = 2.4.
As the value of ey is 2.4 i.e., greater than 1, it is a case of luxurious goods. Here, the %
increase in the quantity demand is greater than the % increase in income.
50. Answer : (c) < TOP
>
Reason : The cost function of the firm is TC = 500 + 10Q – 0.25Q3
TFC = 500
500
Q
∴ Average Fixed Cost = AFC =
500
100
When Q = 100, AFC = = 5.
51. Answer : (d) < TOP
>
Reason : LTC = Q3 – 40Q2 + 450Q
LTC
Q
LAC = = Q2 – 40Q + 450
∂LAC
=0
∂Q
LAC will be minimum, where
∂ ( Q 2 − 40Q + 450 )
=0
∂Q
Or,
or, 2Q – 40 = 0
or, 2Q = 40
40
= 20
2
or, Q =
When Q = 20, LAC = (20)2 – 40 (20) + 450
= 400 – 800 + 450
= 50.
52. Answer : (c) < TOP
>
MPL
MPK
Reason : MRTSL,K =
Q = 10K0.5 L0.5
∂Q 5
∂L 0.5 – 1 –0.5 L0.5
MPL = = 5L = 5(L) =
∂Q 5
∂K 0.5 –1 –0.5 K0.5
MPK = = 5K = 5(K) =
5
L0.5
5 5 K 0.5 K0.5 K
×
K0.5 L0.5 5 L0.5 L
∴ MRTSL,K = = = = .
53. Answer : (d) < TOP
>
Reason : TR = P × Q = 2 × 100 = 200
TC = TFC + TVC = 50 + 40 = 90
∴ Economic profit = TR – TC
= 200 – 90
= Rs.110.
54. Answer : (b) < TOP
>
Reason : TC = 300 + 10Q
∂ TC
∂Q
MC = = 10.
55. Answer : (c) < TOP
>
Reason : LAC = 100 – 20Q + 2Q2
P = 100 – 0.1Q
In the long run, all firms operate at the lowest of their average cost curves.
∂(LAC)
=0
∂Q
So,
Or, – 20 + 4Q = 0
Or, 4Q = 20
Or, Q = 5. (Firm’s output)
At Q = 5,
LAC = 100 – 20 (5) + 2 (5)2
= 100 – 100 + 50
= 50
At equilibrium, LAC = P
When P = 50,
50 = 100 – 0.1Q
or, –0.1Q = –50
or, Q = 500 (Industry’s output)
Industry 's output 500
Firm 's output 5
∴ No. of firms = = = 100.
56. Answer : (a) < TOP
>
Reason : By solving the reaction functions of the firms, the industry output can be derived.
Q1 = 380 – 2Q2 (I)
Q2 = 200 – Q1 (II)
Putting the equation (II) in (I)
Q1 = 380 – 2 (200 – Q1)
or, Q1 = 380 – 400 + 2Q1
or, – Q1 = – 20
or, Q1 = 20.
∴ Q2 = 200 – 20 = 180.
∴ The equilibrium output for the industry Q = Q1 + Q2 = 20 + 180 = 200.
P = 500 – 2(200) = Rs.100.
57. Answer : (c) < TOP
>
Reason : MC = 20
Qd = 100 – P
Qso = P – 20
Given the market demand curve and the aggregate supply curve of the smaller firms, the
dominant firm can calculate its own demand curve.
Supply of the dominant firm = Qs = 100 – P – (P – 20)
= 100 – P – P + 20
Q = 120 – 2P.
–2P= Q – 120
2P = 120 – Q
P = 60 – 0.5Q
TR = 60Q – 0.5Q2
MR = 60 – Q
When the demand curve of the dominant firm is known, it will set its price by equating
MR = MC.
MR = 60 – Q
60 – Q = 20
– Q = 20 – 60
Q = 40
When Q = 20, P = 60 – 0.5 (40) = 60 – 20 = Rs.40.
58. Answer : (c) < TOP
>
Reason : Consumer surplus is the difference between the amount of money actually paid by the
consumer for certain quantity of this commodity and the amount that he would be willing
to pay for this quantity rather than do without it.
∴ Consumer surplus = (100 × 10) – (100 × 9)
= 1000 – 900
= Rs.100.
59. Answer : (c) < TOP
>
Reason : Promotional elasticity using are method is
∆Q  A1 + A 2 
. 
∆A  Q1 + Q2 
EA =
−5, 000 1, 00000 +150, 000 
−50, 000  
 25, 000 + 30, 000 
=
5000 250000
×
50, 000 55, 000
= = 0.45.
60. Answer : (c) < TOP
>
Reason : Qd = 10,000 – 4P
Qs = 2,000 + 6P
Equilibrium price is determined where,
Qs = Qd
3,000 + 6P = 10,000 – 4P
6P + 4P = 10,000 – 3,000
10P = 7000
P = 700.
If the govt. imposes a sales tax of Rs.100 per units
Qs = 3,000 + 6 (P – 100)
= 3,000 + 6P – 600
= 2400 + 6P.
∴Equilibrium price is determined, when Qs = Qd
∴ 2400 + 6P = 10,000 – 4P
6P + 4P = 10,000 – 2400
10P = 7600
P = 760
∴ Change in Price = 760 – 700 = Rs.60 (increase)
61. Answer : (e) < TOP
>
Reason : Qd = 1000
ep = 1.25
ey = 2.00
% change in Q
% change in P
ed =
% change in Q
10
1.25 =
% change in Q = 12.5%
% change in Q
% change in Y
ey =
% change in Q
14
2.00 =
∴ % change in Q = 14.00%
∴ Net effect is = 14.00 – 12.5 = 1.5%
1000 × 1.5% = 15
∴ Demand for apple is expected to be = 1000 + 15 = 1015 boxes per week.
62. Answer : (b) < TOP
>
Px
Py
Reason : Slope of the budget line =
If the prices of both the goods is the same, slope of the budget line will be 1.
63. Answer : (c) < TOP
>
Reason : The consumer will be in equilibrium, when
MUA PA
MUB PB
=
U = 10A0.5 B0.5
∂U 5
∂A –0.5 A
MUA = = 5A =
∂U 5
∂B B
MUB = = 5B–0.5 =
PA = 10
PB = 5
MUA PA
MUB PB
=
5 B 10
×
A 5 5
=
B 10
A 5
=
B 100
A 50
=
B
A
= 2
2A = B
or, A = 2B
1
2
When A = 1, B = = 0.5
∴ the answer is (c).
64. Answer : (d) < TOP
>
Reason : Production function = Q = 50 K0.4 L0.4
Budget constraint 1000 = 40L + 50K
Expansion Path L = 1.25K
Putting the values of L = 1.25 K in the budget constraint, we can get
1000 = 40 (1.25K) + 50K
or, 50K + 50K = 1000
or, 100K = 1000
or, K = 10.
When K = 10, L = 12.5
∴ The maximum possible output for the firm is
Q = 50 (10)0.4 × (12.5)0.4
= 345 units.
65. Answer : (c) < TOP
>
Reason : Production function = Q = 10L2 – 0.5L3
MPL = 20L – 1.5L2
When L = 10,
MPL = 20 (10) – 1.5(10)2
= 200 – 150
= 50.
Market wage rate = w = 50.
50
50
Marginal Cost = = Re.1.
66. Answer : (e) < TOP
>
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.
67. Answer : (c) < TOP
>
Reason : Demand function of the monopolist are given as
P = 800 – 10Q
TC = 300Q + 2.5Q2
TR = P × d = 800Q + 10Q2
∴MR = 800 – 20Q.
∴ Profit maximizing output for the monopolist can be determined, where,
MR = MC
∂ (TC)
∂Q
MC = = 300 – 5Q
∴ MR = MC
800 – 20Q = 300 + 5Q
– 25Q = – 500
Q = 20
∴ P = 800 – 10 (20) = 800 – 200 = 600.
68. Answer : (c) < TOP
>
Reason : Qa = 1,000 – 50Pa
Qb = 800 – 25Pb
TC = 500 + 10Q.
If the monopolists does not practice price discrimination, then
Qa = 1,000 – 50Pa
Qb = 800 – 25Pb
2Q = 1,800 – 75P
or, Q = 900 – 37.5P
or, 37.5P = 900 – Q
or, P = 24 – 0.2Q
TR = 24Q – 0.2Q2
MR = 24 – 0.4Q
Sales maximization is possible, when MR = 0
∴ 24 – 0.4Q = 0
Q = 60
∴ P = 24 – 0.2 (60) = 24 – 12 = Rs.12.
69. Answer : (e) < TOP
>
Reason : If the monopolist practices price discrimination, then, profit maximizing output can be
determined independently in both the markets by equating MR = MC
In Market A
Qa = 1000 – 50Pa
Or, 50Pa = 1000 – Qa
Or, Pa = 20 – 0.02 Qa
TR = 20Qa – 0.02Qa2
∴ MR = 20 – 0.04Q
∴ Profit maximizing output can be determined when MR = MC
∴ 20 – 0.04Q = 10
– 0.04Q = 10
Q = 250
When Q = 250, Pa = 20 – 0.02 (40) = 20 – 5 = Rs.15.
In Market B:
Qb = 800 – 25Pb
or, 25Pb = 800 – Qb
Or, Pb = 32 – 0.04Qb
∴TR = 32Q – 0.04Qb2
∴MR = 32 – 0.08Qb
∴ Profit maximizing output can be determined, when MR = MC
∴ 32 – 0.08Qb = 10
– 0.08Qb = 22
Qb = 275
When Qb = 275, Pb = 32 – 0.04 (275) = 32 – 11 = Rs.21.
70. Answer : (e) < TOP
>
Reason : The concentration ratio is the percentage of total industry sales made by the four (or
sometimes eight) largest firms of an industry.
∴ Eight-firm concentration ratio = 30 + 30 + 25 + 15 = 100%.
71. Answer : (c) < TOP
>
Reason : Demand function of the monopolistically firm is given as Q = 1500 – 0.20P
0.20P = 1500 – Q
P = 7500 – 5Q
TR = 7500Q – 5Q2
∴ MR = 7500 – 10Q
TC = 7500Q – 3Q2 – 0.02Q3
AC = 7500 – 3Q – 0.02Q2
The long run equilibrium can be determined, when AC = AR
or, 7500 – 3Q – 0.02a2 = 7500 – 5Q
or, – 3Q + 5Q – 0.02Q2 = 0
or, 2Q – 0.02Q2 = 0
or, Q(2 – 0.02Q) = 0
or, – 0.02Q = – 2
or, Q = 100.
72. Answer : (c) < TOP
>
Reason : FC = 100
VC = 2Q2 – 5Q
TC = 100 + 2Q2 – 5Q
P = 100 – Q
TR = 100Q – Q2
Profit = TR – TC
= 100Q – Q2 – 100 – 2Q2 + 5Q
= –3Q2 + 105Q – 100
= 3Q2 – 105Q + 100
100
Q
Average profit = 3Q – 105 + = 40
3Q2 – 105Q + 100 = 40Q
or, 3Q2 – 65Q + 100 = 0
a = 3
b = – 65
c = 100
−b ± b 2 − 4ac
2a
Q =
65 ± ( −65) 2 − 4 × 3 ×100
2 ×3
=
65 ± 4225 −1200
6
=
65 ± 55
6
=
65 + 55 120
6 6
∴Q = = = 20
At Q = 20, P = 100 – 20 = Rs.80.
< TOP OF THE DOCUMENT >

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