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Question Paper Economics - I (MSF1A3): April 2008

• Answer all 81 questions.• Marks are indicated against each question.

Total Marks : 100

1. The tendency of market prices to direct individuals pursuing their own interests into productive activities that also promote the economic well being of the society, is referred to as

(a) Price mechanism(b) Invisible hand principle(c) Competitive efficiency(d) Marginal analysis(e) Allocative efficiency. ( 1 mark)

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2. According to general equilibrium analysis who among the following is/are considered as decision making agents?

I. Consumers.II. Producers.III. Resource owners.

(a) Only (I) above(b) Only (II) above(c) Only (III) above(d) Both (II) and (III) above(e) All (I), (II) and (III) above. ( 1 mark)

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3. Which of the following statements is not true?

(a) The quantity desired to be purchased may be different from the quantity actually bought by the consumer

(b) Quantity demanded is a flow concept(c) The factors that influence the decision of the consumer to buy, other than price are assumed to

be constant in demand analysis(d) While plotting the demand curve the price of the commodity is placed on x-axis(e) There exists an inverse relation between price and quantity demanded. ( 1 mark)

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4. There will be an increase in revenue for an increase in price when the price elasticity is

I. Equal to zero.II. Less than one.III. Equal to one.

(a) Only (I) above (b) Only (II) above(c) Only (III) above(d) Both (I) and (II) above(e) All (I), (II) and (III) above. ( 1 mark)

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5. An educational institution is considering an increase in course fees of a particular course to enhance its revenue. If the institute expects that raising course fees would enhance revenue, then

(a) It is ignoring the law of demand(b) It is assuming that the demand for the course is elastic(c) It is assuming that the supply of the course is elastic(d) It is assuming that the demand for the course is inelastic(e) It is assuming that the supply of the course is inelastic. ( 1 mark)

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6. Market research has shown that the cross price elasticity of demand for good X with respect to the price of good Y is a negative number. This means that

(a) Both the goods have a upward sloping demand curve (b) The supply curve for X is a horizontal straight line(c) X and Y are complements(d) X and Y are substitutes (e) Both X and Y are normal goods. ( 1 mark)

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7. Which of the following is a movement along the supply curve?

(a) A fall in the output of rice because of a rise in the prices of pesticides and fertilizers

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(b) An increase in supply of air travel because of the liberalization of the aviation sector(c) A rise in the price of sugar leading to an increased production of sugarcane(d) A rise in the wages for workers in the software industry leading to an increase in the supply of

software professionals(e) An increase in the supply of computers because of entry of many firms into the industry. ( 1 mark)

8. The supply and demand functions of a commodity are estimated as

Qd = 1,000 – 200P

Qs = 800P – 2,000

At equilibrium, the elasticity of supply for the commodity is

(a) 2(b) 4(c) 6(d) 8(e) 1. ( 1 mark)

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(a) The concept of total utility is subjective(b) The operation of law of diminishing marginal utility is subject to a particular time period (c) The marginal utility curve slopes downwards from left to right(d) At satiety point the total utility is minimum(e) The marginal utility curve can be derived by measuring the slope of the total utility curve at

various points on the total utility curve. ( 1 mark)

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10. The shape of indifference curve in case of perfect complements is

(a) L-shaped(b) Straight line sloping downward(c) Straight line sloping upward(d) Convex to origin(e) U-Shaped. ( 1 mark)

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11. For a good to be considered as a ‘luxury good’ the value of its income elasticity of demand should be

(a) Equal to one(b) Greater than one(c) Less than one(d) Zero (e) Negative. ( 1 mark)

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12. The locus of all tangency points between budget lines and the indifference curves is called as the

(a) Income consumption curve(b) Production consumption curve(c) Isoquant(d) Isocost line(e) Production possibility curve. ( 1 mark)

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13. ‘Diamond- water’ paradox shows the operation of

(a) Law of demand(b) Law of supply(c) Law of diminishing marginal utility(d) Law of variable proportions (e) Law of equi-marginal utility. ( 1 mark)

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14. Given the money income of the consumer as Rs. 700 and the prices of two products M and N on which he spends all his income. The product M costs him Rs. 20 per unit and per unit price of product N is Rs.35. What would be the budget constraint?

(a) QM + QN = 700

(b) 20 QM + 35 QN = 700

(c) 20 QM – 35 QN = 700

(d)

(e) (20 + QM) (35 + QN) = 700.( 1 mark)

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15. The shape of marginal product curve is <Answer>



(a) Inverted U-shaped(b) U-shaped(c) Vertical straight line(d) Horizontal straight line(e) Downward sloping straight line. ( 1 mark)

16. Which of the following statements is/ are false?

I. Isoquant is a curve drawn on a graph with different factors of production on the two axes.II. The output is same on any point of the isoquant curve.III All parallel isoquant curves represent the same output.IV. The point where an isocost line is tangential to an isoquant curve is the point where the cost is the least.V. The point where an isocost line is tangential to an isoquant curve is the point where the cost is the highest.

(a) Only (I) above(b) Only (II) above(c) Both (III) and (IV) above(d) Both (III) and (V) above(e) (I), (III) and (IV) above. ( 1 mark)

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17. According to the law of variable proportions when the units of labor are increased keeping the capital same, the marginal productivity of labor will

(a) First increase and then decrease (b) First decrease and then increase(c) Increase continuously (d) Decrease continuously (e) Remain the same. ( 1 mark)

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18. At a stage where the total product is maximum, the marginal product will be

(a) Maximum (b) Minimum(c) Zero(d) Equal to total product(e) Equal to average product. ( 1 mark)

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19. Expansion path is the locus of various points where the firm’s expenditure

(a) Increases without any change in the price of inputs(b) Increases with some change in the price of inputs(c) Increases with change in the price of outputs(d) Decreases without any change in the price of inputs(e) Decreases with change in the price of inputs. ( 1 mark)

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20. Which of the following statements is false?

(a) Isoquants are useful only when two variable inputs are used(b) Isoquants are also called as production indifference curves(c) Marginal Rate of Substitution (MRS) is expressed through an isoquant (d) Two isoquants never touch each other(e) A higher isoquant represent a higher level of output. ( 1 mark)

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21. Which of the following curves are not convex to origin?

I. Individual supply curve.II. Isoquant curve.III. Isocost curve.IV. Budget line.V. Total Product curve.

(a) Both (I) and (II) above(b) Both (II) and (III) above(c) (I), (II) and (III) above(d) (I), (II) and (IV) above(e) (I), (III), (IV) and (V) above. ( 1 mark)

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(a) Average product cannot be zero(b) Average product will always be greater than marginal product(c) Marginal product is zero when total product is maximum

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(d) For first unit of variable input the marginal product is the same as total product(e) Marginal product increases only when the total product is increasing at an increasing rate. ( 1 mark)

23. In case of a homogeneous production function, the expansion path will be

(a) A straight line through origin(b) Vertical straight line(c) U–shaped(d) L–shaped(e) Horizontal straight line. ( 1 mark)

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24. The total cost is a function of

(a) The price of input(b) The number of different inputs used(c) The output to be produced(d) The demand of the product(e) The nature of the product. ( 1 mark)

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25. The time cost, if expressed in terms of money is referred as

(a) Implicit cost(b) Explicit cost(c) Indirect cost(d) Economic cost(e) Variable cost. ( 1 mark)

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26. Which of the following statements is true with regard to cost curves in the short run?

(a) The marginal cost curve intersects the average variable cost curve at its lowest point and the average total cost curve at its highest point

(b) The marginal cost curve intersects the average variable cost curve at its highest point and the average total cost curve at its lowest point

(c) The marginal cost curve intersects both the average variable cost curve and the average total cost curve at their lowest points

(d) The marginal cost curve intersects both the average variable cost curve and the average total cost curve at their highest points

(e) The marginal cost curve never intersects the average variable cost curve and the average total cost curve. ( 1 mark)

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(a) The long run average cost is determined by economies of scales(b) When increase in production of one product leads to decrease in cost of production of another

product, it is termed as economies of scope(c) Pecuniary economies of scale accrue to a firm when the firm gets discount due to large scale

operation(d) Economies of scales are classified into internal and external economies of scales(e) Real economies of scale can be achieved through the increase in the quantity of inputs. ( 1 mark)

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28. Which of the following is/are referred as technological change(s)?

I. Innovation of new products.II. Improvement in the existing product.

III. Reduction in the cost of production.

(a) Only (I) above(b) Only (II) above(c) Both (I) and (II) above(d) Both (I) and (III) above(e) All (I), (II) and (III) above. ( 1 mark)

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29. If the firm’s total revenue exceeds its economic costs, the residual is considered as

(a) Pure profit(b) Producer surplus(c) Accounting profit(d) Consumer surplus(e) Marginal revenue. ( 1 mark)

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30. Which of the following statements is incorrect?

(a) Fixed cost is incurred even if the production is zero(b) Total average cost cannot be zero(c) Average cost is minimum when it is equal to marginal cost

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(d) The average total cost curve is flatter than average variable cost curve(e) The minimum point of average cost curve will be to the left of the minimum point of the

average variable cost curve. ( 1 mark)

31. The ‘reserve capacity economies’ comes under

(a) Production economies(b) Labor economies(c) Technical economies(d) Managerial economies(e) Marketing economies. ( 1 mark)

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32. Which of the following costs can be easily attributed to a product or a process?

(a) Fixed cost(b) Variable cost(c) Implicit cost(d) Private cost(e) Separate cost. ( 1 mark)

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33. Which of the following statements is false about perfect competition?

(a) It is a kind of market structure where no particular firm can influence the price(b) There is free flow of information(c) The technical characteristics of the products produced by various firms are identical(d) The demand curve of an individual firm is infinitely inelastic(e) The level of market price is determined by the forces of demand and supply. ( 1 mark)

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34. In a perfectly competitive market, firms earn only normal profit in the long-run. This is

(a) Due to homogenous products they produce(b) Because of constant price(c) Due to existence of large number of buyers(d) Due to free entry and exit of firms(e) Because of absence of transport cost. ( 1 mark)

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35. In perfect competition, the slope of average revenue curve is

(a) Twice the slope of marginal revenue curve(b) Half the slope of marginal revenue curve(c) Zero(d) Infinity(e) One. ( 1 mark)

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36. Under perfect competition, the supply of an individual firm becomes zero, if the price is

(a) Below the average variable cost(b) Above the average variable cost(c) Above the marginal cost(d) Equal to marginal cost(e) Equal to average variable cost. ( 1 mark)

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37. Under perfect competition which of the following will happen when a specific sales tax is imposed?

(a) The MC curve will shift upward to left and the amount of goods produced at the prevailing price will reduce

(b) The MC curve will shift downward to right and the amount of goods produced at the prevailing price will reduce

(c) The MC curve will shift upward to left and the amount of goods produced at the prevailing price will increase

(d) The MC curve will shift downward to right and the amount of goods produced at the prevailing price will increase

(e) The MC curve will shift downward to right and the amount of goods produced at the prevailing price will remain the same. ( 1 mark)

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38. Which of the following is/are (an) assumption(s) of the kinked demand curve model?

I. There are few firms in the oligopolistic industry.II. Each firm produces a product which is close substitute for the other firm’s product.

III. Product qualities vary and firms incur a huge amount on advertising expenditure.

(a) Only (I) above(b) Only (II) above

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(c) Only (III) above(d) Both (I) and (II) above(e) Both (II) and (III) above. ( 1 mark)

39. Which of the following statements is true?

(a) In perfect competition there is no difference between a firm and an industry(b) In monopoly a supply curve does not exist(c) In oligopoly the AR curve is a horizontal straight line(d) In monopolistic competition products are homogenous(e) In monopsony there are large number of buyers and large number of sellers. ( 1 mark)

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40. According to Lerner, the difference between which two factors indicates the deviation from perfect competition to monopoly?

(a) Price and marginal cost(b) Price and average cost(c) Average cost and marginal cost(d) Price and total revenue(e) Average cost and total revenue. ( 1 mark)

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41. Which of the following statements is false?

(a) The demand curve of a monopolist slopes downwards from left to right(b) There is no supply curve for a monopolist(c) In the short-run a monopolist may earn negative profits(d) If the MC curve of the monopolist is positively sloped then the increase in price will be

greater than the specific tax imposed(e) A monopolist can practice price discrimination only when the two markets are perfectly

separated. ( 1 mark)

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42. In Monopoly profits are maximum when

(a) Marginal cost equals average revenue(b) Marginal cost equals marginal revenue(c) Marginal cost equals average cost(d) Marginal cost is not equal to marginal revenue(e) Marginal cost is not equal to average cost. ( 1 mark)

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43. A monopolist is said to be in equilibrium when the elasticity of his average revenue curve is

(a) Greater than one(b) Equal to one(c) Less than one(d) Zero(e) Infinity. ( 1 mark)

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44. The demand function for a product is estimated as P = 40 – 4Q. If the current market price is Rs.8, what is the price elasticity of demand?

(a) – 0.333 (b) – 0.250(c) – 1.321(d) 1.321(e) 1.891. ( 1 mark)

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45. The demand and supply functions of a commodity are given as follows:

Qs = 200P – 250

Qd = 750 – 50P.

The equilibrium output for the product is

(a) 450 units(b) 550 units(c) 650 units(d) 400 units(e) 300 units. ( 1 mark)

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46. The demand function for a commodity is estimated to be Qd = 6,00,000 – 20P.The theoretical highest price that can

prevail in the market is

(a) Rs. 90,000(b) Rs. 30,000

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(c) Rs. 10,000(d) Rs. 20,000(e) Rs. 40,000. ( 1 mark)

47. The demand schedule of a perishable good is given below:

Price(Rs.)

Quantity demanded(Units)

8 40

10 60

What is the arc price elasticity of demand?

(a) 0.72(b) 0.62(c) 0.52(d) 0.42(e) 1.80. ( 1 mark)

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48. For a product, the demand function is given as Qd =140 – 2P. If the product is sold at a price of Rs. 60, the marginal

revenue earned from the sale of the product is

(a) Rs. 5 (b) Rs. 25 (c) Rs. 50 (d) Rs. 65 (e) Rs. 45. ( 1 mark)

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49. An increase in the sales tax increases the price of a commodity from Rs.3 to Rs.4. If the quantity demanded decreases from 10 to 5 units, the absolute value of arc price elasticity of demand of the commodity is(a) 2.33 (b) 2.50 (c) 5.00 (d) 3.00 (e) 3.33. ( 1 mark)

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50. Demand and supply functions for a product are given as

Qd = 10,000 – 4P

QS = 3,000 + 6P.

If the government imposes a sales tax of Rs.200 per unit, the price increases by

(a) Rs. 100(b) Rs. 110(c) Rs. 120(d) Rs. 130(e) Rs. 140. ( 2 marks)

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51. The marginal utility function of a consumer is estimated to be

MU = 0.70m.

How many units of good m the consumer would be willing to consume if the price of the good m is Rs. 28?

(a) 10 units(b) 20 units(c) 30 units(d) 40 units(e) 50 units. ( 2 marks)

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52. A consumer is indifferent between the combinations X and Y.

Combination Good A (units) Good B (units)

X 10 10

Y 12 14

The value of Marginal Rate of Substitution (MRSBA) for the consumer is

(a) 0.50

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(b) 1.00(c) 1.50(d) 2.00(e) 0.05. ( 1 mark)

53. For a consumer in equilibrium, Marginal Rate of Substitution of good A for good B (MRSAB) is 5. If price of the

good A (PA) is Rs.95, price of good B (PB) is

(a) Rs. 17(b) Rs. 19(c) Rs. 6(d) Rs. 14(e) Rs. 15. ( 1 mark)

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54. The total utility obtained from the consumption of ice cream for a consumer is given by the equation, TU = X2.5. If the price of ice cream is given to be Rs. 67.5 per unit, the consumer maximizes his utility by consuming how many units of ice cream?


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55. Marginal utilities of goods A and B are 500 utils and 1,000 utils respectively. The price of good B is Rs.200. If the consumer is in equilibrium, the price of good A is

(a) Rs. 60 (b) Rs. 70(c) Rs. 80(d) Rs. 90(e) Rs.100. ( 2 marks)

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56. The production function for XYZ Ltd. is estimated as TP = 80L2 – L3. The maximum possible average product of labor is

(a) 1,200 units(b) 1,300 units(c) 1,400 units(d) 1,500 units(e) 1,600 units. ( 1 mark)

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57. The production function of Singh and co. is given as TPL = 30L – 1.5L2. The number of labor after which marginal

product becomes negative is


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58. The following are the marginal productivity functions of labor and capital for a firm:

MPK = 0.75 , MPL = 0.75 .

If the wage paid to the laborers is Rs.8 per unit and the cost of capital is Rs.5 per unit, the cost minimizing proportion of L to K is

(a) L = K(b) L = K(c) L = (5 + 8) K(d) L = (5 – 8) K(e) L = (8 × 5) K. ( 2 marks)

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59. The short run production function of a firm is estimated to be

Q = 36L2 – L3.

If the firm is a rational entity, it would employ labor in the range of

(a) 0 to 12 units (b) 0 to 18 units (c) 12 to 18 units

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(d) 12 to 24 units (e) 18 to 24 units. ( 2 marks)

60. Which of the following can be considered as long run cost function(s)?

I. C = 20 + 3Q + 0.25Q2.II. C = 200Q + 0.5Q2.III. C = 100 + Q – 2Q2.IV. C = 10Q + 150Q2.

(a) Only (I) above(b) Only (III) above(c) Both (II) and (III) above(d) Both (II) and (IV) above(e) Both (I) and (III) above. ( 1 mark)

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61. The total cost function of ABC Ltd. is given as TC = 20Q – 0.30Q2 + 0.01Q3. What is the output at which marginal cost is minimum?


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62. The fixed cost of a firm is Rs. 250 and the variable cost is estimated as

VC = 20Q + Q2. What is the total cost incurred by the firm when output is 10 units?


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63. The long run total cost function of a firm is TC = Q3 – 80Q2 + 1,900Q.What is the minimum possible long run average cost?


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64. The total cost function for Suman Ltd. is given as TC = 200 + 8Q + 2Q2. The firm is a perfectly competitive firm and is selling the product at Rs.48. If the output produced and sold by the firm is 10 units, the profit earned by Suman Ltd. is

(a) Zero (b) Rs. 10(c) Rs. 20(d) Rs. 25(e) Rs. 30. ( 2 marks)

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65. For a firm, variable cost at various levels of output are given below:

Quantity (units) Variable cost (Rs.)1 52 53 104 155 206 25

What is the total cost incurred to produce 5th unit of output, if the total fixed cost is Rs. 20?


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66. The marginal revenue of a firm is Rs. 2 and the marginal cost is estimated as MC= 82 – Q. What is the profit maximizing output?


67. The average cost function of a firm is given as follows:

.What is total cost for the firm at an output of 10 units?(a) Rs. 1,800(b) Rs. 1,900(c) Rs. 1,700(d) Rs. 1,600(e) Rs. 2,000. ( 2 marks)

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68. Total cost function of a firm is TC = 500 + 5Q. If price of the product sold by the firm is Rs.7 per unit, the break-even sales revenue is

(a) Rs. 100 (b) Rs. 250 (c) Rs. 700 (d) Rs.1,250 (e) Rs.1,750. ( 1 mark)

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69. If total cost function for a firm is TC = 36Q – 0.60Q2 + 0.020Q3, the minimum possible average cost is

(a) Rs.63.00 (b) Rs.36.50 (c) Rs.31.50 (d) Rs.60.00 (e) Rs.48.50. ( 1 mark)

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70. The demand function of a firm is estimated as P = 1,000 – 50Q and the average variable cost function of the firm is given as AVC = 250 + 25Q. At the equilibrium level of output if the average fixed cost is Rs.60, then what is the total cost at that level of output (assume short run)?

(a) Rs. 2,175(b) Rs. 2,165(c) Rs. 2,155(d) Rs. 2,075(e) Rs. 2,265. ( 2 marks)

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71. A firm operating in a perfectly competitive market has an average variable cost function AVC = 800 – 80Q + 8Q2. What is the price below which the firm has to shut-down its operations in the short run?


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72. The demand function for a firm operating in perfect competition is given as P = 40 – 4Q. What is the average revenue if it sells 4 units of output?


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73. The Long-run Average Cost function of a firm operating under perfect competition is estimated to be

LAC = 50 – 625Q + 25Q2.

If the current market price of the good produced by the firm is Rs.20, the long run equilibrium output of the firm is

(a) 10.5 units(b) 11.5 units(c) 12.0 units(d) 12.5 units(e) 15.0 units. ( 2 marks)

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74. There are 200 individual firms in a perfectly competitive industry with identical cost functions. The demand function for the industry is estimated to be Qd = 3,000 – 200P and the total cost function of a firm is TC = 200 – 50Q + 2Q2,

equilibrium price of the product is


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75. The long run average cost function of a firm under perfect competition is estimated 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) 50(b) 80(c) 100(d) 120(e) 140. ( 2 marks)

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76. A monopolist has a marginal revenue function, MR = 1,200 – 40Q. The marginal cost of the firm is Rs.160. What is the profit maximizing output of the firm?


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77. Demand and cost functions of a monopolist are

P = 800 – 10QTC = 300Q + 2.5Q2.

Profit maximizing price for the monopolist is

(a) Rs.350(b) Rs.400(c) Rs.600(d) Rs.650(e) Rs.700. ( 2 marks)

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78. The following is the sales data of various firms operating in an industry.

Firm Sales (in Rs. crore)

I. A 3,000

II. B 2,200

III. C 1,570

IV. D 4,720

V. E 1,248

VI. F 1,008

VII. G 3,132 VIII. H 1,422

The 4-firm and 6-firm concentration ratios of the industry are respectively

(a) 0.66 and 0.74 (b) 0.71 and 0.88 (c) 0.78 and 0.83 (d) 0.66 and 0.87 (e) 0.59 and 0.74. ( 1 mark)

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79. A monopolistically competitive firm has the following short run cost and revenue functions

TC = 5,000 + 30Q – 20Q2 + Q3

TR = 30Q – 2Q2

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If the firm is maximizing profits at the current level of output, what would be the total cost of the firm?

(a) Rs.2,944 (b) Rs.3,824(c) Rs.4,062(d) Rs.4,208(e) Rs.5,878. ( 2 marks)

80. Two firms, A Ltd., and B Ltd., are duopolists producing a similar product and facing identical demand functions

PA = 100 – QA

where QA is total quantity sold by A and PA is price per unit.

Total cost functions of A and B Ltd. are: TCA = 100 + 20QA

TCB = 200 + 30QB.

If A Ltd., is enjoying price leadership through low-cost, the amount of profit sacrificed by B Ltd. to avoid a price war is

(a) Rs.1,025(b) Rs. 25(c) Rs.2,400(d) Rs. 125(e) Rs.2,275. ( 2 marks)

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81. In a country a firm Super Ltd., enjoys monopoly power in producing and supplying a product ‘Ultra’. The fixed cost of the firm is Rs.200 and its average variable cost is constant at Rs.30 per unit. Super Ltd. sells goods in Northern region and Southern region. The estimated demand functions for the good in Northern region is given as

PN = 40 – 2.5QN and in Southern region it is estimated as PS = 120 – 10QS.

If price discrimination is not practiced, the output produced by Super Ltd. to maximize sales revenue is


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END OF QUESTION PAPER

Suggested Answers

Economics - I (MSF1A3): April 2008

Answer Reason

1. b The tendency of market prices to direct individuals pursuing their own interests into productive activities that also promote the economic well being of the society, is referred to Invisible hand principle

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2. e According to general equilibrium analysis Decision making agents are• Consumers.• Producers.• Resource owners.

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3. d While plotting the demand curve the price of the commodity is placed on y-axis. < TOP >

4. d There will an increase in revenue when for an increase in price when the price elasticity is either zero or less than one.

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5. D If the institute believes that raising course fees will enhance revenue, it can happen only if the demand for the course is inelastic. This implies that as a result of an increase in price, the demand for the course do not fall, which helps in increasing revenue.

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6. c If the cross price elasticity of demand is negative it means that the goods are complements, e.g. an increase in the price of X will shift the demand curve for Y to the left.

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7. d A movement along the supply curve is caused by change in the price and resultant change in the quantity supplied. When price of labor (wages) increase, supply of labor increases. All other options lead to a shift in the supply curve.

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8. c At equilibrium, Qs = Qd1000 – 200P = 800P – 20003000 = 1000PP = 3.When P = 3, Qs = 400

Elasticity of supply =

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9. d At satiety point the total utility is maximum. < TOP >

10. a In case of perfect complements the indifference curve is L – shaped. < TOP >

11. b A good is considered as a luxury good if it’s income elasticity is greater than one. < TOP >

12. a The locus of points of tangency between budget line and the indifference curves is called as the income consumption curve.

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13. c ‘Diamond – water’ paradox explains that the more of a commodity we have, the marginal utility starts diminishing. If the availability of the product is less, marginal utility would be high.

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14. b Based on the given data the budget constraint can be written as 20 QM + 35 QN = 700

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15. a The marginal product of a factor increases first and after reaching a certain level it starts falling. So due to this the marginal product curve assume an inverted U- shaped.

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16. c An isoquant (equal product curve) is the locus of all those combinations of two inputs, which yields a given level of output. Parallel equal product curves do not represent the same output. The point where an iso-cost line is tangential to an equal-product curve (isoquant curve) is the profit maximizing point.

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17. A The law of variable proportions states that “ as we increase the number of units of one input and keep the other inputs same, the marginal productivity of the variable input increases initially and then decrease.

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18. c At a stage where the total product is maximum, the marginal product will be Zero. < TOP >

19. a Expansion path is the locus of different points where the firm’s expenditure increases without any change in the price of inputs.

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20. c It is Marginal Rate of Technical Substitution (MRTS) which is expressed through an isoquant. Whereas Marginal Rate of Substitution (MRS) is expressed through an indifference curve.

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21. e Only isoquant curve is convex to origin.Supply curve slopes upweel from left to right.Isocost curve slopes downwards from left to right.Budget line slopes downwards from left to right.Total product curve is inverted u shape.

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22. b The average product will be greater than marginal product only after the point when both of them are equal. Before this point the marginal product will greater than average product.

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23. a If the production function is homogeneous then the expansion path will be a straight line through origin.

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24. c The cost function shows that the total cost is depended on the output to be produced. < TOP >

25. a The time cost when expressed in terms of money is referred as implicit cost. < TOP >

26. c The marginal cost curve intersects both the average variable cost curve and the short run average total cost curve at their lowest points

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27. e (a) is true hence it is not the correct answer(b) is true hence it is not the correct answer(c) is true hence it is not the correct answer(d) is true hence it is not the correct answer

(e) is not true because real economies of scale can be achieved through the reduction in the quantity of inputs. Hence it is the correct answer.

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28. e A technological change involves:• Innovation of new products.• Improvement in the existing product.• Reduction in the cost of production.

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29. a If the firm’s total revenue exceeds its economic costs, the residual accruing to the entrepreneur is called as economic or pure profit.

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30. e Option (e) is not true. The reason for this is that the marginal cost curve cuts the average cost curve and the average variable cost curve at their minimum points and as the marginal cost curve is upward rising curve and the average cost curve being flatter than average variable cost curve. Hence the minimum point of average cost will be to the right of the minimum point of the average variable cost.

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31. c The ‘reserve capacity economies’ are part of Technical economies. < TOP >

32. e Separate cost can be easily attributed to a product or a process. < TOP >

33. d In perfect competition the demand curve of a individual is infinitely elastic, that means that the individual can sell any amount of output at prevailing price.

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34. d In a perfectly competitive market in the long run no firm earns abnormal profit because of existence of free entry and free exit into the industry. So when ever there is some extra profit in the industry some new firms will enter into the market and compete away the extra profit. Thus in the perfect competition the firms will earn only normal profits.

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35. c In perfect competition the marginal revenue is equal to price which is constant. Hence the slope of marginal revenue curve is zero.

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36. a In perfect competition the supply of an individual firm is equal to zero if the price is below average variable cost.

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37. a In perfect competition when a specific sales tax is imposed then the MC curve will shift upward to left and the amount produced at the prevailing price will reduce.

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38. d • Is an assumption of kinked demand hypothesis.• Is an assumption of kinked demand hypothesis.• Is not an assumption of kinked demand hypothesis. According to kinked demand model Product qualities are constant, advertising expenditure are zero.

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39. b (a) Not true. There exists a difference between a firm and an industry(b) True. For a monopolist supply curve does not exists(c) Not true. Horizontal AR curve is a feature of perfect competition. For an oligopolist the AR curve is a downward sloping line(d) Not true. In monopolistic competition products are differentiated(e) Not true. In monopsony there is only one buyer buying from many seller.

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40. a According to Lerner the difference between price and marginal cost indicates the deviation from perfect competition to monopoly.

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41. d If the MC curve of the monopolist is positively sloped then the increase in price will be lesser than the specific tax imposed

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42. b To maximize profit the first order condition requires that the MR should equal to MC. A monopolist can maximize profits by equating MR with MC.

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43. a A monopolist is said to be in equilibrium where the elasticity of his average revenue curve is greater than one.

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44. b Price elasticity of demand = ∂Q/∂P × P/QGiven P = 8Demand function: P = 40 – 4QOr, 4Q = 40 – P Or, Q = 10 – 0.25POr Q = 10 – 0.25(8) = 10 – 2 = 8Thus, ∂Q/∂P × P/Q = -0.25 × 8/8 = -0.250

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45. b Qs = 200P – 250

Qd = 750 – 50P

Equilibrium price is determined when Qs = Qd.

∴ 200P – 250 = 750 – 50Por, 250P = 1000or, P = 4When P = 4, Qs = 200(4) – 250 = 800 – 250 = 550 units.

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46. b The theoretical highest price that can prevail in the market is when the quantity demanded is zero.6,00,000 – 20 P = 06,00,000 = 20 PP = = Rs. 30,000.

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47. e P1 = 8 Q1 = 40

P2 = 10 Q2 = 60

∆P = 2 ∆Q = 20Arc EPd = =

EPd = 1.80

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48. c Qd = 140 – 2P

Qd =140 – 2(60)

Qd =140 – 120

= 20P = 70 –0.5 QTR = 70Q –0.5 Q2

MR = 70 – 1QWhen Q = 20,MR = 70 –1(20) = 70–20 = Rs.50.

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49. a Arc price elasticity of demand = ∆Q/∆P × (P 0+ P1/Q0+Q1) = ( –5/1) × (7/15) = 2.33. < TOP >



50. c Qd = 10,000 – 4P

Qs = 3,000 + 6P

Equilibrium price is determined where,Qs = Qd

3,000 + 6P = 10,000 – 4P6P + 4P = 10,000 – 3,00010P = 7000P = 700.If the govt. imposes a sales tax of Rs.200 per unitQs = 3,000 + 6 (P – 200)

= 3,000 + 6P – 1200 = 1800 + 6P.∴Equilibrium price is determined, when Qs = Qd

∴ 1800 + 6P = 10,000 – 4P6P + 4P = 10,000 – 180010P = 8200P = 820∴ Change in Price = 820 – 700 = Rs.120 (Hence the price will increase by Rs. 120)

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51. d The consumer will consume till MU = PMU = 0.7m0.7m = 28m = 40 units.

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52. a MRSBA = < TOP >

53. b When the consumer is in equilibrium, =

∴ 5 = Pb = Rs.19

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54. c A rational consumer would consume upto the point where the Marginal utility = priceMarginal utility is given by Derivative of total utility i.e. X 2.5

Given 2.5X 1.5 =67.5 or x 1.5 = 27 or X = 9 units

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55. e ∴ PA = = Rs.100. < TOP >

56. e AP = TP/L = 80L – L2

Maximum AP: ∂AP/∂L = 080 – 2L = 0Or, L = 40At L = 40, AP = 80(40) – 40 x 40 = 1,600 units.

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57. c TPL = 30L – 1.5L2

MPL = 30 – 3L

Marginal returns become negative, once MPL equals zero. Thus,

30 – 3L = 0Or, L = 10.

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58. b Efficient allocation of L & K:MPL/w = MPK/r

0.75K0.75/(L0.25 × 8) = 0.75L0.75/(K0.25 × 5)5K = 8LOr, L = 5/8K.

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59. e First stage of production function ends when APL is highest and second stage ends when

MPL = 0. APL is highest when APL = MPL.

Q = 36L2 – L3

APL = Q/L = 36L – L2

MPL = ∂Q/∂L = 72L – 3L2

By equating APL and MPL,

36L – L2 = 72L – 3L2

2L2 = 36LOr, L = 18Thus, first stage of production is over the range of labor input 0 to 18.At the end of the second stage of production function,MPL = 0

72L – 3L2 = 0Or, L = 24.Thus, the second stage of production function is over the range of labor input 18 < L < 24.A rational firm would operate only in the second stage of production function. This is because of increasing APL in the first stage and negative MPL in the third stage.

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60. d Since functions (I) and (III) have fixed cost components i.e. 20 and 100, they are relevant in the short run only. And function such as C = 200Q + 0.5Q2 and C = 10Q + 150Q2 are examples of long run cost function because there is no fixed cost components exist in these two functions.

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61. e TC = 20Q – 0.30 Q2 + 0.01Q3

MC = = 20 – 0.6 Q + 0.03Q2

MC is minimum when = 0 = -0.6 + 0.06 Q = 0

0.06 Q = 0.6Q = 10.

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62. a Total cost = Fixed cost + variable costWhen Q = 10, VC = 20(10) + 102

= 200 + 100 = 300∴ TC = 250 + 300 = Rs.550

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63. e LTC = Q3 – 80Q2 + 1900QLAC = = Q2 – 80Q + 1900LAC will be minimum, where Or, or, 2Q – 80 = 0or, 2Q = 80or, Q = When Q = 40, LAC = (40)2 – 80 (40) + 1900 = 1600 – 3200 + 1900 = Rs.300.

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64. a The total revenue = Price × quantity. Then it becomes 48Q.Profits = total revenue – total costs Profits = 48Q – 200 – 8Q – 2Q2

= 40Q – 2Q2 – 200Profit at the output of 10 units = 40 (10) – 2 (10)2 – 200 = 400 – 200 – 200 = 400 – 400 = 0.

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65. d TC = FC + VC = 20 + 20 = Rs. 40. < TOP >



66. d The MC = 82 – Q∴ Profit maximizing output for the firm is determined where,MR = MCor, 2 = 82 – Qor, Q = 82 – 2 = 80 units.

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67. e AC = 800/Q + 80 + 4QTC = 800 + 80Q + 4Q2

TVC = 80Q + 4Q2

At output 10, TC = 800+80(10) + 4(10)2 = 800+ 800 + 400 =Rs.2,000 .

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68. e TC = 500 + 5QVC = 5Q; FC = 500AVC = = 5BEP = = = 250∴ BE Sales revenue = 250 × 7 = Rs.1750.

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69. c AC = TC/Q = 36 – 0.60Q + 0.020Q 2

AC is minimum when AC/ Q = 0= – 0.60 + 0.040Q = 00.040Q = 0.60Q = 15At Q = 15, AC = 36 – 0.60(15) + 0.020(15) 2 = 36 – 9 + 4.5 = Rs.31.50

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70. a Since the firm is operating in short run the equilibrium condition of the firm will be MR = MCGiven

P =1000 – 50QSo TR = P × Q = 1000Q – 50Q2

MR = 500 – 100QGiven AVC = 250 + 25Q VC = 250Q +25Q2

MC = 250 + 50QAt equilibrium MR = MC = 1000 – 100Q = 250 + 50Q = 750 = 150Q = Q = 5At this level of output the AFC = Rs. 60. So FC = 60 x 5 = Rs.300 VC = 250(5) + 25(5)2 = 1250 + 625 = Rs. 1875 TC = FC + VC = 300 + 1875 = Rs.2,175

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71. e A firm will shut down its operations if the price is less than average variable cost. Since under perfect competition, price is also equal to marginal revenue, the firm will continue operations in the short run so long as price is at least equal to average variable cost. Thus the minimum price, which the firm will shut down, is the minimum average variable cost. AVC = 800 – 80Q + 8Q2

Minimum average variable cost: AVC/ Q = 0Thus, -80 + 16Q = 0Or, 16Q = 80Q=5When the firm is producing 5 units, then AVC = 800 – 80(5) + 8(25) = 600. Thus, if price falls below Rs.600, The firm has to shut down its operations.

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72. a In perfect competition the price is equal to average revenue so AR = 40 – 4 QQ = 4AR = 40 – 16 = Rs. 24

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73. d 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 LAC = 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 = 625Or, Q = 12.5 units.

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74. c For a firm operating in a perfectly competitive industry, the MC curve above the AVC curve is the supply curve of the firm.MC = ∂TC/∂Q = - 50 + 4Q = POr, 4Q = P + 50 Or, Q = 0.25P + 12.5There are 200 firms, hence Qs = 200x Q = 50P + 2500Equilibrium price is where, Qs = Qd

3000 – 200P = 50P + 2500Or, 250P = 500 Or, P = Rs.2.

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75. c LAC=100 – 20Q + 2Q2

P=100 – 0.1QIn the long run, all firms operate at the lowest of their average cost curves.So, Or, – 20 + 4Q = 0Or, 4Q = 20Or, Q = 5. (Firm’s output)At Q = 5,LAC=100 – 20 (5) + 2 (5)2=100 – 100 + 50=50At equilibrium, LAC = PWhen P = 50, 50 = 100 – 0.1Qor, –0.1Q = –50or, Q = 500 (Industry’s output)∴ No. of firms = = = 100.

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76. c A monopolist maximizes its profits when MR = MC.MR = 1,200 – 40QMR = MC 1200 – 40Q = 16040Q = 1040Q = 26 units.

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77. c Demand function of the monopolist are given asP = 800 – 10QTC = 300Q + 2.5Q2

TR = P × q = 800Q – 10Q2

∴MR = 800 – 20Q.∴ Profit maximizing output for the monopolist can be determined, where,MR = MCMC = = 300 + 5Q∴ MR = MC800 – 20Q = 300 + 5Q– 25Q = – 500Q = 20∴ P = 800 – 10 (20) = 800 – 200 = Rs.600.

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78. B Total sales: 3000 + 2200 + 1570 + 4720 + 1248 + 1008 + 3132 + 1422 = 183004-firm concentration ratio = (4720 + 3132 + 3000 + 2200)/18300 = 13052/18300 =0.71

6-firm concentration ratio = (4720 + 3132 + 3000 + 2200 + 1570 + 1422)/18300= 16044/18300= 0.88.

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79. d The profit maximizing output is where MC = MR30 – 40Q + 3Q2 = 30 – 4QOr, 3Q2 = 36QOr, Q = 12At output of 12 units, total cost = 5000 + 30(12) – 20(12)2 + (12)3 = 5000 + 360 – 2880 + 1728 = Rs.4208.

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80. b To avoid price war, Beta Ltd. should charge same price as charged by the leader, Alpha Ltd. Alpha charges a price where it maximizes its profits. It is possible when MRA = MCA.

PA = 100 – QA

When Beta charges same price, it sells the same quantity of output as Alpha i.e. QA = QB.

Thus, PA = 100 – QA

Or, TRA = (100 – QA)QA = 100QA – QA2

Thus, MRA = 100 – 2QA

At equilibrium, 100 – 2QA = 20

Or, QA = 80/2 = 40

Or, PA = 100 – 40 = 60.

Thus, price charged by Beta is also Rs.60Thus, total revenue of Beta = 60 x 40 = 2400And, total cost = 200 + 30(40) = 1400Profits = 2400 – 1400 = 1000.The profit maximizing output for Beta is where MRB = MCB

TRB = (100 – QB)QB = 100QB –

MRB = 100 – 2QB

At equilibrium, 100 – 2QB = 30

Or, QB = 70/2 = 35

And, PB = 100 – 35 = 65.

Total revenue of beta at price Rs.65 = 65 x 35 = 2275Total cost = 200 + 30 (35) = 1250

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Profits = 2275 – 1250 = 1025Hence, profits sacrificed = 1025 – 1000 = Rs.25.

81. d When price discrimination is not practiced by the monopolist, PN = PS.

PN = 40 – 2.5QN

2.5QN = 40 – PN

QN = 16 – 0.4PN

PS = 120 – 10QS

10QS = 120 – PS

QS= 12 – 0.1PS

Total output sold by the monopolist = Q = QS + QN

Thus, Q = 16 – 0.4PN + 12 – 0.1PS

Q = 28 – 0.5PTR = P x Q = P(28 – 0.5P) = 28P – 0.5P2

Maximum TR: TR/ Q = 028 – P = 0Or, P = 28When P = 28, Q = 28 – 0.5(28) = 14 units.

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