1

Preface
On the initiative of DAV College Managing Committee & encouragement of our honourable Regional
Director Dr. S Marriya, this question bank is prepared by the DAV teachers of UP & UK who have
attended a two day workshop for PGT Economics held at Meerut on 22nd & 23rd August, 2015. The
members of Board of Studies coordinated the work with all the teachers of UP & UK.
It aims at improving the performance of economics students in board exam 2016. This question bank
endeavours the commitment towards academic excellence of the students of DAV public schools.
The question bank is prepared in two volumes. It carries solved Multiple Choice Questions, High
Order Thinking Questions, Value Based Questions & topic wise Board Questions from 2008 to 2015 of
all types. This will act as a support material for the students in enhancing the performance in the
forthcoming board exam.

PLAN FOR THE STRUCTURED REVISION

Students must realize that time is a scarce resource and start the planned and effective
revision for a good result.
1 . Every student must paste a copy of the syllabus in his note book.
2. Topic wise/ Unit wise revision should be done - for that students are advised to read the topics
thoroughly from study material. Understanding of the concepts must be developed.
3. After preparing the particular topic/ unit, practice questions related to that topic from the
question bank (students are advised to write the answers for improving their writing skills)
4. The above work may be monitored by the bright students who are the group leaders because
peer group learning proved to be effective. Answers of slow learners to be checked by the
teacher himself.
5. Students who are unable to do all the questions they are advised to do at least board questions
given in question bank.
6. After the I Pre- Board, again the previous board papers should be thoroughly drilled and
solved by the students again. But this time the solution will be paper wise; but not unit wise.

SYLLABUS (2015-16)

WEIGHTAGE OF MARKS (UNIT WISE)

CLASS - XII (2015-16) 100 Marks 3 Hours

UNITS MARKS NO. OF PERIODS
Part 1 MICRO ECONOMICS
Introduction 6 11
Consumer’s Equilibrium & Demand 16 34
Producer Behaviour & Supply 16 34
Forms of market & Price determination 12 31
Part 2 MACRO ECONOMICS
National Income & Related Aggregates 15 32
Money & Banking 8 18
Determination of Income & Employment 12 27
Government Budget & Economy 8 17
Balance of Payments 7 16

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 100 220
DETAILED SYLLABUS
Part A: Introductory Microeconomics
Unit 1: Introduction- Meaning of microeconomics and macroeconomics
What is an economy? Central problems of an economy: what, how and for whom to produce; concepts of
production possibility frontier and opportunity cost.
Unit 2: Consumer's Equilibrium and Demand Consumer's equilibrium - meaning of utility, marginal
utility, law of diminishing marginal utility, conditions of consumer's equilibrium using marginal utility
analysis. Indifference curve analysis of consumer's equilibrium-the consumer's budget (budget set and
budget line), preferences of the consumer (indifference curve, indifference map) and conditions of
consumer's equilibrium.
Demand, market demand, determinants of demand, demand schedule, demand curve and its slope,
movement along and shifts in the demand curve; price elasticity of demand – factors affecting price
elasticity of demand; measurement of price elasticity of demand - (a) percentage change method and (b)
geometric method (linear demand curve); relationship between price elasticity of demand and total
expenditure.
Unit 3: Producer Behaviour and Supply
Production function – Short-Run and Long-Run -Total Product, Average Product and Marginal Product.
Returns to a Factor Cost: Short run costs - total cost, total fixed cost, total variable cost; Average cost;
Average fixed cost, average variable cost and marginal cost-meaning and their relationships. Revenue -
total, average and marginal revenue - meaning and their relationships. Producer's equilibrium-meaning and
its conditions in terms of marginal revenue-marginal cost.
Supply, market supply, determinants of supply, supply schedule, supply curve and its slope, movements
along and shifts in supply curve, price elasticity of supply; measurement of price elasticity of supply - (a)
percentage-change method and (b) geometric method.
Unit 4: Forms of Market and Price Determination under Perfect Competition with simple
applications - Perfect competition - Features; Determination of market equilibrium and effects of shifts in
demand and supply. Other Market Forms - monopoly, monopolistic competition, oligopoly - their meaning
and features. Simple Applications of Demand and Supply: Price ceiling, price floor.
Part B: Introductory Macroeconomics
Unit 5: National Income and Related Aggregates
Some basic concepts: consumption goods, capital goods, final goods, intermediate goods; stocks and flows;
gross investment and depreciation. Circular flow of income; Methods of calculating National Income -
Value Added or Product method, Expenditure method, Income method. Aggregates related to National
Income: Gross National Product (GNP), Net National Product (NNP), Gross and Net Domestic Product
(GDP and NDP) - at market price, at factor cost; National Disposable Income (gross and net), Private
Income, Personal Income and Personal Disposable Income; Real and Nominal GDP. GDP and Welfare
Unit 6: Money and Banking
Money - its meaning and functions. Supply of money - Currency held by the public and net demand deposits
held by commercial banks. Money creation by the commercial banking system. Central bank and its
functions (ex.of Reserve Bank of India): Bank of issue, Govt. Bank, Banker's Bank, Credit control through
Bank Rate, CRR, SLR, Repo and Reverse Repo Rate, Open Market Operations, Margin requirement.
Unit 7: Determination of Income and Employment
Aggregate demand and its components. Propensity to consume and propensity to save (average and
marginal). Short-run equilibrium output; investment multiplier and its mechanism. Meaning of full
employment and involuntary unemployment. Problems of excess demand and deficient demand; measures to
correct them - changes in government spending, taxes and money supply.
Unit 8: Government Budget and the Economy
Government budget - meaning, objectives and components Classification of receipts - revenue receipts and
capital receipts; classification of expenditure – revenue expenditure and capital expenditure. Measures of
government deficit - revenue deficit, fiscal deficit, primary deficit their meaning.
Unit 9: Balance of Payments

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Balance of payments account - meaning and components; balance of payments deficit-meaning. Foreign
exchange rate - meaning of fixed and flexible rates and managed floating. Determination of exchange rate in
a free market.

Suggested Question Paper Design

Economics (Code No. 030) Class XII (2015-16) March 2016 Examination
Theory: 100 marks + Project: 10 Marks Duration: 3 hrs.
VSA SA I SA 2 LA
S. TYPES OF QUESTIONS MCQ 3 4 6 MARK %
N. 1 marks marks marks S
mark
1 Remembering – ( knowledge – Simple 2 1 2 2 25 25%
recall questions, meaning, terms,
concepts, principles, theories, identify
information)
2 Understanding – ( Comprehension to 3 2 1 2 25 25%
be familiar with meaning & to
understand conceptually, Interpret,
compare, contrast, explain,
paraphrase, or interpret information)
3 Application ( Use abstract information 3 1 2 1 20 20%
in concrete situation, to apply
knowledge to new situations, use given
content to interpret a situation,
provide an example, solve a problem)
4 HOT skills: ( Analysing & synthesis – 1 1 1 2 20 20%
classify, compare, contrast,
differentiate between different
between different pieces of information
from variety of sources)
5 Evaluation ( Appraise, Judge, justify, 1 1 - - 1 10%
value or worth of a decision or
outcomes based on values)
6 10X1 6X3=1 6X4=2 8X6=4 100 100%
=10 8 4 8 (30)

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 INTRODUCTION
MULTIPLE CHOICE QUESTIONS

1. Which of the following forms the subject matter of Micro Economics.

(a) Theory of consumers behaviour
(b) Aggregate demand and supply
(c) Govt. Budget
(d) National Income

2. Which is not the subject matter of Macro Economics.

(a) Employment level (b) Aggregate Demand & Supply
(c)National Income (d)Cotton Textile Industry
3. Economic problem arises because
(a) Resources are scarce (b) Wants are unlimited
(c) Resources have alternative uses (d)All of the above
4. Which problem is not a central problem of an Economy?
(a) What to produce & in what quantity?
(b) How to produce & for whom to produce?
(c) Efficient utilisation of resources
(d) When to produce?
5. Any point outside the boundary line of PPC shows:
(a) under utilisation of Resource (b) unattainable combination of output
(c)efficient utilisation of Resources (d)None of these
6. In which situation PPC shifts towards right
(a) Resources are increased (b) Resources are reduced
(c) Inefficient technology (d) None of these
7. Production Possibility Curve
(a) Slopes downwards & concave to the origin
(b) Slopes upwards & straight line
(c) Parallel to x axis
(d) Above all
8. An Economy produces two goods Wheat and Cloth. Find out marginal opportunity cost from the
following :
Wheat Cloth
0 100
1 90
(a) 1 (b) 0.4 (c) 10 (d) 0.25

9. When is PPC a straight line curve?

a. When MRT falls b. When MRT rises c. When MRT is constant

10. Economics which is objective and based on facts is known as

a. Micro Economics b. Macro Economics c. Positive Economics

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11. Economics which is subjective and is value based is known as
a. Price Theory b. Normative Economics c. Income Theory

12. The Economic activities which are fully dependent on the role of market forces are known as
a. Planned Economy b. Macro Economy c. Market Economy

13. The right ward shift of PPC indicates:

a. Outdated Technology b. Improvement in Technology c. None

14. Production in an economy is below its potential due to unemployment. Government starts
employment scheme. Which of the following diagram does depict it?

(a) (b) (c)

15. If X and Y are two goods produced in an economy, then marginal opportunity cost refers to
(a) b. (∆ X)/(∆ Y) c. Y/X

16. The following table shows various production possibilities for an Economy ( an imaginary table )

Production Possibility Consumer Goods Capital Goods

A 1 50
B 2 40
C 3 25
D 4 5
The above table illustrates
a. Decreasing marginal opportunity cost
b. Increasing Marginal opportunity cost
c. Constant Marginal opportunity cost

17. Which of the following curve shows change in Production Possibility Curve due to improvement in
technology of producing good X only whereas technology of producing Y is same?

Ans. 1. (a); 2. (d); 3. (d); 4. (d); 5. (b); 6. (a); 7. (a); 8. (c). 9. c 10. c 11. b 12. c 13. b
14 . a 15. a 16. b 17. c

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 INTRODUCTION
BOARD QUESTIONS
Note: O – outside Delhi, D – Delhi, F - Foreign

Q1. Giving reason comment on the shape of Production Possibility Curve based on the following schedule:
(3) O 2015 set1
Good X Good Y
0 30
1 27
2 21
3 12
4 0

Ans:-
Good X Good Y MRTxy = ∆Y/∆X 1 1/2
0 30 -
1 27 3Y:1X
2 21 6Y:1X
3 12 9Y:1X
4 0 12Y:1X
Since MRT is increasing, the PP curve is downward sloping concave to the origin. 1 1/2
(Diagram not required)
Q2. Giving reason comment on the shape of Production Possibility Curve based on the following schedule:
(3) O 2015 set2
Good X Good Y
0 16
1 12
2 8
3 4
4 0

Ans:-
Good X Good Y MRTxy = ∆Y/∆X 1 1/2
0 16 -
1 12 4Y:1X
2 8 4Y:1X
3 4 4Y:1X
4 0 4Y:1X
Since MRT is constant, so the PP curve is straight line curve downward sloping. 1 1/2
(Diagram not required)
Q3. i) What is likely impact of “Make in India” appeal to the foreign investors by the Prime Minister of India, on the
production possibility frontier of India? Explain. (3) O 2015
Ans:- ‘Make in India” appeal signifies invitation to foreign producers to produce in India. This will lead to increase
in resources thus raising production potential of the country.
Technology will improve as foreign investors will bring latest technology. As a result PPC will shift rightwards.
(Diagram not required) OR
ii) What is likely to be the impact of efforts towards reducing unemployment on the production potential of the
economy?
Ans:- Reducing Unemployment has no effect on the production potential of the country. It is because production
potential is determined assuming full employment. Unemployment indicated that the country is operating below
potential. Reducing unemployment simply helps in reaching potential. (Diagram not required)

Q4. Name the economic value achievable when attempts are made to increase resources in the country. (1) O C 2014
Ans:- Welfare motive – helping poor in getting more resources or facilities. It will make them more satisfied by

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 fulfilling more of their resources.

Q5. Name the economic value achieved by the spread of education in the context of production potential.(1) O C 2014
Ans:- Value : Empowering people- People will be more skilled , their efficiency will increase & they will increase
the production. It empowers the workers, it increases their contribution in production, so PPC shifts rightwards.

Q6. Unemployment is reduced by the measures taken by govt. State its economic value in the context of PPC.(1)2014 D
Ans:- Value: Better Utilisation of resources. Reducing unemployment means producer is moving from inside PPC
towards PPC leading to better utilisation of resources.
Increasing income of people – more affordability.

Q7. Why is Production Possibilities Curve concave? Explain (3) 2014 O

Ans: PPC is concave due to increasing Marginal rate of Transformation of x &y. As resources are not equally suited
for the production of both the goods. If resources are transferred from production of one good to another, cost
increases, therefore more resources are to be sacrificed for every additional unit to be produced.

Q8. Production in an economy is below its potential due to unemployment. Government starts employment
generation schemes. Explain its effect using production possibility curve. (4) 2013 O
Ans:- When employment is increased, resources are better utilised, Producer was inside the PPC, now he is moving
towards PPC. PPC is not changed.

Q9. What is opportunity cost? Explain with the help of an example. (1) 2009 O 2008 D (3) 2012 O set 1
Ans:- Opportunity cost is the cost of next best alternative sacrificed. Example: On a piece of land, wheat &
sugarcane both can be grown. If farmer decides to grow sugarcane, his opportunity cost of growing sugarcane is the
quantity of wheat which he has sacrificed.

Q10. Define PPC. Explain why it is down ward sloping from left to right. (3) 2012 O set 3
Ans:- All possible combinations of two goods which can be produced by the producer by fully utilising the given
resources at given technology. It is downward sloping from left to right because:
i) Resources are limited – if we increase production of one good, another has to be sacrificed
ii) Technology remains constant.

Q11. Define micro economics. (1) 2012 O set 1 & 3

Ans: Micro Economics is a branch of Economics which studies the behaviour of individual units of an economy.
Example: a producer, a consumer, a firm, an industry, demand of a consumer, market supply of a good etc.

Q12. What is planned economy? (1) 2011 O set 1

Ans: Economy which is directly under the control of the government. All the resources are identified & utilised by
the government for the welfare objective. All the problems are solved by the planning.

Q13. How is PPC affected by unemployment in the economy? Explain. (3) 2011 O set1 & 3
Ans:- During unemployment, resources are not reduced. Resources are available but they are not utilised efficiently,
so PPC does not change, it remains same, but producer is producing inside PPC which shows underutilisation of
resources..

Q14. Define macroeconomics. (1) 2011 O set3

Ans: Macro Economics is a branch of economics which studies the economy as a whole. Example: Aggregate

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Demand, Aggregate Supply, General Price level, Gross investment etc.

Q15. Explain the problem of how to produce? (3) O C 2014 (4) 2010 Delhi OR
Ans:- This problem refers to selection of technique to be used for production of goods and services. A good can be
produced using different techniques of production. By ‘technique’, we mean which particular combination of inputs to
be used. Generally, techniques are classified as: Labour intensive techniques and Capital intensive techniques.
i. In Labour intensive technique (LIT), more labour and less capital (in the form of machines, etc.) is used.
ii. In Capital intensive technique (CIT), there is more capital and less labour utilization.
For example, in India, LIT is preferred due to abundance of labour, whereas, countries like U.S.A., England, etc.
prefer CIT due to shortage of labour and abundance of capital.
Guiding Principle of ‘How to Produce': Combine factors of production in such a manner so that maximum output is
produced at minimum cost, using least possible scarce resources.

Q16. Distinguish between microeconomics & macroeconomics. Give examples. (4) 2010 Delhi
Microeconomics Macroeconomics

It studies about individual economic units like It studies about an economy as a whole.
households, firms, consumers, price, individual
consumer’s demand, wages, rent, profit, revenues etc.

It uses the method of partial equilibrium, i.e. It uses the method of general equilibrium, i.e.
equilibrium in one market. equilibrium in all markets of an economy as a whole.

The major microeconomic variables are price, The major macroeconomic variables are aggregate
individual consumer’s demand, wages, rent, profit, price, aggregate demand, aggregate supply, inflation,
revenues, etc. unemployment, etc.

1) Theory of Consumer’s Behaviour and Demand 1) Theory of National Income

2) Theory of Producer’s Behaviour and Supply 2) Theory of Money
3) Theory of Price Determination under Different 3) Theory of General Price Level
Market Conditions 4) Theory of Employment
5) Theory of International Trade

Q17. Explain the problem of ‘what to produce’ (3) O C 2014 (4) 2008,2009 D 2010 O OR
Ans:- This problem involves selection of goods and services to be produced and the quantity to be produced of each
selected commodity. Every economy has limited resources and thus, cannot produce all the goods. More of one good
or service usually means less of others.
For example, Production of more war goods is possible only by reducing the production of civil goods if resources are
limited. So, on the basis of the importance of various goods, an economy has to decide which goods should be
produced and in what quantities. This is a problem of allocation of resources among different goods. The problem of
‘What’ has two aspects:
(i) What possible commodities to produce: An economy has to decide, which consumer goods (rice, wheat, clothes,
etc.) and which of the capital goods (machinery, equipment’s, etc.) are to be produced. In the same way, economy has
to make a choice between civil goods (bread, butter, etc.) and war goods (guns, tanks, etc.). Demand Supply & Price
decides the solution of the problem of ‘what’. If D > S, price rises & it becomes profitable for the producer to produce,
thus producer will produce it.
(ii) How much to produce: After deciding the goods to be produced, economy has to decide the quantity of each
commodity that is selected. It means, if involves a decision regarding the quantity to be produced, of consumer and
capital goods, civil and war goods and so on.
Guiding Principle of ‘What to Produce& in what quantities': Allocate the resources in a manner which gives
maximum aggregate satisfaction.

Q18. Explain any two main features of a centrally planned economy. (4) 2010 O
Ans: i) Fully controlled by the government. Government evaluates the availability of resourced, identifies the needs
& all the central problems are solved through planning.
ii)Government works for welfare, not for profit.

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 Q19. Give two examples of Microeconomic Studies (1) 2009 D
Ans:- Demand of a good, equilibrium of a consumer.

Q20. Why does an economic problem arise? Explain. (3) 2009 D OR

Ans:- Economic Problem arises due to Scarcity of resources.( Scarcity means goods are not free & society
does not have enough of the goods to satisfy the wants of its people.)
 Human needs are unlimited – If we fulfil one need another arises. Needs never end.
 Resources to fulfil theses needs are limited.
 Therefore there is a need to ‘economise the resources’. Economising the resource does not mean being
miser, it means reducing wastage of resource & using them to their best possible efficiency.
 These resources have alternative uses, therefore there is a need to choose among these alternative uses. This
is problem of choice.
Q21. Why do the problems related to allocation of resources in an economy arise? Explain (3) 2009 O OR
Ans: same answer as above.

Q22. Explain the problem of ‘for whom to produce’. (3) 2014 D

Ans: This problem is the problem of distribution of national income among various factor of production. It refers to
selection of the category of people who will ultimately consume the goods, i.e. whether to produce goods for poorer
and less rich or richer and less poor. Since resources are scarce in every economy, no society can satisfy all the wants
of its people. Thus, a problem of choice arises.
Goods are produced for those people who have the paying capacity. The capacity of people to pay for goods depends
upon their level of income. How is the rent of land determined? how is the interest of capital determined? how is the
wages of labour decided? & how is the profit of enterprise decided? Means- this problem is concerned with
distribution of income among the factors of production (land, labour, capital and enterprise), who contribute in the
production process. guiding principle is to decide the price equal to their contribution & best distribution is that in
achieving the situation when one cannot be made better off without making other worse off.

Q23. Define ‘Marginal Rate of Transformation’ (1) 2008 O

Ans: The amount of good Y sacrificed in order to increase the production of one additional unit of good X is
called as Marginal rate of transformation. We can also define MRT in general terms. MRT is the ratio of units of
one good sacrificed to produce one more unit of the other good. MRT = Units of good Y sacrificed / More units of
good X produced
MRT xy= Δ Y / Δ X

INTRODUCTION
HIGHER ORDER THINKING QUESTIONS

Q1. Give two examples to illustrate that Micro Economics depends upon Macro Economics.
Ans: i)An individual firm’s decisions are based on the government policy of direct & indirect taxes-
If government reduces duty & indirect tax on paper & printing material, individual producers will
increase their investment on printing.
ii)Due to economic slow down If government decides to reduce the CRR, SLR & bank rate,
individual banks will reduce their interest rates & individuals will take more loan.
Q2. Show the following situation with PPF (PPC)
(a) Fuller utilisation of resources (b) Growth of resources. (c) Under utilisation of resources.
Ans:

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 Nm is PPC – concave to the origin
ABC on PPC show efficient utilisation
of resources ( full utilisation of
resources)
L point shows under utilisation of
resources
Rightward shift of PPC by dotted line
shows growth of resources.

Q3.An economy always produces on, but not inside a PPC. Defend or refute.
Ans: Refute. As producing on PPC means full utilisation of resources which is an objective for the firm to
achieve. When firms are unable to utilise the resources fully, they work below PPC when resources are
underutilised. As the firms increase the efficiency in the production process, they move from point inside
PPC towards PPC showing better utilisation of resources.
Q4.A lot of people die and many factories were destroyed because of a severe earthquake in a country. How
will it affect the country’s PPC?
Ans: Severe earthquake leads to the mass destruction where resources are destroyed. The PPC shifts
leftwards as the resources are reduced.
Q5.Calculate MRT from following table. What will be the shape of PPF and why?
Combinations Green Chilly (Units) Sugar Units MOC
A 100 1 -
B 95 2 5
C 85 3 10
D 70 4 15
E 50 5 20
F 25 6 25
MOC is increasing , so the shape of PPC will be concave to the origin.

Q6.Why PPC is also called opportunity cost curve?

Ans: Opportunity cost is the cost of next best alternative sacrificed. PPC also shows amount of B good
sacrificed in order to produce Good A.

Q7.Government is trying to bring Foreign Direct Investment in infrastructural sector. How would it affect
country’s PPC?
Ans: i) FDI will increase the resources of the country so PPC will shift rightwards
ii)Foreign companies bring latest technology, so PPC will shift rightwards.
iii) More FDI will generate employment, so producers utilise the resources better & moves from
point inside PPC towards PPC
Q8. A teacher is getting Rs. 6,000 per month as salary. If he leaves the job and starts tuition work, he is
expected to earn Rs. 5,000 per month. What would be his opportunity cost ?
Ans: Rs 5000 which he can earn in the tuition work is his opportunity cost.

Q9. A doctor has a private clinic in New Delhi and his annual earnings are Rs. 10 lakhs. If he works in a
government hospital in New Delhi, his annual earnings are Rs. 8 lakhs. What is the opportunity cost of
having a clinic in New Delhi ?
Ans: Rs. 8 lakhs which he can earn in government hospital is his opportunity cost.

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 INTRODUCTION
VALUE BASED QUESTIONS

Q1. A farmer can earn Rs. 40,000 by producing indigo but he earns Rs. 30,000 by producing Wheat. What is the
opportunity cost of producing Wheat? Why does he choose production of wheat?
Ans: opportunity cost of producing wheat is Rs 40,000 of indigo, which he sacrifices for producing wheat.
He sacrifices more because wheat is food grain which is necessary for survival.
Value Point: Fulfilling minimum needs of the people.
Q2. If an Economy is not able to utilise its available resources efficiently, what will be the effect on PPC? What will
you suggest for economic growth?
Ans: The producer will be inside PPC, showing underutilisation of resources. People may be unemployed.
Suggestion for better utilisation: using better technique of production. Improving efficiency & skill of labour.
Value Point; Better utilisation of resources.

Q3. The Government of a state is planning to construct a by-pass around a very busy market town. The new road
would run through wet lands bordering a local river where a wide range of different creatures live. So the
environmentalists are against the project. The educationalists and the other wanted the money to be used to build
a school and to improve the existing poor health facilities. The Government decides to go ahead with the road
construction. What is the opportunity cost in this case? What moral value has been violated? (3)
Ans: The opportunity cost is the damaged to the local ecology or the investment in public transport, education
and health services that have had to be sacrificed.
Value point: social welfare / care and concern

Q4. Owing to escalating petrol costs many people have taken to public transportation causing peek hour rush.
Due to this situation Ram, who owns a car, offered to help his neighbour by car pooling. What feature of petrol,
has lead to this economic problem? (3)
Ans: (i) Resources are limited. (ii) They have alternative uses.
Value Points: Sharing & caring / Social responsibility

Q5. India is a labour abundance and capital scarce economy. Which technique of production should be used
to produce the commodity ?
Ans: Labour Intensive technique to reduce unemployment & better utilisation of available resources.

Q6. As water resources are limited in our country, how can we economise the water resources so that it
would not become a future problem for us ? Give any two suggestions.
Ans: By using all methods of conserving the water. Latest technology can also be used for conserving it.
By reducing wastage & reusing & recycling the water resource.

Q7. Rita worked as a domestic help. She got a loan from self-help groups and she started her own handicrafts
business. In two years her business flourished and she employed four urban women. Which branch of economics
involved here? What values are there? (3)
Ans. Micro economics.
Value Points: Empowerment of women/ social responsibility

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 Consumer equilibrium & Demand
MULTIPLE CHOICE QUESTIONS
1 . Which statement is false -
(a) So long as MU positive, TU is increases.
(b) TU is zero when MU is zero.
(c) TU starts decreasing when MU is negative.
(d) None of the above

2. The extent to which a consumer expects a commodity to satisfy his wants for the same is known as
________ of that commodity for him.
(a) Utility (b) satisfaction (c) equilibrium (d) demand

3. Total utility is maximum when MU is _____

(a) Negative (b) Minimum (c) Maximum (d) zero

4. Locus of different combination of two goods which a consumer can buy by spending his whole income is
known as : -
(a) Total utility (b) Budget (c) Budget line (d) Budget set.

5. Total Utility falls when Marginal Utility is : -

(a) positive (b) Negative (c) maximum (d) Zero.

6. What will you say about consumer’s preference between the combination (10,4) & ( 8, 2) ?
(a) He will remain indifferent between two combinations.
(b) He has monotonic preference of (10,4) over (8,2)
(c) He has monotonic preference of (8,2) over (10,8)
(d) None of the above

7. Shape of IC is convex due to _____________ MRT.

(a) Increasing (b) Equal (c) Diminishing (d) Maximum.
8. According to IC approach, a consumer attains equilibrium at a point where budget
line is ___________to indifference curve.
(a) Tangent (b) Straight (c) Diminishing (d) Maximum

9. Shape of IC Curve is ________

(a) Downward sloping and convex to the origin
(b) Upward sloping and convex to the origin.
(c) Down wards sloping and concave to the origin
(d) Upward sloping and concave to origin

10. An IC Curve is downward sloping because if quantity of one commodity __ the quantity of the other is
to be _______in order to maintain the same satisfaction level.
(a) Reduce ,increase
(b) Increase , reduce.
(c) Increase , increase
(d) Reduce, Reduce.

11. Properties of indifference curve are: -

(a) Negatively sloped (b) Convex to the point of origin (c) two IC curves never intersect each other (d) All
of the above.

13
12. Consumer’s Satisfaction is maximum when the marginal rate of substitution of X & Y is ________ to
the price of x to price of y.
(a) Equal (b) less (c) more (d) not equal

13. What is shown by the above demand curve?

(a) Increase in Demand (b) Decrease in Demand (c) Expansion (d) Contraction

14. According by utility analysis, ‘Utility is_______________.

(a) cardinal concept (b) ordinal concept (c) cardinal and ordinal concept (d) None

15. _______ is derived from the consumption of all the units of a commodity
(a) marginal utility (b) total utility (c) average utility (d) consumer equilibrium

16. What term is used for additional utility on account of the consumption of
an additional unit of a commodity.
(a) Total utility (b) average utility (c) marginal utility (d) None of these

17. What change should take place to make the budget line flatter?
(a) When Price of x falls (b) When Price of x increases (c) when income increases (d) when income
reduces.

18. “As more and more units a commodity are consumed marginal utility derived
from every additional unit must decline”, The name of law is _________.
(a) Law of diminishing marginal utility
(b) Law of demand
(c) Law of supply
(d) consumer equilibrium

19. Which of the following condition implies in consumer equilibrium in case

of one commodity?
(a) MUx > Px (b) = = MUm (c)Px = MUx (d) MRSxy = Px/Py

20. Marginal utility of money in Marginal utility analysis is -

(a) constant (b) increases (c) decreases (d) None of these

21. What happens when >

(a) increase in consumption of X & Y
(b) decrease in consumption of X & Y

14
(c) increase in consumption of X
(d) increase in consumption of X and decrease in consumption of Y.
22. In case of two commodities a consumer strikes equilibrium when
(a) = = MUm (b) > (c) < (d) = = MUm

23. This shows different combinations of two goods which a consumer can attain or afford by given his
income and market prices of the goods.
(a) Budget set (b) indifference map (c) indifference curve (d) Budget line

24. Which of the following is not a determinant of individual demand function

(a) Price of inputs (b) Price (b) Income of Consumer (d) Taste and references

Price (Rs.) Demand ( Units)

20 80
20 100
Name the type of demand by the above example
(a) contraction (b) expansion c) increase in demand (d) decrease in demand

25.
Price ( Rs) Demand ( Units) Total Expenditure

16 200 3200
20 160 3200

Answer about Elasticity by Expenditure method

(a) Ed <1 (b) Ed >1 (c) Ed =1 (d) Ed =0

Q26. Slope of demand curve in the equation Qd = a + bP is calculated by ‘b’, which stands for:-
(a) b= ∆P/ ∆Q (b) b= p2 – p1/ Q2 –Q1 (c) both a & b (d) none

Q27. What makes a demand curve convex to the origin?

(a) When slope decreases (b) When slope increases (c) when slope is constant (d) none

Q28. Suppose your friend is indifferent to the bundles (5,6) and (6,6). Are the preferences of your friend
monotonic?
a) He has monotonic preference of (6,6) over (5,6)
b) He remains indifferent towards both the combinations.
c) Prefer (5,6) over (6,6)
d) None of the above

Q 29. Which of the following statement is wrong?

a) Law of diminishing marginal utility is not applicable in the field of education.
b) If demand of a good falls due to fall in price of the good, it is an inferior good.
c) Increase in the price of substitute good is the cause of leftward shift of demand curve of a good.
d) Law of demand is not applicable during emergency situations.

Q 30. Which of the shaded area in the following diagrams represent total expenditure at given OP price &
OQ quantity? Why?

15
 Q31. Suppose a consumer can afford to buy 6 units of good 1 and 8 units of good 2 if she spends her entire
income. The prices of the two goods are Rs.6 and Rs. 8 respectively. How much is the consumer’s income ?
(a) 100 (b) 48 (c) 36 (d) 64

Answers 1- b, 2- a , 3- d, 4- c, 5- b, 6- b, 7-c, 8- a, 9-a, 10-b, 11-d, 12- a, 13- c, 14-c, 15-b, 16-c, 17-a, 18-a,
19-c, 20- a, 21- d, 22-a, 23-a, 24- cd, 25-c, 26-c, 27- a, 28- b, 29- c , 30-a, 31- a,

Consumer equilibrium
ALL TYPES
Q 1. If Marginal Rate of Substitution is increasing throughout, the Indifference Curve will be : (1) 2015 O
a)Downward sloping convex b)Downward sloping concave c)Downward sloping straight line d)Upward
sloping convex
Ans: b) Downward sloping concave to the origin.

Q.2. A consumer consumes only two goods X & Y, both priced at Rs 2/- per unit. If the consumer chooses
a combination of two goods with Marginal Rate of Substitution equal to 2, is the consumer in equilibrium?
Why or why not? What will a rational consumer do in this situation? Explain. (6) 2015 O
Ans: Given Px =2, Py = 2 & MRS xy = 2,
A consumer is said to be in equilibrium when
MRSxy = Substituting the values we find that
2 =
2>1
i.e. MRSxy >
Therefore Consumer is not in equilibrium.
If MRSxy > It means that consumer is willing to pay more for one more unit of X as
compared to what market demands. The consumer will buy more & more of X good. As a result
MRS will fall due to the law of Diminishing Marginal Utility. This will continue till
MRSxy =
& consumer is in equilibrium. ( Diagram not required)

OR

16
 Q3. A consumer consumes only two goods X & Y whose prices are Rs 5/- and Rs 4/- respectively. If the
consumer chooses a combination of two goods with the Mux equal to 4 and that of Y equal to 5, is the
consumer in equilibrium? Why or why not? What will a rational consumer do in this situation? Use utility
analysis. (6) 2015 O
Ans:- Given Px =5, Py =4 & Mux =4, MUy =5, the consumer will be in equilibrium when
Mux/ Px = MUy/Py
By substituting the values, we find that
4/5 5/4
OR Mux/ Px < MUy/Py
Consumer is not in equilibrium
Since per rupee Mux is lower than per rupee MUy, the consumer will buy less of x & more of y. As
a result due to Law of Diminishing Marginal Utility, Mux will rise and MUy will fall till
Mux/ Px = MUy/Py. ( Diagram not required)
Q4. A consumer consumes only two goods X and Y and is in equilibrium. Show that when the price of
good X rises, the consumer buys less of good X. Use utility analysis. OR (4) 2014 O
Ans:- For consumer to be in equilibrium
Mux/ Px = MUy/Py = Mum
If Price of good x rises then
Mux/ Px < MUy/Py
In this situation Consumer’s satisfaction for x is less than the price he is paying, so he will reduce the
demand for X & increase the demand for good Y. As a result of law of diminishing marginal utility Mux
will rise & Mu y will fall & this adjustment will continue till Mux/ Px = MUy/Py = MUm

Q5. Given the price of a good, how will a consumer decide as to how much quantity of that good to buy ?
Use utility analysis. (4) 2014 O (3) 2012 O set 1
Ans: Consumer equilibrium one commodity case utility analysis:- In Case of single commodity a
consumer attains equilibrium when Mux = Px Means - Marginal Utility derived from the consumption of
last unit is equal to its price
The consumer decides the level of equilibrium by comparing marginal utility (MU) with price (P).
If MU > P it means that the consumer is deriving more utility from the consumption of good x than the
price paid by him, so he will buy more unit of it. As the consumer buys more MU declines. The consumer
stops increasing the units of x when MU becomes equal to price (i.e. MU=P). If the consumer buys more
units after MU=P, MU < P. Consumer will reduce the consumption of x. By reducing its demand its utility
will increase till MU= P.
Explanation through Schedule & Curve:-
Quantity Price ( Rs) Marginal Utility (Utils)
1 10 20 Mux> Px (more consumption)
2 10 15 Mux> Px (more consumption)
3 10 10 Mux = Px ( Equilibrium)
4 10 4 Mux < Px ( Less consumption)
5 10 0 Mux < Px ( Less consumption)
6 10 -1 Mux < Px ( Less consumption)

17
 It is clear from the above diagram that
When the consumer purchases the first unit, the
utility that he gets is 20 utils worth Rs. 10. Will he
buy the 1st unit? Obviously, yes, because he gets
more than what he gives. Similarly, we compare the
utility received from other units with the price paid.
We find that he will buy 3 units as MU equals price
here.
The condition for maximization of satisfaction when
a good is purchased then is:
MU = Price.
Consumer will buy 3 units of good.

Q6. What is Budget line? Why is it downward sloping curve? (3) 2013 set 2 O
Ans:- All possible combination of two goods that a consumer can purchase by spending his entire income
when income & price of two goods are given. Equation of budget line :-
Px . Qx + Py . Qy = M
Budget line is negatively sloped because consumption of one commodity is associated with the sacrifice of
another commodity as income is constant.

Q7. Define Budget line. (1) 2011 O set1,3,2014 D, 2010 Delhi

Ans:- All possible combination of two goods that a consumer can purchase by spending his entire income
when income price of two goods are given. Equation of budget line:-
Px . Qx + Py . Qy = M
Q8. Distinguish between budget set & budget line (3) 2012 O set3
Ans:- BUDGET LINE BUDGET SET
All possible combinations of two goods that All possible combinations of two goods that a
a consumer can purchase by spending his consumer can afford at a given income &
entire income when income & price of two price of two goods.
goods are given.
Spends the entire income Not necessarily spends entire income, may
spend less of it.

NM budget line
All points on Budget line NM are included All points on or inside triangle NOM are
in budget line included in budget set.
Q9. Explain the three properties of indifference curve (6) 2013 set 2,3 O
Ans:-
a) Indifference curve slopes downwards from left to right or negatively sloped. It shows inverse
relationship i.e. in order to remain on the same level of satisfaction if consumption of one good is
increased, consumption of other good to be sacrificed.
b) Indifference curve is always convex to the origin, due to reducing marginal rate of substitution.
c) Indifference curve never touches or intersects each other.

18
 Q10.Define indifference map. Why does an indifference curve to the right show more utility?(4) 2012 set 1,2 O
Ans:- Higher IC reflects higher level of satisfaction. As on higher IC curve consumer can consume more of
at least one good & not less of other good.

As consumer moves from IC1 TO IC 2 HE

HAS MORE OF X good & not less than y good
, so IC2 gives higher satisfaction.

If he moves from IC2 to IC 3 he consumes

x2x3 unit of x good & not less than y good, so
he gets higher level of satisfaction as compared
to IC2.

Q11. A consumer consumes only two goods X and Y and is in equilibrium. Price of X falls. Explain the
reaction of the consume through the Utility Analysis. (3) 2012 set 2 O
Ans: Consumer equilibrium utility analysis- two commodity case.
consumer maximises its satisfaction by spending his entire income on two or more goods. For
simplification let us assume that the consumer buys only two goods x and y. Given income and prices, the
consumer will be in equilibrium when the following two conditions are satisfied:
(1) Ratio Of MU & Price of a good is equal to the ratio of MU & price of another good & it is equal to
the MU from the last rupee spent on each good.
Mux/ Px = MUy/ Py = MUm
(2) This is subject to budget constraint that money spent first equals income i.e.
Px.Qx + Py. Qy = M ( Income)
Explanation through Curve:
Above diagram shows two curves Mux/ Px ( left to
right downwards) & MUy/ Py curve , that intersect at
point e which is equilibrium. A point where consumer
will get maximum satisfaction by spending his income
in such a way that he gets the same utility from the last
rupee spent on each good. This is satisfied when Mux/
Px = MUy/ Py = M.U. of a rupee spent on a good.

If the condition is not satisfied , what difference will it make? Suppose the two ratios are:
Mux/ Px > MUy/Py - It means that per rupee MUx is higher than per rupee MUy. It further means that by
transferring one rupee from Y to X, the consumer gains more utility than he looses. This prompts the
consumer to transfer some expenditure from Y to X. Buying more of X reduces MUx, Px remaining

19
unchanged, MUx/Px, i.e. per rupee MUx, is also reduced. Buying less of Y raises MUy. Py remaining
unchanged it raises, per rupee MUy. The change continues till per rupee MUx becomes equal to per rupee
MUy. In other words :
Mux/ Px = MUy/Py = per rupee MU
This condition is also termed as the Law of Equi-Marginal Utility

Q12. Define an indifference curve. Explain why an indifference curve is downward sloping from left to
right. (4) 2012 o set 1 Define an Indifference curve. (1) 2015, 2014, 2010 O
Ans: Indifference curve represents all the combinations of two goods which gives the same level of
satisfaction to a consumer.
IC curve shows same level of satisfaction. All the
points A,B,C,D.
If consumer has to increase consumption of x, he
will be from X1 to X2 for which he has to sacrifice
Y1Y2 amount of Y in order to remain on the same
level of satisfaction.

Q 13. A consumer consumes only two goods X & Y. At a consumption level of these two goods, he finds
that the ratio of marginal utility to price in case of X is higher than in case of Y. Explain the reaction of the
consumer. (4) 2011 O set 1
Ans:- If a consumer finds that the ratio of marginal utility to price in case of X is higher than in case of Y,
i.e.Mux/ Px > MUy/Py -It means that per rupee MUx is higher than per rupee MUy. Reaction of consumer
is as follows:
 It further means that by transferring one rupee from Y to X, the consumer gains more utility than he
looses. This prompts the consumer to transfer some expenditure from Y to X.
 Buying more of X reduces MUx, Px remaining unchanged, MUx/Px, i.e. per rupee MUx, is also
reduced.
 Buying less of Y raises MUy. Py remaining unchanged it raises, per rupee MUy. The change
continues till per rupee MUx becomes equal to per rupee MUy i.e. equilibrium is achieved
Mux/ Px = MUy/Py = per rupee MU

Q14. Explain the conditions of consumer’s equilibrium with the help of the Indifference Curve Analysis.
(6) 2013 set 2,2011 O set1,2010 O (6) 2010 D
Ans:-A consumer is in equilibrium when he maximises his utility given his income & market prices. A
consumer attains equilibrium when he reaches highest possible indifference curve given his budget
constraint. A consumer equilibrium conditions:
i) Slope of indifference curve = slope of budget line
MRSxy = Px/ Py
ii) Diminishing Marginal Rate of Substitution.
AB = Budget line
IC1, IC2, IC3 show scale of preference
Point E= Equilibrium where budget line is tangent to
IC2 .Both the above conditions are fulfilled. &
consumer will be fully satisfied by purchasing ON
amount of Y & OM amount of X.
Point F & G will be on lower IC & shows lower
level of satisfaction.
Point H is beyond the affordability

Q15. Explain the law of diminishing marginal utility with the help of a total utility schedule. (3) 2010 O(4)
2011 O set3

20
Ans:- As we consume more & more units of a commodity, each successive unit consumed gives lesser and
lesser satisfaction, after a point, i,e, marginal utility finally diminishes. It is termed as the Law of
Diminishing Marginal Utility.
Explanation with the help of utility schedule
Units of an Ice Cream Marginal Utility (MU) Total Utility ( TU)
1 20 20
2 16 36
3 10 46
4 4 50
5 0 50
6 -4 46
Here we observe that as more units are consumed marginal utility declines after a point. This is termed as
the law of diminishing marginal utility. It is a psychological law, so it is also called as fundamental law of
satisfaction/ fundamental psychological law.
Relationship Between Marginal Utility & Total Utility:

Above schedule shows the relationship, which is also

depicted in diagram.
Relationship is studied as :
i) When MU increases TU increases at
increasing rate
ii) When MU falls TU increases at
diminishing rate
iii) When MU is zero TU is Maximum
iv) When MU is negative, TU falls
(Diagram is not required)

Q 16. Explain the concepts of (i) marginal rate of substitution and ii) budget line equation with the help of
numerical examples. (6) 2011 O set3
Ans:- i) MARGINAL RATE OF SUBSTITUTION ( MRSxy) Amount of good Y sacrificed in order to
consume one additional unit of good X. MRSxy = ∆Y / ∆ X
MRSxy diminishes with every increase in good X, due to law of diminishing marginal utility. As a
consumer increases the consumption of good X, its utility falls due to which the consumer is ready to
sacrifice less of Y for every increase in good X.
ii) BUDGET LINE:- All possible combination of two goods that a consumer can purchase by spending his
entire income when income price of two goods are given. Equation of budget line :-
Px . Qx + Py . Qy = M
Budget line is negatively sloped because consumption of one commodity of one commodity is associated
with the sacrifice of another commodity.
Explanation with the help of numerical example:-
Suppose a consumer has income of Rs. 200/- Price of X is Rs. 25/- & Price of Y is Rs. 50 per unit. If he
spends his entire income on good X he can buy 8 units of X. If he spends his entire income on good Y he
can buy 4 units of Y. Other possibilities are shown in the following schedule:-
Quantity of good X Quantity of good Y Px.Qx + Py.Qy = M
0 4 25x 0 + 50 x 4 = 200
2 3 25x 2 + 50 x 3 = 200
4 2 25x 4 + 50 x 2 = 200
6 1 25x 6 + 50 x 1 = 200
8 0 25x 0 + 50 x 4 = 200

21
 Q17. What are the conditions of consumer’s equilibrium under indifference curve approach? What changes
will take place if the conditions are not fulfilled to reach equilibrium. (6) 2010 D
Ans: A consumer is in equilibrium when he maximises his utility given his income & market prices. A
consumer attains equilibrium when he reaches highest possible indifference curve given his budget
constraint. A consumer equilibrium conditions:
i) Slope of indifference curve = slope of budget line
MRSxy = Px/ Py
ii) Diminishing Marginal Rate of Substitution.
AB = Budget line
IC1, IC2, IC3 show scale of preference
Point E= Equilibrium where budget line is tangent to
IC2 .Both the above conditions are fulfilled. &
consumer will be fully satisfied by purchasing ON
amount of Y & OM amount of X.
Point F & G will be on lower IC & shows lower
level of satisfaction.
Point H is beyond the affordability

If MRS > Px/Py

This means consumer is willing to sacrifice greater quantities of one good(say X) to obtain a unit more of
the other(say Y). Thus, he values good Y more than good X and is likely to consume more good Y.
Eventually as the consumption of good Y increases and that of good X falls, he becomes reluctant to shell
out large quantities of good X for an additional unit of good Y because now his utility from good Y falls due
to operation law of diminishing marginal utility(DMU).
This implies his MRS falls and consequently becomes equal to px/py.
If Px/Py > MRS
This means the consumer is willing to sacrifice lesser units of good X than the market demands, to obtain an
additional unit of good Y. In short, he values good X more than good Y. In such a case, he is willing to pay a
price lower than the market price for good Y.
Thus, the transactions cannot take place and he will end up consuming more units of good X. With an
increase in consumption of good X, the utility derived from it falls due to law of DMU. Now, he starts
valuing good Y and is now ready to substitute greater quantities of good X to obtain a unit more of good Y.
As a result, MRS increases and becomes equal to px/py.
Thus, in both the cases, the final outcome is
MRS = Px/Py This is the point of consumer equilibrium

Q18. A consumer consumes only 2 goods. Explain his equilibrium with the help of utility approach.(6) 2008 D
Ans:- Same as q. no 11.

Q19 a) How is total utility derived from marginal utilities? b) Who has introduced the concept of
“utility”?
Ans:- a) Total Utility can be Obtained by the sum of Marginal Utilities from the consumption of different
units of the commodities. TU = ∑ MU OR TU = MU1 + MU2 + MU3 + …… + MUn
b) Prof. Alfred Marshall

Q20.Explain why is an indifference curve (a) downward sloping and (b) convex. (6) 2014 O
Ans:- Indifference curve is convex to the origin due to diminishing Marginal Rate of substitution.
Marginal rate of substitution is the amount of good Y sacrificed in order to produce one additional
unit of good X. It decides the slope of indifference curve. Slope of IC = MRSxy = ∆ Y / ∆ X
MRSxy reduces as consumption of X increases because of Law of diminishing marginal utility (LDMU). As
consumer increases consumption of one additional unit of X, its utility falls due to LDMU therefore
consumer is ready to sacrifice lesser unit of good Y.

22
 THEORY OF DEMAND
ALL TYPES
Q1. If due to fall in price of good X, Demand for good Y rises, the two goods are: (1) 2015 O1
a) Substitutes b) Compliments c) Not related d) Competitive
Ans:- b) Compliments.

Q2. What is market demand? Name the factor affecting market demand for a commodity?(1)2008,2012,2013 O (3) 2014 D set3
Ans: Market demand is the sum of quantities of a commodity demanded by all the consumers in the market at
different prices per time period.
FACTORS AFFECTING DEMAND OF A COMMODITY:-
i) Price of a commodity (Px) – Price is an important determinant of Demand. Demand for a commodity
rises when it is offered at low price and it falls when the commodity is available at higher price.
ii) Income of the consumer ( Y) - With the rise in income of the consumer his purchasing power increases.
As a result he can buy more of a commodity that he was not buying earlier due to
monetary constraint. Similarly a fall in income of the consumer will force him to cut down his
expenditure and he will demand less of a commodity. Demand for normal oor superior goods
rise with rise in income where as demand for inferior goods fall due o rise in income.
iii) Price of related goods ( Pz) - Related goods are of two types i.e. Substitute and complementary goods.
Substitute Goods Substitute goods are those which can be used in place of each other with
equal ease. Example- Pepsi Cola and Coca-Cola. Of the two given goods the demand will be
higher for the goods which have comparatively lower price and vice versa.
Complementary goods Complementary Goods are those goods which are used together for
Consumption and are incomplete without each other. It means they complete the deficiencies
of each other. Example - Car and Petrol. A fall in the price of one commodity leads to rise in the
demand of its complementary good. Example: - If the price of petrol falls demand for car will rise.
iv) Taste and preferences (T) - Tastes and Preferences of the consumers will also affect the demand of the
commodity. A student will demand more of books and pens then utensils because of his preference for the
same. Similarly old television sets were replaced by Plasma T.V.
v) Other Factors - Some other factors that affect the demand of commodity are-
 Demand for Seasonal Goods- The consumer will demand woolen clothes in winter only.
 If Government reduces the Tax Rate then it enhances the purchasing power of the consumer and
his demand for goods will also increase.
 If the population ( size & composition) of an area increases then their demand will also increase and
they will demand more consumer goods and vice versa.
 Future expectation of change in price

Q3. Give the meaning of ‘‘inferior’’ good and explain the same with the help of an example.(1)2010D,2009O,2012(4)2014O
Ans:- Inferior goods:- When demand for the good falls due to increase in income, the good is called as inferior good.
Example:- When consumer’s income rises, demand for toned milk reduces & demand for cream milk increases.
If price of inferior goods fall, its demand also falls, so demand curve for inferior good is upward sloping. It is also
called as giffin good.

Q4. Explain the difference between normal & inferior goods? (3) 2013
Ans:- NORMAL GOOD INFERIOR GOOD
When income of a consumer increases, demand for When income of a consumer increases, demand for
normal good increases inferior good decreases
Example:- When income increases demand for Example:- When consumer’s income rises, demand
cream milk increases. Cream milk is normal good for toned milk reduces. Toned milk is inferior good
as compared to cream milk.
Demand curve is negatively sloped from left to right Demand curve is positiively sloped from left to right

Q5. What does a rightward shift of demand curve indicate? (1) 2013 O set3

23
 Ans:- Increase in demand- when demand increases due to other factors affecting demand except price. Like increase
in price of substitute goods, decrease in price of complimentary good.

Q6. Explain any 2 causes of ‘increase’ in demand of the commodity (3) 2010 D
Ans:- i) Favourable change in Taste and preferences (T) - Tastes and Preferences of the consumers will also affect
the demand of the commodity. A student will demand more of books and pens then utensils because of his preference
for the same. When there is favourable change in taste & preference of consumer
ii) Increase in price of Substitute Goods (which can be used in place of each other)If price of a good increases the
demand for the substitute good also increases. Example - Pepsi and Coca-Cola. Of the two given goods the demand
will be higher for the pepsi if coca cola is sold at higher price..

Q7. Give one reason for a shift in demand curve. (1) 2012 set 1
Ans:- Change in price of related goods, Change in income, Change in taste & preference of consumer etc.

Q8 . Explain the effect of the following on the demand for a good:

i) Rise in income ii) Rise in price of related goods. (6) 2012 O set2
OR Explain how rise in income of a consumer affects the demand of a good. Give examples.(4)2011 O set 1&3( part i) only)
Ans:- If income increases, its impact on demand is studied under two situations
a)When income increases demand for normal goods increase & demand for inferior goods decrease.
Example: If income increases consumer shifts its demand from toned milk (inferior ) to cream milk (normal ) so
demand for normal goods increases & demand curve shifts rightwards.

When income increases demand for

normal good ( cream milk) increases
& demand curve shifts rightwards
from DtoD’.

b) When income increases demand for inferior goods decrease. Example: when income increases consumer
chooses comparatively better quality product & thus inferior good is less demanded. Like toned milk, which
is comparatively inferior.

When income increases demand for inferior good (

toned milk) falls
& demand curve shifts leftwards from DtoD1.

ii)Rise in the price of related goods:- is studied in case of substitute goods & complimentary goods both.
a) Impact of rise in the price of substitute goods:- If price of a substitute good increases demand for the other
good also increases. Example: tea & coffee are substitute goods. If price of coffee increases, demand for coffee
reduces & people replace tea in place of coffee, so demand for tea increases & demand curve of tea shifts
rightwards:-

24
 D = Demand curve for Tea
When price of coffee increases, demand for tea
increases at same price of tea. Demand for tea curve
shifts rightward from D to D’ ( qq1)

a) Impact of rise in the price of complimentary goods:- :- If price of a complimentary good increases demand
for the other good decreases. Example: Petrol & Car are complimentary goods. If price of Petrol increases,
demand for Car reduces, so demand for Car reduces & demand curve of Car shifts leftwards:-

D = Demand curve for Car

When price of petrol increases, demand for car falls
at same price of car. Demand for car curve shifts
leftward from D to D1 ( q1q) showing impact of rise
in price of complimentary goods.

Q9.What is the relation between good X & good Y in each case, if with fall in the price of X demand for good Y
i) rises and ii) falls? Give reason. (3) 2008 D
Ans:-i) If price of good X falls & demand for good Y rises, the goods are complimentary goods. Example; Petrol &
two wheelers. If price of petrol falls, demand for two wheelers rise.
ii)If price of good X falls & demand for good Y also falls, the goods are substitute goods. Example: Pepsi &
coke, If price of pepsi falls, people will demand pepsi more and the demand for coke will fall.

Q10. Goods X & Y are substitutes. Explain the effect of fall in price of Y on demand for X. (3) 2010 O
Ans: If 2 goods are substitutes & price of Y falls the demand for X also falls. Example: Pepsi & coke, If price of pepsi
falls, people will demand pepsi more and the demand for coke will fall & demand curve for Coke will shift leftwards.

D is the demand curve for coke. When price of pepsi falls

demand for coke also falls as the demand for pepsi will
reduce & demand curve will shift leftwards.

Q11.Explain the inverse relationship between price & demand of the commodity (3) 2010 D
OR State the law of demand and show it with the help of a schedule. (3) 2009 O
Ans:- The Law of Demand states that, Other things being constant, in case of a normal good, there is inverse relation
between price of a good and its demand. When price rises, demand falls & when prices of the good falls its demand
increases. It can be studied through demand schedule & curve:

25
Demand schedule of a commodity
Price ( Rs per unit) Quantity demanded ( in units)
50 50
40 100
30 150
20 200
10 250
Demand curve:- Graphical representation of demand schedule is called as demand curve.
Demand curve is negatively sloped showing inverse relationship between price & demand of the good.

The diagram shows

DD’ Demand curve
Negatively sloped – left to right downwards
Price falls by pp1 & demand rises by qq1

Q12. Why is demand for water inelastic? (1) 2010 O

Ans: Because water is an essential good.

Q13 Distinguish between increase in demand & increase in quantity demanded. (3) 2010 O, 2012 O set3
Ans:-
Increase in demand Increase in quantity demanded
1.it is increase in demand at constant price 1.It is expansion in demand when price falls
2.It is due to other factors affecting demand 2. It is due to change in price of the good when
when price of good remain constant the other factors affecting demand remain
constant.
3.causes behind increase in demand are 3.Cause behind Expansion
 Rise in price of substitute goods  Fall in the price of the commodity
 Fall in the price of complimentary Cause behind Contraction
good
 Increase in income & favourable
change in the taste & preference of
consumers
4. Demand curve shifts rightwards in case of 4. Consumer moves rightwards on the same
increase in demand demand curve in expansion.

Q14. Explain the effect of the following on the market demand of a commodity: (6) 2009 O

26
 A) Change in the price of related goods.
B) Change in the number of its buyers.
Ans:- A) same as part ii) of question 8. & vice versa also to be explained.
B) Change in the number of its buyers:- If no of buyers increase it increases the demand for the good increases
& demand curve shifts rightwards. On the contrary if no of buyers decrease it decreases the demand for the good &
demand curve shifts leftwards.
When No. of consumers increase in the market When no. of consumers decrease in the market

Q15. What is a demand schedule? (1) 2008 O

Ans: INDIVIDUAL DEMAND SCHEDULE:- A tabular representation of various quantities of a commodity
demanded by a consumer at various prices per time period.
MARKET DEMAND SCHEDULE:- It is addition of the quantities of all the consumers in the market at a price at a
particular time i.e. horizontal summation of individual demand

Q16. How will an increase in the price of coffee affect the demand for the tea? (6) 2008 O
Ans;- Impact of rise in the price of coffee on the demand for tea:- Tea & Coffee are substitute goods. If price of a
substitute good increases demand for the other good also increases. Therefore, if price of coffee increases, demand for
coffee reduces due to law of demand & people replace tea in place of coffee ( as every consumer wants to substitute
cheap goods in place of expensive one, so demand for tea increases & demand curve of tea shifts rightwards:-

D = Demand curve for Tea

When price of coffee increases, demand for tea
increases at same price of tea. Demand for tea curve
shifts rightward from D to D’ ( qq1)

Price of coffee rises Demand for coffee falls ( Law of demand) Consumer will substitute Tea in
place of coffee ( substituting cheap goods in place of expensive one) Demand for Tea Increases

ELASTICITY OF DEMAND
ALL TYPES
Q1. A consumer spends Rs 1000/ on a good priced at Rs 10 per Unit. When its price falls by 20% the consumer
spends Rs 800/ on the good. Calculate the price elasticity of demand by the percentage method. (3) 2015 O1
Ans:
Price (P) Total Expenditure Quantity
PxQ demanded ( Q)
10 1000 100

27
 8 800 100
Price falls by 20% = 20% of 10 = 2 = ∆P P2 = 10 -2 = 8
Ed = x = x
Ed = 0 ( zero) Perfectly inelastic demand.

Q2.Explain the significance of ‘minus sign’ attached to the measure of price elasticity of demand in case of a normal
good, as compared to the ‘plus sign’ attached to the measure of price elasticity of supply. (3) 2015 O1
Ans:- Minus sign ( -) in the formula of elasticity of demand shows the negative relationship between price and
demand of a commodity & on the contrary (+) Plus sign in the formula shows positive relationship between the price
& supply of a commodity.

Q3. A consumer buys 30 units of a good at a price of Rs 10 per unit. Price elasticity of demand for the good is (-) 1.
How many units the consumer will buy at a price of Rs. 9 per unit? Calculate. (3)2014 D3
Ans:- Given – Ed = -1, P1 = 10 , P2 = 9 , ∆p = 10 -9 =1, Q1 = 30, ∆Q =?
Ed = x by putting the values we get 1= x
3 = ∆Q Quantity = 3 + 30 = 33

Q4. Price elasticity of demand of a good is (-) 1. When its price per unit falls by one rupee, its demand rises from 16
to 18 units. Calculate the price before change. (3) 2014 D set2
Ans:- Ed = -1, ∆ P = 1, ∆Q = 18- 16 = 2, Q = 16, P = ?
Ed = x by putting the values we get 1 = x
16 = 2p = P = 16/2 = 8 P = 8 Price before change.

Q5. A consumer buys 18 units of a good at price of Rs 9 per unit. The price elasticity of demand for the good is (-) 1.
How many units the consumer will buy at a price of Rs 10 per unit? Calculate. (3) 2014 D set1
Ans: Ed = -1, q = 18, P = 9, ∆P = 10 – 9 = 1, ∆ Q = ?
Ed = x putting the values we get 1= x
∆Q = 2 , Units the consumer will buy at Rs 10 = 18 - 2 = 16

Q6. When the price of a good falls from Rs 10 to Rs 8 per unit, its demand rises from 20 units to 24 units. What can
you say about price elasticity of demand of the good through the ‘expenditure approach’ ? (3) 2014
Ans:
PRICE (P) QUANTITY (Q) EXPENDITURE (PXQ)
10 20 200
8 24 192
When price falls expenditure also falls , this shows direct relationship between price & expenditure
It is Inelastic demand ( Ed < 1)

Q7. The price elasticity of demand for a good is – 0.4. If its price increases by 5% by what % will its demand fall?
Calculate. (3) 2013
Ans: Given – Ed = - 0.4, % change in Price = 5% , % change in demand = ?
Ed = % change in demand / % change in price
0.4 = x / 5 = 2 % change in demand is = 2% OR

Q8. Explain any 2 factors that affect the price elasticity of demand. Give suitable examples. (3) 2013
Ans:- Nature of Goods: - The elasticity of demand is of necessary goods is inelastic or Ed<1. The elasticity of
demand of luxury good is highly elastic or ed >1. The elasticity of demand of comfort goods is equals to one ed=1
2. Availability of Substitutes:- If the substitutes of goods are available than elasticity of demand is high or elastic
demand ed >1 and if the substitutes are not available than demand is in elastic ed < 1

Q9. Price elasticity of demand of a good is – 0.75. Calculate the percentage fall in its price that will result in 15%
rise in its demand. (4) 2013 O set3
Ans:- Ed = % change in demand / % change in price
0.75 = 15 / x = .75x = 15 = 15/ .75 = % change in price is = 20%

Q10. A consumer buys 10 units of a good at a price of Rs 10 per unit. He incurs an expenditure of Rs 200 on buying

28
 20 units. Calculate price elasticity of demand by the percentage method. Comment upon the shape of demand curve
based on this information. (4) 2012 O set1
Ans:
PRICE (P) QUANTITY (Q) EXPENDITURE (PXQ)
10 10 100
10 20 200
Ed = x = Ed = x = Ed = Perfectly elastic demand

Q11. When price of a good is 7 per unit a consumer buys 12 units. When price falls to Rs 6 per unit he spends Rs 72
on the good. Calculate price elasticity of demand by using the percentage method. Comment on the likely shape of
demand curve based on this measure of elasticity. (4) 2012 O set2
Ans:
PRICE (P) QUANTITY (Q) EXPENDITURE (PXQ)
7 12 84
6 12 72
Ed = x Ed = x =0 Demand is perfectly inelastic (vertical to x axis)

Q12. A consumer buys 13 units of a good at a price of Rs 11 per unit. When price rises to Rs 13 per unit he buys 11
units. Use expenditure approach to find price elasticity of demand. Also comment on the shape of the demand curve
based on this information. (4) 2012 Oset3
Ans:
PRICE (P) QUANTITY (Q) EXPENDITURE (PXQ)
11 13 143
13 11 143
Ed = 1 as expenditure remained constant with the change in price of the good. Demand curve is rectangular
hyperbola.

Q13 . When price of a good is Rs 13 per unit, the consumer buys 11 units of that good. When price rises to Rs. 15
per unit, the consumer continues to buy11 units. Calculate price elasticity of demand. (3) 2011O set 1
Given- P = 13, Q = 11, ∆P = 15- 13 = 2 , ∆Q = 11-11 = 0
Ed = x putting the value Ed = x = 0/ 22 = 0 ( Zero) Ed = Perfectly inelastic.

Q14. From the following data calculate price elasticity of demand: (3) 2011 O set 3
PRICE DEMAND ( Units)
9 100

9 150
Ans: Ed = x 50/100 x 9/0 = Ed = Perfectly elastic

Q15. Explain the effect of the following on the price elasticity of demand of the commodity:- (3) 2009 , 2010 D
i) No. of substitutes
ii) Nature of the commodities
Ans: i) Number of Substitutes:- If the substitutes of goods are available than elasticity of demand is high or
elastic demand ed >1 and if the substitutes are not available than demand is in elastic ed < 1
ii)Nature of Goods: - The elasticity of demand is of necessary goods is less than one Ed < 1. The
elasticity of demand of luxury good is greater than one ed >1. The elasticity of demand of comfort
goods is equals to one ed = 1

Q16. When price of a commodity falls by Re. 1 per unit, its quantity demanded rises by 3 units. Its price elasticity of
demand is - 2. Calculate its quantity demanded if the price before the change was Rs. 10 per unit. (4) 2010 O
Ans:- Given ∆P = 1, ∆Q = 3, Ed = -2, P1 = 10
Ed = x putting the value we get 2= x 2Q = 30 , Q = 15

Q17. When the price of a commodity falls by Rs. 2 per unit , its quantity demanded increases by 10 units. Its price

29
 elasticity of demand is (-) 1. Calculate its quantity demanded at the price before change which was Rs. 10 per Unit.
(4) 2010 O
Ans:- Given ∆P = 2, ∆Q = 10, Ed = -1, P1 = 10
Ed = x putting the value we get 1= x 2Q = 100 , Q = 50

Q18. Explain the geometric method of measuring price elasticity of demand. (3) 2009 O
Ans: Geometric Method: Elasticity on a linear demand curve is measured by using the formula:
Elasticity of demand = lower segment of demand curve/ Upper segment of demand curve
AB is a negatively sloped straight line demand curve joining two axis. Elasticity at different
points can be calculated as follows:-
At point C= Lower segment / upper segment
CE/ AC as CE= AC , Ed = 1

At point B = BE/ AB as BE> AB , Ed > 1

At Point A = AE / A = AE/ 0 , Ed =

At Point D = DE / AD as DE < AD Ed< 1

At point E = E/ AE as E = 0 , 0/AE = Ed = 0

Q19. When price of a good rises from Rs. 5 per unit to Rs. 6 per unit, its demand falls from 20 units to 10 units.
Compare expenditures on the good to determine whether demand is elastic or inelastic. (3) 2008 D
Ans: PRICE (P) QUANTITY (Q) EXPENDITURE (PXQ)
5 20 100
6 10 60
When price increases expenditure decreases. It shows that the demand is highly elastic ( Price & expenditure are
inversely related)

Q20. Price elasticity of demand of a good is (-) 1. At a given price the consumer buys 60 units of the good. How
many units will the consumer buy if the price falls by 10 %? (3) 2008 O
Ans: Ed = -1 , Q = 60, % change in price = 10%, Q2 = ?
Ed = % change in demand / % change in Price
1 = ∆Q/Q x100
∆P/Px100
1 = ∆Q/ 60 x100
10
1 = 10 ∆Q x 1 .
6 10
60 = 10 ∆Q 60/ 10 = 6 =∆Q
% change in quantity demanded = ∆Q/Q x100 = 6/ 60 x100 = 10%

Q21. When does the demand for a good said to be perfectly inelastic? (1) 2013 O set3
Ans:
Perfectly Inelastic Demand ( Ed = 0):- When the demand for
the commodity does not change as a result of change in its
price, demand is said to be perfectly in elastic.
Price Demand
7 10
5 10
Demand is constant at oq which is in case of life saving drugs,
salt, match box etc.

Q22. When is the demand of a commodity said to be inelastic? (1) 2009 D.

30
Ans:
Inelastic Demand ( Ed < 1) :- When Proportional change in
demand is less than proportional change in price, the demand is
said to be inelastic demand.
Price Demand
20 10
10 12
Essential goods usually have inelastic demand. Where demand
changes less with the change in price. (pp1 > qq1)

Consumer equilibrium & DEMAND

HIGHER ORDER THINKING QUESTIONS
Q1. Explain the relation between Slope of demand curve & Elasticity of demand.
Ans: flatter demand curve( less slope) has greater price elasticity and a steeper curve ( more slope) has
lower price elasticity of demand.
Ep = ∆q/∆p x p/q
Where its first part, ∆q/∆p, is the reciprocal of the slope of the demand curve, and the second part, p/q is the
ratio of the price to quantity.
Slope of demand curve = ∆p/∆q
Ed =

Q2. Given the slope of demand curve is –0.5 Calculate Elasticity of demand, when
initial price is Rs 20 per unit and initial quantity is 50 unit of commodity.
Solution :- Slope of demand curve measures the rate at which demand changes with respect to its price.
Slope of demand curve = ∆p/∆q. P= Price ( independent variable)
Ed =
Ed = 1/ - 0.5 x 20/50 = 20/25 = 0.8 < 1 inelastic demand

Q3. In the equation QD = 100 – 4P i)find the value of Qd when P is zero

Ans: QD = 100 – 4x 0 QD = 100
ii)value of P when Qd is zero
Ans: 0 = 100 – 4P 4P = 100 P = 100/4 = 25 = P
iii)How will the demand curve change when equation changes to Qd = 200 – 4P
Ans: When intercept increases demand curve shifts rightwards parallel to previous curve
iv)How will the demand curve change when equation changes to Qd = 200 – 8 P
Ans: When b increases demand curve becomes flatter

Q4. Find the equation from given information: a promoter discovers that the demand for theatre tickets is
1200 when the price is Rs. 60, but demand decreases to 900 when the price is raised to Rs. 75.
Ans: Slope = ∆P/ ∆Q or p2 – p1/ Q2 –Q1
= 900 -1200/ 75 – 60 = - 300/15 = - 20
Qd = a - 20P
Q5. Commodities X & Y have equal elasticity of demand. The demand of X rises from 400 units to 500
units due to a 20% fall in its price. Calculate the % rise in the demand of Y if its price falls by 8%.

31
Solution:- Given ∆Px = 20% , ∆ Qx = 500 – 400 = 100, Qx = 400, ∆Py = 8%, Edx = Edy
Edx = % change in demand / % change in price
%change in demand = x 100 = 100/ 400 x 100 = 25
25/ 20 = 5/4 = 1.25 Edx = Edy
1.25 = x/ 8 = 10%

Q6. A person’s total utility schedule is given below. Derive his marginal utility schedule.
Quantity 0 1 2 3 4 5
TU (units) 0 10 25 38 48 55
Solution. MU : --- 10 15 13 10 7

Q.7 A person’s MU schedule is given below. Derive her TU schedule (Assume that TU of consuming
zero unit is zero):
Quantity 1 2 3 4 5
MU- units 7 10 8 6 3
Solution. TU : 7 17 25 31 34

Q.8 Complete the following table:

Quantity 1 2 3 4 5
Total Utility 50 90 - 140 150
Marginal Utility 50 - 30 - -
Solution.
TU 50 90 120 140 150
MU 50 40 30 20 10

Q.9 The following is the utility schedule of a person:

Quantity 1 2 3 4 5

Marginal Utility 5 4 3 2 1
(Units)
Suppose that the commodity is sold for Rs. 3. How many units of the commodity the person will purchase so
that his satisfaction is maximum?
Solution. The consumer will purchase 3 units of the commodity such that
MUx =Px’ i.e., 3 = 3

Q.10 The Ed for good X is known to be twice that of good Y. Elasticity of demand for good Y is 1. Price of X falls
by 5% while that of good Y rises by 5%. What is the % age change in the quantities of X and Y?
Ans: If Ed of good Y is 1, Ed of X will be 2.

5% for Y good.
2= % change in demand / 5

32
% change in demand = 2x 5% = 10 %.

Q.11 Calculate the missing figures:

Units 1 2 3 4 5
TU (utils) 16 - - - 40
MU ( utils) - 12 8 6 -
Solution.
Units TU (in utils) MU (in utils)
TU= ∑MU MUn = TUn -TUn-1
1 16 16
2 28 12
3 36 8
4 42 6
5 40 -2
Q.12 Suppose the price of a commodity ‘x’ is given as Rs. 8 and the MU (in terms of money) for 4 units is
given as:
Units 1 2 3 4
MUx (Rs) 12 10 8 6
How many units should a consumer purchase so that his satisfaction is maximum?
Solution.
Units MUx (in Rs) Price (Px) (in Rs)
Consumed
1 12 8
2 10 8
3 8 8
4 6 8
rd
Consumer will purchase 3 units because at 3 unit, MU = Price.
The consumer will not purchase less than 3 units as MU > Price and there is scope for increasing the
total satisfaction by purchasing more units.
Similarly, consumer will not buy more than 3 units as MU < Price and total satisfaction can be
increased by purchasing less quantity

Q.13 The marginal utility schedule for goods X and Y are given below. Both the goods are priced at Rs 1
each and income of Rakesh (as individual) is assumed to be Rs 8. Determine, how many units of both the
commodities should be purchased by Rakesh to maximize his total utility?
Quantity Marginal Utility of X Marginal Utility of Y
(units) (MUx) (units) (MUy) (units)
1 11 19
2 10 17
3 9 15
4 8 13
5 7 12
6 6 10
7 5 8
8 4 6

33
Solution.To maximize the total utility, Rakesh should purchase that combination of both the goods, when:
MU of last rupee spent on each commodity is same, i.e. MUx / Px = MUy / Py and MU falls as consumption
increases. It happens when Rakesh purchases 6 units of Y and 2 units of X. At this combination:
MU from last rupee (i.e. 8th rupee) spent on commodity X gives the same satisfaction of 10 utils as
given by last rupee (i.e. 7th rupee) spent on commodity Y; and MU of each commodity falls as
consumption increases.
The total satisfaction of 107 utils (=19+17+15+13+12+11+10+10) will be obtained.
Px. Qx + Py . Qy = M
1x 2 + 1 x 6 = 8 = equilibrium.
Q.14 Suppose a consumer’s preferences are monotonic. What can say about her preference ranking over
the bundles (10,10), (10,9) and (9,9)?

Solution. When a consumer’s preferences are monotonic, the bundles will be ranked as under:
Bundle Rank
(10,10) I
(10,9) II
(9,9) III

Q.15 A consumer wants to consume two goods. The prices of the two goods are Rs 4 and Rs 5
respectively. The consumer’s income is Rs 20.
i)Write down the equation of the budget line.
ii)How much of good 1 can the consumer consume if he spends her entire income on that good?
iii)How much of good 2 can she consume if she spends her entire income on that good?
iv)Find slope of budget line.
Solution. (i) Equation of the budget line is
P1 X1 + P2 X2 = M
4X1 + 5x2 = 20
(ii) 4x1 + 5x2 = 20
Since X2 = 0
4x1 + 0 = 20
4x1 = 20
X1 = 20/4 = 5
The consumer can consume 5 units of good 1 if the consumer spends her entire income on good 1.
(iii) 4x1 + 5x2 = 20
Since X1 = 0
0 + 5x2 = 20
X2 = 20/5 = 4
The consumer can consume 4 units of good 2 if the consumer spends her entire income on good 2.
(iv) slope of budget line = Px/ Py = 4/5 = 0.8

Q 16 Suppose a consumer has Rs 30/- with him which he wants to spend on two goods X & Y. The prices
of X & Y are Rs. 4/- & Rs 2/- respectively. Marginal Utility schedule is given as follows. Help the
consumer to decide how to spend his entire income on the purchase of two goods so that he is fully satisfied.
Also mention the conditions of consumer’s equilibrium.

34
 Units 1 2 3 4 5 6 7 8 9 10
MUx 80 72 64 56 48 40 32 24 16 8
MUy 40 38 36 34 32 30 28 26 24 22
Solution: A rational consumer wants to maximise his Satisfaction by his consumption. Equi marginal utility
law states that a consumer is fully satisfied when he is allocating his entire money on the purchase of two or
more goods in such a way that the ratio of MU of X & Price of X of one good is equal to the ratio of MU of
Y & Price of Y. Conditions of consumer’s equilibrium
MUx/Px = MUy/Py ..........MUn/Pn = MUm
In order to achieve the above status the ratio are calculated as below:-
Units MUx MUy MUx/Px MUy/Py
1 80 40 20 20
2 72 38 18 19
3 64 36 16 18
4 56 34 14 17
5 48 32 12 16
6 40 30 10 15
7 32 28 8 14
8 24 26 6 13
9 16 24 4 12
10 8 22 2 11
By applying budget constraint M= Px.qx + Py. qy 30= 4x4 + 2x7
Consumer will be fully satisfied by spending his entire money Rs. 30/- on purchasing 4 units of X
commodity & 7 units of Y commodity.
NUMERICALS- DEMAND AND ELASTICITY OF DEMAND

Q.1 There are 3 households: A, B and C in a market. From the following tavle, calculate demand for
household B at various levels of price:

Price (Rs) Household A Household B Household C Market Demand

14 12 - 22 52
12 16 - 32 72
10 24 - 44 102
8 34 - 60 142
6 48 - 84 198

Solution.
Price (Rs) Household A Household B Household C Market Demand
14 12 18 22 52
12 16 24 32 72
10 24 34 44 102
8 34 48 60 142
6 48 66 84 198

Demand for Household B = Market Demand – (A’s demand + C’s demand)

35
Q.2 Prepare the market demand schedule from the given demands of individuals. (Assuming that there
are only three individuals X, Y and Z in the market)
Price (Rs) Demand (X) Demand (Y) Demand (Z)
4 10 5 4
5 8 4 3
6 6 3 2
7 4 2 1

Solution.
Price (Rs) Demand (X) Demand (Y) Demand (Z) Market Demand (X+Y+Z)
4 10 5 4 19
5 8 4 3 15
6 6 3 2 11
7 4 2 1 7

Q.3 The following table shows the expenditure, which Amit is willing to spend on commodity ‘X’ at
various levels of price. Prepare demand schedule of Amit.
Price (Rs) 5 6 7 8 9
Expenditure 100 96 84 80 72
(Rs)

Solution.
Price (Rs) Expenditure (Rs) Demand in units (Expenditure ÷ Price)
5 100 100 ÷ 5 = 20
6 96 96 ÷ 6 = 16
7 84 84 ÷ 7 = 12
8 80 80 ÷ 8 = 10
9 72 72 ÷ 9 = 8

Calculation Of Elasticity Of Demand (When Both Price And Quantity Are Given)
Formulae at a Glance

1. Percentage Method / Proportionate Method

Ed = OR Ed = x

2. Total Expenditure Method

(i) Ed < 1: When TE varies directly with price
(ii) Ed > 1: When TE varies inversely with price
Ed = 1: When TE does not change with change in price.

Q.4 When price is Rs 10 per unit, demand for a commodity is 100 units. As the price falls to Rs 8 per
units, demand expands to 150 units. Calculate elasticity of demand

36
Solution.
Original Quantity (Q) = 100 units Original Price (P) = Rs 10
New Quantity (Q1) = 150 units New Price (P1) = Rs 8
Change in Quantity (∆Q) = 50 units Change in Price (∆P) = Rs 2
Elasticity of Demand (Ed) =?
Price Elasticity of demand (Ed) = ∆Q/∆P X P/Q
= 50/-2 X 10/100
= (-) 2.5
Answer. Ed = (-) 2.5 (Demand is highly elastic as Ed < 1)
Negative sign of Ed indicates the inverse relationship between price and quantity demanded.

Q.5 When price of sugar is Rs 5 pr kg, its demand is 50 kg. When price rises by Rs 5 per kg, its demand
falls by 10 kg. Calculate the elasticity of demand.
Solution.
Original Quantity (Q) = 50kg Original Price (P) = Rs 5
New Quantity (Q1) = 40kg New Price (P1) = Rs 10
Change in Quantity (∆Q) = -10kg Change in Price (∆P) = Rs 5
Elasticity of Demand (Ed) =?

Price Elasticity of demand (Ed) = ∆Q/∆P X P/Q = -10/5 X 5/50 = (-) 0.2
Answer. Ed = (-) 0.2 (Demand is less elastic as Ed < 1)
Negative sign of Ed indicates the inverse relationship between price and quantity demanded.

Calculation of Elasticity of demand (When Elasticity of demand is given)

Q.6 The market demand for a good at Rs 4 per unit is 100 units. Due to increase in price, the market
demand falls to 75 units. Find out the new price, if the price elasticity of demand is (-) 1.
Solution.
Original Quantity (Q) = 100 units Original Price (P) = Rs
New Quantity (Q1) = 75 units New Price (P1) = ?
Change in Quantity (∆Q) = -25 units Change in Price (∆P) = ∆P
Elasticity of Demand (Ed) = (-) 1
Price Elasticity of demand (Ed) = ∆Q/∆P X P/Q
1 = 25/∆P X 4/100 ∆P =Rs 1
As the quantity demanded is decreasing, price will increase. It means,
New Price = Original Price (P) + Change in Price (∆P) = 4+1 = Rs 5
Answer. New Price = Rs 5
Q.7 When the price of good X is Rs 5, the consumer buys 100 units of good X. At what price would he
be willing to purchase 140 units of good X? The price elasticity of demand for good X is 2.
Solution.
Original Quantity (Q) = 100 units Original Price (P) = Rs 5
New Quantity (Q1) = 140 units New Price (P1) = ?
Change in Quantity (∆Q) = 40 units Change in Price (∆P) = ∆P
Elasticity of Demand (Ed) = 2

Price Elasticity of demand (Ed) = ∆Q/∆P X P/Q

2 = 40/∆P X 5/100 ∆P = Rs 1

37
 As the quantity demanded is decreasing, price will increase. It means,
New Price = Original Price (P) + Change in Price (∆P) = Rs 5 – Rs 1 = Rs 4
Answer. New Price = Rs 4

Q.8 The demand for a good at Rs 10 per unit is 40 units. Price falls by Rs 5. If price elasticity of demand
is (-) 3, calculate the new quantity demanded.
Solution.
Original Quantity (Q) = 40 units Original Price (P) = Rs 10
New Quantity (Q1) = ? units New Price (P1) = Rs -5
Change in Quantity (∆Q) = ∆Q units Change in Price (∆P) = Rs 5
Elasticity of Demand (Ed) = - 3
Price Elasticity of demand (Ed) = ∆Q/∆P X P/Q
- 3 = ∆Q/- 5 X 10/40 i.e. ∆Q = 60 units
As price is decreasing, the quantity demanded will increase. It means,
New Quantity = Original Quantity (Q) + Change in Quantity (∆Q)
= 40 + 60 = 100 units
Answer. New Quantity = 100 units

Q.9 When the piece of commodity falls by Rs 2 per unit, its quantity demanded increases by 10 units. Its
price elasticity of demand is (-) 1. Calculate its quantity demanded at the price before change which was Rs
10 per unit.
Solution.
Original Quantity (Q) = 40 units Original Price (P) = Rs 10
New Quantity (Q1) = ? units Fall in Price (∆P) = Rs -2
New Price (P1) = Rs 8
Elasticity of Demand (Ed) = (-) 1
Price Elasticity of demand (Ed) = ∆Q/∆P X P/Q
-1 = 10/- 2 X 10/Q i.e. Q = 50 units
Answer. Quantity demanded at price before change (Original Quantity) = 50 Units
Elasticity of Demand by Percentage Method
Q.10 When price of a commodity falls by 80%, the quantity demanded of it increases by 100%. Find out
its price elasticity of demand.
Solution.
% Change in Demand = 100% % Change in Price = -80%
Elasticity of Demand (Ed) =?
Ed = = 100% / - 80% Price Elasticity of Demand (Ed) = (-) 1.25
Answer. Ed = (-) 1.25 (Demand is highly elastic as Ed > 1)

Negative sign of Ed indicates the inverse relationship between price and quantity demanded.
Q.11 When price of a commodity gets doubled, its quantity demanded reduced to half. Calculate the
coefficient of price elasticity of demand.
Solution.
% Change in Demand = - 50% % Change (Rise) in Price = 100%
Elasticity of Demand (Ed) =?

38
 Ed = Price Elasticity of Demand (Ed) = (-) 0.5

Answer. Ed = (-) 0.5 (Demand is less elastic as Ed < 1)

Negative of Ed indicates the inverse relationship between price and quantity demanded.

Q.12 A 5% fall in the price of x leads to 10% rise in the demand for x. A 20% rise in the price of y leads to
6% fall in the demand for y. Calculate the price elastic ties of demand of x and y. Out of x and y, which
commodity is more elastic?
Solution.
Price Elasticity of Demand for ‘x’
% Change in Demand of x = 10% % Change in Price of x = - 5%
Elasticity of Demand (Ed) =?
Ed =
Price Elasticity of Demand (Ed) = (-) 2 Ed = (-) 2

Price Elasticity of Demand for ‘y’

% Change in Demand of y = - 6% % Change in Price of y = 20%
Elasticity of Demand (Ed) =?
Ed =
Price Elasticity of Demand (Ed) = (-) 0.3
Answer. Price Elasticity of x = (-) 2; Price Elasticity of y = (-) 0.3; is more elastic as compared to y.
Negative sign of Ed indicates the inverse relationship between price and quantity demanded.

Q.13 The quantity demanded of a commodity at a price of Rs 8 per unit is 600 units. Its price falls by 25
percent and the quantity demanded rises by 120 units. Calculate the price elasticity of demand. Is its demand
elastic? Give reason for your answer.
Solution.
Original Quantity (Q) = 600 units Change in Price = Rs - 25%
Change in Quantity (∆Q) = 120 units Elasticity of Demand (Ed) = ?
New Quantity (Q1) = 720 units

Percentage change in demand = ∆Q/Q X 100 = 120/600 X 100 = 20%

Ed =
= 20% /- 25%
Price Elasticity of Demand (Ed) = (-) 0.8
Answer. Ed = (-) 0.8; (Demand is less elastic because Ed < 1)
Negative sign of Ed indicates the inverse relationship between price and quantity demanded.
Q.14 When the price of a commodity is Rs 20 per unit, its quantity demanded is 800 units. When its piece
rises by Rs 5 per unit, its quantity demanded falls by 20 percent. Calculate its price elasticity of demand. Is
its demand elastic? Give reasons for your answer.
Solution.
Original Quantity (Q) = 800 units Original Price (P) = Rs 20
% Change in Quantity (∆Q) = - 20% Change in Demand (∆P) = Rs 5
Elasticity of Demand (Ed) = ? New Price (P1) = Rs 25

39
Percentage change in demand = ∆P/P X 100 = 5/20 X 100 = 25%
Ed = = - 20% / 25% Price Elasticity of Demand (Ed) = (-) 0.8
Answer. Ed = (-) 0.8; (Demand is less elastic because Ed < 1)
Negative sign of Ed indicates the inverse relationship between price and quantity demanded.

Calculation of Elasticity of Demand (When Total Expenditure is given)

Q.15 Calculate price elasticity of demand:

Price (Rs) Total Expenditure (Rs)
5 500
6 420
Solution.
Price (Rs) Total Expenditure (Rs) Quantity (in units)
(Total Expenditure ÷ Price)
5 500 100
6 420 70

Original Quantity (Q) = 100 units Original Price (P) = Rs 5

New Quantity (Q1) = 70 units New Price (P1) = Rs 6
Change in Quantity (∆Q) Change in Price (∆P) = Rs 1
Elasticity of Demand (Ed) = ?
Price Elasticity of demand (Ed) = ∆Q/∆P X P/Q = - 30/1 X 5/100 = (-) 1.5
Answer. Ed = (-) 1.5 (Demand is highly elastic as Ed > 1)
Negative sign of Ed indicates the inverse relationship between price and quantity demanded.

Q.16 A consumer spends Rs 80 on a commodity when its price is Rs 1 per unit and spends Rs 96 when its
price is Rs 2 per unit. Calculate price elasticity of demand for the commodity by the percentage method?
Solution.
Price (Rs) Total Expenditure (Rs) Quantity (in units)
(Total Expenditure ÷ Price)
1 80 80
2 96 48

Original Quantity (Q) = 80 units Original Price (P) = Rs 1

New Quantity (Q1) = 48 units New Price (P1) = Rs 2
Change in Quantity (∆Q) = - 32 units Change in Price (∆P) = Rs 1
Elasticity of Demand (Ed) = ?
Price change in demand = ∆Q/Q X 100 = - 32/80 X 100 = - 40%
Answer. Ed = (-) 0.4 (Demand is less elastic as Ed < 1)
Negative sign of Ed indicates the inverse relationship between price and quantity demanded.

Q.17 A dentist was charging Rs 300 for a standard cleaning job and it used to generate total revenue equal
to Rs 30,000 per month. She has, since last month, increased the price of dental cleaning to Rs 350. As a
result, fewer customers are now coming for dental cleaning, but the total revenue is now Rs 33,250. From
this, what can we conclude about the elasticity of demand for her dental service?

40
Solution.
Fees (Rs) Total Revenue (Rs) Total of Customers
(Total Revenue ÷ Fees)
300 30,000 100
350 33,350 95

Total Expenditure Method

With increase in fees, the total revenue of dentist has also increased. Hence, the elasticity of demand for her
dental service is less than one.
Proportionate Method
Original Quantity (Q) = 100 Original Price (P) = Rs 300
New Quantity (Q1) = 95 New Price (P1) = Rs 350
Change in Quantity (∆Q) = - 5 Change in Price (∆P) = Rs 50
Elasticity of Demand (Ed) = ?
Price change in demand = ∆Q/∆P X P/Q = - 5/50 X 300/100 = (-) 0.3
Answer. Ed = (-) 0.3 (Demand is less elastic as Ed < 1)
Negative sign of Ed indicates the inverse relationship between price and quantity demanded.

Q.18 With rise in price from Rs 8 to Rs 14, total expenditure on the commodity rises by 40% and becomes
Rs 1,120. Calculate price elasticity of demand. Also indicate whether demand is elastic or inelastic.
Solution.
Price (Rs) Total Expenditure (Rs) Quantity (in units)
(Total Expenditure ÷ Price)
8 **800 100
14 1,120 80

Original Quantity (Q) = 100 units Original Price (P) = Rs 8

New Quantity (Q1) = 80 units New Price (P1) = Rs 14
Change in Quantity (∆Q) = - 20 units Change in Price (∆P) = Rs 6
Elasticity of Demand (Ed) = ?
Price Elasticity of demand (Ed) = ∆Q/∆P X P/Q = - 20/6 X 8/100 = (-) 0.267
Answer. Ed = (-) 0.267 (Demand is less elastic as Ed < 1)
Note: ** Calculation of Original Expenditure: Let Original Expenditure be x.
Given: New Expenditure = Rs 1,120.
Also Given:
x + 40% of x = 1,120
x + 40x/100 =1,120
140x = 1,12,000
x or Original Expenditure = Rs 800

Price Elasticity of Demand by Total Expenditure Method

Q.19 Calculate the elasticity of demand by total expenditure method:
Price (Rs) Total Expenditure (Rs)
4 40
6 50
Solution.

41
Demand is less elastic (Ed < 1) as the total expenditure increases from Rs 40 to Rs 50 with rise in price from
Rs 4 to Rs 6.
Answer. Demand is less elastic (Ed < 1)

Q.20 Calculate the elasticity of demand by total expenditure method:

Price (Rs) Total Expenditure (Rs)
5 50
6 50

Solution.
Demand is unitary elastic (Ed = 1) as the total expenditure remains constant at Rs 50 with an increase in
price from Rs 5 to Rs 6.
Answer. Demand is unitary elastic (Ed = 1)
Q.21 As the price of a product decreases by 7%, the total expenditure on it goes up by 3.5%. What can we
say about the elasticity of demand for this product?
Solution.
Demand is highly elastic (Ed > 1) as the total expenditure has increased by 3.5% with a decrease in price of
7% in the price.
Answer. Demand is highly elastic (Ed > 1)
Q.22 When the price of a good rises from Rs 5 per unit to Rs 6 per unit, its demand falls from 20units to
10 units. Compare the expenditures incurred on the good to determine whether its demand is elastic or
inelastic.
Solution.
Price (Rs) Quantity in units (Rs) Total Expenditure in Rs
(Price X Quantity)
5 20 100
6 10 60

Demand is highly elastic (Ed > 1) as total expenditure has decreased from Rs 100 to Rs 60 with an increase
in the price from Rs 5 to Rs 6.
Answer. Demand is highly elastic (Ed > 1)

Q.23 A consumer buys 10 units of a good at a price of Rs 6 per unit. Rice elasticity of demand is (-) 1. At
what price will he buy 12 units? Use expenditure approach of price elasticity of demand to answer this
question.
Solution.
Price (Rs) Quantity in units (Rs) Total Expenditure in Rs
(Price X Quantity)
6 10 60
? 12 ?

As per elasticity of demand is unity, i.e. -1, it signifies that total expenditure will remain unchanged at Rs
60. It means, Price after change = TR ÷ Q = 60 ÷ 12 = Rs 5 per unit.
Answer. Rs 5 per units

42
24. Three new plants are established in the tribal areas of Chattisgarh . Many people who were previously
unemployed in the area are now employed. How will this affect the demand curve for colour TV and Black
and White TVs in the region ?
Ans: With the increase in income of various households, demand curve for colour TVs in the region will
shift rightward implying that demand for colour TVs will increase as it is a normal or superior good, demand
for black and white TVs will reduce leading to leftward shift of demand curve as it is an inferior good as
compared to colour TV. ( Shift in demand curve can be shown separately for both the goods )

25. In order to encourage tourism in Goa, the Government of India suggests Indian Airlines to reduce airfare
to Goa from the four major cities, Chennai, Kolkata, Mumbai and New Delhi. If the Indian Airlines reduces
the air fare to Goa, how will this affect the market demand curve for air travel to Goa ?
Ans: If air fare to Goa is reduced, there would be movement along the same demand curve. There will be an
increase in quantity demanded( Expansion in demand).

26 There are train and bus services between New Delhi and Jaipur. Suppose that the train fare between the
two cities comes down. How will this affect the demand curve for bus travel between the two cities ?
Ans: Train and bus services are substitutes to each other. If the train fare (price of a substitute) comes down,
the demand for bus travel will decrease. As a result, there would be leftward shift of the demand curve for
bus travel.

27. A dentist was charging Rs. 300 for a standard cleaning job and per month it used to generate a total
revenue equal to Rs. 30,000. She has since last month increased the price of dental cleaning to Rs. 350. As a
result, fewer customers are now coming for dental cleaning, but the total revenue is now Rs. 33,250. From
this,what can we conclude about the elasticity of demand for such a dental service ?
Ans:
PRICE (TR) TOTAL EXPENDITURE
Rs 300 Rs. 30,000
Rs. 350 Rs. 33,250
By the total expenditure method, we find that with a rise in price, total expenditure on the dental service
increases, therefore its demand is less than unit elasticity ( Ed < 1).

28. Suppose the price of a movie seen at a theatre rises from Rs. 120 per person to Rs. 200 per person. The
theatre manager observes that the rise in prices causes attendance at a given movie to fall from 300 persons
to 200 persons. What is the price elasticity of demand for movies?
Ans:
Price Units
120 300
200 200
x x = ½ = 0.5 Ed <1 - Inelastic demand

29. If the local pizzeria raises the price of a medium pizza from Rs 60 to Rs 100 and quantity demanded falls
from 700 pizzas a night to 100 pizzas a night, what is the price elasticity of demand for pizzas?
Ans:
Price Units
60 700
100 100
x x = 36/ 28 = 9/7 = 1.2 Ed > 1 - Highly elastic demand

30. As a result of high wage settlement in the New York City due to taxi strike of several years ago, taxi
owners increased taxi fares. Was this the right decision?
Ans: The answer depends on the price elasticity of demand for taxi rides in New York City. If the demand
for taxi rides is price-inelastic, the decision was correct. If demand is elastic, then increasing taxi fares

43
reduces the total revenue of taxi owners. In order to see what happened to the total profits of taxi owners, we
must compare this decrease in total revenue with the change in total costs (higher wages for taxi drivers but
fewer taxies and fewer taxi drivers). Unfortunately, in the real world we often do not have (and it might be
difficult) to get estimates of the elasticity necessary to reach correct decisions.

31. If the market demand for agricultural commodities is price-inelastic, would a bad harvest lead to an
increase or a decrease in the incomes of farmer as a group ? Why ?
Ans: A bad harvest is reflected in a decrease in supply (i.e., an upward shift in the market supply curve of
agricultural commodities). Given the market demand for agricultural commodities, this decrease in supply
causes the equilibrium price to rise. Since the demand is price-inelastic, the total receipts of farmers as a
group increase. When the demand for an agricultural commodity is price-inelastic, the same result can be
achieved by reducing the amount of land under cultivation for the commodity. This is done in some farmaid
programs.

32. Suppose a consumer want to consume two goods which are available only in integer units. The two
goods are equally priced at Rs.10 and the consumer’s income is Rs 40.
(i) Write down all the bundles that are available to the consumer.
(ii) Among the bundles that are available to the consumer, identify those which cost her exactly Rs. 40.
Ans: (i) All the bundles that are available to the consumer are as under :
(0, 0) (0, 1) (0, 2) (0, 3) (0, 4)
(1, 0) (1, 1) (1, 2) (1, 3)
(2, 0) (2, 1) (2, 2)
(3, 3) (3, 1)
(4, 0)
(ii) Following bundles cost exactly Rs 40
(0, 4) (1, 3) (2, 2) (3, 1) (4, 0)

33. An ice cream seller sells ice cream for Rs 30 each. Lakshmi, who loves ice cream has already eaten 3.
Her marginal utility from eating 3 ice creams is 90. Suppose further that, for her, the marginal utility of one
Rupee is 3. Should she eat more ice cream or should she stop ?

For equilibrium of a consumer the following condition must be fulfilled:

MU of Ice-cream/ Price of Ice-cream = MU of a rupee.
Given MU of eating 3 ice-creams = 90. Now, price of ice-cream = Rs 30 and marginal utiliy of rupee = 3.
Substituting these in the above condition, we have:
90 / 30 = 3
3=3
Thus, the condition for consumer’s equilibrium is fulfilled. She should stop eating more ice-creams.

34. The price elasticity of demand of commodity X is ½ of elasticity of demand of commodity Y. When
price of X falls by 40%, its demand rises by 20 units. Calculate price elasticity of demand of commodity X
& Y, if original 100 units of X were demanded at price of Rs 5 per unit.
Ans: Ex = Ey/2 , ∆Qx = 20 , Qx = 100, Px = 5
40% of 5 = 2 , so new price = 5 – 2 = 3
Edx = x x
Edx = 0.5
Edy/2 = Edx
Edy /2 = 0.5
Edy = 2 x 0.5 =
Edy = 1

44
35. The price elasticity of demand of good X & Y are in the ratio 1:3. A 10% rise in the price of good X
results in a fall in its demand from 500 to 400 units. Calculate the percentage change in quantity demanded
of good Y when its price falls from Rs. 10/- to Rs. 8/- per unit.
Ans: Epx &y are in the ratio 1:3.
Ep = % change in demand / % change in price
= ∆q/q x100 = 100/ 500 x 100 = 20
Ep x = 20/10 = 2
Epy = 2x3= 6
∆p/p x 100 = 2/10x100 =20
6 = x/ 20
X= 20x6 = 120 percentage change in quantity demanded of good Y

Consumer equilibrium & DEMAND

VALUE BASED QUESTIONS

Q1. “Even high price of electricity has failed to reduce the demand”. The given statement is a newspaper
heading. Keeping in mind the law of demand and elasticity of demand answer the following questions.(4)
(a) Why even after the rise in price of electricity the demand has not fallen? Give two reasons.
(b) Mention any two ways through which we save power.
Ans.: a) (i) Electricity has no close substitute. (ii) Electricity is a multi use commodity.
b) (i) By putting off electric appliances when not required. (ii) By using alternative sources of power
like solar energy, hydro electricity and wind mill.
Value points: social responsibility/ conservation of energy.

Q2. Vinod belong to a middle income family who lives in a small city. The price of salt is Rs.10 per Kg. and
his family consumes 5 Kg of salt annually. Now all sellers of salt have raised their price to Rs.15 per Kg. (3)
a) Would the Vinod’s purchases of salt to be affected by the price increase? Why or Why not?
b) In view of your answer what can you say about the price elasticity of demand for salt?
c) Suppose the Vinod’s income doubles, how would this affect the quantity of salt consumed by his family?
Ans.: a) No, because salt is a basic necessity.
b) Price elasticity of demand for salt is perfectly inelastic.
d) It should not affect his demand because elasticity of demand is zero.
Value Point: consumer awareness.

Q3. Assume that commuters regard bus journeys as an inferior good and car journeys as a normal good.
Explain the impact on the demand of bus service. (4)
a) A rise in incomes of the consumer.
b) How could people’s tastes be altered so that bus journey’s are no longer regarded an inferior good?
Ans.: a) As bus service is considered an inferior good so if the income of the consumer rises the demand
curve for bus service will decrease. It leads to a leftward shift in the demand curve.
b) Express services may be introduced at an affordable fare.
Value point: social responsibility / conservation of energy.

Q4. A person has a basic choice between eating meal at home or in a restaurant. The cost of food that is
eaten at home is Rs.100. Whereas the cost of restaurant meal is Rs.150. What does the theory of consumer
behaviour suggests the rational consumer will decide to do; eat at home or in restaurant?
Ans.: The MU per rupee of a meal at home is greater than the MU per rupee of
the restaurant meal. So a rational consumer will eat the meal at home.
Value point: consumer awareness.

45
 PRODUCER BEHAVIOUR &
SUPPLY
MULTIPLE CHOICE QUESTIONS
1. Diminishing marginal returns imply:
(a) Decreasing average variable costs.
(b) Decreasing marginal costs.
(c) Increasing marginal costs.
(d) Decreasing average fixed costs.

2. The marginal, average, and total product curves encountered by the firm producing in the short run exhibit
all of the following relationships except:

(a) When total product is rising, average marginal product may be either rising or falling
(b)When marginal product is negative, total product and average product are falling.
(c) When average product is at the maximum, marginal product equals average product, and total product is
rising.
(d)When Marginal product is at a maximum, average product equals marginal product, and total product is
rising.

3. To economists, the main difference between short run and long run is that:

(a) In short run all inputs are fixed, while in long run all inputs are variables.
(b) In short run the firm varies all its inputs to find the least cost combination of inputs.
(c) In short run, at least one of the firm’s input level is fixed.
(d) In long run, the firm is making a constrained decision about how to use existing plant and equipment.

4. Diminishing returns occur:

(a) When units of a variable input are added to a fixed input and total product falls.
(b) When units of a variable input are added to a fixed input and marginal product falls.
(c) When the size of the plant is increased in the long run.
(d) When the quantity of the fixed input is increased and returns to variable input falls.

5. If the marginal product of labour is below the average product of labour, it must be true that:
(a) The marginal product of labour is negative.
(b) The marginal product of labour is zero.
(c) The average product of labour is falling.
(d) The average Product of labour is negative.

6. The average product is maximized when marginal product of labour:

(a) Equals the average product of labour.
(b) Equals zero.
(c) Is maximized.
(d) None of these.

46
7. The change in the total product resulting from a change in a variable input is:
(a) Average cost (b) Marginal cost
(c) Average product (d) Marginal product

8. Which cost increases continuously with the increase in production?

(a) Average cost (b) Marginal cost
(c) Fixed cost (d) Variable cost

9. Which one of the following cost curves is never ‘U’ shaped?

(a) Average cost curve (b) Marginal cost curve
(c) Average variable cost curve (d) Average fixed cost curve

10. Which one of the following is a variable cost?

(a) Cost of raw materials.
(b) Cost of equipment.
(c) Interest payment on past borrowings.
(d) Payment of rent of building.

11. In the short run, when the output of a firm increases, its average fixed cost:
(a) Increases (b) decreases
(c) Remains constant (d) first declines and then rises

12. A firm’s average fixed cost is Rs.20 at 6 units of output. What will it be at 4 units of output?
(a) Rs.60 (b) Rs.30
(c) Rs.40 (d) Rs.20

13. If marginal cost equals to average total cost, average cost is:
(a) Falling (b) rising
(c) Maximum & constant (d) minimum & constant

14. If the average cost is falling,

(a) Marginal cost is rising
(b) Marginal cost is falling
(c) marginal cost is equal to average cost
(d) it is impossible to tell if marginal cost is rising or falling

15. The difference between average total cost and average variable cost:
(a) is constant
(b) is total fixed cost
(c) gets narrow as output decreases
(d) is the average fixed cost

16. In the short run, when a firm produces zero output, its total cost is equal to:
(a)Zero (b) variable cost
(c) fixed cost (d) marginal cost

47
17. At any given output, the difference between total cost and total fixed cost is:
(a) equal to marginal cost (b)equal to total variable cost
(c) zero in the short run (d) average variable cost
Answers : 1.(b)2.(b) 3.(d) 4.(b) 5.(c) 6.(a) 7.(d) 8.(d) 9. (d) 10. (a) 11. (b) 12. (b) 13. (d) 14. (d) 15. (d) 16.(c)
17.(b)

REVENUE
1.The average revenue under monopoly is:
(a) A straight line parallel to x –axis
(b) A downward sloping straight line
(c) A upward sloping straight line
(d) ) A straight line parallel to y–axis

2. For a perfect competitive market , price would be equivalent to:

(a) average revenue (b) marginal revenue
(c) total revenue (d) both a and b

3. In case of constant price

(a) AR =MR (b) AR >MR
(c) AR<MR (d) AR=TR

4. Which of the following statement is false with respect to the relationship between TR and MR ?
(a) TR =MR under perfect competition
(b) As long as MR is positive , TR increases
(c) When MR =0, TR is at its maximum point
(d) When MR became negative , TR starts falling

5. If total revenue is Rs.2,00,000 when 10,000 units are sold, then Average Revenue is equal to
(a) Rs. 2,00,000 (b) Rs.10,000
(c) Rs 20 (d) Rs. 2,10,000

6. What is break even – point?

(a) It is the point where TR =TC
(b) It is the point where AR = MR
(c) It is the point where TC =MR
(d) It is the point where AR is maximum

7. ------------ can become negative when price falls with rise in output.
(a) AR (b)TR
(c)MR (d) TC
Answers: 1.(b) 2.(d) 3.(a) 4.(a) 5.(c) 6.(a) 7.(c)

PRODUCER’S EQUILIBRIUM
1. It is a point when a producer maximises his profits or minimises his losses
(a) Breakeven point (b) Shut down point
(c) Producer’s Equilibrium (d) Optimum Utilisation Point

48
2. At a particular level of output, a producer finds that MC<MR. What will a producer do to maximize his
profits?
(a) Producer will increase the production
(b) Producer will reduce the production
(c) Producer will make no change in production
(d) None of the above

3.Producer’s Equilibrium under MR and MC approach is achieved when

(a) MR=MC
(b) MR >MC after the equality between MR and MC
(c) Either (a) or (b)
(d) Both (a) and (b)

4.Profit of a producer under perfect competition is maximum at a level where P=MC and MC is:
(a) Decreasing (b) constant
(c) Increasing (d) equal to MR

5. Which of the following is not True with reference to marginal cost

(a) At the state of producer’s equilibrium MC of the firm should be rising.
(b) At the state of producer’s equilibrium MC = MR
(c) When price falls with rise in output MC curve slopes downward
(d) All are true
Answers: 1.(c) 2.(a) 3.(d) 4.(c) 5.(d)

SUPPLY
1. It refers to supply by all the firms producing that good
(a) Change in Supply (b) Individual Supply
(c) Market Supply (d) Supply Function

2. A vertical supply curve parallel to y – axis implies that the elasticity of supply is
(a) Zero (b) Infinity (c) unity (d) greater than one

3. An increase in supply of the good is caused by

(a) Improvements in its technology.
(b) fall in the prices of other good
(c) fall in the prices of factors of production
(d) All of above

4. Contraction of supply is the due to

(a) Decrease in the numbers of producers.
(b) Increase in the price of other good
(c) Decrease in the price of the good concern
(d) Increase in the price of the good concern

5. If the % change in supply is less than % change in price, it is called

(a) unit elastic supply (b) less elastic supply

49
(c)more elastic supply (d) perfect inelastic supply

6. The supply curve shifts to the left due to

(a) improved technology (b) increased excise duty
(c) decreased price of inputs (d) all of above
Answers: 1.(c) 2.(a) 3.(d) 4.(c) 5.(b) 6.(b)

PRODUCER equilibrium
ALL TYPES

PRODUCTION FUNCTION
Q1. What are the different phases in the law of variable proportions in terms of marginal product? Give reason behind
each phase. Use diagram. (6) 2015 O set1, (4) 2014 O set1 (6) 2008
Ans: The law operates in short run states that as we increase the quantity of only one input keeping other input
constant initially MP increases than decreases and ultimately become negative. This can be studied in three phases:
Ist Phase ( phase of Increasing returns) :- As the variable factors are increased with the fixed factors, first Marginal
Product (MP) increases due to division of work & specialisation & therefore Total Product (TP) increases at
increasing rate. Average product (AP) also increases but below MP. MP rises & reaches maximum in this stage.
IInd Phase ( Phase of Diminishing returns) :- In the second stage when optimum combination of fixed & variable
factors is already achieved then every increase in variable factors will reduce MP. When MP falls TP increases at
diminishing rate & AP after MP=AP starts falling. At the end of the stage MP becomes zero & TP is maximum. A
rational producer operates under this stage.
IIIrd Phase ( Phase of Negative returns) :- If the producer continues to increase variable factor, MP becomes
negative , TP starts falling & AP also falls but never touches zero. A rational producer never operates under this
stage.
Explanation through curve:-
The diagram shows three stages
In first stage MP increases till A & TP increases at increasing rate
till A’. AP also increases but below MP
In second stage MP starts falling, TP increases at diminishing rate &
AP increases till MP=AP then AP also starts falling.
In third stage MP becomes negative after B point & TP also falls.

Reason:- The reasons for Increasing Returns to factor :

i) As the no. of variable factors increase with some amount of fixed factor variable factors ensures better
division of work leading towards specialisation & therefore increases production at increasing rate.
ii) In the beginning when variable factors are increased with fixed factors, fixed factors are underutilised, fixed
factors are better utilised with the variable factors, so Increasing returns are obtained till optimum
combination of fixed & variable factors are not achieved.
The reasons of diminishing returns to factor:-
iii) When variable factors are increased so much that optimum combination of fixed & variable factors is
achieved, then returns starts diminishing if further variable factors are increased.
iv) All factors of production are in scarce supply. When there is an imperfect substitutes of a factor with
another factor, returns starts diminishing.

50
v) Some factors are kept constant, after a point these fixed factors are completely utilised, after which they are
required to be increased. If they are constant, diminishing returns are obtained.
The reason of Negative returns to factor:-
vi) Over utilisation of fixed factors is due to fixity of fixed factors, which results in negative returns after a point
if variable factors are continued to be increased.

Q2. State the behaviour of marginal product in the law of variable proportions. Explain the causes of this behaviour.
Ans: same as above. (4) 2014 D s 1

Q3. Explain the law of variable proportions with the help of total product and marginal product curves. (6) 2013 O
set1 (4) 2012 O set1/set2 , (6) 2010
Ans: Same as above

Q4. State the phases of change in total product in the law of variable proportions. Also explain the reason behind each
phase. Use diagram. (6) 2012 O set 3
Ans: same as above

Q5. Give meaning of returns to factor. (1) 2014 D set1

Ans: If some factors are constant and one factor is variable, the proportion between fixed & variable factors change &
by increasing the quantity of variable factors resulting output is affected, First MP increases than decreases and
ultimately become negative. this effect on output is called returns to factor.

Q6. Define Marginal Product (1) 2014 O set1

Ans: Marginal Product is the the change in total output by using one more unit of variable factor .
MP = Change in TP/ Change in units of variable factors
OR MP = ∆ TP/ ∆ Input OR MPn = TPn – TP n-1

Q7.Complete the following table: (3) 2013 O set1

Units of labour Average Product Marginal Product
(Units) (Units)
1 8
2 10
3 10
4 9
5 4
6 7
Ans:
Units of labour Average Product Marginal Product
(Units) (Units)
1 8 8
2 10 12
3 10 10
4 9 6
5 8 4
6 7 2

Q8. Define production function. (1) 2011O set1,3, 2008 O

Ans: Production function is defined as the functional relationship between input and output for a given state of
technique.
Q= f (L, K….) Q= Output , f = functional relationship, L,K = Factors of production ( input)

Q9. State whether the following statements are true or false. Give reasons for your answer: (6) 2010 D
i) When marginal revenue is constant and not equal to zero, then total revenue will also be constant.
ii) As soon as marginal cost starts rising , average variable cost also starts rising.
iii)Total product always increases whether there is increasing returns or diminishing returns to a factor.
Ans:

51
Q10. State whether the following statements are true or false. Give reason for your answer. (6) 2010 O
a) when TR is constant AR will be constant.
Ans: False. AR = TR/Q, so when TR is constant, AR will reduce with the increase in sale of output(Q)

Production Units (Q) TR AR

1 50 50
2 50 25
3 50 16.6
4 50 12.5

b) AVC can fall even when MC is rising.

Ans: True. As AVC will fall till MC < AVC, MC increases or decreases

c) When MP falls AP will also fall.

Ans: False: AP falls when MP < AP.

Q11. Giving reason, state whether the following statements are true or false: (6) 2009 D
a) When there are diminishing returns to a factor, total product always decreases.
Ans: False: Diminishing returns imply diminishing Marginal Product (MP) & MP is positive. We know that ∑
MP = TP, thus TP increases at diminishing rate when MP falls, TP will never fall in the diminishing phase.
b) Total product will increase only when marginal product increases.
Ans: False. ∑MP = TP , so TP will increase till MP is positive, whether MP increases or decreases.
c) When marginal revenue is zero, average revenue will be constant.
Ans: False. As AR is constant where AR = MR.

REVENUE
Q1. Define Average Revenue. Show that Average Revenue and Price are same. (3) 2015 O set1
Ans: Average Revenue(AR) is the revenue or receipt received per unit of output sold.
AR = TR / Output sold
AR and price are the same.
TR = Quantity sold × price or TR = Q x P
AR =

52
 AR = Putting the value of TR
AR= price
Q2. What is meant by Revenue in micro economics? (1) 2014 D set1, 2008 D
Ans: Revenue means the amount of money received by a firm from the sale of a given output in the market.

Q3. State relation between Marginal Revenue and Average Revenue. (3) 2014 D set1
Ans: i) AR increases till MR > AR
ii) AR decreases when MR < AR
iii) AR is constant and maximum when MR = AR.
Relationship is explained through diagram which is not required if not asked.

Q4. Why is Average Revenue always equal to price? (3) 2014 O set
Ans: Explained in Q no 1. Above.

Q5. Define Marginal Revenue. (1) 2013 O set1

Ans: It is the addition to total revenue when sales are increased by one unit.

Q6. What is revenue? Explain the relation between MR & AR. (4) 2012 O set 3
Ans: Explained in Q. no 2 & 3 above.

Q7. Complete the following table:- (3) 2009 O

Output (Units) TR (Rs) MR (Rs) AR (Rs)
1 - - 8
2 - 4 -
3 12 - 4
4 8 - 2
Ans: 7
Output (Units) TR (Rs) MR (Rs) AR (Rs)
1 8 8 8
2 12 4 6
3 12 0 4
4 8 -4 2

Q8. Complete the following table:- (4) 2008 D

Output (Units) AR (Rs) MR (Rs) TR (Rs)
1 - 15 -
2 - - 26
3 11 - -
4 3 -
Ans: 8
Output (Units) AR (Rs) MR (Rs) TR (Rs)
1 15 15 15
2 13 11 26
3 11 7 33
4 9 3 36

Q9. Complete the following table: (4) 2008 O

53
 Price (Rs) Output(Units) TR (Rs) MR (Rs)
- 1 6 -
4 - - 2
- 3 6 -
1 - - (-) 2
Ans: 9

Price (Rs) Output(Units) TR (Rs) MR (Rs)

6 1 6 6
4 2 8 2
2 3 6 (-) 2
1 4 4 (-) 2

COST
Q1. What is the behaviour of (a) Average Fixed Cost & (b) Average Variable Cost as more and more units of a good
are produced? (3) 2015 O set1
Ans: Average Fixed Cost (AFC) is defined as fixed cost of producing per unit of the commodity. It is obtained
by dividing TFC by the level of output. Symbolically-
AFC = TFC / No. of units produced
AFC = TFC / Q
Average Variable Cost (AVC) is defined as the variable cost of producing per unit of commodity. It is obtained
by dividing TVC by the level of output. Symbolically :-
AVC = TVC / output OR
AVC = TVC / Q
AFC = TFC / Q
AFC is derived from TFC which is constant . When it is divided
by increasing number of output, AFC falls continuously. In fact
it is rectangular hyperbola.
AVC = TVC / Q
AVC is ‘U’ shaped curve.
Initially AVC falls as TVC increases at diminishing rate due to
increasing returns. Increasing returns is also called as
diminishing cost.
AVC is minimum after this point it starts increasing due to the
fact that TVC increases at increasing rate due to diminishing
returns. Diminishing returns is also called as increasing cost.

Q2. State the relation between Total Cost and Marginal Cost. (3) 2014 D set1
Ans: TC = ∑ Marginal Cost. When MC is given TC is calculated by adding MC, when fixed costa are not
there.
Units of output TC MC
1 10 10
2 18 8
3 30 12
4 45 15

Q2.Give two examples of Fixed cost. (1) 2013 O set1

Ans: i) Salaries of permanent employees. ii) purchase of machinery

Q3. Define Marginal cost (1)2012, 2013 O set1

54
Ans: Marginal Cost is the addition made to the total variable cost or total cost when one more unit of output is
produced. In other words MC is the cost of producing one additional unit of output. Symbolically:
MC = OR MC =

Q4. A producer starts a business by investing his own savings and hiring the labour. Identify implicit & explicit cost
from this information. Explain. (3) 2012 O set1
Ans: Implicit cost: Imputed interest on own savings. 1
Because he would have earned this interest if he had lent the savings. ½
Explicit cost: Wages paid to labour. 1
Because it is actual money expenditure on input.1/2

Q5. An individual is both the owner and the manager of a shop taken on rent. Identify implicit cost and explicit cost
from this information. Explain (3) 2012 o set2
Ans: Implicit cost: estimated salary of the owner. 1
Because the owner would have earned this salary if he had worked with a firm not owned by him. ½
Explicit cost: Rent paid. 1
Because it is actual money expenditure on input. ½

Q6. A producer borrows money to start a business and looks after the business himself. Identify the implicit & explicit
cost (3) 2012 O set3
Ans: Implicit cost: estimated income of the producer. 1
Because the producer would have earned this income if he had worked with another firm. ½
Explicit cost: Interest paid. 1
Because it is actual money expenditure on payment of interest. ½

Q7. Draw TC,TVC & TFC in a single diagram. (3) 2012 O set1
Ans:

Line horizontal to x axis is TFC.

TVC is inverse ‘S’ shaped curve starting from origin
TC is also inverse ‘S’ shaped curve staring from
level of TFC.
Change in TC is due to change in TVC as TFC is
fixed.
Vertical distance between TC & TVC is TFC
As TC = TFC + TVC

Q8. Draw AC, AVC, AFC in a single diagram. (3) 2012 O set 2
Ans:

55
 AFC is downward sloping curve – rectangular
hyperbola.
AC, AVC & MC curves are ‘U’ Shaped
AVC can start below AFC as TVC starts from
below TFC.
AC = AFC + AVC, so AC is above AVC & AFC
Gap between AC & AVC reduces with the
increase in output, as AFC falls which shows the
difference Between AVC & AC.

Minimum point of AC is towards right side of

minimum point of AVC

Q9. What is the behaviour of TVC when output increases? (1) 2012 O set1
Ans: When output is zero, TVC is zero, so it starts from origin. As production increases TVC first increases at
diminishing rate then increases at increasing rate taking the shape of reverse ‘S’ due to law of variable
proportions..

Q10. What is the behaviour of AFC when output increases? (1) 2012 O set2
Ans: AFC is downward sloping curve from left to right i.e. rectangular hyper bola. As AFC = TFC/Q & TFC is
constant.

Q11. Distinguish between explicit cost and implicit cost and give examples. (3) 2011 O set1,3
Ans:
Explicit Cost Implicit cost
1. An explicit cost is a direct 1. Implicit cost is a cost of self
monetary payments made to owned resources.
others in the course of running a
business.
2. These costs are included in the 2. These costs are not included while
accounting of the firm while estimating accounting profit of the
finding accounting profit. firm.
3. Explicit costs include employee 3. Producer using his own labour,
wages, purchase raw materials, land, building, capital/ money etc.
rent/mortgage payments, in the production process for
purchasing equipment , which no direct payments are
equipment maintenance costs etc. made.
4. It is a payment concept 4. It is revenue concept.

Q12. Define marginal cost. Explain its relation with average cost. (4) 2011 O set1,3 OR
Ans: Marginal Cost is the addition made to the total variable cost or total cost when one more unit of output
is produced. In other words MC is the cost of producing one additional unit of output. Symbolically:
MC =
Relation between AC & MC
AC & MC are ‘U’ Shaped curve reflecting law of variable proportions.
1. When MC is less than AC than AC tends to fall.
2. When MC is equal to AC than AC is minimum.
3. When MC is more than AC than AC tends to increase

56
Q13 Define Variable Cost. Explain the behaviour of total variable cost as output increases. (4) 2011 O set1,3
Ans: Costs which change directly with the change in output are variable cost. These costs increase with increase in
output, decrease with decrease in output & becomes zero at zero level of output.

TVC is zero at zero level of output

Curve starts from origin – as cost is zero at zero level of
output
TVC is reverse ‘S’ shaped curve due to law of variable
proportions.

Initially it increases at diminishing rate ( from O to A –

up to 2 level of output ) due to increasing returns to
factor.
After A point ( output level 3 & 4) it increases at
increasing rate due to diminishing returns to factor.

Q14. A firm’s AFC when it produces 2 units is Rs.30. Its ATC schedule is given below. Calculate its MC & AVC at
each level of output. (3) 2010 D
TFC = AFC x Q = 30 x 2 = 60 = TFC
Output (Units) 1 2 3
ATC ( Rs) 80 48 40
Ans:
Output (units) ATC (Rs) TFC TC TVC AVC = MC
TVC/Q
1 80 60 80 20 20 20
2 48 60 96 36 18 16
3 40 60 120 60 20 24

Q15. Define fixed cost. (1) 2009 D

Ans: Cost which does not change with the change in output is called as fixed cost. It is cost incurred on fixed factors
like machinery, building etc.

Q16. Complete the following table:- (4) 2009 D

Output (Units) AVC TC MC
1 - 60 20
2 18 - -
3 - - 18
4 20 120 -
5 22 - -
Ans:

57
 Output (Units) AVC TC MC TVC TFC
1 20 60 20 20 40
2 18 76 16 36 40
3 18 94 18 54 40
4 20 120 26 80 40
5 22 150 30 110 40
OR
Output (Units) AVC TC MC
4 9 36 -
5 - - 4
6 - 42 -
7 6 - -
8 - 40 -

Output (Units) AVC TC MC TVC TFC

4 9 36 - 36 0
5 8 40 4 40 0
6 7 42 2 42 0
7 6 42 0 42 0
8 5 40 -2 40 0
Q16. Why is TC > AVC? (1) 2009 O
Ans: TC = TFC + TVC & AVC = TVC /Q . Total cost is the total of all the costs whereas AVC is calculated from
TVC which is a part of TC.

Q17. Giving reason, state whether the following statements are true or false: (6) 2009 O
i) AC falls only when MC falls
Ans: False AC falls till MC < AC.
ii) The difference between ATC and AVC is constant
Ans: False. ATC – AVC = AFC which is falling. So the difference between ATC & AVC falls not constant.
iii)When TR is maximum, MR is also maximum.
Ans: False . As ∑MR = TR, so TR increase when MR is positive, TR is maximum when MR is zero.

Q18. What does cost mean in economics? (1) 2008 D

Ans: Total expenditure incurred on purchase or hire of various inputs to produce goods and services.

Q19. Complete the following table:- (4) 2008 D

Output (Units) TVC (Rs) AVC (Rs) MC (Rs)
1 10 - -
- - 8 6
3 27 - -
- - 10 13

Output (Units) TVC (Rs) AVC (Rs) MC (Rs)

1 10 10 10
2 16 8 6
3 27 9 11
4 40 10 13

Q20. Distinguish between i) Fixed cost and Variable cost giving examples and ii) AC & MC giving an example. (4)
2008 O
Ans: i) 2 marks
FIXED COST VARIABLE COST
The cost which remain constant with the increase in The costs which change directly with the change in
output output.
Example; expenditure on fixed factors like building, Example: Expenditure on raw material, fuel, temporary
Machinery, tools, equipment, salaries of permanent labour etc.
employees

58
ii) Average cost (AC) is defined as cost of producing per unit of the commodity. It is obtained by dividing
TC by level of output. Symbolically;-
Q = Output
Marginal cost is an addition made to the total variable cost or total cost when one more unit of output is
produced. In other words MC is the cost of producing one additional unit of output. Symbolically:
MC = OR MC = (when fixed costs are not given)
Example: i) Cost of producing one unit of chocolate is Rs 5/- this is marginal cost. Cost of producing 10
chocolates is added & divided by 10 is average cost.
PRODUCER EQUILIBRIUM
Q1. Explain why will a producer not be in equilibrium if the conditions of equilibrium are not met. (6) 2015 O set1
Ans: A producer is at equilibrium when he gets maximum profit. Equilibrium conditions for MC & MR method are
i) MC = MR ii)MC > MR after equilibrium OR MC must be rising.
If MR > MC, it is profitable to produce more. Therefore, so long as MR is greater than MC, the maximum
profit level, or the equilibrium level is not reached. The equilibrium is not achieved because it is possible to
add to profits by producing more.
If MR < MC The producer is also not in equilibrium because benefit is less than the cost. By producing less
the producer can add to his profits.
When MC is equal to MR, the benefit is equal to cost, the producer is in equilibrium subject to that
MC becomes greater than MR beyond this level of output. When MC equals MR (subject to the supporting
condition) the producer’s profit would be less if he produces output more than or less than the ‘MC = MR’
output as explained above. Therefore, for equilibrium to reach it is a necessary condition (but not sufficient)
that MC equals MR.

Q2. From the following information about a firm, find the firm’s equilibrium output in terms of marginal cost and
marginal revenue. Give reason. Also find profit at this output. 2014 O

Output (units) Total Revenue Total Cost (TC)

1 7 8
2 14 15
3 21 21
4 28 28
5 35 36
Ans: A producer is at equilibrium when he gets maximum profit. Equilibrium conditions for MC & MR method are
i) MC = MR ii)MC > MR after equilibrium OR MC must be rising.

Output Total Total MR MC

(units) Revenue Cost
(Q) (TR) (TC)
1 7 8 7 8 MC > MR no equilibrium
2 14 15 7 7 MC = MR, MC is falling no
equilibrium
3 21 21 7 6 MR > MC no equilibrium
4 28 28 7 7 MR = MC equilibrium
5 35 36 7 8 MR < MC no equilibrium
Both the conditions are fulfilled when producer produces 4 units of output. So this is equilibrium.

Q3. From the following information about a firm, find the firm’s equilibrium output in terms of marginal cost and
marginal revenue. Give reasons. Also find profit at this output. (6) 2014 O set1
Output (units) Total Revenue Total Cost (TC)
1 6 7
2 12 13
3 18 17

59
 4 24 23
5 30 31
Ans: A producer is at equilibrium when he gets maximum profit. Equilibrium conditions for MC & MR method are
i) MC = MR ii)MC > MR after equilibrium OR MC must be rising.

Output Total Total Cost MR MC

(units) Revenue (TC)
1 6 7 6 7 MC > MR no equilibrium
2 12 13 6 5 MC < MR no equilibrium
3 18 17 6 4 MC < MR no equilibrium
4 24 23 6 6 MC = MR & MC is rising - Equilibrium
5 30 31 6 8 MC > MR no equilibrium
Producer is at equilibrium when he produces 4 units of output.

Q4. What is producer’s equilibrium? Explain the conditions of producer’s equilibrium through the ‘marginal cost and
marginal revenue’ approach. Use diagram. (6) 2011 O set 1,3 & (6) 2012 O set2
Explain the condition of producer’s equilibrium with the help of a numerical example. (4) 2013 O set1
Ans: A producer is at equilibrium when he gets maximum profit. Equilibrium conditions for MC & MR method are
i) MC = MR ii)MC > MR after equilibrium OR MC must be rising.
Explanation with the help of schedule:
Units of output MR MC
1 12 15
2 12 12
3 12 10
4 12 8
5 12 7
6 12 9
7 12 10
8 12 12
9 12 15
In the above schedule MC = MR condition is fulfilled at 2 & 8 levels of output, but consumer will be at
equilibrium as MC is increasing at 8 level of output. Thus consumer is at equilibrium when producer
produces 8 units of output.
Graphic Presentation

Note that in the above curve MC = MR condition is satisfied both at A & e both level of output ( OQ1 &
OQ) But the second condition – MC becomes greater than MR – is satisfied only at OQ i.e. point e.
Therefore equilibrium output level is OQ units.
When Price is not constant
When a producer can sell more only by lowering the price, the MR curve is downward sloping. The
typical MC curve is U-shaped.

60
Note that MC = MR condition is satisfied at both A and e. But the second condition – MC is greater
than MR or MC curve cuts MR from below – is satisfied only at e. So, the equilibrium level of output
in OQ.

Q5. From the following schedule find out the level of output at which the producer is in equilibrium. Give reason for
your answer. (4) 2009 D
Ans: A producer is at equilibrium when he gets maximum profit. Equilibrium conditions for MC & MR method are
i) MC = MR ii)MC > MR after equilibrium OR MC must be rising.
Output ( Units) Price ( Rs.) Total Cost (Rs) TR MR MC
1 24 26 24 24 26 MC > MR
2 24 50 48 24 24 MC = MR but MC is falling
3 24 72 72 24 22 MC < MR
4 24 92 96 24 20 MC < MR
5 24 115 120 24 23 MC< MR
6 24 139 144 24 24 MC = MR & MC increases
Equilibrium
7 24 165 168 24 26 MC > MR
Producer is at equilibrium when he produces 6 units of output, as both the conditions are fulfilled here.

Q6. Given below the cost & revenue schedule of a producer. At what level of output is the producer in equilibrium?
Give reason for your answer. (4) 2009 O
Ans: A producer is at equilibrium when he gets maximum profit. Equilibrium conditions for MC & MR method are
i) MC = MR ii)MC > MR after equilibrium OR MC must be rising.

Output ( Units) Price ( Rs.) Total Cost (Rs) TR MR MC

1 10 13 10 10 13 MC > MR
2 10 22 20 10 9 MC < MR
3 10 30 30 10 8 MC < MR
4 10 38 40 10 8 MC < MR
5 10 47 50 10 9 MC< MR
6 10 57 60 10 10 MC = MR & MC increases
Equilibrium
7 10 71 70 10 14 MC > MR
Producer is at equilibrium when he produces 6 units of output, as both the conditions are fulfilled here.

Q7. Explain the conditions leading to maximisation of profits by a producer. Use TR & TC approach. (4) 2008 D
Q8. Explain the producer’s equilibrium using a schedule. Use TC and TR approach. (4) 2008 O
TR & TC Approach is out of syllabus now.

SUPPLY

61
Q1. Explain how technological progress is a determinant of supply of a good by a firm. (3) 2014 O set1, (3) 2008 D
Ans: Improved techniques reduce the cost of production and increase the supply of a firm & therefore supply curve of the firm
will shift rightwards.

supply ‘increases’ the supply curves SS shifts to

the right S’S’. The market is now willing to supply
more i.e. OQ1, at the same price OP.

Q2. (OR) Explain how input prices are a determinant of a good by a firm.(3) 2014 O set1, (4) 2012 O set1(3) 2008 D,
(3) 2008 O
Ans:- A fall in prices of inputs or factors of production will reduce the cost of production & thus increase the supply
of the commodity. Supply curve of the firm in this case will shift rightwards.
On the contrary when input price rises, cost of production increases & supply falls, therefore supply curve shifts
leftwards. Example: Price of sugarcane rises- cost of production rises- supply falls & vice versa.

Q3. What is Market supply of a product? (1) 2014 O set1, (1) 2008 O
Ans: Market supply means quantity of a commodity that all the firms are willing and able to offer for sale at each
possible price during a given period of time.

Q4. When the price of a good rises from Rs 20 per unit to 30 per unit, the revenue of the firm producing this good
rises from Rs 100 to Rs 300. Calculate the price elasticity of supply. (3) 2013 O set1
Ans:
Price Revenue Supply = revenue/ Price
20 100 5
30 300 10
Es = x Es = x ES = 2 highly elastic supply

Q5. How does the change in tax on a product influence the supply of that product? Explain. (4) 2012 O set3
Ans: Imposition of taxes reduces supply. When government increases indirect tax on goods, cost of
production increases & supply of good falls, therefore supply curve shifts leftwards.

Figure at price OP, previously OQ1 units were

supplied at S1 supply curve.
Which decreased to OQ2. It means that the
market is now willing to supply less at the same
price OP.Thus Supply curve shifts towards left to
S2.

On the other hand if government decreases indirect taxes, supply increases as cost of production also falls &
supply curve shifts rightwards.

62
 supply ‘increases’ the supply curves SS shifts
to the right S’S’. The market is now
willing to supply more i.e. OQ1, at the same
price OP.

Q6. Draw supply curve showing price elasticity of supply equal to i) zero ii) one iii) infinity through out (3) 2012 O set3
Draw supply Curves with price elasticity of supply equal to i) zero, ii) one iii) infinity and iv) Es < 1. (4) 2008 O
Ans:
ii)Unitary Elastic Supply ( Es = 1) :- When Proportional Change in
Supply is equal to proportional change in price, the Supply is said to be
unitary elastic. If supply curve is extended towards left it will touch
origin.
Price Supply
7 10
5 12

i) Perfectly Inelastic Supply ( Es = 0):- When the Supply for the

commodity does not change as a result of change in its price, Supply is
said to be perfectly in elastic.
Price Supply
7 10
5 10

iii)Perfectly Elastic Supply (Es = :- When Supply of a commodity

rises or falls to any extent without any change in price, the Supply for
the commodity is said to be perfectly elastic. It is an imaginary situation
Price Supply
5 10
5 20
5 30

iv)Inelastic Supply ( Es < 1) :- When Proportional change in Supply is

less than proportional change in price, the Supply is said to be inelastic
Supply. If supply curve is extended towards left it will touch x axis.
Price Supply
20 12
10 10
Essential goods usually have inelastic Supply. Where Supply
changes less with the change in price. (pp1 > qq1)

Q7. Explain the distinction between change in supply & change in quantity supplied. Use diagram. (6) 2012 O set1
Ans:

63
 Change in Supply Change in quantity Supplied
1.it is increase & decrease in Supply 1.It is expansion & contraction in Supply
2.It is due to other factors affecting Supply when 2. It is due to change in price of the good when the
price of good remain constant other factors affecting Supply remain constant.
3.causes behind increase in Supply are 3.Cause behind Expansion
 Fall in input price  Fall in the price of the commodity
 Technological improvement Cause behind Contraction
 Fall in indirect taxes  Increase in the price of the commodity is
 Goal of sale maximisation the reason for expansion.
Causes behind decrease in Supply
 Rise in input price
 Obsolete Technology
 Rise in indirect taxes
4. Supply curve shifts rightwards in case of 4. consumer moves rightwards on the same Supply
increase in Supply & leftward shift in decrease curve in expansion & leftwards movement in
in Supply contraction
5, It is called as “shift of Supply” It is called as “movement along Supply curve”
6 Explanation through diagram

Q8. Explain how changes in price of other products influence the supply of a given product. (4) 2012 set2
Ans: If price of a substitute goods increase, supply of the other commodity concerned will fall & therefore
supply curve will shift leftwards. ( Curve – leftward shift)
On the other hand if price of a complementary good increases, supply of the other commodity concerned
increases. Supply curve in this case shifts rightwards ( Curve – rightward shift)

Q9. What is decrease in supply? (1) 2011 O set 1,3

Ans: ‘Decrease’ in supply means less of the commodity is supplied at the same price. As a result, the
supply curve shifts inwards to the left. ‘Decrease’ in supply of a good can be caused by a change in any one
or more of the 'other factors' affecting supply, own price remaining unchanged. For example, if the input
prices rise or obsolete technology, rise in indirect tax etc. resulting in a leftward shift of the supply curve.

Q10. Total revenue is Rs. 400 when the price of the commodity is Rs. 2 per unit. When price rises to Rs. 3 per Unit,
the quantity supplied is 300 units. Calculate the price elasticity of supply. (3) 2010 D
Price ( Rs) P Quantity supplied ( Units) Q Total Revenue = P x Q
2 400/2 = 200 400
3 300
Es = x Es = x Es = 1 Unitary elastic supply

Q11. At a price of Rs. 5 per unit of commodity A, total revenue is Rs. 800. When its price rises by 20 %, total revenue
increases by Rs. 400. Calculate its price elasticity of supply. (3) 2010 O

64
Ans:
Price ( Rs) P ∆P Quantity supplied ( Units) Q Total Revenue = P x Q ∆TR
5 20 = ∆P/5 x 100 800/5 = 160 800 400
20x5= ∆P x100 = 1
5+1 = 6 1200/ 6 = 200 800 +400 = 1200

Es = x Es = x = 0.25 Es <1 , inelastic supply

Q12. What causes a downward movement along supply curve? (1) 2009 D
Ans: It means contraction in supply which is due to fall in the price of the commodity when other factors affecting
supply remain constant.

Q13. Explain the meaning of increase in supply & increase in quantity supplied with the help of a schedule.(3) 2009 D
Ans:
increase in supply Increase in quantity supplied
1.it is increase in supply 1.It is expansion in supply
2.It is due to other factors affecting supply when price of 2. It is due to increase in price of the good when the
good remain constant other factors affecting supply remain constant.
3.causes behind increase in supply are 3.Cause behind Expansion
 Fall in price of substitute goods  Increase in the price of the commodity
 Rise in the price of complimentary good
 Improvement in technology
 Decrease in input price
 Decrease in indirect tax
4. Supply curve shifts rightwards in case of increase in 4. consumer moves rightwards on the same supply curve
supply in expansion

Q14. Commodities X & Y have equal price elasticity of supply. The supply of X rises from 400 units due to a 20%
rise in its price. Calculate the percentage fall in supply of Y if its price falls by 8 %. (4) 2009 D
Ans:
Es = x
Q15. Give one reason for a rightward shift in supply curve. (1) 2009 O
Ans: Improvement in technology of producing goods

Q16. The price elasticity of supply of commodity Y is half the price elasticity of supply of commodity X. 16% rise in
the price X results in a 40% rise in its supply. If the price of Y falls by 8%, calculate the % fall in its supply.
(4) 2009 O
Ans: Es x = % change in supply x / % change in price x = 16/ 40 = 0.4
Es y = ½ x 0.4 = 0.2
Es y = % change in supply y / % change in pricey
0.2 = x/ 8 = 1.6 % change in supply of y.

PRODUCER EQUILIBRIUM
HIGH ORDER QUESTIONS

Question 1: What does the AFC curve look like? Why does it look so?
Answer 1: AFC curve is downward sloping to right. As the output increases, the average fixed cost gets
distributed, i.e., AFC falls.
Question 2: What would be the shape of the demand curve (or AR curve) so that total revenue curve is
(a) positively sloped straight line passing through the origin, (b) A horizontal line?

65
Answer 2: (a) The demand curve (or AR curve) will be parallel to x-axis when the total revenue curve is
positively sloped straight line passing through the origin [See Fig. (i)].

y TR

TR

O Quantity x

P D/AR

O Quantity X
Fig (i)
(b)The demand curve (or AR curve) will be sloping downwards from left to right when the total revenue
curve is horizontal [See Fig. (ii)]
y

P TR

O Quantity X

D/AR

O Quantity X

Fig. (ii)
Question 3: Because of cyclone in a coastal area, the sea water covers a lot of rice fields. This reduces the
productivity of land. How will it affect the supply curve of rice of that region?
Answer 3: Supply curve of rice of that region will shift to left due to reduce in productivity of land because
of cyclone. Due to cyclone, production of rice will fall. Now irrespective of increase in price of rice,
production (or supply) cannot rise. In other words, supply of rice will fall at the same price.

Question 4: Is it correct to say that profit of a producer under perfect competition is maximum at a level at
which P= MC but MC is decreasing?
Answer 4: No, MC should be increasing along with P=MC.

Question 5: "Developing countries have supply constraint”. Do you agree?

Answer 5: Yes, it is true that developing countries have supply constraints. In these countries supply is

66
limited due to underdeveloped technology, inefficient transportation, lack of infrastructural facilities and
scare resources etc.
Producers are willing to increase supply but do not have the resources to do so.

Question 6: How input prices are a determinant of supply of a good by a firm? Explain.
Answer 6: In case of increase in input price, cost of production tends to rise. Accordingly, producers will
supply less of the commodity at its existing price as there is a decrease in producer's profit.
On the other hand, in case of fall in the price of inputs, the cost of production tends to fall, leading to an
increase in producer's profit. This encourages him to increase his supply.

Question 7: Identify the different phases of the law of variable proportions of the following schedule .Give
reason for your answers

Phase 1-TP increases at increasing rate, MP also increases and become maximum due to efficient use of
factors.
Phase 2- TP increases at decreasing rate due to depreciation on machinery and laziness of labours, MP goes

67
on decreasing but positive and go reaches at zero point.
Phase 3-TP starts falling and MP become negative due to use of our variable factors.
Question 8: What is the main (sole) aim of producers? Suggests the way to achieve it.
Answer 8: The main aim to producers is to earn profit. It may be normal profit or super normal profit.
(1) Normal profit- In short run under perfect competition. Normal profit achieved when AR=AC in this
situation there is no loss or no profit to the producers.

(2)Super normal profit- In this situation P>AC or TR >TC or AR>AC.

A perfectly competitive firm may earn super normal profit or loss in short run, however in the long run, it
can only get normal profits. While under imperfect competition a firm may earn super normal profit even in
long run if the producer increases his production at the lower factor cost he can achieve the goal.

Question 9: A firm produces 100 units of a commodity during the period of one year. It utilises factor input
in the process of production. The detail of cost of inputs and investment made given below-:
ITEMS AMOUNT (IN LAKH)
1. Money borrowed @15% per annum 30
2. Total capital invested 80
3. Payment for raw material 10
4. Normal profit 7.5
5.Rent for entrepreneur’s own building 1
6. Wages and salaries paid 2
7. Payment into depreciation fund 0.6
8.Payement for insurance premium 0.4
Calculate (a) Explicit cost (b) Implicit cost
Answer 9: Given interest @ 15% per annum
Total interest on capital (80lakh) = 15/100X100= 12lakh
So interest on capital borrowed (30lakh) =15/100X30=4.5lakh
So interest on capital own capital of entrepreneur (50lakh) = 15/100X50= 7.5 lakh
EXPLICIT COST
Interest on borrowed money= 4.5 lakh
Payment for raw material = 10 lakh
Wages and salaries paid= 0.6 lakh
Payment into dep. fund= 0.4 lakh
Total explicit cost = 17.5 lakh

68
 IMPLICIT COST
Interest on entrepreneur capital = 7.5 lakh
Normal profit = 7.5 lakh
Rent for entrepreneur’s own building =1lakh
Total implicit cost = 16 lakh
Question 10: When price of a good falls from Rs.10 to Rs.9 per unit, total revenue declines from Rs. 1200
to Rs.918. Calculate its price elasticity of supply
Answer 10: PRICE Q.SUPPLY REVENUE
P 10 Q 120 TR 1200
P1 9 Q1 102 TR1 918

change in quantity supplied Initial Price

elasticity of supply = -- --------------------------------------- x ----------------
change in price Initial supply
elasticity of supply = 18/1 X 10/120
elasticity of supply = 1.5 ( there is elasticity of supply > 1)
Question 11: Explain the relationship b/w MR and Price elasticity of demand.
Answer 11: * When MR has positive value, price elasticity of demand is more than one.
*When MR has negative value, price elasticity of demand becomes less than one.
*When the value of MR is zero, price elasticity of demand is unity.
MR=AR(1-1/elasticity of demand) or MR=P(1-1/elasticity of demand)
(elasticity of demand= elasticity of demand)
Question 12: "All expenses of a firm are production cost." Do you agree?
Answer 12: No, it's not. Production cost refers to only those expenses which pertain to production of goods.
These costs may be direct or indirect.
Direct cost-- (cost of raw material, wages of daily workers) Indirect cost-- (salaries ,electricity charges)
The only condition being that they should be related to the production process either directly or indirectly.
So production cost includes cost of factors of production.
Question 13: As output increases, AC tends to be closer to AVC. Why?
Answer 13: We know that AC=AFC+AVC. As output increases ,AFC must continuously fall, because of
TFC is constant .Consequently, the component of AFC in AC tends to shrink. This bring AC closer to AVC.

69
 PRODUCER EQUILIBRIUM
PRACTICAL APPLICATION
Practicals on TP, AP and MP
Question 1. Calculate average product (AP) and marginal product (MP):
Variable factor (units) 0 1 2 3 4 5 6 7
TP (units) 0 3 8 12 15 17 17 16
{AP:-, 3,4,4,3.75,3.40,2.83,2.28;MP:-,3,5,4,3,2,0,-1}
Question 2. Calculate TP and AP:
Variable factor (units) 1 2 3 4 5 6 7
MP(units) 20 16 12 8 4 0 -4
{TP:-20,36,48,56,60,60,56;AP:20,18,16,14,12,10,8}
Question 3. Calculate TP and MP:
Variable factor(units) 1 2 3 4 5 6
AP(units) 50 48 45 42 39 35
{TP:50,96,135,168,195,210;MP:50,46,39,33,27,15}
Question 4. Find out the missing values from the following table:

Variable factor(units) 0 1 2 3 4 5

TP(units) - - 10 - 24 -
AP(units) - - - 6 - 5
MP(units) - 4 - - - -

{TP:0,4,10,18,24,25;AP:4,5,6,6,5;MP:4,6,8,6,1}

Practicals on Law of variable proportions

Question 5. Calculate MP of the variable factor and indicate the various phases of law of variable
proportions, from the following schedule:
Units of variable factor(VF) 0 1 2 3 4 5
TP(units) 0 5 12 18 8 15
{MP: 5, 7, 6, 0,-3; Phases -1st phase up to 2 units of VF; 2nd phase from 3 to 4 units of VF; 3rd phase from
5th unit of VF}
Question 6. from the following table, find out the phase during which there are increasing returns to a
factor. Give reasons for your answer. {CBSE, Delhi Comptt. 2011(I)}
Units of variable factor 1 2 3 4 5

Average Product(units) 10 12 14 14.5 14

{First phase of increasing returns to factor is governed till 3 units of output as MP is increasing in this
phase; MP: 10,14, 18, 16,12}

70
 COST
Question 1. Complete the following table:
Units of output TC TFC TVC MC
0 100 - - -
1 120 - - -
2 130 - - -
{TFC: 100,100,100; TVC: 20, 30; MC: 20, 10}
Question 2. Calculate total variable cost and marginal cost at each given level of output from the
following table:
Output(units) 0 1 2 3 4
Total cost 40 60 78 97 124
{Total variable cost: 20, 38, 57, 84; Marginal cost: 20, 18, 19, 27}
Question 3. Calculate TFC, TVC, AFC, AVC and MC.
Output(units) 0 1 2 3 4 5 6
TC 120 150 170 186 200 220 270
{TFC: 120 at all levels of output; TVC: 0, 30, 50, 66, 80, 100, 150; AFC:120,60,40,30,24,20;
AVC:30,25,22,20,20,25; MC: 30,20,16,14,20,50}
Question 4. Given fixed cost = 20, calculate: (a) TVC (b) TC from the following:
Output(units) 1 2 3
Marginal cost 10 15 25
{Total variable cost: 10, 25, 50; total cost: 30, 45, 70}
Question 5. Find MC from the following data:
Output Average Fixed Cost Marginal Cost
(units)
1 60 32
2 30 30
3 20 28
4 15 30
5 12 35
6 10 43
{Total cost: 92, 122, 150, 180, 215, 258; Average Variable Cost: 32, 31, 30, 30, 31, 33}
Question 6. Find out the missing figure from the table given below:
Output(units) 1 2 3 4 5
TFC 10 - - - -
TVC 50 - - - -
TC - - - 270 -
MC - 30 - - -
AFC - - - - -
AVC - - 40 - -
AC - - - - 70
{TFC:10 at all output; TVC: 50, 80, 120, 260, 340; TC: 60, 90, 130, 270, 350; MC: 50, 30, 40,
140, 80; AFC: 10, 5, 3, 3.33, 2.50, 2; AVC: 50, 40, 40, 65, 68; AC: 60, 45, 43.33, 67.50, 70}
Question 7. Find AVC and MC at each level of output.
Output(units) 0 1 2 3
TC 60 100 130 150
{AVC: 40, 35, 30; MC: 40, 30, 20}
Question 8. Output increases from 3 to 4 units. As a result, TC rises from 19.60 to 24.50. Find out
MC. {MC: 4.90}

71
 REVENUE
Question 1. Calculate TR, AR, and MR.
Units sold 1 2 3 4
Price 5 4 3 2
{TR: 5, 8, 9, 8; AR: 5, 4, 3, 2; MR: 5, 3, 1,-1}
Question 2. Determine AR and MR.
Units sold 1 2 3 4 5 6 7
TR 20 36 48 56 60 60 56
{AR: 20, 18, 16, 14, 12, 10, 8; MR: 20, 16, 12, 8, 4, 0,-4}
Question 3. Calculate TR and MR.
Units sold 1 2 3
AR 10 9 9
{TR: 10, 18, 27; MR: 10, 8, 9}
Question 4. Calculate TR and AR.
Units sold 1 2 3 4 5 6 7
MR 10 8 6 4 2 0 -2
{TR: 10, 18, 24, 28, 30, 30, 28; AR: 10, 9, 8, 7, 6, 5, 4}
Question 5. Complete the following table:
Units 1 2 3 4 5 6 7 8
sold
TR 10 - 24 - 30 30 28 -
MR 10 - - 4 - 0 - -4
AR - 9 - 7 6 - 4 3
{TR: 10,18,24,28, 30, 30, 28,24; MR: 10,8,6,4,2,0,-2,-4; AR: 10,9,8,7,6,5,4,3}
Question 6. A Shopkeeper sold 25 calculators at the price of 125 each. His total receipts increased to
3,380 after selling 26 calculators. At what price did he sell the 26th calculators?
{130}
Question 7. When sale of a unit increased from 20 units to 35 units, the total revenue increased by 1200.
Calculate MR. { 80}
PRODUCER’S EQUILIBRIUM
Question 1. From the following schedule, find out the level of output at which the producer is in
equilibrium, using MC and MR approach. Give reason for your answer.
Price (per unit 7 6 5 4
@8 )
1 2 3 4 5
Total cost 6 11 15 18 23
{Producer is in equilibrium at 3 units of output as: (i) MC is equal to MR; and (ii) MC becomes greater
than MR after this level of output.}
Question 2. The TR and TC values of a firm are given in the following schedule. Calculate MR and MC.
Also determined the level of output, at which producer’s equilibrium is achieved?
Output 1 2 3 4 5 6 7
(units)
TR 20 40 60 80 100 120 140
TC 30 55 78 98 120 150 190
{MR:20,20,20,20,20,20,20; MC:30,25,23,20,23,40; producer’s equilibrium is achieved at 4 units of output
as : (i)MC is equal to MR; and (ii) MC becomes greater than MR after this level of output.}

72
 PRODUCER EQUILIBRIUM
VALUE BASED QUESTIONS
Question 1: Availability of agriculture land (fixed factor) is limited in the world,
but demand of food grain is continuously increasing. Is it possible to increase the supply of food grains by
continuously increasing variable factors like seeds, fertilizers etc.?
Answer 1: Availability of agriculture land is limited in the world, production of food grains may be
increased by continuous increase in variable factors only up to a optimum combination with fixed factor.
After that law of negative returns is applied.
Value: Critical thinking
Question 2: What efforts should be made in an economy for the continuous use of exhaustible natural
resources in production?
Answer 2: There are various efforts; namely,
i. To increase use of renewable resources.
ii. To explore the substitutes of resources
iii. To reduce the wastage of resources.
Question 3: In a situation of rise in the sale of ice cream, the ice cream producer would like to increase the
production. What factors of production fixed or variable will be reduced by him? Explain with reasons.
Answer 3: When sale of ice cream decreases, profit of producer will fall by which he will try to control his
cost of production but in short run he cannot change the cost of fixed factors therefore he will reduce the
cost of variable factors.
Question 4: Which one of the following is the fixed cost for a firm?
(i) Rent paid in advance for three months.
(ii) Hourly wage to be paid to labour every month.
Answer 4: (i) It is fixed cost. It cannot be recovered if the firm closes down the operations.
Value: Critical thinking
Question 5: Comment on the following statement: “In the short run, a firm total cost will be zero if the firm
chooses to produce nothing.”
Answer 5: The statement is likely to be false. If a firm has any fixed costs at all, the firm’s total costs will
not be equal to zero even if it produces zero output.
Value: Analytic
Question 6: Because of cyclone in a coastal area the sea level covers a lot of rice fields. This reduces the
productivity of land. How will affect the supply curve of that region?
Answer 6: With a fall in the productivity of the land the output of rice will fall. Less stock will not be in a
position to offer for sale. Even if the price of rice rises, producers will not be in a position to offer more
quantity for sale. Thus, the supply curve of rice will shift to the left.
Value: Analytic
Question:-7 How can the tax policy of government be effective in controlling the of liquor like harmful
products?
Answer 7: The production of liquor like harmful products will be less profitable to the producer due to
increasing tax rates because the difference between revenue and cost decreases and hence producer’s profit
will decrease, and the supply of liquor will be decreased.
Value: Social health Consciousness
Question 8: What is the price elasticity of supply of M.F. Husain paintings?

73
Answer 8: The price elasticity of supply of M.F. Husain paintings is zero, because no matter how high price
rises, no more paintings can ever be produced.
Value: Critical thinking
Question 9: The area of cultivable land is more or less fixed in a country. Under such conditions, suggest
two ways to increase the productivity of land.
Answer 9: The productivity of land can be increased by
 Using better inputs and techniques of production, and
 By shifting the use of land from a low-value use to a high-value use.
Value: Efficient Utilization of resources
Question 10: A manager of circus wants to increase the revenue, which measure is more appropriate when,
ED>1 i) Increase in the entry fee ii) Decrease in the entry fee. Explain?
Answer 10: By reducing the entry fee the number of visitors may increase and total revenue will increase,
but if the entry fee is increased, numbers of visitors may decrease and total revenue will fall.
Value: Problem solving
Question 11: Since price of commodity forms average revenue for a firm, both average revenue and
marginal revenue cannot be negative. Is it true?
Answer 11: False. AR represents the price of a product. A business firm invariably has to charge a price
which forms AR of the firm. Negative AR will imply that a firm sells its output in the market and instead of
charging the consumers it pays them in form of cash, etc. MR would be negative, if a firm is faced with a
less unit elastic demand.
Value: Critical Thinking
Question 12: If MC is more than MR at a particular level of output, how will a producer react to maximize
the profit?
Answer 12: The producer will reduce the production to maximize the profit.
Value: Analytic
Question 13: Suppose a firm is producing a level of output such that MR > MC. What should the firm do to
maximize the profit?
Answer 13 : MR > MC is the condition for maximum profit. In the given question MR > MC, thus the firm
has the capacity to increase production so as to earn maximum profit. So the firm increases its production.
Value: Analytic
Question 14: Define market supply. What is it affect on the supply of a good when government imposes a
tax on the production of that good? Explain.
Answer 14: Quantity of a particular commodity offered from sale by all the firms at different prices in the
market is known as market supply.
If govt. imposes heavy taxes on the production of a particular commodity the cost of production increases,
price remains constant. This results in reduction in profit
In this situation the producers will shift his resources toward producing those commodities on which govt.
imposed fewer taxes. As a result supply of a particular commodity decreases.
Question 15: Define market supply. What is it affect on the supply of a good when government imposes a
tax on the production of that good? Explain.
Answer 15: Quantity of a particular commodity offered from sale by all the firms at different prices in the
market is known as market supply.
If govt. imposes heavy taxes on the production of a particular commodity the cost of production increases,
price remains constant. This results in reduction in profit
In this situation the producers will shift his resources toward producing those commodities on which govt.
imposed fewer taxes. As a result supply of a particular commodity decreases.

74
 MARKET FORMS & EQUILIBRIUM
MULTIPLE CHOICE QUESTIONS
1. In which market AR = |MR
(a) Monopoly (b) Perfect Market
(c) Monopolistic Market (d) Oligopoly
2. In which market restrictions on entry of new firm
(a) Perfect Market (b) Monopolistic Market
(c) Monopoly (d) None of the above.
3. Under which market firm is price taker
(a) Perfect Market (b) Monopoly
(c) Monopolistic Market (d) Oligopoly
4. Under Oligopoly
(a) Large no of sellers (b) Few sellers
(c) Single seller (d) None of above.
5. A price of which a consumer is willing to buy and a seller is willing to sell the commodity is called.
(a) Minimum Price (b) Maximum Price
(c) equilibrium price (d) None of the above.
6. When a monopoly firm charges different prices from different consumers for the same product is
called:
(a) Quantity discrimination (c)Price discrimination
(b) Product differentiation (d)none

7. Quantity of a commodity which is bought and sold at the equilibrium price is called.?
(a) Maximum quantity (b) Minimum quantity
(b) Both (a) and (b) (d) Equilibrium quantity

8. At a given price, when demand for commodity is more than supply of the commodity then it is called
excess demand or shortage. Here given price is:
(a) less than equilibrium price.
(b) more than equilibrium price
(c) less than or equal to equilibrium price.
(d) More than or equal to equilibrium price.
9. Maximum ceiling price refers to:
(a) Max. retail price
(b) Max. price the buyer is willing to pay
(c) Max. price at which seller is willing to sell.
(d) Max . price the producer is legally allowed to charge.
10. Selling cost are not required under-
(a) Monopolistic competition
(b) Oligopoly
(c) Perfect competition
(d) none

75
11. Which of the following is not a characteristic feature of a perfect competitive market?
a. Large no. of firms in an industry
b. Output of firms are perfect substitutes for one another
c. Firms face downward sloping curve.
d. Free entry & exit of firms in the industry
12. With a given demand curve, an increase in supply will result in:
a. fall in equilibrium price and equilibrium quantity.
b. a fall in equilibrium price and a rise in equilibrium quantity
c. a rise in equilibrium price and a fall in equilibrium quantity
d. Rise in equilibrium quantity & price.
13. Which of the following is not the revenue curve of a perfectly competitive firm in the short run.

a. I b) ii & iii c) None

14. Which of the following graphs is an accurate way of representing demand curve facing a monopolistic
curve

(a) (b) (c) (d) None

15. Which of the following goods generally represents characteristics close to perfectly competitive
market:
a.Manufacturing Goods b. Agricultural Goods c. None d. all the above

16.’Railways is an example of
a. Monopoly b. Perfect Competition c. Monopolistic competition d. Oligopoly
17. The market structure of ‘soap’ industry in India is an example of
a. Monopoly b. Perfect Competition c. Monopolistic Comp. d. Oligopoly

18. A Monopolist can sell any quantity he likes at a price. Which one of the following goes with it :
a. False b. True c. Partly False & Partly True

19 Cement ‘ is an example of :
a.Imperfect Oligopoly b. Perfect Oligopoly c. Collusive Oligopoly d. monopoly

76
20. Suppose on any given day, the market price of mangoes get fixed at Rs. 50/- kg by market forces of
demand and supply. Every dealer of mangoes would be free to sell any quantity he likes at this price. This is
the feature of
a.Price Maker Firm b. Price Taker Firm c. None d.perfect competition
21.There is no difference in Firm and Industry in
a. Perfect Competition b. Monopoly c. Monopolistic Competition d. all

22. AR Curve coincides with MR Curve in

a.Monopoly b. Perfect Competition c. Monopolistic Competition d. none

23. Imposition of Price ceiling below the equilibrium price leads to

a. Excess Demand b. Excess Supply c. None d. fall in price

24. Price ceiling is imposed to protect the interests of

a. Producers b. Consumers c. Both a and b. d. all

25. The maximum price fixed by the government at which the goods can be purchased through fair price
shops is called
a. Excess Demand b. Aggregate Demand c. Rationing d. none

26. The following is the description of equilibrium prices in case of a viable industry. Which one is true?

a. b. c. d. none

27. Demand curve of a monopolistic market form of structure is more elastic due to
a. Close Substitutes b. No close substitutes c. perfect Substitutes d. all

28. The condition for a firm to earn normal profit is

a.Price > LAC b. Price = LAC c. Price < LAC d. none

29. A Few firms which explicitly agree to work together to avoid competition and secure monopoly control
of the market is known as
a. OPEC b. Cartel c. Railways d. none

30. Product Differentiation is one of the features of

a. Monopolistic Competition b. Perfect Competition c. Monopoly d none
Multiple choice questions : (1 Mark)
1.(b) 2.(c) 3.(a) 4.(b) 5.(c) 6.(c) 7.(d) 8.(a) 9.(d) 10.(c) 11. c 12. b 13. c 14. b 15. b 16. c 17. c
18. a 19. b 20. b 21. b 22. b 23. a 24. b 25. c 26. b 27. a 28. b 29 . b 30. a

77
 MARKET FORMS & EQUILIBRIUM
BOARD QUESTIONS
Q1.
What are the effects of ‘price floor’ (minimum price ceiling) on the market of a good? Use diagram (3) 2015 O
Ans: Price floor is the legal minimum price. When equilibrium price is determined by market forces of Demand &
supply is very low. It is so low that producers are not getting appropriate price for their product, then government
intervenes & fixes a price which is higher than market price, below which no one is supposed to sell. It is also called
as price floor which creates excess supply if the legal price is above the market price. Suppliers are willing to supply
more at the price floor than the market wants at that price.

At price floor there is excess supply in the market as

shown in the figure.

Price will tend to fall if this excess supply is not removed.

Government makes buffer stock of food grains when govt

fixes minimum support price.

Q2. In a perfectly competitive market the buyers treat products of all the firms as homogeneous. Explain the
significance of this feature. (3) 2015 O
Ans: It means that the buyers treat the products of all the firms in the industry as homogenous. The products produced
by the firms are identical, or treated as identical, or perfectly standardized. The buyers do not distinguish the output of
one firm from that of the other.
The implication of this feature is that since the buyers treat the products as identical they are not ready to pay a
different price for the product of any one firm. They will pay the same price for the products of all the firms in the
industry.
On the other hand, any attempt by a firm to sell its product at a higher price will fail. To sum up, the 'homogenous
products' feature ensures a uniform price for the products of all the firms in the industry.

Q3. Market for a good is in equilibrium. The supply of the good increases. Explain the chain of effects of this change.
(6) 2015 O(6) 2011 O set1
Ans: Increase in supply will cause equilibrium price and output to change in opposite directions.
When supply increases due to other factors affecting supply except price, supply curve shifts rightwards.
An increase in supply will cause a reduction in the equilibrium price and an increase in the equilibrium
quantity of a good.
 The increase in supply creates an excess supply at the initial price.
 Excess supply causes the price to fall and quantity demanded to increase.
 Fall in price will reduce supply & increase demand, so the excess supply will reduce.
 Fall in price will continue till gap of S & D will be zero & new equilibrium will be achieved.

78
 Equilibrium of Demand & Supply which shows
op1 & oq1 as eq. Price & eq.quantity.
When Supply increases supply curve shifts
rightward from S1 to S2. At op1 price there is
excess Supply
This excess Supply leads price to fall towards op2,
due to which supply decreases & demand rises as
arrows show. It reduces excess supply. Increase in
price continues till new equilibrium is achieved
where excess supply is zero. This is new
equilibrium.
Equilibrium price falls from op1 to op2
Equilibrium quantity rises from oq1 to oq2.
Q4. What is perfect oligopoly? (1) 2014 D
Ans: If in an oligopoly market, the firms produce homogeneous products, it is called perfect oligopoly.

Q5. What is imperfect oligopoly? (1) 2014 O

Ans: . If the firms produce differentiated products, it is called imperfect oligopoly.
Q6. Why are firms said to be interdependent in oligopoly market? Explain (3) 2014 D
Explain why are firms mutually interdependent in an oligopoly market. (3) 2013 set 2

Ans: When there is only a limited number of firms, it is likely that rivals have some knowledge as to how these firms
operate.
If one firm does something about the price and quantity of the product it produces, the rivals are likely to take quick
note of it and react by changing their own price and output plans.
Therefore the given firm, expecting reactions from its rivals, takes into account such possible reactions before taking
any decision about the price and output of the product it produces.
It makes each firm dependent on other firms in the industry.

Q7. Why is the no. of firms small in oligopoly? Explain. (3) D 2011, O 2012 set1 (3) 2014 O
Ans: Oligopoly means competition among few firms. The main reason why the number of firms is small is that there
are barriers which prevent entry of firms into industry.
These barriers are Patents, large capital, control over the crucial raw materials etc, which prevent new firms from
entering into industry.
Only those who are able to cross these barriers are able to enter, so few firms remain in the oligopoly..

Q8.Market of a commodity is in equilibrium. Demand for the commodity “increases”. Explain the chain of effects of
this change till the market again reaches equilibrium. Use diagram. (6) 2014
Ans: When demand increases due to other factors affecting demand except price like Increase in income, increase in
price of substitute goods, fall in the price of complimentary good, favourable change in taste , preference etc. demand
curve shifts rightward The chain effects of rightward shift is as follows:-
 When demand increases demand curve shifts rightward .
 At equilibrium price there is excess demand at initial price
 Excess demand tends price to increase.
 As price increases, consumers are willing to demand less & producers are willing to supply more due to law
of demand & supply.
 Increase in supply & decrease in demand reduces excess supply.
 Increase in price will continue till this excess demand is zero, which happens at new equilibrium.

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 Equilibrium of Demand & Supply is point A which
shows op1 & oq1 as eq. Price & eq. quantity.
When demand increases demand curve shifts
rightward from D1 to D2. At op1 price there is
excess demand AB
This excess demand leads price to rise towards
op2, due to which supply increases & demand falls
as arrows show. It reduces excess demand.
Increase in price continues till point e is achieved
where excess demand is zero. This is new
equilibrium.
Equilibrium price rises from op1 to op2
Equilibrium quantity also rises from oq1 to oq2.

Q9. Market of a commodity is in equilibrium. Demand for the commodity ‘decreases’. Explain the chain of effects of
this change
till the market again reaches equilibrium. Use diagram. (6) 2014 O
Ans: When demand decreases due to other factors affecting demand except price, demand curve shifts left wards
which will cause a reduction in the equilibrium price and quantity of a good. Chain of reactions are as follows:
 The decrease in demand causes excess supply to develop at the initial price.
 Excess supply will cause price to fall
 as price falls producers are willing to supply less of the good, thereby decreasing output & consumers are
willing to demand more due to law of demand & supply.
 Increase in demand & decrease in supply reduces excess supply.
 Decrease in price will continue till this excess supply is zero, which happens at new equilibrium.
Equilibrium of Demand & Supply is point B which
shows op1 & oq1 as eq. Price & eq. quantity.

When demand decreases demand curve shifts leftward

from D1 to D2. At op1 price there is excess supply AB.
This excess demand leads price to fall towards op2,
due to which demand increases & supply falls as
arrows show. It reduces excess supply.Decrease in
price continues till point e is achieved where excess
supply is zero. This is new equilibrium.
Equilibrium price falls from op1 to op2
Equilibrium quantity also falls from oq1 to oq2.

Q 10. Explain the implications of large number of buyers in a perfectly competitive market. (3) 2013 set 2(3) D & O
2011, 2012 O
Ans: 'large number' imply that the number of sellers is large enough to render a single seller's share in total market
supply of the product insignificant. Insignificant share means that if only one individual firm reduces or raises its own
supply, the prevailing market price remains unaffected. One single seller has no option but to sell what it produces at
this market determined price. This position of an individual firm in the total market is referred to as price taker. This
is a unique feature of a perfectly competitive market.
Similarly, the 'large number' of buyers also has the same implication. A single buyer's share in total market demand is
so insignificant that the buyer cannot influence the market price on his own by changing his demand. This makes a
single buyer also a price taker.
To sum up, the feature 'large number' indicates ineffectiveness of a single seller or a single buyer in influencing the
prevailing market price on its own, rendering him simply a price taker.

Q 11. What is a price taker firm? (1) 2012 set2

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Ans: Perfectly competitive firm is a price taker firms which has no price policy. Price of commodity is fixed in the
industry by market forces of Demand & supply. Price fixed by the industry is taken by the firms at which they sell the
goods.

Q 12. Market for a good is in equilibrium. Explain the chain of reactions in the market when there is i) decrease in
supply ii) decrease in demand. OR (6) 2012 O
Ans: i) decrease in supply will cause an increase in the equilibrium price and a decrease in the equilibrium quantity of
a good.
 The decrease in supply creates an excess demand at the initial price.
 Excess demand causes the price to rise and quantity demanded to decrease.

Equilibrium of Demand & Supply which shows op1 &

oq1 as eq. Price & eq.quantity.
When Supply falls supply curve shifts leftward from S1
to S2.
Equilibrium price rises from op1 to op2
Equilibrium quantity falls from oq1 to oq2.

ii) decrease in demand :- When demand decreases due to other factors affecting demand except price, demand curve
shifts left wards which will cause a reduction in the equilibrium price and quantity of a good. Chain of reactions are as
follows:
 The decrease in demand causes excess supply to develop at the initial price.
 Excess supply will cause price to fall
 as price falls producers are willing to supply less of the good, thereby decreasing output & consumers are
willing to demand more due to law of demand & supply.
 Increase in demand & decrease in supply reduces excess supply.
 Decrease in price will continue till this excess supply is zero, which happens at new equilibrium.
Equilibrium of Demand & Supply is point B which
shows op1 & oq1 as eq. Price & eq. quantity.
When demand decreases demand curve shifts
leftward from D1 to D2. At op1 price there is
excess supply AB.
This excess demand leads price to fall towards op2,
due to which demand increases & supply falls as
arrows show. It reduces excess supply.Decrease in
price continues till point e is achieved where excess
supply is zero. This is new equilibrium.
Equilibrium price falls from op1 to op2
Equilibrium quantity also falls from oq1 to oq2.

Q13. Market for a good is in equilibrium. There is simultaneous increase both in demand & supply but there is no
change in price.
Explain how is it possible. Use a schedule. (6) 2008 D (6) 2009,D
2012O set1,2,3
Ans: Both Demand and Supply Increase: Original Equilibrium is determined at point E, when the original demand
curve DD and the original supply curve SS intersect each other. OQ is the equilibrium quantity and OP is the

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equilibrium price. The effect of increase in both demand and supply on equilibrium price and equilibrium quantity is
discussed under three different situations:
When Increase in Demand = Increase in Supply:

When increase in demand is proportionately equal to

increase in supply, then rightward shift in demand curve
from DD to D1D1 is proportionately equal to rightward
shift in supply curve from SS to S1S1 The new
equilibrium is determined at E1. As both demand and
supply increase in the same proportion, equilibrium price
remains the same at OP, but equilibrium quantity rises
from OQ to OQ1.

When increase in demand is proportionately more than

increase in supply then rightward shift in demand curve
from DD to D1D1 is proportionately more than rightward
shift in supply curve from SS to S1S1. The new
equilibrium is determined at E1 equilibrium price rises
from OP to OP1 and equilibrium quantity rises from OQ
to OQ1.

When increase in demand is proportionately less than

increase in supply, then rightward shift in demand curve
from DD to D1D1 is proportionately less than rightward
shift in supply curve from SS to S1S1 . The new
equilibrium is determined at E1 equilibrium price falls
from OP to OP1 whereas, equilibrium quantity rises from
OQ to OQ1.

Q 14. What is the behaviour of MR in a market in which a firm can sell any quantity of the output at a given price? (1)
2012 set1
Ans: When price is given & constant MR is also constant & horizontal to X axis.

Q15. What is a price maker firm? (1) 2011

set1,.2012 set1
Ans: Monopoly firm & firms in monopolistic competition, which can change the price. Firms reduce price to increase
sales & if firms increase price sales reduces.

Q16.Draw in a single diagram the average revenue and marginal revenue curves of a firm which can sell any quantity
of the good
at a given price. Explain. (3) 2011 O set 1
Ans: Perfectly competitive firm sells goods at the fixed price. AR & MR are horizontal to x axis.

Quantity of Price Per Unit ( P) TR ( Q x P) MR = Δ TR / Δ Q

Output (Q) AR = TR/Q
1 10 10 10

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 2 10 20 10
3 10 30 10
4 10 40 10
5 10 50 10
6 10 60 10
7 10 70 10

Q17. Explain the implications of the feature ‘ homogeneous products’ in a perfectly competitive market. O 2011s1
Ans: It means that the buyers treat the products of all the firms in the industry as homogenous. The products produced
by the firms are identical, or treated as identical, or perfectly standardized.
The buyers do not distinguish the output of one firm from that of the other. The implication of this feature is that since
the buyers treat the products as identical they are not ready to pay a different price for the product of any one firm.
They will pay the same price for the products of all the firms in the industry. On the other hand, any attempt by a firm
to sell its product at a higher price will fail.
To sum up, the 'homogenous products' feature ensures a uniform price for the products of all the firms in the industry.

Q18. In which market form can a firm not influence the price of the product in the market? (1) 2010 Delhi
Ans: Perfect competition.

Q19. Define Monopoly. (1) 2009,2010 Delhi

Ans: Monopoly is one firm industry which has full control over supply & price of the good.

Q20. What can you say about the no. of buyers & sellers under the monopolistic competition ? (1) 2010 Delhi
Ans: Large no. of buyers & sellers are there, but their no. is lesser than perfect competition.

Q21. How does the eq. price of a ‘normal’ good change when income of its buyers falls? Explain the chain of
effects.(4) 2010D,O
Ans: When income of household falls consumer switches over to inferior goods & demand for normal goods falls.
Demand will decrease & demand curve will shift leftwards. Chain effects of Increase in demand is to be written as per
q. no.8.

Q22. Name the characteristics which makes monopolistic competition different from perfect competition.(1)2010O
Ans: Product differentiation & non price competition.

Q23. State one feature of oligopoly. (1) 2010 O

Ans:
Q24. In which market form demand curve of a firm is perfectly elastic? (1) 2010 O
Ans: Perfect competition.

Q25. Explain the implications of freedom of entry & exit of firms under perfect competition. (3) 2010 O
Ans: Freedom of entry means that there are no artificial barriers like patent rights, legal restrictions, etc. and
natural barriers like huge capital expenditure required for a new firm wishing to enter into industry.
Implication- No firm can earn above normal profits in the long run. Each firm earns just the normal profits,
i.e. minimum necessary to carry on business.
If the existing firms are earning above normal profits, i.e. positive economic profits. Attracted by the
positive profits, the new firms enter the industry. The industry's output, i.e. market supply, goes up. The

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price comes down. New firms continue to enter and the price continues to fall till economic profits are
reduced to zero.
If the existing firms are incurring losses. The firms start leaving. The industry's output starts falling, price
starts going up, and all this continues till losses are wiped out. The remaining firms in the industry then once
again earn just the normal profits.

Q26. Why is a firm under perfect competition a price taker? Explain. (3) 2009 D
Ans: Firm under perfect competition is a price taker because of
 Large no. of buyers & sellers- due to which individual buyer or seller have so negligible contribution in
total that no individual consumer or supplier can affect the price of good. Firm takes the price determined
in the industry.
 Homogeneous products – products are same – so uniform price
 Perfect knowledge of market to all the buyers & sellers.

Q27. Explain two points of distinctions between monopoly and monopolistic competition. ( 4) 2009 O
Ans:
Monopolistic Competition Monopoly

1. Large no of buyers & sellers are there, so 1. One firm industry which has full control
contribution of each firm or consumer is so over supply and price of goods.
small in total supply or demand that they
can’t affect the price due to this feature

2. Product differentiation is found in which 2. No close substitutes are found, as there is

goods are close substitutes of each other. only firm.

3. Free entry & exit of firms in the industry, 3. Strong barriers in the entry & exit of the
so each firm gets normal profit in the long firm in the industry by law, so firm gets
run abnormal profit in the long run.

4. Non price competition is found in which 4. No need for non price competition. Though
extra expenditures are incurred for sales sometimes monopoly firm incur
promotion. Advertisements play an expenditure on advertisement only to
important role. maintain good relation with the consumers
not for sales promotion.

5. Demand curve is highly elastic, as there is 5. Demand curve is inelastic due to single
more competition. Small change in price seller & full control over price & no other
affects the demand more. options to the consumers. Seller is able to
make more changes in price without much
affecting the quantity demanded
y
y
D/AR
Price

Price

D/AR
x
O x
O Quantity Quantity

Q28. Explain any two main features of perfect competition. ( 4) 2009 O

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Ans:
1. Large number of sellers and buyers
'large number' imply that the number of sellers is large enough to render a single seller's share in total market supply
of the product insignificant. Insignificant share means that if only one individual firm reduces or raises its own supply,
the prevailing market price remains unaffected. One single seller has no option but to sell what it produces at this
market determined price. Similarly, the 'large number' of buyers also has the same implication. A single buyer's share
in total market demand is so insignificant that the buyer cannot influence the market price on his own by changing his
demand. This makes a single buyer also a price taker.
To sum up, the feature 'large number' indicates ineffectiveness of a single seller or a single buyer in influencing the
prevailing market price on its own, rendering him simply a price taker.
2. The products of all the firms in the industry are homogenous
It means that the buyers treat the products of all the firms in the industry as homogenous. The products produced by
the firms are identical, or treated as identical, or perfectly standardized. The buyers do not distinguish the output of
one firm from that of the other.
The implication of this feature is that since the buyers treat the products as identical they are not ready to pay a
different price for the product of any one firm. They will pay the same price for the products of all the firms in the
industry. On the other hand, any attempt by a firm to sell its product at a higher price will fail.
To sum up, the 'homogenous products' feature ensures a uniform price for the products of all the firms in the industry.

Q29. With the help of a demand and supply schedule, explain the meaning of excess demand and its effect on price of
a commodity. (6) 2009 O OR
Ans: Excess demand is a situation where Demand is more than supply at a particular price. It is not an equilibrium
situation . Excess demand leads to prise rise.
Price Demand Supply Situation Impact
1 10 2 Excess demand D > S Price rise
2 8 4 Excess demand D > S Price rise
3 6 6 Equilibrium D = S No change
4 4 8 Excess Supply S > D Fall in price
5 2 10 Excess Supply S > D Fall in price

At OP1 price there is excess demand of AB

Consequently Price will tend to rise.
When price rises Demand falls & supply increases
The gap between Demand & supply reduces with every
rise in price.
This adjustment of rise in price will continue till D = S &
equilibrium is obtained.

Q30. Define equilibrium price of a commodity. How is it determined? Explain with the help of a schedule.(6) 2009 O
Ans: Equilibrium price is the price at which the sellers of a good are willing to sell the same quantity which buyers of
that good are willing to buy. Thus equilibrium price is the price at which demand & supply are equal to each other. At
this price there is no tendency to change.
DEMAND FORCE:- Consumer demands the commodity because it has utility for him & satisfies needs. The aim of
every consumer is to maximise his satisfaction, the maximum price paid by the consumer depends on marginal utility
obtained by the consumer( Mux = Px), thus consumer decides maximum limit of price by marginal utility of the good.
There is inverse relationship between Price & demand of the good, so demand curve is negatively sloped.
SUPPLY FORCE:- Producer supplies the commodity to maximise the profit. Profit is maximised when Revenue is
maximum & cost is minimum. Minimum level of price accepted by the producer is equal to the marginal cost of
production. Thus minimum price will be determined by MC of the good.
There is direct relationship between price & supply of the good, so supply curve is positively sloped.

Price of the commodity is determined by the forces of demand & supply. Producer wants to sell the good at maximum
price to earn more & more profit ( decided by MC) where as Consumer wants to buy the good at lowest price to

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maximise satisfaction ( decided by MU). Price is determined between maximum limit of MU & minimum limit of
MC & is determined at a point where demand is equal to supply of the good.

We can explain this meaning with the help of demand and supply schedule of a good, given below :
Price per unit Demand Supply Equilibrium
( Rs) Units Unit
1 11 3 Excess Demand
2 9 5 Excess Demand
3 7 7 Equilibrium
4 5 9 Excess Supply
5 3 11 Excess Supply
The market equilibrium is established at a price of Rs. 3 per unit, because at this price both the market demand and
market supply are equal (7 units). This is the price which has a tendency to persist.

Q31. Define Market for a good. (1) 2008 D

Ans: Market does not mean a shopping complex, it refers to the whole area with in which the buyers & sellers come
into contact with each other. Market is of one commodity.

Q32. State three features of monopoly. (3) 2008 D

Ans: Single seller & Large no. of Buyers:- There is single producer of a commodity in the market. He may be alone
or he may be a group of partners or joint stock company. Being single producer of the good, firm has full control over
supply and price of the commodity.
Strong barriers in the entry & exit of firms in the Industry:- Under monopoly there are strong restrictions in the
entry & exit of firm in the industry. Generally there are government controls, patent rights granted to the firm due to
which new firms cannot enter.
No close substitutes are found:- Monopoly firm maintains its monopoly status because there are no close substitutes
found in the market. It restricts competition in the market & consumers have no choice.

Q33. Define equilibrium price. (1) 2008 O

Ans: Equilibrium price is the price at which the sellers of a good are willing to sell the same quantity which
buyers of that good are willing to buy. Thus equilibrium price is the price at which demand & supply are equal to each
other. At this price there is no tendency to change.

Q34. Explain what happens to the profits in the long run if the firms are free to leave the industry. (3) 2008 O
OR
Explain what happens to losses in the long run if the firms are free to leave the industry.
Ans: If the existing firms are earning above normal profits, i.e. positive economic profits. Attracted by the
positive profits, the new firms enter the industry. The industry's output, i.e. market supply, goes up. The
price comes down. New firms continue to enter and the price continues to fall till economic profits are
reduced to zero.
If the existing firms are incurring losses. The firms start leaving. The industry's output starts falling, price
starts going up, and all this continues till losses are wiped out. The remaining firms in the industry then once
again earn just the normal profits.

Q35. Explain the implication of the following: (6) 2008 O

i) The feature ‘differentiated products’ under monopolistic competition.
It is the distinctive feature of this competition. Products which firms are selling are not perfect substitutes
of each other, but close substitutes of each other. There are two types of product differentiation: Real
difference when products have real qualitative difference. Imaginary difference – when goods are
different only in colour, design, brand etc, but same in quality. Each firm is in a position to exercise some
degree of monopoly (in spite of large number of sellers) through product differentiation.
Implication of ‘Product differentiation’ is that buyers of a product differentiate between the same
products produced by different firms. Therefore, they are also willing to pay different prices for the same
product produced by different firms. This gives some monopoly power to an individual firm to influence
market price of its product. Product differentiation creates a monopoly position for a firm.

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 Higher degree of product differentiation (i.e. better brand image) makes demand for the product less
elastic and enables the firm to charge a price higher than its competitor’s products. For example,
Toothpaste: Pepsodent, Colgate,
ii) The feature of ‘large no. of sellers’ under perfect competition.
Large no. of buyers & sellers are there, but their no. is lesser than perfect competition. So contribution of
each firm or consumer is so small in total supply or demand that they can’t affect the price due to this
feature. There are large numbers of firms selling closely related, but not homogeneous products. Each
firm acts independently and has a limited share of the market. So, an individual firm has limited control
over the market price. Large number of firms leads to competition in the market.

MARKET FORMS & EQUILIBRIUM

HIGH ORDER THINKING QUESTIONS
Q1. Explain how the efficiency may increase if two firms merge?
Ans: When the two firms merge, their combined efficiency is expected to improve owing to:
(A) Increase in the scale of output and the consequent economies of scale.
(B) Better division of labour and specialization; and
(C) Use of better technology, saving the cost of production.

Q 2. Why is the demand curve facing a monopolistically competitive firm likely to be very elastic?
Ans: It is because the products produced by the monopolistically competitive firms are close substitutes to
each other. If products are close substitutes to each other the elasticity of demand is high, which is what
makes the firm‟s demand curve(under monopolistic competition) very elastic.

Q 3. Why is the demand curve facing a firm perfectly elastic under perfect competition but less than
perfectly elastic under monopolistic competition?
Ans. The demand curve under perfect competition is perfectly elastic. Perfectly elastic demand curve means
any quantity can be sold only at a given price. Under perfect competition, the price of the product is
determined by the industry by the forces of demand and supply and the firm has no option but to accept it.
Uniform price prevails because all firms are selling a homogeneous product. A firm cannot influence or alter
the price. Implying that a firm can sell any quantity at the given price. Therefore, the demand curve will be a
straight line parallel to the X-axis as shown in Fig. ; which is perfectly elastic, showing Ed=infinity
The demand curve under monopolistic competition is less than perfectly elastic. It means more can be sold
only at lower price. Under monopolistic competition, the seller sells a differentiated product, so he exercises
partial control over price. But he can sell more only by lowering the price; certainly not at the existing price.
This is what makes the demand curve less than perfectly elastic.

Q 4. Which features of monopolistic competition are monopolist in nature?

Ans. (i) Product differentiation
(ii) Control over price
(iii)Downward sloping demand curve

Q 5. How does an increase in the price of a substitute good in consumption affect the equilibrium
price?
Ans: With increase in the price of the substitute good, the equilibrium price of the concerned good will
increase owing to shift in demand curve to the right.

Q 6. “Changes in both demand any supply of a commodity may or may not affect its equilibrium
price.” Explain.

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Ans: If the demand and supply of a commodity change equally, and in the same direction there will be no
effect on its price. On the other hand, an unequal change in demand and supply will affect equilibrium price.
When demand increases more than supply, equilibrium price will rise. On the other hand, when supply
increases more than demand, equilibrium price will fall.

Q 7. When will the equilibrium price of a commodity not change even if its demand and supply both
increase? Explain with the help of a diagram.
Ans. If both increases equally.

Q 8. A severe drought results in a drastic fall in the output of wheat. Analyze how will it affect the
market price of wheat?
Ans: As a result of severe drought, the output of wheat is reduced. It means the supply of wheat in the
market will reduce, causing a shift of supply curve to the left. Accordingly, market price of wheat will
increase.

Q 9. Suppose the demand for jeans increases. At the same time, because of an increase in price of
cotton, the supply of jeans decreases. How will it affect the price and quantity sold of jeans?
Ans: Increase in market demand for jeans along with a decrease in the supply of jeans should raise the price
of jeans and the quantity sold will decline.
Q 10. China is a big manufacturer of technology of telephone instruments. It has recently become a
member of W.T.O., which means it can sell its products in other member countries like India.
Suppose that it does export a large number of telephone instruments to India:
(A) How will it affect the price and quantity sold of telephone instruments in India?
(B) Suppose that the demand for telephone instruments is relatively elastic. How will it affect India‟s
total expenditure on telephone instruments?
Ans: (A) As a result of large export of telephone instruments by Chine to India, the market supply of
telephone instruments increases. It reduces the price of telephone instruments while the quantity sold will
increase.
(B) If the demand for telephone instruments is relatively elastic, reduction in price should increase total
expenditure on telephone instruments in India.
Q 11. Mrs. Ramgopal says that economists say inconsistent things: as price falls, demand rises, but as
demand rises, price rises. Defend or refute.
Ans: The statement of Mrs. Ramgopal that “as price falls, demand rises, but as demand rises, price rises”,
can be defended. The first part of the statement i.e. as price falls demand rises is the general behaviour of the
consumer in the market. This is simply a forward movement along a demand curve. Demand changes due to
change in the price of the commodity. But, there may also be situation when increase in demand leads to
increase in price. When the supply of the commodity remains unchanged. And demand increases (due to
factors other than price such as increase in income of the consumer or change in taste preference of the
consumer.) The demand curve shifts upward and it raises the market price. Fig. illustrates the two situations:

Fig 1 Fig 2

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12. Answer all the questions in terms of shifts in or movements along the demand and supply curves.

(A) In 2001, the Supreme Court of India banned smoking in public places. How is this likely to affect
the average price of cigarettes and the quantity sold?

(B) New discoveries of oil reduce the price of petrol and diesel. Consider their effects on the market
for new cars.
(C) New environmental regulations require the drug industry to use a more environment friendly
technology whose running cost are higher but which discharges less chemicals than before. How
would it affect the price of drug?
Ans: (A) A ban on cigarette smoking in public places should cause a backward shift in demand curve.
Consequently average price of cigarettes should fall. Fall in average price of cigarette should cause a fall in
quantity sold.
(B) New discoveries of oil reducing the price of petrol/diesel should imply increase in demand for cars (in
terms of shift in demand curve to the right), as cars and petrol/diesel are complementary goods.
(C) Due to the use of costlier (environment friendly) technology, supply curve of drug will shift to the left,
causing a rise in the price of drug.

Q13. Severe flood in Jammu & Kashmir has devastated apple plantation. On the other hand people
are changing their preferences & increasing the demand for apple juice. How it will affect the
equilibrium price & quantity of apple juice. Explain it with the help of diagrams.
Ans: Severe flood in Jammu & Kashmir has devastated apple plantation & reduced the supply of apple,
price of apple will go up , so the supply curve of apple juice will shift leftwards
On the other hand people are changing their preferences & increasing the demand curve for apple juice will
increases & so shifts rightwards.
Effect on the equilibrium price & quantity will be studied in three situations:

When D = S then Eq. price will rise & eq quantity will remain same.

When D > S Then Eq. price & equilibrium quantity both will rise.

When D > S Then Eq. price will rise & equilibrium quantity will fall.

Q14. Suppose during summers the price of raw cotton increases. How will it affect the equilibrium
price and quantity of cotton clothes? Illustrate with diagram.
Ans: During summers the price of raw cotton increased due to which cost of producing cotton clothes
increased & therefore supply of cotton clothes reduced & supply curve shifts leftwards.
Effect on equilibrium price & quantity is shown in the diagram

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 Equilibrium of Demand & Supply which shows op1 &
oq1 as eq. Price & eq. quantity.
When Supply falls supply curve shifts leftward from S1
to S2.
Equilibrium price rises from op1 to op2
Equilibrium quantity falls from oq1 to oq2.

Q15. Suppose the market determined rent for apartments is too high for common people to afford. If
the government comes forward to help those seeking apartments on rent by imposing control on rent,
what impact will it have on the market for apartments?

Ans: When Market price is so high that it is difficult to afford, government intervenes & imposes maximum
price which is below the market price, above which no one is allowed to sell. It is price control.
This will increase the demand for apartments.
It will make the apartments affordable for the people.
This measure of government includes welfare of public.

Q16.What happens when the government distributes wheat from Public Distribution System at lower
price? Explain it with the help of diagram. How government makes this policy successful?
Ans: When government distributes wheat from PDS at lower price, it becomes affordable to the poor.
This is called as maximum price fixation ( Price ceiling) . It is explained with the help of diagram.

OP is market price which is high enough to

afford, so government fixes a price OP1 which is
lower than market price.

At lower price there is excess demand over

supply, due to which price tends to rise.

A price ceiling creates a shortage when the legal price is below the market equilibrium price, A price ceiling
that is below the market equilibrium price creates a shortage that causes consumers to compete vigorously
for the limited supply. Supply is limited because suppliers are not getting the prices that would allow them
to earn a profit.
Rationing is imposed by the government to make the policy of Maximum price fixation successful. It is a
method where the quota for purchasing the goods is fixed by the government. A maximum limit is fixed
beyond which no one can purchase the goods.

*Best Of Luck for your Exams*

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