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Question Paper
Economics - I (MSF1A3): July 2008
• Answer all 74 questions.
• Marks are indicated against each question.
Total Marks : 100
<Answer>
1. Rationality on the part of firms do not only imply stating the objectives but also has to take care of constraints.
Which of the following is/ are the constraint(s) for firms?
I. Productive capacity.
II. Market size.
III. Size of budget.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above
(e) Both (I) and (III) above. ( 1 mark)
<Answer>
2. Which of the following statements is not true?
(a) In a mixed economy governments compete in input markets and product markets to obtain the
resources and products they need to supply goods and services
(b) The concept of marginalism assumes that the independent variable changes by a single unit
(c) Opportunity cost is the highest valued benefit that must be sacrificed as a result of choosing
an alternative
(d) Partial equilibrium analysis is useful and relevant to apply when there is interrelationship
between commodities or between factors
(e) General equilibrium considers simultaneous equilibrium of all the markets taking into account
all effects of changes in price in one market over others. ( 1 mark)
<Answer>
3. Veblen effect is one of the exceptions to the law of demand. According to this effect the consumers buy more
amount of a commodity as the price increases because they feel that
(a) The commodity is essential for them
(b) The commodity is scarce
(c) There is an improvement in the quality of the commodity
(d) There will be a further increase in the price of the commodity in future
(e) It is a pride to buy a commodity with higher price. ( 1 mark)
<Answer>
4. A change in which of the following will not cause a shift in the demand curve of a commodity?
(a) Income of the consumer
(b) Price of the same commodity
(c) Price of the related commodity
(d) Taste and preferences of the consumer
(e) Wealth of the consumer. ( 1 mark)
<Answer>
5. If the price elasticity of demand is a negative number then it can be termed as
(a) Perfectly elastic
(b) Perfectly inelastic
(c) Relatively elastic
(d) Relatively inelastic
(e) Unitary elastic. ( 1 mark)
<Answer>
6. When price elasticity of demand is equal to one, the marginal revenue will be
(a) Equal to one
(b) Zero
(c) Less than zero
(d) Greater than zero but less than one
(e) Greater than one. ( 1 mark)
<Answer>
7. The demand function of product ‘m’ for Mr. Khan is given as follows:
Qm = 6,550 – 6Pm + 0.15Y.
Where, Y = income of Mr. Khan = Rs.10,000, Pm = price of m = Rs.225 per kilogram. What is the income
elasticity of demand of product m for Mr. Khan?
(a) 0.117
(b) 0.617
(c) 0.224
(d) 0.297
(e) 0.327. ( 2 marks)
<Answer>
8. The cross price elasticity of demand for two goods which are perfect substitutes is
(a) Infinity
(b) One
(c) Zero
(d) Between zero and one
(e) Less than zero. ( 1 mark)
<Answer>
9. The elasticity of a straight line supply curve parallel to the X-axis is said to be
(a) Equal to infinity
(b) More than one but less than infinity
(c) Equal to one
(d) Less than one but more than zero
(e) Equal to zero. ( 1 mark)
<Answer>
10. A firm supplied 5,000 pet bottles at the rate of Rs.12 per pet bottle to 10 departmental stores in Hyderabad in the
month of March 2008. Next month, due to a rise in the price to Rs.18 per pet bottle, the supply of the pet bottle
increases to 7,250 pet bottles. What is the arc elasticity of supply of the pet bottles?
(a) 0.42
(b) 0.72
(c) 0.92
(d) 1.44
(e) 1.97. ( 2 marks)
<Answer>
11. The total market demand for good X consist individual demand of three individuals Mr. A, Mr. B and Mr. C. The
demand schedule of these individuals is given below:
Price of the Quantity demanded (Units)
good (Rs.) A B C
30 2 0 4
25 2 0 8
20 4 2 16
15 8 4 24
What is the absolute value of arc price elasticity of demand for the good, when the price decreases from Rs.20 to
Rs.15 per unit?
(a) 1.689
(b) 2.708
(c) 2.991
(d) 3.554
(e) 4.215. ( 2 marks)
<Answer>
12. A firm fixes the price of its product at Rs. 1,500 per unit and the absolute value of price elasticity of demand for
the product is 5. What is the marginal revenue?
(a) Rs. 1,000
(b) Rs. 1,200
(c) Rs. 1,300
What will be the arc advertising elasticity of demand, if the advertising expenditure increases from Rs.4,000 and
Rs. 5,000?
(a) – 1.02
(b) – 1.44
(c) – 1.70
(d) – 0.35
(e) – 0.68. ( 2 marks)
<Answer>
15. Refer to the diagram below:
(a) 10 units
(b) 20 units
(c) 30 units
(d) 35 units
(e) 40 units. ( 2 marks)
<Answer>
22. The utility function of Ms. Manju is estimated as:
U = 30X1.5.
If the price of the good is Rs.90 per unit, how many units of good X the consumer would consume?
(a) 3 units
(b) 4 units
(c) 5 units
(d) 7 units
(e) 11 units. ( 1 mark)
<Answer>
23. Refer to the diagram below:
(c) 9 < L ≤ 18
(d) 9 < L ≤ 24
(e) 9 < L ≤ 12. ( 2 marks)
<Answer>
32. The production function of a firm is given as Q = 20L0.6K0.4. If the price of labor is Rs. 40 and the price of
capital is Rs. 40, then what is the equation of expansion path of the firm?
(a) K = 0.605L
(b) K = 0.644L
(c) K = 0.667L
(d) K = 0.629L
(e) K = 0.699L. ( 2 marks)
<Answer>
33. If the average product function of labor is given as APL = 75L – L2, the maximum possible total product of labor
(TPL) is
(a) 60,000 units
(b) 62,500 units
(c) 65,000 units
(d) 65,500 units
(e) 66,000 units. ( 2 marks)
<Answer>
34. The production function of XYZ Ltd., is Q = 400L0.5K0.5.The current wages (w) and cost of capital (r) are
Rs.100 and Rs.50, respectively. Market price of the good produced by the company is Rs.10. If XYZ Ltd., is
currently using 100 units of capital (K), which is fixed, the quantity of labor that the firm should use to maximize
its total profit is
(a) 15,000 units
(b) 25,000 units
(c) 30,000 units
(d) 40,000 units
(e) 50,000 units. ( 2 marks)
<Answer>
35. Which of following statements is false regarding the relationship between a firm’s cost curves and its product
curves?
(a) Over the range of rising marginal product, marginal cost is falling
(b) When marginal product is maximum, marginal cost is minimum
(c) Over the range of rising average product, average variable cost is falling
(d) When average product is maximum, average variable cost is minimum
(e) Over the range of diminishing marginal product, marginal cost is constant. ( 1 mark)
<Answer>
36. Which of the following statements is true?
(a) The operating cost of a fixed asset like machine is a fixed cost
(b) The shape of the fixed cost curve reflect the law of diminishing returns
(c) The short run total cost curve starts from origin
(d) The average fixed cost curve is a horizontal straight line
(e) The shape of average cost curve is U-shaped but flatter than the average variable cost curve. ( 1 mark)
<Answer>
37. The total cost function for a firm is estimated as:
TC = 48Q – 8Q2 + 2Q3.
The minimum possible average cost is
(a) Rs. 31
(b) Rs. 32
(c) Rs. 33
(d) Rs. 34
(e) Rs. 40. ( 2 marks)
<Answer>
38. The total cost function of a firm is given as follows:
TC = 400 + 15Q – 7.5Q2 + 0.25Q3.
(a) The long run average cost curve is also known as the planning curve
(b) The long run average cost is the locus of the tangency points of the short run average cost
curves
(c) The long run marginal cost curve is derived from the short run marginal cost curves and
‘envelope’ them
(d) The long run marginal cost curve is formed from points of intersection of the short run
marginal cost curves with the vertical line drawn from the points of tangency of the
corresponding short run average cost curves and the long run average cost curve
(e) The long run marginal cost must be equal to the short run marginal cost for the output at
which the corresponding short run average cost curve is tangent to the long run average cost
curve. ( 1 mark)
<Answer>
45. Which of the following statements is true with regard to various economies of scales?
I. Division of labor, apart from increasing the skills of the labor force, results in saving of the time
usually lost in going from one type of work to another.
II. Technical economies are associated with the ‘fixed capital’ which includes all types of machinery and
other equipment.
III. Inventory economies are sometimes called ‘stochastic economies’, because the role of inventories is to
meet the random changes in the input and the output sides of the operation of the firm.
IV. Managerial costs are partly production costs and partly selling costs, since the managerial team in a
firm is concerned with both the production and the distribution activities of the firm.
(a)Both (I) and (II) above
(b) Both (II) and (III) above
(c) (I), (II) and (III) above
(d) (I), (II) and (IV) above
(e) All (I), (II), (III) and (IV) above. ( 1 mark)
<Answer>
46. The economies accruing to the firm due to discounts that it can obtain due to its large scale operations are termed
as
(a) Technical economies
(b) Managerial economies
(c) Inventory economies
(d) Marketing economies
(e) Pecuniary economies. ( 1 mark)
<Answer>
47. Which of the following are long run cost functions?
I. TC = 500 + Q.
II. TC = 25Q + 18Q2.
III. TC = 200 + 9Q + 18Q2 + 36Q3.
IV. TC = 45Q + 24Q2 + 50Q3.
(a) Both (I) and (II) above
(b) Both (II) and (IV) above
(c) Both (III) and (IV) above
(d) (I), (II) and (III) above
(e) (I), (II) and (IV) above. ( 1 mark)
<Answer>
48. The demand for a competitive firm’s output is _____________ at the market price.
(a) Infinitely elastic
(b) Infinitely inelastic
(c) Relatively elastic
(d) Relatively inelastic
(e) Unitary elastic. ( 1 mark)
<Answer>
49. According to the second order condition for profit maximization, in a perfectly competitive market the slope of
marginal cost and marginal revenue curves will respectively be
(d) The lump sum tax will result in a downward shift in the marginal cost curve
(e)The imposition of a lump sum tax will result in an upward shift of the ATC curves. ( 1 mark)
<Answer>
54. There are 100 firms operating in a perfectly competitive market, producing a homogenous product ‘X’. They
have identical cost function, given as TC = 20 + Q + 2Q2. The market demand function is estimated to be Q =
500 – 50P. What is the market price of each unit of ‘X’ and total industrial output respectively?
(a) Rs. 7 and 120 units
(b) Rs. 8 and 100 units
(c) Rs. 7 and 150 units
(d) Rs. 8 and 80 units
(e)Rs. 9 and 90 units. ( 2 marks)
<Answer>
55. The market supply and demand functions for a good in are given as follows:
Qs = 5,500 + 40P.
Qd = 20,000 – 60P.
The industry for the good exhibits all the features of a perfectly competitive market. The variable cost function
of an individual firm is given as:
AVC = 145 – 24Q + Q2.
If the fixed costs are Rs. 500, the profit earned by the firm is
(a) Rs.1,548
(b) Rs.1,648
(c) Rs.1,584
(d) Rs.1,554
(e) Rs.1,564. ( 2 marks)
<Answer>
56. Ramesh & Co. is operating in a perfectly competitive market and produces a product X. The price estimated for
X is Rs.60 per unit, but the AVC at the level of output produced is Rs.90. Ramesh & Co. should
(a) Change its level of output and produce that level where MC equals MR
(b) Shut down and lose only its total fixed cost
(c) Reduce the price of product X and increase the number produced and offered for sale
(d)Increase the price of product X and reduce the number produced
(e) Change its level of output and produce that level where MC equals AR. ( 1 mark)
<Answer>
57. Ruby Ltd., a firm operating under perfect competition has the long run average cost function given as
LAC = 17,500 – 1,250Q + 25Q2.
If the existing market price of the commodity produced by the firm is Rs.120, what is the total revenue of the
firm at optimum level of output?
(a) Rs. 2,050
(b) Rs. 2,850
(c) Rs. 3,000
(d) Rs. 3,220
(e) Rs. 4,020. ( 2 marks)
<Answer>
58. A firm operating in a perfectly competitive market has the following Average Variable Cost function :
AVC = 2,072 – 252Q + 9Q2.
What is the price below which the firm has to shut-down its operations in the short run?
(a) Rs. 300
(b) Rs. 302
(c) Rs. 304
(d) Rs. 308
(e) Rs. 408. ( 2 marks)
<Answer>
59. Alpha Ltd., is operating in a perfectly competitive industry. The total cost function of Alpha Ltd., is estimated to
be TC = 1,200 + 600Q – 50Q2 + Q3. Industry supply function is Qs = 200 + 4P. If profit maximizing output for
Total cost function of the monopolist is TC = 10 + 100Q. If the monopolist practices price discrimination, what is
the equilibrium level price of market A and market B respectively?
(a) Rs.250, Rs. 300
(b) Rs.300, Rs. 200
(c) Rs.320, Rs. 400
(d) Rs.340, Rs. 420
(e) Rs.204, Rs. 302. ( 1 mark)
<Answer>
68. Devi Ltd., has a monopoly in producing a special type of health drink. The demand function for this health drink
is estimated as Q = 125 – P. The total cost function is TC = 25Q. The profit earned by Devi Ltd. is
(a) Rs. 2,500
(b) Rs. 2,625
(c) Rs. 2,725
(d) Rs. 2,600
(e) Rs. 2,450. ( 2 marks)
<Answer>
69. Which of the following statements is false regarding monopolistic competition?
(a)Under monopolistic competition excess capacity remains in each firm in the sense that more
output can be produced at a lower cost
(b)Monopolistically competitive markets are characterized by brand names and by continual
product development and improvement
(c)As a result of advertising, each monopolistically competitive firm produces less than it would
otherwise
(d)The demand curve for a monopolistically competitive firm is downward sloping because of
product differentiation
(e)The demand curve for a monopolistically competitive firm is relatively elastic since there are
close substitutes for the product of a firm. ( 1 mark)
<Answer>
70. For a monopolistically competitive firm the short run cost and revenue functions are estimated as follows:
TC = 15,000 + 30Q – 20Q2 + Q3.
TR = 30Q – 2Q2.
The profit maximizing level of output for the firm is
(a) 12 units
(b) 18 units
(c) 8 units
(d) 9 units
(e) 10 units. ( 2 marks)
<Answer>
71. Which of the following is not a condition which prevails in a monopolistically competitive market?
(a) There are relatively large number of firms, each satisfying a small, but not microscopic, share
of the market demand for a similar but not identical products
(b) The product of each firm is not a perfect substitute for the products of competitive firms. The
product is differentiated from any other product. A product group represents several closely
related, but not identical, products that serve the same general purpose for consumers. The
sellers in each product group can be considered competing firms within the industry
(c) The firms in the market consider the reactions of their rivals when choosing their product
prices or annual sales targets
(d) Relative freedom of entry and exit of firms exists in monopolistically competitive markets
(e) Neither the opportunity nor the incentive exists for the firms in the market to cooperate in
ways that decrease competition. ( 1 mark)
<Answer>
72. Which of the following statements is/are false about to Cournot’s model of Duopoly?
I. In Cournot’s model of Duopoly there are large numbers of buyers.
II. There are two independent firms selling differentiated products.
III. Each duopolist seeks to maximize his total profit in each period.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above
(e) Both (II) and (III) above. ( 1 mark)
<Answer>
73. Which of the following are decided by the central agency in a Cartel?
I. Quantity to be produced.
II. Price of the product.
III. Allocation of production among the members.
IV. Distribution of profits among the members.
(a) Both (I) and (II) above
(b) Both (III) and (IV) above
(c) (I), (II) and (III) above
(d) (I), (II) and (IV) above
(e) All (I), (II), (III) and (IV) above. ( 1 mark)
<Answer>
74. The market demand function for a cartel consisting of two firms with equal market share is given as Q = 200 –
20P. The total cost function of each of the duopolists is TC = 10 + 0.4Q2. The total profit of each of the
duopolists is
(a) Rs. 10
(b) Rs. 20
(c) Rs. 30
(d) Rs. 40
(e) Rs. 50. ( 2 marks)
Suggested Answers
Economics - I (MSF1A3): July 2008
Answer Reason
d Constraint for a firm is assessing its productive capacity and market size. < TOP
1.
Whereas the size of budget is a constraint for a consumer >
d Option (d) is not true. Partial equilibrium analysis is not useful and relevant to < TOP
2.
apply when there is interrelationship between commodities or between factors >
c According to this Veblen effect, the consumers buy more amount of a < TOP
3.
commodity because they feel that there is an improvement in the quality of the >
commodity.
b A change in the own price of the commodity will not cause a shift in the < TOP
4.
demand curve unless there is a change in demand at every change in price. >
Other wise a change in price will cause a movement along the demand curve.
5. d If the price elasticity of demand is a negative number then it can be termed as < TOP
relatively inelastic >
b When price elasticity of demand is equal to one then the marginal revenue will < TOP
6.
be zero >
Because MR =
c The income elasticity of demand is given as follows: < TOP
7.
ey = >
Where P1 and Q1 are the initial price-quantity combination and P2 and Q2 are
the changed price-quantity combination. In the above question.
P1 = Rs.12
P2 = Rs.18
Q1 = 5,000
Q2 = 7,250
Putting the values of P1, Q1, P2 and Q2, we have,
es = = 0.92.
a The market for a product consists of all the individuals who demand the good. < TOP
11.
Therefore, by summing up the demand of all the individuals in the market, we >
can get the market demand at a particular price.
Price of the good A B C Total
30 2 0 4 6
25 2 0 8 10
20 4 2 16 22
15 8 4 24 36
Absolute value of Arc price elasticity of demand for the good
= = .
b MR = < TOP
12.
∴ MR = (since AR = price) = 1,500 ( 4/5) = Rs.1,200. >
c When tax is imposed, the supply function becomes Qs = 3200 + 20(P – 10) < TOP
13.
Thus, at equilibrium, 3200 + 20 (P – 10) = 4200 – 100P >
4200 – 3200 + 200 = 120P
Or, P = 1200/120 = Rs. 10.
c The demand function is Qd = 2,50,000 – 35A < TOP
14.
>
When advertising price is Rs.4,000 per unit,
Qd = 2,50,000 – 35 (4000)
= 2,50,000 –1,40, 000 = 1,10,000 units
When advertising price is Rs.5,000 per unit,
Qd = 2,50,000 – 35 (5000)
MUY = U/ Y = 40X
At equilibrium, MUX/PX = MUY/PY
40Y/2 = 40X/4
Or, 20Y = 10X
Or, 2Y = X
Thus, if X = 40, Y = X/2 = 40/2 = 20 units.
b The consumer would consume the good up to a point where MU = P. < TOP
22.
TU = 30X1.5 >
MU = 45X0.5 = 90
X0.5 = 2
Or, X = 4 units.
b In the given case the commodity q1 is an inferior commodity and the < TOP
23.
>
commodity q2 is a normal commodity
d The third stage of production process is characterized by decreasing TP, < TOP
24.
decreasing AP and negative MP. >
c If the degree of homogeneity of function is equal to one then we have constant < TOP
25.
returns to scale which is also called as linear homogenous production function. >
b A point where the average product is equal to the marginal product, the average < TOP
26.
product is maximum and marginal product is decreasing >
e If the production function of the firm is non-homogenous then the optimal < TOP
27.
expansion path will not be a straight line even if the ratio of the factor prices >
remains constant.
b I. Q = K1/2 + L1/2 < TOP
28.
>
When K = 1 and L = 1, Q = (1)1/2 + (1)1/2 = 2
When K = 2 and L = 2, Q = (2)1/2 + (2)1/2 = 2.82
When inputs are doubled, output are less than doubled. It is a case for
decreasing returns to scale.
II. Q = 3K + 4L
When K = 1 and L = 1, Q = 3+ 4 = 7
When K = 2 and L = 2, Q = 6 + 8 = 14
When inputs are doubled, output are also doubled.
∴ It is a case of constant return to scale.
= Q = 4000 L0.5
To maximize profits, the firm should hire labor until MRPL = W. Since P =
MR = Rs.10, we have MRPL = MR x MPL
MPL =
= 2,000 L-0.5
0.5
= 2000/L
=10 x 2000/L0.5
MRPL = MR x MPL
20000/L0.5 = 100
200 = L0.5
Or, L = 40,000 units.
e Over the range of diminishing marginal product, marginal cost is rising. < TOP
35.
>
e a. Is not true because the operating cost of a fixed asset like machine is < TOP
36.
a variable cost for example fuel and electricity >
b. Is not true because the shape of the variable cost curve reflect the
law of diminishing returns
c. Is not true because the short run total cost curve does not start from
origin.
d. Is not true because the average fixed cost curve is rectangular
hyperbola.
e. Is true because the shape of average cost curve is U-shaped but
flatter than the average variable cost curve.
e AC = TC/Q = 48 – 8Q + 2Q 2 < TOP
37.
AC is minimum when AC/ Q = 0 >
= – 8 + 4Q = 0
4Q = 8
Q=2
At Q = 2, AC = 48 – 8(2) + 2(2) 2 = Rs. 40
b TC = 400 + 15Q – 7.5Q2 + 0.25Q3 < TOP
38.
>
Then, MC = ∂TC/∂Q = 15 – 15Q + 0.75Q2
MC will be minimum when ∂MC/∂Q = 0
∂MC/∂Q = -15 + 1.5Q = 0
Or, 1.5Q = 15
Or, Q = 15/1.5
Q = 10 units.
c Marginal cost at a given level of output is the increment made in total cost to < TOP
39.
produce an extra unit of output. >
So, marginal cost of 5th unit is equal to total cost of fifth unit minus total cost
of fourth unit.
Total cost = Total fixed cost + total variable cost
Total cost of 5th unit = 1,050 + 500 =Rs. 1,550
Total cost of 4th unit = 650 + 500 =Rs. 1150
OP1E2Q2 while total cost = area OB1 BQ2. Hence the loss is equal to P1B1BE2
a The short run supply curve of the firm is again the upward rising portion of the < TOP
51.
marginal cost curve which lies above the AVC curve. However, in the long >
run, the MC curve is not the supply curve of the firm because in the long run,
only one point of the MC curve can be the equilibrium point where the firm
earns only normal profit.
e The condition for the long run equilibrium of a firm operating under perfect < TOP
52.
competition is that the SMC = LMC = LAC = SAC = P = MR. >
d The imposition of lump sum tax will not have any impact on the marginal cost < TOP
53.
of a firm >
c Cost function of each firm is < TOP
54.
TC = 20 + Q + 2Q2 >
MC = 1 + 4Q
Each firm can maximize profits by ensuring that MR = MC
Since we are assuming perfect competition MR = P
∴ MR = MC = P
P = 1+ 4Q
Q = 0.25P - 0.25
∴the profit maximizing output of the industry
Qs = 100Q (as there are 100 firms)
= 100 (0.25P - 0.25 )
= 25P – 25
The industry will be in equilibrium when the quantity supplied is equal to the
quantity demanded.
∴ 25P – 25 = 500 – 50P ( market demand function)
75P = 525
P = Rs.7
Qs = 25(7) – 25
=175 – 25 = 150 units.
a Given < TOP
55.
Qs = 5,500 + 40P >
Qd = 20,000 – 60P
Market will be in equilibrium at the price where Qd = Qs
20,000 – 60P = 5,500 + 40P
14,500 – 100P = 0
P = 145
Since the industry is operating under perfection competition firms are price
takers.
∴P = AR = MR.
AVC function of the firm is
AVC = 145 – 24Q + Q2
VC = 145Q – 24 Q2 + Q3
MC = 145 – 48Q + 3Q2
The firm will be in equilibrium at the output where MR =MC
∴ 145 = 145 – 48Q + 3Q2
48Q - 3Q2 = 0
16Q - Q2 = 0
Q (16 – Q) = 0
Q = 0, Q =16
Thus the profit maximizing output is 16.
Profit earned by the firm is measured as TR – TC
TR = P Q
= 145 16 = 2,320
TC = FC + VC
= 500 + 145(16) – 24(16)2 + (16)3 = 772
∴ Profit = 2,320 – 772 = Rs.1,548.
b The firm should always shut down even in the short run if the average revenue < TOP
56.
it is receiving is lower than the average variable cost as it is then making a loss >
greater than its fixed costs.
c The firm operating in a perfectly competitive industry earns only normal < TOP
57.
profits in the long run because of free entry and exit of the firms. The firm >
operating at its minimum average cost can only prevail in the market. Thus, the
equilibrium condition in the long run is when the firm is operating at Min.
LAC.
If AC = 17,500 – 1,250Q + 25Q2 LTC = 17,500Q – 1,250Q2 + 25Q3
LMC = = 17,500 – 2,500Q + 75Q2
LAC is minimum, when LMC =LAC
Thus, 17,500 – 2,500Q + 75Q2 = 150 – 1,250Q + 25Q2
Or, 1,250Q = 50Q2
Or, 50Q = 1250
Or, Q = 25 units.
TR = P × Q = 120 × 25 = Rs.3,000
d A firm will shut down its operations if the price is less than average variable < TOP
58.
cost. Since under perfect competition, price is also equal to marginal revenue, >
the firm will continue operations in the short run so long as price is at least
equal to average variable cost. Thus the minimum price, at which the firm will
shut down, is the minimum average variable cost.
AVC = 2072 – 252Q + 9Q2
Minimum average variable cost: AVC/ Q = 0
Thus, -252 + 18Q = 0
Or, Q = 14
When the firm is producing 14 units, then
AVC = 2072 – 252(14) + 9(196) =Rs. 308
Thus, if price falls below Rs.308, the firm has to shut-down its operation in the
short run.
c To maximize profits, a perfectly competitive firm produces an output where P < TOP
59.
= MC >
MC = ∂TC/∂Q = 600 – 100Q + 3Q2
P = 600 – 100Q + 3Q2, where Q = 150 units (given)
Hence, P = 600 – 100(150) + 3(150)2 = 53,100
Thus, total industrial production is equal to (200 + 4 x 53,100) = 2,12,600
Units.
e In case of oligopoly the condition for entry(E) is positive. In case of perfect < TOP
60.
competition and monopolistic competition it is zero and in case of monopoly it >
is indeterminate as the entry is totally restricted.
a The Learner’s measure of the index of monopoly power lies between zero and < TOP
61.
one. >
e (I) is a factor responsible for price discrimintion because price < TOP
62.
discrimination due to consumer preferences is possible under the >
following conditions:
• When a consumer is unaware that another consumer is paying
different price for the same good
• When a consumer has an irration feeling that he is paying a
high price for a better quality, though, in fact it may not be true.
• When the difference in the price is so small that the consumer
is not worried about it.
(II) is also a factor responsible for price discrimintion. For some product
resale of direct service is not possible, these provide enough scope for
price discrimination.
(III) is also a factor responsible for price discrimintion. Price
discrimination in this case is possible due to tariffs, transport cost etc.
Hence option (e) is the correct answer.
d H = 2(0.30)2 + 4(0.10)2 = 0.18 + 0.04 = 0.22 < TOP
63.
>
c A monopolist may maximize profit with respect to variations of either output or < TOP
c The marginal revenue in a monopoly is lower than price for all units other than < TOP
65.
the first. >
a MR = P(1 • 1/|E|) < TOP
66.
16 = p [1–1/5] >
16 = p (0.8)
p = Rs. 20.
a TRA = PA × Q = 400Q – 50Q2 < TOP
67.
>
MR = 400 – 100Q
TC = 10 + 100Q
MC = 100
Equilibrium level of output
MR = MC
400 – 100Q = 100
Q A= 3
PA = 400 – 150 = Rs. 250
TRB = PB × Q = 500Q – 50Q2
MR = 500 – 100Q
TC = 10 + 100Q
MC = 100
Equilibrium level of output
MR = MC
500 – 100Q = 100
QB= 4
PB = 500 – 200 = Rs. 300
a Demand function of the firm is given as Q = 125 – P < TOP
68.
P = 125 – Q >
TR = P Q
= 125Q – Q2
MR = 125 – 2Q
TC = 25Q
MC = 25
Profit maximizing output is obtained when MR = MC
= 125 - 2Q = 25
2Q = 100
Q = 50
P = 125 – Q
= 125- 50 = 75
Profit = TR – TC
TR = P Q
= 75 50 = 3750
TC = 25Q
= 25 50 = 1250
∴ Profit = 3750 – 1250 =Rs.2,500.
c Advertising can affect the level of demand for a firm’s product and the price < TOP
69.
elasticity of that demand. It should be kept in mind that advertising is an >
alternative to price reduction as a means of selling more per year and
increasing profits. In the long run, however, free entry ensures that these profits
will disappear. New entrants and the firm’s existing rivals will copy its
advertising campaigns. Ultimately, it will become more costly to gain
additional sales through advertising. As a result of advertising, each
monopolistically competitive firm produces more than it would otherwise. This
reduces the excess capacity in its industry. However, it does not benefit
consumers because the price does not fall to reflect the lower average costs of
production. Instead, selling costs are added to production costs
a The profit maximizing output is where MC = MR < TOP