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1. < Answer
The difference between, the price an individual is willing to pay and the price he or she actually pays is >
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.
3. < Answer
The demand for most products varies directly with the change in consumer income. Such products are >
known as
a. Normal goods b. Prestigious goods c. Complementary goods
d. Inferior goods e. Substitute goods.
4. < Answer
A combination of Capital (K) and Labor (L) lies to the right of the firm’s cost line; it means that the >
combination is
a. Undesirable b. Efficient, given the budget
c. Inefficient, given the budget d. Unattainable, given the budget
e. Inferior to the points within the constraint in terms of production.
5. < Answer
The horizontal demand curve for a firm is one of the characteristic features of >
a. Both (I) and (III) above b. (I), (II) and (III) above
c. (I), (III) and (IV) above d. (II), (III) and (IV) above
e. All (I), (II), (III) and (IV) above.
25. Which of the following cost curves is not ‘U’ shaped? < Answer
>
a. Long run average cost curve b. Long run marginal cost curve
c. Short run average cost curve d. Average variable cost curve
e. Average fixed cost curve.
26. A curve drawn indicating the slope of the total utility curve closely resembles the < Answer
>
a. Demand curve b. Supply curve c. Average utility curve
d. Marginal revenue curve e. Indifference curve.
27. < Answer
A kinked demand curve occurs in an oligopoly when a firm >
I. The slope of the indifference curve represents the marginal rate of substitution between two
goods.
II. Indifference curve in case of perfect substitutes is a straight line with positive slope.
III. Two indifference curves intersect with each other in case of perfectly complementary
goods.
IV. A higher level of indifference curve connotes higher level of output.
END OF SECTION A
Section B : Problems (60 Marks)
41. For a firm, the average cost function is estimated as < Answer
>
100
Q
AC = + 20 + 4Q
What is total variable cost for the firm at an output of 15 units?
a. Rs.100 b. Rs.750 c. Rs.1,200 d. Rs.1,340 e.
Rs.2,100.
(1 mark)
0.3 0.3
42. If the production function is Q = 20K L , what is the marginal rate of technical substitution < Answer
of labor for capital? >
L K L K
K L K L
a. 0.3 b. 0.3 c. d. e. K –L.
(2 marks)
43. Suppose the price of movie tickets at a theater increases from Rs.12 per couple to Rs.20 per < Answer
couple. The theater manager observed that the increase in price caused attendance at a given >
movie to fall from 300 persons to 200 persons. What is the price elasticity of demand for the
movie?
a. 0.5 b. 1.0 c. 0.8 d. 1.2 e. 5.0.
(1 mark)
44. Which of the following cost functions signifies a long-run cost function? < Answer
a. TC = 250 + 3Q b. TC = 300 >
2
c. TC = 50 + 100Q + 2Q d. Both (b) and (c) above
e. None of the above.
(1 mark)
45. The total revenue and total cost functions of Nike Shoe Company are < Answer
>
Q2
2
TR = 400Q – ,TC = 600 +70Q + Q2
What is the profit maximizing output for the firm?
a. 100 units b. 110 units c. 140 units d. 180 units e. 200
units.
(2 marks)
46. Demand and supply functions of cigarettes are given by the following functions: < Answer
QD = 5,800 – 80P , QS = 1,000 + 40P >
If the government imposes a tax of Rs.12 on each unit to discourage smoking, what would be
the new equilibrium price?
a. Rs.40.0 b. Rs.44.0 c. Rs.48.0 d. Rs.52.0 e.
Rs.42.5.
(3 marks)
47. Mr. Subba Rao, owner of Billow Garments & Brothers, employs labor and knitting machines < Answer
as inputs to produce woolen garments. The following are the marginal productivity functions >
of labor and capital for the firm:
L0.75 K 0.75
K 0.25 L0.25
MPK = 0.75 , MPL = 0.75
If the wage paid to the laborers is Rs.8 and the cost of capital is Rs.5 each, the cost minimizing
proportion of L to K is
a. L = (8/5) K b. L = (5/8) K c. L = (5 + 8) K d. L = (5 – 8) K e. L = (8 ×
5) K.
(2 marks)
48. The demand function for a firm is P = 30 – 3Q. If the average cost (AC) is Rs.6, what is the < Answer
>
output at which the firm earns normal profits?
a. 3 units b. 30 units c. 10 units d. 6 units e. 8
units.
(1 mark)
49. In Hyderabad city, there are eight popular construction companies. Data pertaining to the sale < Answer
proceeds (no. of flats sold) of eight construction companies in the year 2003 is given below : >
Name of the construction company No. of flats sold in the year 2003
Modi Constructions 500
Legend Constructions 300
Hima Sai constructions 450
Kartikeya Constructions 120
Aditya constructions 100
Ranga Prasad Constructions 80
Happy Home constructions 125
Jayabheri constructions 580 The four-
firm concentration ratio of the construction industry is
a. 0.711 b. 0.811 c. 0.611 d. 0.511 e. 0.411.
(2 marks)
50. If the average product of labor (APL) is 30L – L2, the maximum possible total product (TPL) is < Answer
>
a. 2,000 units b. 4,000 units c. 6,000 units d. 8,000 units e. 12,000
units.
(2 marks)
51. A perfectly competitive industry comprises of 150 firms. Of which, 50 are located in Chennai, < Answer
>
while remaining 100 are in Hosur. All the output is sold only at Hyderabad. The cost of
transporting one unit of output from Hosur to Hyderabad is Rs.8 and Rs.12 from Chennai to
Hyderabad. The cost function of all the firms in the industry (excluding transportation cost) is
identical and is estimated as
C = 100 + Q2
If the industry demand function is Qd = 2,020 – 10P, what is the equilibrium output for the
industry?
a. 1,450 units b. 1,528 units c. 2,720 units d. 1,700 units e. 1,620
units.
(3 marks)
52. The market demand function for a good is < Answer
P = 1,000 – Q >
If the marginal cost remains constant at Rs.25, the industry output in a Cournot’s duopoly is
a. 750 units b. 650 units c. 675 units d. 725 units e. 700
units.
(3 marks)
53. If the equilibrium output in a perfectly competitive industry is 2,100 units, what could be the < Answer
equilibrium output for the industry in a duopoly market? >
(1 mark)
67. Mr. Sachin can earn money from various activities. His hourly earnings from cricket is < Answer
Rs.5,000, acting Rs.30,000, coaching Rs.10,000 and ceremonies Rs.15,000. The opportunity >
cost of an hour of coaching for Sachin is
a. Rs.5,000 b. Rs.10,000 c. Rs.15,000 d. Rs.30,000 e. None of the above.
(1 mark)
68. The demand and supply functions of a good are < Answer
Qs = 400 + 15P >
Qd = 600 – 10P
If the government fixes a price ceiling of Rs.12 for the product, there would be
a. No supply of the good b. Shortage of the good
c. Excess supply of the good d. Excess demand for the good
e. No effect on demand and supply.
(1 mark)
69. Marginal utility of good X is 300 utils and its price is Rs.12. If price of good Y is Rs.30, the < Answer
marginal utility of good Y at equilibrium is >
a. 350 utils b. 700 utils c. 750 utils d. 550 utils e. 600
utils.
(1 mark)
70. A firm operating in a monopolistic competition has the following demand function: < Answer
P = 1,000 – Q >
If the marginal cost of the firm is constant at Rs.10, the equilibrium output in the long run is
a. 720 units b. 990 units c. 525 units d. 495 units e. 690
units.
(2 marks)
71. When the price is Rs.75, demand for a good is 10 units and when the price is Rs.70, demand is < Answer
>
12 units. Assuming that the demand function for the good is linear, the theoretical maximum
possible quantity of the good that can be demanded is
a. 100 units b. 25 units c. 5 units d. 40 units e. 76
units.
(2 marks)
72. A monopolist effectively segmented the market into two sub markets – X and Y. The total < Answer
revenue functions in two sub markets are given by: >
TRX = 20QX – 0.01Q2X ; TRY = 32QY – 0.02Q2Y
The marginal cost of the monopolist is constant at Rs.6.
If the monopolist practices price discrimination, profit-maximizing prices are
a. PX= Rs. 700 and PY = Rs. 650 b. PX= Rs. 650 and PY = Rs. 700
c. PX= Rs. 19 and PY = Rs. 13 d. PX= Rs. 13 and PY = Rs. 19
e. PX= Rs. 500 and PY = Rs. 525.
(3 marks)
73. The production function for a firm is given by Q = 50K 0.5 0.5
L . The efficient input combination < Answer
>
ratio is estimated to be K = 4L. If the firm has to produce an output of 2,000 units, the efficient
input combination is
a. L = 30 units and K = 120 units b. L = 20 units and K = 80 units
c. L = 15 units and K = 60 units d. L = 30 units and K = 60 units
e. L = 30 units and K = 30 units.
(1
mark)
74.
A firm operating under perfect competition has the following cost functions: < Answer
>
MC = 75 – 20Q + 1.5Q2, AVC = 75 – 10Q + 0.5Q2
The price below which the firm shut down its operation in the short-run is
a. Rs.20 b. Rs.25 c. Rs.40 d. Rs.50 e. Rs.75.
(2 marks)
75.
Refer to the graph below. If price of good Y is Rs.2, income of the consumer is < Answer
>
END OF SECTION B
Suggested Answers
Economics –I (121) : January 2004
1. Answer : (e) < TOP
Reason : Consumer surplus is the difference between the willingness price and actual price for a consumer. >
a. Producer costs represent the cost incurred by the producer in producing the good.
b. Monopolist Profit: Economic profit generated as a result of a firm’s market control. It’s termed
monopoly profit as a reflection of the most prominent market structure with market control—
monopoly.
c. Economic Profit: The difference between business revenue and total economic cost. This is the
revenue received by a business over and above the minimum needed to produce a good.
d. Producers Surplus: The revenue that producers obtain from selling a good over and above the
opportunity cost of production. This is the difference between the minimum supply price that
sellers would be willing to accept and the price that is actually received.
e. Consumer Surplus is the satisfaction that consumers obtain from a good over and above the price
paid. This is the difference between the maximum demand price that the consumer would be
willing to pay and the price that he actually pays.
The correct answer is (e).
2. Answer : (e) < TOP
Reason : Elasticity of demand is defined as percentage change in the quantity demanded due to the percentage >
change in the price; price elasticity of demand = percentage change in the quantity demanded /
percentage change in the price of the commodity.
I. The slope of the demand curve represents the change in the price of the good to the change in the
quantity demanded of the good.
II. As one goes down the demand curve the price elasticity of demand decreases.
III. When the demand for the good is inelastic, a fall in the price of the good does not result in a greater
increase in the quantity demanded. Hence, there would be no increase in the total revenue of the
firm.
IV. Elasticity of demand is measured by dividing the percentage change in the quantity demanded by
percentage change in the price and not by dividing the change in quantity demanded by change in
the price. (Note: ED = Percentage change in the quantity demanded/Percentage change in price).
The correct answer is (e).
3. Answer : (a) < TOP
Reason : In case of normal goods, a given increase in income results in increase of demand. Normal goods can be >
further classified into luxury good or necessary goods based on the value of the income elasticity of
demand. If the value of income elasticity is more than one, it signifies that the good is a luxury item.
Since, the value of the income elasticity of demand is not known; we can classify the good to be normal
goods.
a. In case of normal goods the quantity demanded increases/decreases with the increase/decrease in
the income levels of the consumers.
b. In case of necessities, though there would be positive change in the quantity demanded of the good
for a given change in the income, the percentage change in the quantity demanded would be less
than the percentage change in the income. Since, we do not know the value of the income elasticity
of demand; we cannot classify the good as luxury or necessary good.
c. Complementary goods are those which are jointly used to satisfy a want. Cross elasticity of
demand, and not income elasticity of demand, is used to determine the relationship between the
two goods.
d. In case of inferior goods percentage change in the quantity demanded is negative with the change
in the income. Hence, (d) is not the correct answer.
e. In case of Luxury goods, the percentage change in quantity demanded is greater than the
percentage change in the income. Since, we do not know whether the percentage change in
quantity demanded is greater than the percentage change in the income, we cannot classify the
good to be luxury good.
4. Answer : (d) < TOP
Reason : A combination of inputs to the right of the cost line indicates that it is a point above the cost function >
which cannot be reached with the given budget. Hence, the correct answer is (d).
5. Answer : (d) < TOP
Reason : Perfect competition is a form of market structure which represents a market without rivalry among the >
individual firms. When the product is similar and identical, given all other conditions, a perfectly
competitive firm can only be a price taker. The price of the good is determined by the market forces. The
demand curve is horizontal to x-axis implying that the producers can produce as much as quantity of
output to the given level of price.
a. Oligopoly is a form of market structure where there are few sellers. The demand curve is
indeterminable because of the interdependence between the firms and it depends on the reaction
curves of the competitor.
b. Monopoly is a form of market structure where there is only one producer of the good. The demand
curve is downward sloping implying that the producer is a price-maker. The distinguishing feature
of this form of market structure is that the average costs of production continually decline with
increased output as a result of which average costs of production will be lowest when a single large
firm produces the entire output demanded.
c. Monopolistic competition is a market structure where there are many firms selling closely related
but non-identical goods. The demand curve is downward sloping because of product
differentiation.
d. The demand curve in the perfect competition is horizontal to x-axis implying that producer can
produce as much as the quantity of output for a given level of price.
e. The demand curve of a duopolist is indeterminate because of high degree of interdependence
between the firms.
Hence, the correct answer is (d).
6. Answer : (b) < TOP
Reason : a. When marginal cost is increasing with the increase of output, average returns may be increasing or >
decreasing.
b. When output is increasing, average fixed costs decreases whether or not marginal cost is increasing
or decreasing.
c. When marginal cost is increasing with the increase of output, average variable costs may be
increasing or decreasing.
d. When MC is rising, TC also increases
e. When marginal cost is increasing with the increase of output, average costs may or may not
increasing.
7. Answer : (e) < TOP
Reason : Monopolistic competition is a type of market structure which is characterized by many firms selling >
closely related but unidentical goods. The features of the monopolistic competition may be summarized
as follows:
a. In case of monopoly, the entry is blocked.
b. In case of oligopoly, the presence of few players restricts the entry of new firms.
c. In case of duopoly, there exist only two firms. The entry of new firms is restricted because of
actions of the two firms.
d. In case of monopoly, the entry is blocked..
e. In case of monopolistic competition, there is relatively free entry and exit of the firms.
The correct answer is (e).
8. Answer : (c) < TOP
Reason : The firm is said to attain break even point implies that the firm is earning zero economic profit i.e., TR = >
TC or AR = AC.
a. a. It is not appropriate in this instance because it is not indicating break-even point but
representing economic losses as total revenue is less than total cost.
b. It is not appropriate in this instance because it is not indicating break-even point
but representing that the firm is getting economic profits.
c. It is appropriate in this instance because when average revenue (TR/Q) is equal to average cost
(TC/Q) implies that the firm is earning zero economic profits.
d. It is not appropriate in this instance because it is not indicating break even point but is representing
that marginal revenue is more than marginal cost.
e. It is not appropriate in this instance because it is not indicating break even point but is representing
that marginal revenue is equal to marginal cost.
Hence, the correct answer is (c).
9. Answer : (e) < TOP
Reason : The vertical distance between TC and TVC shows the fixed cost of the firm. >
a. The law of diminishing returns states that as more and more units of a variable resource are
combined with a fixed amount of other resources, employment of additional units of the variable
resource will eventually increase output only at a decreasing rate. But, it does not reflect the
vertical distance between TC and TVC.
b. AFC is given by TFC/Q.
c. MC is given by dTC/dQ or dTVC/dQ. Thus, only slope of TC and TVC reflect the MC.
d. AVC is given by TVC/Q. It has no significance with respect to vertical distance between TC and
TVC.
e. The vertical distance between TC and TVC shows the fixed cost of the firm.
The correct answer is (e).
10. Answer : (a) < TOP
Reason : Movement of the demand curve implies that the change in the price of the good will lead to change in >
the demand for the good. For instance, fall in the price leads to extension in the demand curve. Similarly
increase in the price of good leads to contraction in the demand for the good. A shift in the demand
curve is caused by a change in any non-price determinant of demand. The curve can shift to the right or
left. The factors that are responsible for shift in the demand curve may be listed out as follows:
• Income of the consumers
• prices of other goods (substitutes or complements)
• Tastes and preferences of consumers.
a. It is appropriate in this instance because it is not the factor that is responsible for the shift in the
demand curve but it represents the movement along the demand curve.
b. It is not appropriate in this instance because it is one of the factors that is responsible for shift in
the demand curve.
c. It is not appropriate in this instance because it is one of the factors that is responsible for shift in
the demand curve.
d. It is not appropriate in this instance because it is one of the factors that is responsible for shift in
the demand curve.
e. It is not appropriate in this instance because it is one of the factors that is responsible for shift in
the demand curve. The correct answer is (a).
11. Answer : (a) < TOP
Reason : Monopolistic competition is a type of market structure characterized by many firms selling closely >
related but un-identical goods. The features of the monopolistic competition may be summarized as
follows:
Features of Monopolistic competition
• Relatively large number of firms
• Differentiated products
• Some control over price in a narrow range
• Relatively easy entry and exit
a. It is appropriate in this instance because both the markets indicate product differentiation.
b. It is not appropriate in this instance because, it is not a common feature but one of the features of
Oligopoly.
c. It is not appropriate in this instance because, it is not a common feature but one of the features of
Oligopoly.
d. It is not appropriate in this instance because, it is not a common feature but one of the features of
Oligopoly.
e. It is not appropriate in this instance because, it is not a common feature but one of the features of
Oligopoly. The correct answer is (a).
12. Answer : (c) < TOP
Reason : In an oligopoly market there are few sellers so that there is interdependence among the >
sellers and the sellers are aware of it. This encourages them to form cartels for their mutual
benefits. Oligopsony is a complementary form of oligopoly, where there exists a few
buyers and a large number of sellers. Cartels imply direct agreement among competing
oligopolists with the aim of reducing uncertainty. Hence, (c) is the correct answer.
13. Answer : (c) < TOP
Reason : Demand for a commodity is the quantity of that commodity demanded at a particular period for certain >
price. If a good is durable, that is if its purchase can be postponed, then it exhibits an elastic demand
because consumers can postpone their purchases when they feel the price is high.
a. It is not appropriate in this instance because it indicates a situation where the elasticity of demand
or the coefficient of elasticity is equal to zero.
b. It is not appropriate in this instance because, it is indicating that there is no impact or consumers
are not responding to the changes in the prices of the goods and therefore the demand for that
good is perfectly inelastic and therefore the demand curve will be vertical to the X-axis.
c. It is appropriate in this instance because it is indicating a situation where the consumers are
sensitive to the changes in the prices of the goods and therefore the demand for that good is elastic
and therefore the demand curve will be flatter.
d. It is not appropriate in this instance because it is indicating a situation where the percentage change
in the quantity demanded is equal to the percentage change in the price and the coefficient of
elasticity is equal to one.
e. It is appropriate in this instance because it is indicating a situation where the demand for the
commodity is perfectly inelastic.
The correct answer is (c).
14. Answer : (a) < TOP
Reason : Long run average cost curve is a U shaped curve indicating initially there exists economies of scale >
followed by diseconomies of scale.
a. When AC is increasing, MC must be increasing
b. Operation of law of diminishing marginal productivity is not the cause of the upward
rising long run average cost curve.
c. Only diseconomies of scale lead to increase in AC, while economies of scale reduce
the AC.
Hence, the correct answer is (a).
15. Answer : (e) < TOP
Reason : a. The supply curve of a perfectly competitive firm is that portion of its marginal-cost curve >
lying above average variable costs.
b. The supply curve of a perfectly competitive firm is that portion of its marginal-cost curve
lying above average variable costs because of unique relationship between price and quantity
supplied.
c. Supply curve will be vertical when amount quantity can be delivered, whatever be the price.
It is possible in case of perishable goods.
d. Horizontal supply curve indicates that at a given price, any amount of goods can be delivered.
e. Unlike in perfect competition, there is no unique relationship between price and quantity supplied. Hence, in
case of a monopolist, the supply curve is absent.
16. Answer : (a) < TOP
Reason : When an entrepreneur wants to maximize the profits without affecting the price, the best way is to >
reduce the average cost to its minimum possible level. When MC curve cuts AC curve, AC will be at its
minimum possible. Hence, a firm to maximize the profits, without affecting the price should produce at
a level where MC = AC.
a. When MC curve cuts AC curve, AC will be at its minimum possible. Hence, a firm to maximize
the profits, without affecting the price should produce at a level where MC = AC.
b. It is appropriate to minimize the total average cost instead of average variable cost.
c. MC = P signifies only equilibrium condition in a perfectly competitive market.
d. When MC = AVC, AVC will be at minimum. It is appropriate to minimize the total average cost
instead of average variable cost.
e. It is appropriate to minimize the total average cost instead of marginal cost to maximize profits
without changing the price.
Hence, the correct answer is (a).
17. Answer : (d) < TOP
Reason : When the level of output changes, the total cost as well as total variable costs also changes. Since there >
would be no fixed cost in the long run, AFC remains at 0 in the long run. Hence, the correct answer is
(d).
18. Answer : (d) < TOP
Reason : Monopolistic competition is a type of market structure which is characterized by many firms selling >
closely related but unidentical goods. The features of the monopolistic competition may be summarized
as follows:
Features of Monopolistic competition
• Many firms: There is relatively large number of firms, each satisfying a small, but not microscopic,
share of the market demand for similar, but not identical products.
• Differentiated products: 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.
• Some control over price in a narrow range: The firms in the market do not consider the reactions
of their rivals when choosing their product prices or annual sales targets.
• Relatively easy entry: Relative freedom of entry and exit of firms exists in monopolistically
competitive markets.
a. It is not appropriate in this instance because if the marginal cost curve to the right implies
increasing cost of expenditure.
b. It is not appropriate in this instance because increase in the demand for the product will shift the
marginal revenue curve to the right and not the left.
c. It is not appropriate in this instance because with the increase in the demand for the product
average cost curve will decrease and therefore the marginal revenue curve will not shift to the
right.
d. It is appropriate in this instance because it is indicating that with increase in the demand for the
product average cost curve will move upwards (advertising expenses) and marginal revenue will
shift to the right.
e. In anticipation of increased demand for the commodity through advertisement it increases the
average cost and therefore it is not appropriate in this instance. The correct answer is (d).
19. Answer : (c) < TOP
Reason : The slope of the indifference curve is represented by the marginal rate of substitution between the two >
goods.
a. It is not appropriate in this instance because, marginal rate of substitution between two imperfect
substitutes cannot be an increasing factor, and hence the indifference curve cannot be concave.
b. It is not appropriate in this instance because, marginal rate of substitution between two imperfect
substitutes is decreasing in accordance with the law of diminishing marginal utility and hence the
indifference curve will be convex.
c. It is appropriate in this instance because, it is representing a situation where the products A &B are
perfect substitutes. In case of perfect substitutes, the marginal rate of substitution remains constant.
Hence, the indifference curve would be downward sloping straight line.
d. A upward sloping straight line indicates positive slope.
e. In case of perfect complementary goods, the indifference curve would be L shaped.
The correct answer is (c).
20. Answer : (c) < TOP
Reason : Marginal product is the increase in the total product resulting from a unit increase in the employment of >
a variable input. When marginal product is negative, TP decreases. When TP is falling and output is
increasing, AP also starts falling.
a. TP will be maximum, when MP = 0
b. AP will be maximum, when MP = AP
c. When marginal product is negative, TP decreases. When TP is falling and output is increasing, AP
also starts falling.
d. When MP is negative, TP falls.
e. AP cannot be negative.
The correct answer is (c).
21. Answer : (e) < TOP
Reason : Least-cost production implies that the producer produces a given level of output where the marginal >
physical product to the factor price ratio is equal to the factor inputs.
a. It is not appropriate in this instance because it is indicating that all factor prices are equal indicates
the demand and supply of that factor.
b. It is not appropriate in this instance because it indicates the addition to total output by the
employment of an additional unit of a factor of production all else equal.
c. It is not appropriate in this instance because marginal physical product is the slope of the total
output curve and therefore will not indicate the least cost production.
d. It is not appropriate in this instance because it is not indicating the least-cost-production.
e. It is appropriate in this instance because, it is the change in the total revenue of the firm that results
from the employment of one additional unit of a factor of production. Therefore the marginal
physical product to factor price ratio equal to the factor inputs indicates the least-cost production.
The correct answer is (e).
22. Answer : (c) < TOP
>
Reason : The relationship between marginal product curve and average product curve is such that when marginal
product curve cuts average product curve, the average product will be at its maximum point.
(a) Maximum point is reached when MR = MC.
(b) Total product reaches maximum when MP = 0.
(c) When MP = AP, AP will be maximum.
(d) Marginal product will be maximum, when MP/ L = 0.
∂ ∂
(e) Marginal product will be zero, when employing of an additional labor does not result in increase
of total product.
23. Answer : (c) < TOP
>
Reason : Monopolistic competition is a market structure where there are many firms selling closely related but
non-identical goods. The characteristic features of this market are:
• Large number of buyers and sellers
• Differentiated products but they are close substitutes
• No barriers to entry.
The demand curve is downward sloping because of product differentiation as the firms will have some
amount of liberty in deciding the price of the good, unlike in perfect competition.
a. It is not appropriate in this instance because it is representing the demand curve in perfect
competition.
b. It is not appropriate in this instance because it is not representing the demand curve in monopolistic
competition. A vertical demand curve indicates that the demand is inelastic.
c. It is appropriate in this instance because it is representing the demand curve in monopolistic
competition..
d. & e. Supply curve depends on the cost functions of the firm.
Hence, the correct answer is (c).
24. Answer : (e) < TOP
Reason : The demand curve is horizontal to x-axis implies that the producers can produce as much as quantity of >
output to the given level of price. Therefore, the producer under perfect competition is a price-taker. The
long-run equilibrium, all the existing firms get normal profits because of free entry and exit of firms.
Hence the equilibrium condition in the long run for a firm would be P = AR = MR = MC.
Hence, the correct answer is (e).
25. Answer : (e) < TOP
Reason : a. Long run average cost (LAC = LTC/Q) is U-shaped because of economies of scale initially and >
diseconomies of scale at later stages of production.
b. Long run marginal cost (LMC = ∂LTC/∂Q) is U-shaped as cost of producing additional units
reduces at the beginning because of economies of scale, but raises later due to diseconomies of
scale.
c & d. Short run average cost (SAC = STC/Q) and AVC (= TVC/Q) falls and raises due to operation of
‘law of diminishing marginal productivity’.
e. Average fixed cost (AFC = TFC/Q) falls at a decreasing rate with the increase of output because of
constant total fixed cost.
26. Answer : (a) < TOP
Reason : A curve drawn indicating the slope of the total utility curve represents the marginal utility curve. MU >
curve closely resembles the demand curve. The only difference between MU curve and demand curve is
that demand curve does not go below 0, while MU can be negative.
27. Answer : (e) < TOP
Reason : The kinked demand curve model is based on the assumption that when a firm increase price other firms >
in the industry do not follow and if the firm decrease price other firms also decrease the price. Therefore, the
answer is (e).
28. Answer : (d) < TOP
Reason : Economic profit = Accounting profit – Implicit costs. >