Economics-I (MB141) : July 2006
• Marks are indicated against each question.
1. 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.
(1 mark)
< Answer >
2. In India, the demand for life saving drugs is assumed to be perfectly inelastic. If the government imposes a tax, the
tax burden is borne by
(a) Only seller
(b) Only buyers
(c) More by the buyers and less by the suppliers
(d) Equally by both buyers and suppliers
(e) Less by the buyers and more by the suppliers.
(1 mark)
< Answer >
3. Diseconomies of scale refer to
(a) The forces which reduce the average cost of producing a good as the firm expands the size of its plant
(b) The forces which reduce the marginal cost of producing a good as the firm expands the size of its plant
(c) The forces which increase the average cost of producing a good as the firm expands the size of its plant
(d) The forces which increase the marginal cost of producing a good as the firm expands the size of its plant
(e) The forces which keep the average cost of producing a good constant as the firm expands the size of its plant.
(1 mark)
< Answer >
4. Which of the following statements is true, if demand for mobile phones increases by 12% when income increases
by 5%?
(a) Income elasticity of demand for mobile phones is 2.4 and mobile phones are inferior goods
(b) Income elasticity of demand for mobile phones is 0.42 and mobile phones are normal goods
(c) Income elasticity of demand for mobile phones is 2.4 and mobile phones are necessary goods
(d) Income elasticity of demand for mobile phones is 0.42 and mobile phones are inferior goods
(e) Income elasticity of demand for mobile phones is 2.4 and mobile phones are luxury goods.
(1 mark)
< Answer >
5. When people have very little time to respond to price changes, demand becomes
(a) More elastic (b) Less elastic
(c) Unitary elastic (d) Perfectly elastic
(e) Perfectly inelastic.
(1 mark)
< Answer >
6. Which of the following statements is true with regard to price elasticity of demand?
(a) Elasticity remains constant throughout the demand curve
(b) Elasticity increases with increase in quantity demanded
(c) Elasticity increases as the price decreases
(d) Elasticity is equal to the slope of the demand curve
(e) Higher the elasticity, more responsive the demand is for a given change in price.
(1 mark)
< Answer >
7. When a decrease in price leads to an increase in quantity purchased so as to increase the total revenue, the price
elasticity of demand is
(a) Less than one (b) Equal to one (c) More than one
(d) Zero (e) Infinity.
(1 mark)
< Answer >
8. Which of the following is true when the demand curve is perfectly inelastic?
(a) The whole tax burden is borne by the sellers
(b) The whole tax burden is borne by the buyers
(c) The tax burden is borne more by the sellers and less by the buyers
(d) The tax burden is borne less by the sellers and more by the buyers
(e) The tax burden is borne equally by the sellers and buyers.
(1 mark)
< Answer >
9. When total utility is maximum, marginal utility is
(a) Greater than one (b) Zero (c) Less than one
(d) One (e) Infinity.
(1 mark)
< Answer >
10. Which of the following is true with respect to the law of diminishing marginal utility?
(a) The more the consumption, the lesser the marginal utility from every additional unit consumed
(b) The more the consumption, the greater the marginal utility from every additional unit consumed
(c) The lesser the consumption, the lesser the marginal utility from every additional unit consumed
(d) The lesser the consumption, no marginal utility from every additional unit consumed
(e) The law of diminishing marginal utility is valid for an infinite period.
(1 mark)
< Answer >
11. A profit maximizing firm seeks to maximize the difference between
(a) Marginal revenue and marginal cost
(b) Marginal revenue and average cost
(c) Total revenue and marginal revenue
(d) Total revenue and average cost
(e) Average revenue and average cost.
(1 mark)
< Answer >
12. Average product of a variable input is
(a) The total product divided by the price of the product
(b) The same as marginal product when marginal product is maximum
(c) The total product divided by the amount of variable input used
(d) The same as total product when marginal product is zero
(e) The amount of additional output that can be produced by using one more unit of the variable input.
(1 mark)
< Answer >
13. Which of the following is not a feature of a monopolistically competitive market?
(a) Relative freedom of entry and exit of firms
(b) Relatively large number of firms
(c) Homogeneous product
(d) Non-price competition
(e) Product of a firm is not a perfect substitute to that of another firm.
(1 mark)
< Answer >
14. A curve drawn indicating the slope of the total utility curve closely resembles the
(a) Demand curve (b) Supply curve (c) Average utility curve
(d) Marginal revenue curve (e) Indifference curve.
(1 mark)
< Answer >
15. A firm having a kinked demand curve indicates that
I. If the firm reduces the price, competitors also reduce the price.
II. If the firm increases the price, competitors also increase the price.
III. If the firm reduces the price, competitors do not reduce the price.
IV. If the firm increases the price, competitors do not increase the price.
V. If a firm increases production, competitors also increase production.
(a) Both (I) and (IV) above (b) Both (I) and (V) above
(c) Both (II) and (III) above (d) Both (II) and (V) above
(e) Both (III) and (IV) above.
(1 mark)
< Answer >
16. Which of the following represents the marginal rate of technical substitution (MRTS)?
(a) Slope of the isocost line
(b) Slope of the indifference curve
(c) Slope of the isoquant
(d) Slope of the budget line
(e) Slope of the average cost curve.
(1 mark)
< Answer >
17. Marginal product of labor is the
(a) Cost of employing labor for producing one more unit of output
(b) Change in output from using one more unit of labor
(c) Change in revenue from selling one more unit of output
(d) Change in revenue from using one more unit of labor
(e) Change in cost from using two more units of labor.
(1 mark)
< Answer >
18. The total product reaches maximum, when
(a) Marginal Product = Average Product
(b) Average Product = Zero
(c) Marginal Product = Zero
(d) Marginal Cost = Average Cost
(e) Marginal Revenue = Marginal Cost.
(1 mark)
< Answer >
19. Which of the following costs remain constant as the output increases?
(a) Marginal cost (b) Average variable cost
(c) Average fixed cost (d) Total variable cost
(e) Total fixed cost.
(1 mark)
< Answer >
20. A profit maximizing firm will stop production in the short run if price is
(a) Less than average cost
(b) Less than marginal cost
(c) Less than the average variable cost
(d) Equal to average cost
(e) Less than total cost.
(1 mark)
< Answer >
21. Which of the following does not cause a shift in the demand curve?
(a) Changes in the price of the goods
(b) Changes in the income of the buyers
(c) Changes in the personal preferences
(d) Changes in the price of related goods
(e) Changes in the consumer patterns.
(1 mark)
< Answer >
22. The supply curve of a monopolist
(a) Is the portion of MC curve that lies above the AVC curve
(b) Is the portion of MC curve that lies above the AC curve
(c) Is vertical
(d) Is horizontal
(e) Is absent.
(1 mark)
< Answer >
23. Which of the following assumptions is/are necessary for a market to be perfectly competitive?
I. Products are homogenous.
II. Cost structure of every firm is identical.
III. Buyers have no preferences towards any seller.
IV. Buyers have perfect knowledge about prices in the market.
(a) Only (I) above (b) Only (II) above
(c) Both (I) and (III) above (d) (I), (III) and (IV) above
(e) (II), (III) and (IV) above.
(1 mark)
< Answer >
24. A perfectly competitive firm can increase its sales revenue by
(a) Reducing the price
(b) Increasing the price
(c) Increasing the production
(d) Increasing the expenditure on advertising
(e) Increasing the sales force.
(1 mark)
< Answer >
25. Which of the following factors differentiate perfect competition from monopolistic competition?
I. Number of buyers and sellers.
II. Entry and exit barriers.
III. Product differentiation.
IV. Selling activities.
(a) Both (I) and (III) above (b) Both (I) and (IV) above
(c) Both (III) and (IV) above (d) (I), (II) and (IV) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
< Answer >
26. Ampler Ltd. faces a downward sloping demand curve. The profit maximizing condition for the firm in the short run
is
(a) Marginal revenue = Marginal cost (b) Price = Marginal cost
(c) Marginal revenue = Average cost (d) Marginal revenue = Total cost
(e) Marginal revenue = Total revenue.
(1 mark)
< Answer >
27. The vertical distance between the average cost and average variable cost is
(a) Total cost (b) Total fixed cost (c) Marginal cost
(d) Variable cost (e) Average fixed cost.
(1 mark)
< Answer >
28. Which of the following circumstances refers to a mixed economy?
(a) Free market economy
(b) Government plays the pivotal role in the functioning of the economy
(c) Prices are determined by the market forces only
(d) Government exercises its power only in the important sectors while in the other sectors, a free market
economy exists
(e) Prices are fixed only by the farmers.
(1 mark)
< Answer >
29. Which of the following is an example of variable cost of production?
(a) Cost of buildings (b) Purchasing heavy machines
(c) Salaries of top-level managers (d) Salaries of temporary staff
(e) Acquiring copy-rights of the products.
(1 mark)
< Answer >
30. The break-even point for a perfectly competitive firm is achieved when
(a) Average Revenue = Marginal Cost (b) Average Revenue = Average Cost
(c) Total Revenue = Total Fixed Cost (d) Total Revenue = Marginal Cost
(e) Marginal Revenue = Average Variable Cost.
(1 mark)
< Answer >
31. The upward shift in LAC of an engineering firm, indicates, that firm is experiencing
(a) Internal economies (b) External economies
(c) Internal diseconomies (d) External diseconomies
(e) Decreasing returns.
(1 mark)
< Answer >
32. The supply curve in a competitive firm is represented by
(a) Average variable cost curve
(b) Average cost curve
(c) Average revenue curve
(d) Marginal cost curve below the average revenue curve
(e) Marginal cost curve above the average variable cost curve.
(1 mark)
< Answer >
33. A steel manufacturing industry contains 200 plants, which are producing and selling identical products. The
demand for steel manufacturing industry will be
(a) Horizontal (b) Downward sloping
(c) Upward sloping (d) Convex to the origin
(e) Concave to the origin.
(1 mark)
< Answer >
34. Long-run equilibrium of a competitive industry indicates, that it is earning
(a) Losses
(b) Super normal profits
(c) Some firms earning normal profits while the rest earning super normal profits
(d) Normal profits
(e) Some firms exiting the industry while others entering.
(1 mark)
< Answer >
35. Which of the following is not an example of a firm’s explicit cost?
(a) Salaries paid to workers
(b) An amount of Rs.500 paid to an employee towards the reimbursement of medical expenses incurred by him
(c) Advertisement expenditure incurred by the firm towards promotion of its branded good, ‘Atoka’
(d) The firm’s owner has given up a job, where he was earning Rs.10,000 per month, to run the firm
(e) Payment of telephone bills by the firm.
(1 mark)
< Answer >
36. Which of the following market structures has a predominant feature of price leadership?
(a) Perfectly competitive (b) Monopoly (c) Oligopoly
(d) Monopsony (e) Monopolistic competitive.
(1 mark)
< Answer >
37. The best possible factor input combination in the production process is indicated by the
(a) Expansion Path (b) Isoquant (c) Iso-cost line
(d) Marginal revenue product (e) Indifference curve.
(1 mark)
< Answer >
38. The cost functions of a firm are derived from the
(a) Demand curve of the commodity (b) Price of the output
(c) Production functions of the firm (d) Marginal utility of the consumer
(e) Budget line.
(1 mark)
< Answer >
39. In perfect competition, the long run equilibrium price is equal to
I. Marginal Revenue.
II. Average Cost.
III. Marginal Cost.
IV. Average Revenue.
(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) (I), (II), (III) and (IV) above.
(1 mark)
< Answer >
40. Scarcity of resources forces economic agents to choose among various alternatives. The problem of choice arises
because limited resources with alternative uses are to be utilized to satisfy unlimited human wants. With reference
to this, goods are classified into free good and economic good. Which of the following is not an economic good?
(a) Gas cylinder (b) Mineral water (c) Air
(d) Teakwood (e) Video cassette.
(1 mark)
< Answer >
41. Which of the following is/are factors determining real wages?
I. Chances of extra income.
II. The condition at work.
III. The nature of job.
(a) Only (I) above (b) Only (II) above
(c) Both (I) and (II) above (d) Both (II) and (III) above
(e) All (I), (II) and (III) above.
(1 mark)
< Answer >
42. The reward for capital is known as
(a) Wage (b) Interest (c) Rent (d) Profit (e) Quasi-rent.
(1 mark)
< Answer >
43. In which of the following criterion, the decision maker has an absolutely optimistic view about the outcomes or
pay-offs?
(a) Maximax criterion (b) Minimax criterion
(c) Maximin criterion (d) Laplace decision criterion
(e) Delphi method.
(1 mark)
< Answer >
44. Which of the following is/are assumptions of marginal productivity theory?
I. Productive efficiency of all factor units is identical.
II. Supply of factors of production is elastic.
III. Full employment.
(a) Only (I) above (b) Only (II) above
(c) Both (I) and (II) above (d) Both (II) and (III) above
(e) All (I), (II) and (III) above.
(1 mark)
< Answer >
45. Which of the following is/are non-insurable risks given by Knight?
I. Risk of competition.
II. Market conditions risk.
III. Government policy risk.
(a) Only (I) above (b) Only (II) above
(c) Both (I) and (II) above (d) Both (II) and (III) above
(e) All (I), (II) and (III) above.
(1 mark)
< Answer >
46. Net profit is expressed as
(a) Gross profit + Implicit costs (b) Gross profit – Implicit costs
(c) Total revenue – Total explicit costs (d) Total revenue + Total explicit costs
(e) Gross profit × Implicit costs.
(1 mark)
< Answer >
47. Which of the following is/are criticisms of the classical theory of rate of interest?
I. Assumption of full employment.
II. Long run.
III. Demand for capital only for productive uses.
(a) Only (I) above (b) Only (II) above
(c) Both (I) and (II) above (d) Both (II) and (III) above
(e) All (I), (II) and (III) above.
(1 mark)
< Answer >
48. In which of the following method, the opinion of number of experts is gathered individually?
(a) Delphi method (b) Test Marketing
(c) Controlled experiments (d) Barometric analysis
(e) Laplace decision criterion.
(1 mark)
< Answer >
49. Which of the following is/are the basic assumptions of Ricardian theory in relation to land?
I. The supply of land is fixed and the existing quantity of land gifted by nature cannot be increased or
decreased.
II. Fertility of land are gifted by God and are not due to human efforts of any type.
III. There exists perfect competition.
(a) Only (I) above (b) Only (II) above
(c) Both (I) and (II) above (d) Both (II) and (III) above
(e) All (I), (II) and (III) above.
(1 mark)
< Answer >
50. The reward for land is termed as
(a) Wage (b) Rent (c) Interest
(d) Profit (e) Opportunity cost.
(1 mark)
< Answer >
51. The demand function for a commodity is estimated as follows
Qd = 3,50,000 – 35P
The arc price elasticity of demand between the prices of Rs.3,000 and Rs.4,000 is
(a) –0.385 (b) 0.835 (c) –0.835 (d) –0.538 (e) 0.385.
(2 marks)
< Answer >
52. The demand and supply functions of a food product are given as follows:
Qd = 15,000 – 500P
Qs = 5,000 + 250P
When the Government imposes a specific sales tax at the rate of Rs.10 per unit, the new equilibrium price will be
(a) Rs.16.67 (b) Rs.18.45 (c) Rs.19.78 (d) Rs.25.00 (e) Rs.14.33.
(2 marks)
< Answer >
53. Consider the following data:
If the demand for wheat is unit-elastic, the quantity demanded when the price is Rs.10 per kg will be
(a) 5Kgs (b) 6Kgs (c) 10Kgs (d) 12Kgs (e) 20Kgs.
(1 mark)
Price per Kg (Rs.) Demand for wheat (Kg)
12 5
10 ?
< Answer >
54. The demand function for a commodity is estimated to be
Qd = 3,50,000 – 35P
The theoretical highest price that can prevail in the market is
(a) Rs.9,000 (b) Rs.10,000 (c) Rs.11,000 (d) Rs.12,000 (e) Rs.13,000.
(2 marks)
< Answer >
55. Consider two points A and B on a linear demand curve. The price and quantity demanded associated with the two
points are given below:
The point elasticity of demand for the product if price increases from Rs.8.50 to Rs.10.00 is
(a) 1.33 (b) 0.85 (c) 1.13 (d) 1.42 (e) 0.71.
(2 marks)
Point Price (Rs.) Quantity Demanded (units)
A 8.50 2,000
B 10.00 1,500
< Answer >
56. The demand and supply functions of a good are given as follows:
Qd = 19,000 – 300P
Qs = 17,000 – 100P
What is the equilibrium price of the good?
(a) Rs.10 (b) Rs.20 (c) Rs.30 (d) Rs.40 (e) Rs.50.
(1 mark)
< Answer >
57. A consumer is indifferent between the combinations A and B.
Absolute value of marginal rate of substitution (MRSXY) for the consumer is
(a) 0.33 (b) 3.00 (c) 1.50 (d) 2.00 (e) 1.00.
(1 mark)
Combination Good X
(Units)
Good Y
(Units)
A 7 13
B 10 12
< Answer >
58. Assume that the consumer is in equilibrium consuming commodities X and Y. If marginal utility of commodity X is
175 utils, price of the commodity X is Rs.25, and the price of commodity Y is Rs.30, the marginal utility of Y is
(a) 175 utils (b) 210 utils (c) 280 utils (d) 320 utils (e) 350 utils.
(1 mark)
< Answer >
59. The total utility obtained from cola drink for a consumer is given by the equation, TU = 10X1.5. If the price of Cola
drink is given to be Rs.60 per unit, the consumer maximizes his utility by consuming
(a) 8.00 units of cola (b) 9.00 units of cola
(c) 16.00 units of cola (d) 14.75 units of cola
(e) 15.00 units of cola.
(2 marks)
< Answer >
60. A consumer is willing to buy 100 units of a product at a price of Rs.10 per unit. If the current price of the product is
Rs.9, the consumer surplus is
(a) Re.1 (b) Rs.50 (c) Rs.100 (d) Rs.900 (e) Rs.1,000.
(1 mark)
< Answer >
61. Average productivity of labor for a firm is 25 when labor employed is 50 units. When labor employed is increased
to 52 units, average productivity of labor declines to 24 units. At current input level the marginal productivity of
labor is
(a) –1 unit (b) –2 units (c) 1 unit (d) 2 units (e) 4 units.
(1 mark)
< Answer >
62. MRTSL,K for the production function, Q = 30K0.5L0.5 is
(a) 0.15 (b) 0.15 (c) (d) (e) 0.15 + .
(2 marks)
K
L
L
K
K
L
L
K
K
L
< Answer >
63. Which of the following production functions exhibit constant returns to scale?
I. Q = K 1/2+L 1/2 II. Q = 2K+3L
III. Q = 3K 1/2 L 1/2 IV. Q = K 1/2 L 2/3
(a) Both (I) and (II) above (b) Both (II) and (III) above
(c) (I), (II) and (III) above (d) (I), (III) and (IV) above
(e) (II), (III) and (IV) above.
(2 marks)
< Answer >
64. If the average product of labor (APL) is 60L – L2, the maximum possible total product (TPL) is
(a) 16,000 units (b) 32,000 units (c) 48,000 units
(d) 64,000 units (e) 96,000 units.
(2 marks)
< Answer >
65. Production function for a firm is TPL = 10L – L2. The number of labor after which marginal production becomes
negative is
(a) 4 (b) 6 (c) 5 (d) 10 (e) 8.
(2 marks)
< Answer >
66. When 10 units of output are produced, the average cost of production (AC) is Rs.10. If average cost of production
(AC) increases to Rs.11 with an increase in output by one unit, the marginal cost of producing the 11th unit is
(a) Rs.11 (b) Rs.21 (c) Rs.10 (d) Rs.13 (e) Rs.20.
(1 mark)
< Answer >
67. Tristar Mangoes supplies mangoes to Orissa where there is a great demand for them. The firm faces the following
average variable cost function
AVC = 300 – 10Q + 0.5Q2
Fixed costs are Rs.150. What is the minimum possible marginal cost for Tristar Mangoes?
(a) Rs.243.67 (b) Rs.176.60 (c) Rs.366.67 (d) Rs.233.33 (e) Rs.203.33.
(2 marks)
< Answer >
68. The Long-run Average Cost function of a firm operating under perfect competition is
LAC = 20 – 250Q + 10Q2
If the current market price of the good produced by the firm is Rs.20, the long run equilibrium output of the firm is
(a) 14.0 units (b) 12.5 units (c) 20.0 units (d) 18.5 units (e) 16.0 units.
(2 marks)
< Answer >
69. The total cost function of Marico Ltd. is given as TC = 300Q – 10Q2 + Q3. The average cost of Marico Ltd., if the
output is 20 units is
(a) Rs.120 (b) Rs.140 (c) Rs.160 (d) Rs.300 (e) Rs.500.
(1 mark)
< Answer >
70. The total cost function for a firm is estimated to be TC = 50 – 2Q + 3Q 2 . If the current output is 4 units, the
marginal cost is
(a) Rs.36 (b) Rs.22 (c) Rs.26 (d) Rs.16 (e) Rs.6.
(2 marks)
< Answer >
71. Soft Shoes Ltd. has enjoyed rapid growth in sales and high operating profits on its innovative extended-wear soft
shoes. The cost function of Soft Shoes Ltd. is given as
TC = 150 + 100 Q –10 Q2 + Q3
The price at which Soft Shoes Ltd. shuts down its operations is
(a) Rs.75 (b) Rs.100 (c) Rs.125 (d) Rs.150 (e) Rs.175.
(2 marks)
< Answer >
72. For a perfectly competitive market supply and demand functions are
Qs = 1,000P + 500
Qd = 5,000 – 500P
If variable cost function of a firm is VC = 103Q – 0.5Q2, profit maximizing output for the firm is
(a) 2,500 units (b) 500 units (c) 4,000 units (d) 1,000 units (e) 100 units.
(2 marks)
< Answer >
73. Beta, a shoe manufacturer, is operating in a perfectly competitive industry. The total cost function of Beta is
estimated to be
TC = 200 + 300Q – 40Q2 + Q3
Industry supply function for shoes is
Qs = 100 + 2P
If profit maximizing output for Beta is 50 units, equilibrium output for the industry is
(a) 2,667 Units (b) 3,800 Units (c) 7,700 Units (d) 8,100 Units (e) 2,800 Units.
(2 marks)
< Answer >
74. The demand function for a firm is Q = 2,000 – 50P. If the firm wants to maximize total revenue, its output should
be
(a) 1,200 units (b) 800 units (c) 750 units (d) 1,000 units (e) 500 units.
(2 marks)
< Answer >
75. A monopolist has the following total revenue function:
TR = 3,200Q – 40Q2
The marginal cost of the firm is Rs.320.
If the firm is maximizing profit, the output produced by the firm is
(a) 19 units (b) 36 units (c) 39 units (d) 49 units (e) 59 units.
(2 marks)
< Answer >
76. Rahul Ltd., a monopolist, aims at profit maximization. The fixed cost of the firm is Rs.200 and its average variable
cost is constant at Rs.30 per unit. Rahul Ltd. sells goods in Karnataka and Andhra Pradesh. The estimated demand
functions for the good in Karnataka and Andhra Pradesh are:
PK = 40 – 2QK
PA = 100 – 10QA
where, PK = price charged by Rahul Ltd. in Karnataka
PA = price charged by Rahul Ltd. in Andhra Pradesh
QK = quantity of goods demanded in Karnataka
QA = quantity of goods demanded in Andhra Pradesh.
< Answer >
Suggested Answers
Economics-I (MB141) : July 2006
If price discrimination is not practiced, the output produced by Rahul Ltd. to maximize sales revenue is
(a) 15.0 units (b) 6.5 units (c) 12.0 units (d) 4.5 units (e) 9.0 units.
(2 marks)
77. The total cost function for Lignite Ltd. is given as 200 + 4Q + 2Q2. The firm is a perfectly competitive firm and is
selling the product at Rs.24. If the output produced and sold by the firm is 5 units, the profit (loss) earned by the
firm is
(a) Profit of Rs.100 (b) Loss of Rs.100
(c) Profit of Rs.150 (d) Loss of Rs.150
(e) Profit of Rs.200.
(2 marks)
< Answer >
78. The demand function for Rollex pens is estimated as
QR = 10,000 – 1,500PR + 2Y + 200PC
Where,
QR = Quantity of Rollex pens demanded
PR = Price of Rollex pen
PC = Price of Competitor’s product
Y = Per capita income of the consumer
If the current price of Rollex pen is Rs.5, the price of the competitor’s product is Rs.8 and per capita income is
Rs.5,000, the income elasticity of demand is
(a) 0.521 (b) 1.222 (c) 0.827 (d) 0.709 (e) 1.410.
(2 marks)
< Answer >
79. Possible earnings of Mr. Raj from various activities for an hour are given below:
If Mr. Raj chooses to act for an hour instead of taking up any other activity, the opportunity cost of acting is
(a) Zero (b) Rs.300 (c) Rs.500 (d) Rs.800 (e) Rs.1,000.
(1 mark)
Activity Earnings (Rs.)
Acting 1,000
Consulting 800
Teaching 500
Writing 300
Sleeping 0
< Answer >
80. The demand schedule of a certain brand of tea is given below:
The total revenue for the company producing this brand of tea is maximum when quantity demanded is equal to
(a) 10 units (b) 30 units (c) 40 units (d) 60 units (e) 80 units.
(1 mark)
Price (Rs.) 100 80 50 30 20
Quantity demanded (units) 10 30 40 60 80
< Answer >
1. Answer : (d)
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).
(a) Is not the answer because the combination of capital and labor lies to the right of the firm’s cost
line is not undesirable.
(b) Is not the answer because the combination of capital and labor lies to the right of the firm’s cost
line is not concerned whether the combination is efficient or not, given the budget.
(c) Is not the answer because the combination of capital and labor lies to the right of the firm’s cost
line is not concerned whether the combination is inefficient or not, given the budget
(d) Is the answer because the combination of capital and labor lies to the right of the firm’s cost line is
unattainable, given the budget. The firm’s cannot hire the combination of capital and labor, given
the budget.
(e) Is not the answer because the combination of capital and labor are not inferior to the points within
the constraint in terms of production, but it is not attainable.
2. Answer : (b)
Reason : When the demand for life saving drugs is perfectly inelastic, the burden of a tax is borne entirely by the
buyers.
3. Answer : (c)
Reason : Diseconomies of scale refer to the forces causing the average cost of production to increase as the output
increases. Therefore the answer is (c).
4. Answer : (e)
Reason : Income elasticity of demand = ey =
= = 2.4.
As the value of ey is 2.4 i.e., greater than 1, it is a case of luxurious goods. Here, the % increase in the
quantity demand is greater than the % increase in income.
%change in demand
%demand in income
12
5
5. Answer : (b)
Reason : The time frame allowed for the consumers to respond to price changes is one of the factors determining
the price elasticity of a good. In the long run demand becomes more elastic, because customers have
more time to find substitutes and adjust their consumption patterns. When people have very little time to
respond to price changes, demand becomes less elastic.
6. Answer : (e)
Reason : (a) Is not the answer because it is a false statement that elasticity remains constant throughout the
demand curve. Elasticity takes different values at different point on the demand curve.
(b) Is not the answer because it is a false statement that elasticity increases with increase in quantity
demanded.
(c) Is not the answer because it is a false statement that elasticity increases as the price decreases.
(d) Is not the answer because it is a false statement that elasticity is equal to the slope of the demand
curve. If the demand function is represented by P = f (Q), then the slope of the demand curve is
given by ¶P/ ¶Q and its elasticity is given by ep = P/Q. ¶Q/ ¶P.
(e) Is the answer because higher the elasticity, more responsive the demand is for a given change in
price. Higher the elasticity, higher is the percentage change in quantity demanded than the
percentage change in price.
7. Answer : (c)
Reason: When a decrease in price leads to increase in quantity purchased so much as to increase the total
revenue, the price elasticity of demand is more than unity.
8. Answer : (b)
Reason : If the demand curve is perfectly inelastic, the prices rises by the full amount of the tax and supply
remains unchanged. The entire tax is borne by the customers.
9. Answer : (b)
Reason : Marginal utility starts diminishing as the consumer starts consuming more units of a product. When
marginal utility reaches zero, total utility reaches its maximum and remains constant.
10. Answer : (a)
Reason : The law of diminishing marginal utility states that the marginal utility of any good tends to decline as
more of the good is consumed over a definite period of time.
11. Answer : (e)
Reason : The profit of a firm refers to the difference between total revenue and total cost. Hence, to maximize the
profits, the firm should maximize the difference between total revenue and total cost. The difference
between average revenue (AR) and average cost (AC) represents the average profit of the firm. Hence
maximization of difference between average revenue and average cost also indicates profit maximization.
A firm maximizes its profit when it produces and sells an output at which marginal revenue (MR) is
equal to marginal cost (MC).
12. Answer : (c)
Reason : Average productivity =
No.of units of the input used
Total productivity
13. Answer : (c)
Reason : Existence of homogeneous product is not the characteristic of monopolistically competitive market.
Under this market, the firms sell differentiated products.
14. Answer : (a)
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.
15. Answer : (a)
Reason : I. It is true that if the firm reduces the price, competitive firms also reduce the price
II. It is a false statement that if the firm increases the price, competitive firms also increase the price
III. It is a false statement that if the firm reduces the price, competitive firms do not reduce the price
IV. It is true that if the firm increases the price, competitive firms do not increase the price.
V. It is false that if a firm increases production, competitors also increase production.
Hence the answer is (a).
16. Answer : (c)
Reason : The slope of the isoquant represents the Marginal Rate of Technical Substitution (MRTS) between labor
(L) and capital (K). MRTS is equal to the ratio of the marginal productivities of two factors.
a. The slope of the isocost curve represents ratio of wages (w) and interest (r).
b. The slope of the indifference curve signifies marginal rate of substitution of goods (MRS).
c. The slope of the isoquant curve signifies the marginal rate of technical substitution (MRTS)
between labor and capital.
d. The slope of the budget line represents ratio of price of good X and good Y.
e. The slope of the average cost curve only shows the rate of change in average cost curve with
respect change in output.
17. Answer : (b)
Reason : Marginal product of labor is the addition to the total production by employment of an extra unit of a
variable factor.
(a) Is not the answer because marginal product of labor is not the cost of employing labor for
producing one more unit of output.
(b) Is the answer because marginal product of labor is the change in output from using one more unit of
labor.
(c) Is not the answer because marginal product of labor is not the change in revenue from selling one
more unit of output.
(d) Is not the answer because marginal product of labor is not the change in revenue from using one
more unit of output.
(e) Is not the answer because none of the above is not the answer.
18. Answer: (c)
Reason : Total product reaches maximum position when marginal product is zero. When AP = MP, AP will be at
maximum. When AC = MC, AC will be at minimum. Hence the correct answer is (c).
19. Answer : (e)
Reason : (a) Normally, marginal cost falls initially, reaches a minimum and then gradually increases after some
point with the increase of output.
(b) Average variable cost falls initially, reaches a minimum and then gradually increases after some
point with the increase of output.
(c) As TFC remains constant, AFC falls continuously with the increase in output.
(d) Total variable costs increases with increase of output.
(e) Total fixed cost remains constant with the increase of quantity of output.
20. Answer : (c)
Reason : In the short run, a profit maximizing firm will stop production when price is less than average variable
cost
21. Answer : (a)
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).
22. Answer : (e)
Reason : For a monopolist, there is no unique relationship between price and quantity supplied. Therefore, the
supply curve of a monopolist is irrelevant.
(a) Is not the answer because the supply curve of a perfectly competitive firm is the portion of its
marginal-cost curve that lies above the average variable costs.
(b) Is not the answer because the supply curve of a monopolist is not the portion of its marginal-cost
curve that lies above the average cost curve.
(c) Is not the answer because the supply curve of a monopolist is not vertical.
(d) Is not the answer because the supply curve of a monopolist is not horizontal.
(e) Is the answer because a monopolist has no supply curve.
23. Answer : (d)
Reason: I. In a perfectly competitive market, the products produced by all the firms in the industry are
homogeneous. The technical characteristics of the product as well as the services associated with its sale
and delivery are identical.II. In a perfectly competitive market cost structure of every firm is not
identical. The cost conditions of the industry are reflected in the change in factor prices, as the industry
expands. With the expansion of the industry in the long run, cost curves of the firms shift on account of
external economies and diseconomies.III. In a perfectly competitive market, there are large number of
buyers and sellers in the industry. No individual seller has any economic or market power to influence
the market price in his favor through his own individual behavior or action. Buyers have no preferences
towards any seller.IV. In a perfectly competitive market, buyers have perfect knowledge about prices in
the market. The information regarding price is assumed to be available free of costs.
(a) Is not the answer because I above is one of the necessary assumption for a market to be perfectly
competitive.
(b) Is not the answer because II above is one of the necessary assumption for a market to be perfectly
competitive.
(c) Is not the answer because both I and III above are not all necessary assumptions for a market to
be perfectly competitive.
(d) Is the answer because both I, III and IV above are all necessary assumptions for a market to be
perfectly competitive.
(e) Is not the answer because II above is not the assumption of a perfectly competitive market where
as III and IV above are necessary assumptions for a market to be perfectly competitive.
24. Answer : (c)
Reason : An individual firm in perfect competition is a price taker. The level of market price is determined by the
market supply and demand. A perfectly competitive firm has control over only on quantity. So sales
revenue can be increased by increasing the production only.
(a) Is not the answer because a perfectly competitive firm cannot increase its sales revenue by reducing
the prices.
(b) Is not the answer because a perfectly competitive firm cannot increase its sales revenue by
increasing the prices.
(c) Is the answer because a perfectly competitive firm can increase its sales revenue by increasing the
production.
(d) Is not the answer because a perfectly competitive firm cannot increase its sales revenue by
increasing the expenditure on advertising. Because all firms produce a homogeneous product. The
technical characteristics of the product as well as the services associated with its sale and delivery
are same. A buyer can’t differentiate among products of differentiate firms.
(e) Is not the answer because a perfectly competitive firm cannot increase its sales revenue by
increasing the sale force.
25. Answer : (c)
Reason : In perfect competition and monopolistic competition there are large number of buyers and sellers and
there are no exit and entry barriers. In perfect competition products are homogeneous and there are no
selling activities, whereas in monopolistic competition, the products are differentiated and selling
activities exist.
26. Answer : (a)
Reason : The profit maximizing condition for a firm is where the MC =MR.
27. Answer : (e)
Reason : The vertical distance between the average cost and average variable cost is indicated by average fixed
cost. Hence the correct answer is (e).
28. Answer : (d)
Reason : An economy that relies on both markets and command mechanism is called a mixed economy.
Government as well as business firm provides goods and services. In such economies government
supplies roads, defense, pensions, and sometimes-even schooling directly to the citizens.
29. Answer : (d)
Reason : Variable costs are those costs that increase with the level of output. Salaries of temporary staff are an
example of variable cost.
30. Answer : (b)
Reason : Break Even Point in perfect competition is at when AR = AC.
31. Answer : (d)
Reason : The long run average costs shift upwards as the firm experiences external diseconomies and hence the
costs of the firms rise
a. It is not the answer as internal economies cause the costs to fall
b. It is not the answer as internal diseconomies cause the cost curve to cause a U shape while it is the
external diseconomies that cause the upward shift of the cost curves.
c. It is not the answer as external economies cause the cost curves to shift down and not upwards
d. It is the answer as external diseconomies cause the cost curves to shift upwards
e. It is not the answer, as diminishing returns do not cause the cost curves to shift upwards.
Hence the correct answer is (d)
32. Answer : (e)
Reason : The firm will not be producing at a point below its average variable cost. The marginal cost passes
through the minimum point of the average variable cost . Since the firm will not produce below the
average variable cost, only the part of the marginal cost curve, which is above the average variable cost
curve, is the supply curve of the firm.
a. It is not the answer as the whole of the marginal cost curve of the firm is not its supply curve.
b. It is not the answer as the average coist curve of a firm is not its supply curve
c It is not the answer as the average revenue curve and te average cost curve are equal in perfect
competition and is not the supply curve of the firm.
d. It is not the answer as the part of the marginal cost curve above the average variable cost curve is
the supply curve of the firm
e. It is the answer as the part of the marginal cost curve above the marginal cost curve is the supply
curve of the firm.
Hence the correct answer is (e)
33. Answer : (b)
Reason : Though the demand curves for the individual firms are horizontal in perfect competition, the demand
curve for the industry is sloping downwards. This is because, an individual firm is a price taker in
perfect competition and his demand curve is horizontal.
a. It is not the answer as even if the demand curve for a single firm is horizontal, the demand curves
for the industry, as a whole is downward sloping.
b. It is the answer as the demand for the industry is downward sloping
Hence the correct answer is (b)
34. Answer : (d)
Reason : When an industry is in long run equilibrium, it signifies that all firms are in equilibrium and that there is
no incentive to enter or leave the industry for any firm. All firms earn only normal profits
It is not the answer as when some firms make profits and other make losses, it is only a short run
situation
All firms earning super profits are also a short run situation.
It is not the answer as when some forms earn super profits, it is a case of short run situation
It is the answer as only when all firms earn normal profits, the equilibrium is achieved
It is not the answer as this is a situation of short run equilibrium.
35. Answer : (d)
Reason : Explicit costs refer to those costs that are made out-of-pocket and are recorded in accounting books.
Salaries paid to workers, medical expenses of an employee, advertisement expenses and telephone bills
are all out-of-pocket costs and are entered in the books of accounts. The amount forgone by the firm’s
owner by not working at another job represents the opportunity cost (implicit cost) and hence is the
answer. Note that the opportunity cost is the highest valued benefit that must be sacrificed as a result of
choosing an alternative.
36. Answer : (c)
Reason : Oligopoly market has a predominant feature of price leadership.
37. Answer : (a)
Reason : The locus of points of tangency between set of isoquants and the isocost lines indicates the best possible
input combination. (a) Expansion path is the locus of points of tangency between set of isoqunats and
isocost lines.
38. Answer : (c)
Reason : Cost functions are derived from the production functions, which describes the available efficient
methods of production at any particular point of time. Hence the correct answer is (c).
39. Answer : (e)
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).
40. Answer : (c)
Reason : Air is a free good, provided by nature and does not command a price. All the other goods are economics
goods, as they are relatively scarce and hence have prices.
41. Answer : (e)
Reason : Chances of extra income, the condition at work and the nature of job determine real wages.
42. Answer : (b)
Reason : The reward for capital is known as interest
43. Answer : (a)
Reason : In the maximax criterion, the decision maker has an absolutely optimistic view about the outcomes or
pay-offs
44. Answer : (e)
Reason : Productive efficiency of all factor units is identical, supply of factors of production is elastic, and full
employment are assumptions of marginal productivity theory.
45. Answer : (e)
Reason : Risk of competition, market conditions risk and Government policy risk are the non-insurable risks
given by Knight.
46. Answer : (b)
Reason : Net profit is expressed as gross profit – implicit costs
47. Answer : (e)
Reason : Assumption of full employment, long run and demand for capital only for productive uses are criticism
of the classical theory of rate of interest.
48. Answer : (a)
Reason : In Delphi method, the opinion of number of experts is gathered individually.
49. Answer : (e)
Reason : All these option I , II and III are assumptions of Ricardian theory of rent.
50. Answer : (b)
Reason : The reward for land is termed as rent
51. Answer : (d)
Reason : The demand function : Qd = 3,50,000 – 35P
When price is Rs. 3000 per unit
Q1 = 3,50,000 – 35 (3000)
= 3,50,000 – 1,05,000
= 2,45,000
When price is Rs. 4000 per unit
Q2 = 3,50,000 – 35 (4000)
= 3,50,000 – 1,40,000
= 2,10,000
Arc price elasticity of demand is
Ep =
=
= – 35 ×
= –0.538.
1 2
2 1
2 1 1 2
P P
Q Q 2
P P Q Q
2
+
−
×
− +
7000
35, 000 2
1, 000 455000
2
−
×
3, 500
2, 27, 500
52. Answer : (a)
Reason : If the government imposes a specific sales tax at the rate of Rs. 10 per unit, the supply function will be
QS = 5000 + 250 (P – 10)
At equilibrium,
15000 – 500 P = 5000 + 250 (P – 10)
15000 – 500 P = 5000 + 250 P – 2500
15000 – 500 P = 2500 + 250P
12500 = 750 P
P = = 16.67.
12, 500
750
53. Answer : (b)
Reason : When the demand is unitary elastic, the total revenue earned must be the same.
Thus 12 ×5 = 10 × X or X = 6
54. Answer : (b)
Reason : The theoretical highest price that can prevail in the market is when the quantity demanded is zero.
3,50,000 – 35 P = 0
3,50,000 = 35 P
P = = Rs. 10,000.
3, 50, 000
35
55. Answer : (d)
Reason : ep=
DQ = –500 Q = 2000
DP = 1.50 P = 8.50
\ep= = |1.42|
Q
P
.
P
Q
D
D
2000
8.50
1.50
500
×
−
56. Answer : (a)
Reason : At equilibrium Qd = Qs or 19000 – 300P = 17,000 – 100 P or P = 10
In a perfectly competitive market, the firm accepts the price as given data and the price charged is Rs.10
Hence the correct answer is (a)
57. Answer : (a)
Reason : MRSxy = DY/DX = –1/3 = 0.33
58. Answer : (b)
Reason : At equilibrium =
=
\ MUy= × 30 = 210
\The answer is (b).
Px
MUx
y
y
P
MU
25
175
30
y MU
25
175
59. Answer : (c)
Reason : A rational consumer would consume upto the point where the Marginal utility = price
Marginal utility is given by Derivative of total utility i.e. 15X 0.5
Given 15X 0.5 = 60 or x 0.5 = 4 or X = 16
Hence the correct answer is (c)
60. Answer : (c)
Reason : Consumer surplus is the amount of money actually paid by the consumer and the amount of money he is
willing to pay rather than go without it.
Consumer surplus = (100×10) – (100 × 9)
Or Rs.100
61. Answer : (a)
Reason : TP (when labor = 50 units) = 50 x 25 = 1250
TP (When labor = 52 units) = 52 x 24 = 1248
Thus, MP = (1248 – 1250)/(52 – 50) = -2/2 = -1 unit.
62. Answer : (c)
Reason : MRTSL,K =
Q = 30K0.5 L0.5
MPL = = 15L0.5 – 1 = 15(L)–0.5 =
MPK = = 15K0.5 –1 = 15(K)–0.5 =
MRTSL,K = = = = .
L
K
MP
MP
Q
L
¶
¶ 0.5
15
L
Q
K
¶
¶ 0.5
15
K
0.5
0.5
15
L
15
K
0.5
0.5
15 K
L 15
×
0.5
0.5
K
L
K
L
63. Answer : (b)
Reason : I. Q = K1/2 + L1/2
When K = 1 and L = 1, Q = (1)1/2 + (1)1/2 = 2
When K = 2 and L = 2, Q = (2)1/2 + (2)1/2 = 2.82
When inputs are doubled, output are less than doubled. It is a case for decreasing returns to scale.
II. Q = 2K + 3L
When K = 1 and L = 1, Q = 2 + 3 = 5
When K = 2 and L = 2, Q = 4 + 6 = 10
When inputs are doubled, output are also doubled.
\ It is a case of constant return to scale.
III. Q = 3K1/2 L1/2
When K = 1 and L = 1, Q = 3 (1)1/2 (1)1/2 = 3
When K = 2 and L = 2, Q = 3 (2)1/2 (2)1/2 = 6
\ It is a constant return to scale.
IV. Q = K1/2 L2/3
When K = 1 and L = 1, Q = (1)1/2. (1)2/3 = 1 × 1 = 1
When K = 2 and L = 2, Q = (2)1/2 (2)2/3 = 1.41 × 1.58 = 2.23
\ It is an increasing return to scale.
Hence, the answer is (b).
64. Answer : (b)
Reason : APL= 60L – L2
TPL = APL
× L = 60L2 – L3
TPL can be maximized when MPL = 0
Therefore, ¶ TPL / ¶ L = 120L – 3L2 = 0
L (120 – 3L) = 0
L =0 or L = 40.
\Output can be maximized by employing 40 labors.
\ Maximum possible TPL = 60(40)2 – (40)3 = 96,000 – 64,000 = 32,000 units
65. Answer : (c)
Reason : TPL = 10L – L2
MPL = 10 – 2L
Marginal returns become negative, once MPL equals zero. Thus,
10 – 2L = 0
Or, L = 5.
66. Answer : (b)
Reason : TC (when 10 units of output) = 10 x 10 = 100
TC (when 11 units of output) = 11 x 11 = 121
MC = (121 – 100) = 21.
67. Answer : (d)
Reason : AVC = 300 – 10 Q + 0.5 Q2
VC = Q X AVC = 300 Q – 10 Q2 + 0.5Q3
Fixed cost = 150
TC = FC + VC = 150 + 300 Q – 10Q2 + 0.5 Q3
MC = = 300 – 20 Q + 1.5 Q2
Minimum possible MC is where
= 0
= -20 + 3Q = 0
3Q = 20
Q = 6.67
MC = 300 – 20 (6.67) + 1.5 (6.67)2
= 300 – 133.4 + 66.73 = 233.33.
dTC
dQ
dMC
dQ
dMC
dQ
68. Answer : (b)
Reason : The firm operating in a perfectly competitive industry earns only normal profits in the long run because
of free entry and exit of the firms. The firm operating at its minimum average cost can only prevail in the
market. Thus, the equilibrium condition in the long run is when the firm is operating at Min. LAC.
If AC = 20 - 250Q + 10Q2
LTC = 20Q - 250Q2 + 10Q3 LMC = = 20 – 500Q + 30Q2
LAC is minimum, when MC = AC
Thus, 20 - 500Q + 30Q2 = 20 - 250Q + 10Q2
Or, 250Q = 20Q2
Or, 12.5Q = Q2
Or, Q = 12.5.
LTC
Q
¶
¶
69. Answer : (e)
Reason : AC = TC/Q = 300-10Q +Q2
If Q =20, AC = 300- (10×20) +202= 300-200 + 400 = Rs.500.
70. Answer : (b)
Reason : Here, MC = -2+6Q.If Q =4, MC = -2 +24 = Rs.22
71. Answer : (a)
Reason : TC = 150 + 100 Q – 10 Q2 + Q3
Shut down price is the price where AVC is minimum i.e
AVC = MC
MC = 100 – 20 Q + 3Q2
AVC = = 100 – 10 Q + Q2
AVC = MC
100 – 10 Q + Q2 = 100 – 20 Q + 3 Q2
10 Q = 2 Q2
Q = 5
AVC = 100 – 10(5) + (5)2 = Rs. 75.
2 3 100Q 10Q Q
Q
− +
72. Answer : (e)
Reason : Qs=1000P + 500Qd=5000 – 500p
\ The equilibrium price can be determined by equating
Qs = Qd
\ 1000p + 500 = 5000 – 500p
or, 1500P = 4500
or, P = 3 = MR.
Variable cost of the firm is given as 103Q – 0.5Q2
\ MC = 103 – Q
\ Profit maximizing output for the firm is determined where, MR = MC
or, 3 = 103 – Q
or, Q = 103 – 3 = 100 units.
73. Answer : (c)
Reason : To maximize profits, a perfectly competitive firm produces an output where P = MC
MC = ¶TC/¶Q = 300 – 80Q + 3Q2
P = 300 – 80Q + 3Q2, where Q = 50 units (given)
Hence, P = 300 – 80(50) + 3(50)2 = 300 – 4000 + 7500 = 3800
Thus, total industrial production is equal to (100 + 2 x 3800) = 7700.
74. Answer : (d)
Reason : From the equation we have P = 40 – 0.02 Q
Revenue is maximum when MR = 0
TR= 40Q – 0.02Q2
MR = 40 – 0.04Q
Revenue is maximum when MR =0 or
40 – 0.04Q = 0
or Q = 1000 units.
75. Answer : (b)
Reason : A monopolist maximizes its profits when MR = MC.
TR = 3,200Q – 40Q2
MR = 3,200 – 80Q
MR = MC
3200 – 80Q = 320
80Q = 2880
Q = 36 units.
76. Answer : (a)
Reason : When price discrimination is not practiced by the monopolist,
PK = PA.
PK = 40 – 2.QK
2.QK = 40 – PK :
QK = 20 – 0.5PK;
PA = 100 – 10QA;
10QA = 100 – PA;QA = 10 – 0.1PA
Total output sold by the monopolist = Q = QA + QK
Thus, Q = 20 – 0.5PK + 10 – 0.1PA;
Q = 30 – 0.6P;
TR = P x Q = P(30 – 0.6P) = 30P – 0.6P2
Maximum TR: TR/ Q = 0;
30 – 1.2P = 0
Or, P = 25
When P = 25, Q = 30 – 0.6(25) = 15 units.
¶ ¶
77. Answer : (d)
Reason : The total revenue = Price × quantity.
Then it becomes 24Q.Profits = total revenue – total costs
At the output level of 5 units, the firm incurs a loss of Rs. 150.
Profits = 24Q – 200 – 4Q – 2Q2
= 20Q – 2Q2 – 200
profit at the output of 5 units =
20 (5) – 2 (5)2 – 200
= 100 – 50 – 200
= 50 – 200 = - 150
i.e. loss
Hence the correct answer is (d)
78. Answer : (d)
Reason : Q = 10,000 – 1500(5) + 2(5000) + 200(8)
= 21,600 – 7,500
= 14,100
Income elasticity of demand: dQ/dY × Y/Q = 2 × 5000/14100 = 0.709
79. Answer : (d)
Reason : Mr. Raj could have earned Rs.800/hr by consulting. If he choose acting instead, the best alternative
foregone is consulting. Hence the opportunity cost of acting is Rs.800/hr.
< TOP OF THE DOCUMENT >
80. Answer : (b)
Reason : Solution
Tr = Price X quantity
100 x 10 = 1000
80 x 30 = 2,400
50 x 40 = 2,000
30 x 60 = 1,800
20 x 80 = 1,600
TR is maximum when 30 units of tea is produced.
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