Question 1

Monopoly means:

Accepted Answer

Monopoly is one seller and strong barriers; no close substitutes.

Question 2

In IC approach, equilibrium condition is:

Accepted Answer

At equilibrium, MRS equals price ratio (slope of budget line).

Question 3

Marginal productivity theory of wages states wage equals:

Accepted Answer

In competitive setting, firm hires labour until MRP = W.

Question 4

Compared to perfect competition, monopoly generally results in:

Accepted Answer

Monopoly tends to restrict output and charge higher price than competitive market.

Question 5

Ceteris paribus means:

Accepted Answer

It means holding other factors constant while studying one relationship.

Question 6

Stage II of law of variable proportions is considered rational because:

Accepted Answer

In Stage II, MP is positive though diminishing; additional input still increases output.

Question 7

An isoquant shows:

Accepted Answer

Isoquant is equal product curve for combinations of inputs producing same output.

Question 8

When price of a good falls and quantity demanded increases, it is called:

Accepted Answer

Change in price causes movement along curve—expansion/contraction.

Question 9

The most important characteristic of oligopoly is:

Accepted Answer

Firms’ decisions affect rivals, so reactions matter.

Question 10

Extension of supply occurs due to:

Accepted Answer

Extension/contraction are movements along curve due to price change.

Question 11

If price is above equilibrium, the market experiences:

Accepted Answer

Above equilibrium, Qs>Qd causing surplus and downward pressure on price.

Question 12

An example of substitute goods is:

Accepted Answer

Tea and coffee can substitute each other.

Question 13

Marginal cost (MC) is:

Accepted Answer

MC is the additional cost of producing one more unit of output.

Question 14

A PPC is generally concave to origin because of:

Accepted Answer

Resources are not equally efficient, causing increasing opportunity cost.

Question 15

Monopolist maximises profit where:

Accepted Answer

Profit maximisation occurs at MR=MC; price is then set from AR curve.

Question 16

Law of supply states that:

Accepted Answer

Ceteris paribus, supply rises with price and falls with price.

Question 17

Price discrimination means:

Accepted Answer

Monopolist may charge different prices in different markets/segments.

Question 18

If Ed = 1, demand is:

Accepted Answer

Ed equals 1 indicates unitary elasticity.

Question 19

Excess capacity in monopolistic competition means:

Accepted Answer

In long run, firm operates to left of minimum AC due to downward demand.

Question 20

Profit is maximised when:

Accepted Answer

Profit maximisation occurs at MR=MC with MC cutting MR from below.

Question 21

State the law of diminishing marginal utility.

Accepted Answer

As consumption of a commodity increases, marginal utility derived from each successive unit goes on diminishing, other things remaining constant.

Question 22

State the equilibrium condition of a firm.

Accepted Answer

A firm is in equilibrium when marginal revenue equals marginal cost (MR = MC) and MC is rising.

Question 23

What is cross elasticity of demand?

Accepted Answer

Cross elasticity of demand measures the responsiveness of demand for one good to a change in price of a related good.

Question 24

What is rent?

Accepted Answer

Rent is the reward paid for the use of land and other natural resources.

Question 25

Why is micro economics called price theory?

Accepted Answer

Micro economics is called price theory because it explains determination of prices of goods and factors and output in particular markets.

Question 26

What is market failure?

Accepted Answer

Market failure occurs when the market mechanism fails to allocate resources efficiently, reducing social welfare.

Question 27

State the profit maximisation condition.

Accepted Answer

Profit is maximised when marginal revenue equals marginal cost (MR = MC) and MC is rising.

Question 28

What is an isoquant?

Accepted Answer

An isoquant is a curve showing different combinations of two inputs that produce the same level of output.

Question 29

Define fixed cost.

Accepted Answer

Fixed cost is the cost that does not change with change in output in the short run, such as rent and insurance.

Question 30

State the law of supply.

Accepted Answer

Other things remaining constant, quantity supplied increases when price rises and decreases when price falls.

Question 31

Explain Ricardian theory of rent (basic).

Accepted Answer

Ricardo explained rent as **differential surplus** arising due to differences in fertility and location of land. Since land is scarce and non-uniform, superior lands produce more than inferior lands with same input. The least fertile land in cultivation (marginal land) earns **zero rent**, and rent on superior land equals excess produce over marginal land.

Question 32

Explain TR, AR and MR with relations.

Accepted Answer

Total revenue (TR) is total income from sales (TR = P×Q). Average revenue (AR) is revenue per unit (AR = TR/Q) and is generally equal to price. Marginal revenue (MR) is additional revenue from selling one more unit (MR = ΔTR/ΔQ). Under perfect competition AR = MR; under imperfect competition MR lies below AR.

Question 33

Explain effect of increase in demand on equilibrium price and quantity.

Accepted Answer

When demand increases (demand curve shifts right) and supply remains unchanged, at the old price there is shortage (Qd>Qs). This pushes the price up. Higher price encourages more supply and reduces demand until a new equilibrium is reached at **higher equilibrium price** and **higher equilibrium quantity** (general case).

Question 34

Explain budget line and its slope.

Accepted Answer

Budget line represents all affordable combinations of two goods given income and prices. Its equation is PxX + PyY = M. The slope of budget line is -Px/Py, showing the rate at which the market allows the consumer to substitute one good for another. A change in income shifts the budget line, while a change in price changes its slope.

Question 35

Explain measures to correct externalities.

Accepted Answer

Negative externalities can be corrected through **taxes** (Pigouvian tax) and regulation/standards to reduce harmful activities. Positive externalities can be encouraged through **subsidies** and public provision (education, vaccination). Defining property rights and allowing negotiation (Coase approach) can also reduce externalities. These measures internalise external costs/benefits.

Question 36

Explain importance of micro economics. Also state limitations of micro economics.

Accepted Answer

**Importance of micro economics:** Micro economics explains price determination by analysing demand and supply in individual markets. It is useful for business firms in decisions related to pricing, output, cost control, product planning and profit maximisation. It helps government in policy decisions such as taxation, subsidies, price control and regulation of monopolies. Micro economics also explains resource allocation and efficiency, consumer behaviour and welfare issues like consumer surplus.

**Limitations of micro economics:** Micro economics mainly uses the assumption of **ceteris paribus**, which may not be realistic because many factors change simultaneously. It often relies on simplified assumptions such as perfect competition, full information and rational behaviour. As it is a partial analysis, it may not capture interdependence among markets. Further, micro economics does not directly address macro issues like inflation, unemployment, business cycles and economic growth, which require aggregate analysis.

Therefore, micro economics is very useful for understanding individual markets but has limitations due to assumptions and its narrow scope.

Question 37

Explain types of elasticity of demand (price, income and cross). State their significance in business and policy decisions.

Accepted Answer

Elasticity of demand indicates responsiveness of quantity demanded to changes in different factors. The main types are:

1. **Price elasticity of demand (PED):** Responsiveness of demand to price change. It helps firms in pricing decisions and helps government in taxation and price control. For example, taxing inelastic goods yields higher revenue with smaller quantity reduction.

2. **Income elasticity of demand (YED):** Responsiveness of demand to change in income. For normal goods YED is positive, while for inferior goods it is negative. It helps businesses forecast future demand when income levels change and helps planners understand consumption patterns.

3. **Cross elasticity of demand (XED):** Responsiveness of demand for one good to change in price of related good. It is positive for substitutes and negative for complements. It helps firms in competitive strategy, product pricing and understanding market interdependence.

**Significance:** Knowledge of elasticities supports decisions regarding pricing, output, advertising, product planning, taxation, subsidies and welfare policies. It helps both businesses and government predict market reactions and take better economic decisions.

Question 38

Differentiate between monopolistic competition and oligopoly. Also explain excess capacity in monopolistic competition.

Accepted Answer

**Monopolistic competition vs Oligopoly:** Monopolistic competition has many firms, each small relative to market, and interdependence is low. Products are differentiated and entry barriers are low, so long run profit becomes normal. Oligopoly has few dominant firms, high interdependence, and significant barriers to entry. Products may be homogeneous or differentiated, and price behaviour often shows rigidity with strong non-price competition and possible collusion.

**Excess capacity in monopolistic competition:** Excess capacity means producing less than the output at which average cost is minimum. In monopolistic competition, because each firm faces a downward sloping demand curve due to product differentiation, the long run equilibrium output occurs where AR = AC and MR = MC, but this output is typically to the left of minimum AC. Hence firms do not operate at the most efficient scale and have excess capacity. This represents inefficiency, though it also provides product variety and consumer choice.

Therefore, monopolistic competition offers variety but may lead to excess capacity, whereas oligopoly involves strategic interdependence and entry barriers.

Question 39

Explain monopoly. Discuss its features, sources of monopoly power and monopoly price-output equilibrium.

Accepted Answer

Monopoly is a market structure in which there is a single seller of a product with no close substitutes and strong barriers to entry. The monopolist has control over price because it is the only producer, but it is still limited by consumer demand.

**Features:** Monopoly has one seller and many buyers. The product has no close substitutes, and there are strong barriers to entry such as legal restrictions, control over raw materials or economies of scale. The monopolist faces a downward sloping demand curve (AR) and marginal revenue lies below average revenue.

**Sources of monopoly power:** Monopoly can arise due to patents and copyrights (legal monopoly), control over essential raw materials, natural monopoly due to economies of scale (public utilities), technological superiority and brand loyalty, and government licences.

**Monopoly equilibrium:** The monopolist maximises profit by choosing the output where MR = MC. After deciding equilibrium output, price is determined from the AR (demand) curve corresponding to that output. Because MR < AR, monopoly price is generally higher and output lower compared to perfect competition, leading to possible supernormal profits.

Hence monopoly leads to price-output decisions based on MR=MC and demand conditions.

Question 40

Explain short run cost curves. Describe shapes of AFC, AVC, AC and MC and their relationships.

Accepted Answer

In the short run, at least one factor of production is fixed, so costs are divided into fixed and variable costs. The main short run cost curves are AFC, AVC, AC and MC.

**AFC (Average Fixed Cost):** AFC = TFC/Q. Since TFC is constant, AFC falls continuously as output increases. The AFC curve is a continuously declining curve.

**AVC (Average Variable Cost):** AVC = TVC/Q. AVC is generally U-shaped due to the law of variable proportions. Initially, increasing returns reduce per unit variable cost, so AVC falls; later, diminishing returns increase variable cost per unit, so AVC rises.

**AC (Average Cost):** AC = TC/Q = AFC + AVC. AC is also U-shaped. In the beginning, both AFC and AVC fall, so AC falls. After a point, AVC rises; even though AFC keeps falling, the rise in AVC dominates and AC rises.

**MC (Marginal Cost):** MC = ΔTC/ΔQ = ΔTVC/ΔQ. MC is also U-shaped due to increasing and diminishing returns.

**Relationships:** MC cuts AVC and AC at their minimum points. When MC < AC, AC falls; when MC > AC, AC rises; thus MC = AC at AC minimum. Similar relation holds between MC and AVC. These relationships are important for output and pricing decisions.

Micro Economics — Question Paper

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