Question Paper

Economics – I (121) : April 2004

 Answer all questions.
 Marks are indicated against each
question.

1. The price elasticity of demand for a good is 1. If price elasticity of supply is zero, any excise tax < Answer
>
imposed on the sale of such a good must be
(a) Borne entirely by the seller
(b) Borne entirely by the buyer
(c) Shared equally by the buyer and the seller
(d) Shared to an unspecified degree by both the buyer and the seller
(e) None of the above.
(1 mark)
2. A consumer is purchasing only two commodities, X and Y. At the current consumption level, the < Answer
>
marginal utility per rupee of Y is greater than the marginal utility per rupee of X. To maximize total
utility with the limited income, the consumer should buy
(a) Less of both X and Y (b) More of both X and Y
(c) More of Y and less of X (d) More of X and less of Y
(e) More of Y.
(1 mark)
3. If a perfectly competitive industry is in long-run equilibrium, all firms < Answer
>
(a) Have equal marginal costs (b) Have identical supply curves
(c) Operate at the point where marginal cost just covers all variable costs
(d) Have identical plant sizes (e) Both (a) and (b) above.
(1 mark)
4. The supply curve of a monopolist is always < Answer
>
(a) More elastic than the supply curve for a perfectly competitive industry
(b) Less elastic than the supply curve for a perfectly competitive industry
(c) Steeper than the monopolist’s average cost curve in the relevant region
(d) Undefined because the price-output decision of a monopolist depends upon market demand
(e) None of the above.
(1 mark)
5. In monopolistic competition, firms desire to sell more output at equilibrium because price at < Answer
>
equilibrium is
(a) Greater than average cost (b) Greater than average variable cost
(c) Greater than marginal cost (d) Equal to marginal revenue
(e) Less than average cost.
(1 mark)
6. In the dominant firm model, the profits of the competitive fringe are < Answer
>
(a) Always negative because the dominant firm is trying to run them out of business
(b) Always zero because of the competitive nature of the fringe
(c) Always positive because the fringe is more efficient than the dominant firm
(d) Any of the above depending upon the circumstances
(e) Either positive or zero, but never negative.
(1 mark)
< Answer
7. The profit maximizing output for a monopolist with positive variable cost is always >

(a) Greater than the revenue maximizing output

(b) Equal to the revenue maximizing output
(c) Less than the revenue maximizing output
(d) Greater than the competitive output
(e) Equal to the competitive output unless fixed costs are positive as well.
 (1 mark)
< Answer
8. Which of the following is not true in an industry characterized by perfect competition? >

(a) There is ease of entry and exit

(b) There are many buyers and sellers
(c) The firm’s demand curve is horizontal
(d) A single firm can influence price
(e) The marginal revenue curve is horizontal.
(1 mark)
< Answer
9. The downward kinked demand curve facing the individual oligopolist implies that >

(a) There is continuity in the marginal revenue curve

(b) Competitors have a tendency to follow price decreases but not price increases
(c) Oligopolists face price certainty
(d) If the firm drops its price, its share of market will increase
(e) Total revenue remains the same even if a firm increases prices.
(1 mark)
< Answer
10. In the following diagram, the firm is operating in an industry with monopolistic competition. If the >
firm is operating at point A, which of the following is true?

(a) The seller is operating at the lowest level of long run average cost
(b) Attempts should be made to produce at point B
p
(c) At this point MR =
(d) Long run profit is maximized
(e) The seller is earning excess profits.
(1 mark)
< Answer
11. Long run production moves along an expansion path which is defined as >

(a) A locus of points showing changes in the products’ supply and demand curves in equilibrium
over time
(b) A curve showing rates of factor substitutability
(c) A curve showing diminishing utility of factor substitution
(d) A locus of points showing tangency between short-run isocost and isoquant curves
(e) None of the above.
(1 mark)
< Answer
12. Which of the following statements is true based on the production curve below? >

(a) The marginal product curve peaks at point C

(b) At point B, total product begins to increase at a decreasing rate
(c) At point B, producers might want to consider building larger capacity
(d) Returns to scale are increasing from C to D
(e) From A to B, the producer is experiencing decreasing returns to scale.
(1 mark)
 < Answer
13. If the price elasticity of demand for a good is inelastic, a decrease in its price results in >

(a) No change in demand (b) A decrease in demand

(c) A decrease in total revenue (d) An increase in total revenue
(e) No change in total revenue.
(1 mark)
< Answer
14. If a perfectly competitive firm and a monopoly firm have the same cost structure, face an upward >
sloping MC curve, and the industry has a downward sloping demand curve, then
(a) The competitive firm will produce a smaller output at a lower price
(b) The competitive firm will produce a larger output at a higher price
(c) The competitive firm will produce a larger output at a lower price
(d) The competitive firm will produce a smaller output at a higher price
(e) None of the above.
(1 mark)
< Answer
15. If a firm’s marginal revenue exceeds its marginal cost, profit-maximizing rules require that firm to >

(a) Increase its output in both perfect and imperfect competition

(b) Increase its output in perfect but not necessarily in imperfect competition
(c) Increase its output in imperfect but not necessarily in perfect competition
(d) Decrease its output, in both perfect and imperfect competition
(e) Increase price, not output, in both perfect and imperfect competition.
(1 mark)
< Answer
16. The consumer’s optimal equilibrium is determined by >

(a) The equality of supply and demand in the product market

(b) The equality of supply and demand in the labor market
(c) A point on the next highest indifference curve
(d) A point on the indifference curve that indicates consumer satisfaction
(e) A point at which the indifference curve is tangent to the budget constraint.
(1 mark)
< Answer
17. One study on health care has found that 94% of the people who now do not visit the doctor for a >
yearly check-up would be more likely to do so if the price of a doctor's visit was reduced. From this
study it is implied that
(a) The current price of doctor visits is too high
(b) There is a shortage of doctors
(c) There are too many doctors that specialize and not enough that do check-ups
(d) There is a price ceiling on doctor visits
(e) The doctor visits obey the law of demand.
(1 mark)
< Answer
18. On the following graph, the point where the consumer buys 3 units of good X and 4 units of good Y >
explains that

(a) Utility is maximized although the consumer may not have exhausted entire income
(b) The consumer's income has been exhausted, but the utility-maximizing rule may or may not be
satisfied
(c) Utility could increase by buying more of good X and less of good Y
(d) Utility could increase by buying more of good Y and less of good X
(e) The utility maximizing-rule holds, and the combination of goods chosen is the optimal
combination.
 (1 mark)
< Answer
19. Which of the following statements is/are true when the firm has built the optimal scale of plant for >
producing a given level of output?
(a) Long-run marginal cost and short-run marginal cost are equal
(b) Long-run average cost and short-run average cost are equal
(c) Long-run marginal cost and short-run average cost are equal
(d) (a), (b) and (c) above
(e) Both (a) and (b) above.
(1 mark)
< Answer
20. In the following diagram, if the firm is operating at point C on its long-run average total cost curve, it >
is experiencing

(a) Economies of scale (b) Constant returns to scale

(c) Diseconomies of scale (d) Increasing marginal product
(e) Increasing return to scale.
(1 mark)
< Answer
21. Based on the costs and revenue structures in the following diagram, the firm is >

(a) Earning an economic profit (b) Earning an economic loss

(c) Earning zero economic profit (d) At its long-run equilibrium position
(e) At its short-run equilibrium position.
(1 mark)
< Answer
22. Suppose input prices for a perfectly competitive industry remain constant as the output of the >
industry expands. In the long run, the industry supply curve is
(a) Positively sloped (b) Negatively sloped
(c) Horizontal (d) Vertical
(e) Rectangular hyperbola.
(1 mark)
< Answer
23. Which of the following decisions has to be made by a monopolist firm? >

(a) How much output to produce (b) What price to charge

(c) How to produce output (d) How much to demand in each input market
(e) Either (a) or (b) above.
(1 mark)
< Answer
24. In which of the following market structures, strategic considerations are most important? >

(a) Monopolistic competition (b) Oligopoly

(c) Pure competition (d) Pure monopoly
 (e) Bilateral monopoly.
(1 mark)
< Answer
25. The degree of price elasticity of demand for a good is influenced by whether >

I. It is durable-use or single- use good.

II. It accounts for a small or large proportion of households’ total income.
III. Its output is easily altered.
IV. It has close substitutes.
(a) (I), (II) and (IV) only (b) (I) and (IV) only
(c) (II) and (III) only (d) (II), (III) and (IV) only
(e) All (I), (II), (III) and (IV) above.
(1 mark)
< Answer
26. Which of the following is true if an indifference curve is horizontal (assume X is measured along the >
horizontal axis and Y along the vertical axis)?
(a) The consumer is saturated with commodity X only
(b) The consumer is saturated with commodity Y only
(c) The consumer is saturated with both commodity X and commodity Y
(d) The consumer is saturated with neither commodity X nor commodity Y
(e) None of the above.
(1 mark)
< Answer
27. The problem of determining what combination of inputs will yield the lowest cost for producing a >
given output
I. Is essentially a choice among the technologically efficient combinations.
II. Depends on the relative prices of inputs.
III. Depends on the price of the products.
IV. Depends on the profits made.
(a) Both (I) and (II) (b) Both (II) and (III)
(c) Both (III) and (IV) (d) Both (I) and (IV)
(e) Both (II) and (IV).
(1 mark)
< Answer
28. Which of the following is true of a perfectly competitive firm in equilibrium? >

(a) P = MR = MC (b) P = MR, but MR > MC

(c) P = MC, but MR < MC (d) MR = MC and P < MR
(e) MR = MC and P > MR.
(1 mark)
< Answer
29. A U-shaped marginal cost curve means that the average cost curve >

(a) First declines, reaches a minimum then begins to rise

(b) Declines when marginal costs decline, rises when marginal costs rise, and reaches a minimum
when marginal cost is at minimum
(c) Rises throughout
(d) Declines throughout
(e) None of the above.
(1 mark)
< Answer
30. In long-run equilibrium the monopolist (as opposed to a perfectly competitive firm) can make profit >
because of
(a) Blocked entry (b) High prices he charges
(c) Low long run average costs (d) Advertising
(e) Price discrimination.
(1 mark)
< Answer
31. A monopolist faces identical demand curves for his commodity in two separate markets. By >
practicing third-degree price discrimination, the monopolist
(a) Will increase his TR and total profit
 (b) Can increase his TR and total profits
(c) Cannot increase his TR and total profits
(d) Will charge a different price in different markets
(e) None of the above.
(1 mark)
< Answer
32. The centralized cartel >

(a) Leads to the monopoly solution

(b) Behaves as the multiplant monopolist if it wants to minimise the total cost of production
(c) Is illegal in India
(d) (a), (b), (c) above
(e) Both (a) and (b) above.

(1 mark)
< Answer
33. Which of the following statements is false with reference to Cournot’s model of oligopoly? >

(a) The duopolists do not recognize their interdependence

(b) Each duopolist assumes that the other will keep its quantity constant
(c) Each duopolist assumes that the other will keep its price constant
(d) The solution is stable
(e) Both (c) and (d) above.

(1 mark)
< Answer
34. A perfectly competitive firm earns abnormal profits in the short run when its >

(a) Average cost curve lies above its demand curve

(b) Average revenue curve is tangent to average cost curve
(c) Demand curve lies above the average cost curve
(d) Marginal revenue curve lies above the average cost curve
(e) Both (c) and (d) above.
(1 mark)
< Answer
35. Which of the following costs is not recorded in the books of a firm? >

(a) Out-of-pocket costs (b) Indirect costs

(c) Private costs (d) Implicit costs (e) Fixed
costs.
(1 mark)
< Answer
36. Balesh Pvt. Ltd. is operating in a perfectly competitive industry. If the firm doubles its output during >
the year, then
(a) Price of the product falls more than proportionately
(b) Price of the product falls less than proportionately
(c) Price of the product falls proportionately
(d) Price of the product remains same
(e) Insufficient data.
(1 mark)
< Answer
37. If the total expenditure of the consumer increases as a result of an increase in the price of the >
commodity, the elasticity of demand for the commodity is
(a) Infinity (b) Greater than one
(c) Less than one (d) Equal to one (e) None of the
above.
(1 mark)
< Answer
38. Assuming labor is the only variable input, which of the following is not true in the short run? >
(a) When MPL is highest, MC is lowest
(b) When APL is highest, AVC is lowest
(c) When MPL > APL, AVC is decreasing
(d) When MC < AVC, APL is increasing
 (e) MPL and AVC are inversely related.
(Note: MPL= Marginal Product of Labor, MC = Marginal Cost, AVC = Average Variable
Cost, APL = Average Product of Labor)
(1 mark)
< Answer
39. Isoquant for two inputs which are used in fixed proportion is >
(a) Convex to the origin (b) Concave to the origin
(c) Straight line with negative slope (d) Straight line with positive slope
(e) L-shaped.
(1 mark)
< Answer
40. A perfectly competitive firm is operating at an output where price is greater than marginal cost. >
Which of the following is/are true?
(a) The firm should increase its output so as to maximize profit
(b) The firm should reduce its output so as to maximize profit
(c) The firm is making profits
(d) The firm is incurring losses
(e) Both (a) and (c) above.
(1 mark)
< Answer
41. An increase in the excise duty increases the price of a commodity from Rs.3 to Rs.4. If the quantity >
demanded decreases from 10 to 5 units, the absolute value of arc price elasticity of demand of the
commodity is
(a) 2.33 (b) 2.50 (c) 5.00 (d) 3.00 (e) 3.33.
(1 mark)
< Answer
42. The demand and supply functions of a commodity are estimated as >

Demand: Qd = 100 – P
Supply: Qs = –20 + 3P
The equilibrium price and quantity of the good are
(a) Rs.60 and 40 units respectively (b) Rs.40 and 60 units respectively
(c) Rs.50 and 50 units respectively (d) Rs.30 and 70 units respectively
(e) Rs.70 and 30 units respectively.
(2 marks)
< Answer
43. For a good quantity demanded increases by 10% when the price decreases by 20%. The price elasticity >
of demand is
(a) –1/2 (b) –1/20 (c) –2 (d) –20 (e) – 3.
(1 mark)
< Answer
44. Based on the graph below, if income of the consumer equals Rs.20, the prices of goods X (Px) and Y >
(Py) are

(a) Px= Rs. 5, Py = Rs.4 (b) Px = Rs.4, Py = Rs.2

(c) Px = Rs.3, Px = Rs.2 (d) Px= Rs. 2, Py = Rs.5
(e) Insufficient information.
(2 marks)
< Answer
45. The cost schedule of a firm is given below: >
 Quantity (units) Total Fixed Cost (Rs.) Total Variable Cost (Rs.)
1 100 50
2 100 150
3 100 350
4 100 650
5 100 1, 050
The average
fixed cost of producing 4 units is
(a) Rs.100 (b) Rs.50 (c) Rs.20 (d) Rs.25 (e) Rs.500.
(1 mark)
< Answer
46. Assume that a firm spends Rs.500 on two inputs, labor (taken on the horizontal axis) and capital (taken >
on the vertical axis). If the wage rate is Rs.20 per hour and the cost of capital is Rs.25 per hour, the
slope of the isocost line is
(a) 500 (b) 25 (c) – 4/5 (d) –5/4 (e) 20.
(1 mark)
If average total cost rises from Rs.15 to Rs.30 as total production increases from 150 to 300 units, the < Answer
47. >
marginal cost is
(a) Rs.5 (b) Rs.30 (c) Rs.15 (d) Rs.45 (e) Rs.10.
(1 mark)
< Answer
48. There are six companies in an industry. Market shares of these companies are given below: >

Company Market share

A 30%
B 20%
C 20%
D 10%
E 10%
F 10% The four-firm
concentration ratio for the industry is
(a) 30% (b) 50% (c) 70% (d) 80% (e) 100 %.
(1 mark)
< Answer
49. For a monopolist, if the absolute value of price elasticity of demand of a product is equal to 2 and the >
marginal revenue is Rs.10, then the price of the product is
(a) Rs.20 (b) Rs.10 (c) Rs.0.50 (d) Rs.5 (e) Rs.50.
(1 mark)
< Answer
50. A monopolist is currently charging a price of Rs.12 for the product. If the Lerner index is 0.333, the >
marginal cost of the monopolist is
(a) Rs.2 (b) Rs.4 (c) Rs.6 (d) Rs.8 (e) Rs.10.
(1 mark)
< Answer
51. The total cost and demand functions of a firm are given as TC = 3Q and P = 10 – 0.5Q respectively. If >
there is no price discrimination, the profit earned by the firm is
(a) Rs.16.50 (b) Rs.22.50 (c) Rs.24.50 (d) Rs.28.00 (e) Rs.
32.00.
(2 marks)
< Answer
52. Demand and supply functions for a product are given as >

Qd = 10,000 – 4P
QS = 3,000 + 6P
If the government imposes a sales tax of Rs.200 per unit, the price increases by
 (a) Rs.200 (b) Rs.100 (c) Rs.120 (d) Rs.80 (e) Rs.160.
(2 marks)
< Answer
53. If the demand function for a good is P = 200 – Q, the range of prices over which the demand is >
inelastic is
(a) Rs.5 to Rs.100 (b) Re.0 to Rs.100
(c) Above Rs.100 (d) Above Rs.50
(e) Rs. 50 to Rs.200.
(2 marks)
< Answer
54. Marginal utilities of goods A and B are 500 utils and 1,000 utils respectively. The price of good B is >
Rs.200. If the consumer is in equilibrium, the price of good A is
(a) Rs.60 (b) Rs.70 (c) Rs.80 (d) Rs.90 (e) Rs.100.
(1 mark)
< Answer
55. For a product, demand is perfectly elastic at a price of Rs.40. The supply function is >
Qs = 100+20P. If the government imposes a tax of Rs.4 per unit, change in consumer surplus is
(a) Zero (b) Rs. 40 (c) Rs.300 (d) Rs.600 (e) Insufficient data.
(1 mark)
< Answer
56. The short run production function of a firm is estimated to be >

Q = 36L2 – L3
If the firm is a rational entity, it would employ labor in the range of
(a) 0 to 12 units (b) 0 to 18 units (c) 12 to 18 units (d) 12 to 24 units
(e) 18 to 24 units.
(2 marks)
< Answer
57. Average productivity of labor for a firm is 50 when labor employed is 100 units. When labor employed >
is increased to 104 units, average productivity of labor declines to 48 units. At current input level the
marginal productivity of labor is
(a) –1 unit (b) –2 units (c) 1 unit (d) 2 units
(e) None of the above.
(1 mark)
< Answer
58. Which of the following is an optimum input combination if expansion path of the firm >
is L = 5/2 K?
(a) L=0.4 & K=1.0 (b) L=2.0 & K=1.2
(c) L=4.0 & K=2.0 (d) L=6.0 & K=2.4
(e) L=8.0 & K=2.8
(1 mark)
< Answer
59. Production function for a firm is Q = 100L – 0.1L2. If 10 units of labor are used, average productivity >
of labor is
(a) 90 units (b) 99 units (c) 100 units (d) 200 units
(e) 220 units.
(1 mark)
< Answer
60. The slope of the budget line (when good X is taken on X-axis and good Y is taken on Y-axis) is– 0.25. >
If a consumer with an income of Rs.100 buys equal quantities of two goods, X and Y, what would be
the amount spent on good X?
(a) Rs.75 (b) Rs.20 (c) Rs.40 (d) Rs.60 (e) Rs.80.
(2 marks)
< Answer
61. If total cost function for a firm is TC = 36Q – 0.60Q2 + 0.020Q3, the minimum possible average cost is >

(a) Rs.63.00 (b) Rs.36.50 (c) Rs.31.50 (d) Rs.60.00 (e)

Rs.48.50.
(2 marks)
 < Answer
62. The total cost function and demand function of a good are estimated to be TC = 100 – 5Q + 2Q 2 and Q >
= 100 – P respectively. If the current output is 5 units, the average profit is
(a) Rs.50 (b) Rs.60 (c) Rs.65 (d) Rs.70 (e) Rs.85.
(2 marks)
< Answer
63. The Long-run Average Cost function of a firm operating under perfect competition is estimated to be >

LAC = 50 – 625Q + 25Q2

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) 12.5 units (b) 15.0 units (c) 20.0 units (d) 25.0 units (e) 30.0
units.
(2 marks)
< Answer
64. Total cost function of a firm is TC = 500 + 5Q. If price of the product sold by the firm is Rs.7 per unit, >
the break-even sales revenue is
(a) Rs.100 (b) Rs. 250 (c) Rs.700 (d) Rs.1,250 (e)
Rs.1,750.
(2 marks)
< Answer
65. The cost and profit functions of a firm are >

TC = 200 + 10Q
Profit = – 15Q2 + 200Q – 200
If the firm aims at maximizing total revenue, the output would be
(a) 10.0 units (b) 9.5 units (c) 7.0 units (d) 6.3 units (e) 19.0 units.
(2 marks)
< Answer
66. In a perfectly competitive industry there are 200 firms with identical cost functions. The demand >
function for the industry is estimated to be Qd = 3,000 – 200P. If the cost function of a firm is TC = 200
– 50Q + 2Q2, equilibrium price of the product is
(a) Rs. 3 (b) Rs. 2 (c) Rs.4 (d) Rs.5 (e) Rs.8.
(3 marks)
< Answer
67. Raj Ltd. is operating in a perfectly competitive market. The average variable cost (AVC) function of >
Raj Ltd. is
AVC = 350 – 40Q + 2Q 2

The firm has an obligation to pay Rs.500 towards lease rental irrespective of the output produced. What is
the price below which the firm has to shut-down its operations in the short run?
(a) Rs.300 (b) Rs.150 (c) Rs.225 (d) Rs.210 (e) Rs.250.
(2 marks)
< Answer
68. 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) (I), (II) and (III) above (b) (II), (III) and (IV) above
(c) (I), (III) and (IV) above (d) Both (II) and (III) above
(e) Both (I) and (II) above.
(2 marks)
< Answer
69. Alpha Ltd. and Gamma Ltd. are the two firms operating in a duopoly. The cost functions of Alpha Ltd. >
and Gamma Ltd. are TC = 10Q and TC = 0.5Q2G. If the demand function for the industry is Q = 200
A A G

– 4P, what is the Cournot’s equilibrium output for the industry?

(a) 64 units (b) 91 units (c) 79 units (d) 82 units (e) 53 units.
(2 marks)
< Answer
70. A monopolistically competitive firm has the following cost and revenue functions >
 TC = 5,000 + 30Q – 20Q + Q 2 3

TR = 30Q – 2Q 2

If the firm is maximizing profits at the current level of output, what would be the total cost of the firm?
(a) Rs.4,208 (b) Rs.2,824 (c) Rs.3,062 (d) Rs.2,944 (e)
Rs.2,878.
(2 marks)
< Answer
71. Smash 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. Smash Ltd. sells goods in Karnataka and Andhra
Pradesh. The estimated demand functions for the good in Karnataka and Andhra Pradesh are:
PK = 40 – 2.5QK

PA = 120 – 10Q A

where, PK = price charged by Smash Ltd. in Karnataka

PA = price charged by Smash Ltd. in Andhra Pradesh
Q K = quantity of goods demanded in Karnataka
Q A = quantity of goods demanded in Andhra Pradesh
If price discrimination is not practised, the output produced by Smash Ltd. to maximize sales revenue
is
(a) 14.0 units (b) 6.5 units (c) 12.0 units (d) 4.5 units (e) 9.0
units.
(3 marks)
< Answer
72. In 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. Fast move, a shoe manufacturer, is operating in a perfectly competitive industry. The total cost function >
of Fast move is estimated to be
TC = 200 + 300Q – 40Q2 + Q3
Industry supply function for shoes is
Qs = 100 + 2P
If profit maximizing output for Fast move 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. Zenith Bros. is a pioneer in manufacturing of luxury soaps. The demand function faced by Zenith >
Bros. is estimated to be
P = 16,000 – 8Q.
The long run average cost function of the firm is
LAC = 16,000 – 14Q + 0.004Q2
Assuming that Zenith Bros. operate under a monopolistically competitive market, the excess capacity
of the firm at long run equilibrium is
(a) 1,750 units (b) 1,900 units (c) 250 units (d) 350 units (e) 1,500
units.
(3 marks)
< Answer
75. Alok, a premier toy manufacturer, recorded an increase in sales by 10 percent. During the year, Alok >
reduced the prices by 10 percent. Per capita income in the economy increased by 2.5 percent and the
competitor, Alok, reduced the prices of his toys by 5 percent. Income elasticity of demand for the toys
is estimated to be 2 and cross-price elasticity between Alok toys and Block toys is estimated to be 0.5.
Given the situation, what is the price elasticity of demand for Alok toys?
(a) 7.50 (b) 0.75 (c) –7.50 (d) –0.75 (e) 2.50.
(2 marks)

END OF QUESTION PAPER

 Suggested Answers
Economics – I (121) : April 2004
1. Answer : (a) < TOP
>
Reason : The price elasticity of demand is only one of the elasticity parameters required to determine
the degree to which the burden of a tax is shared by a seller and a buyer. When the supply is
perfectly inelastic, there will be no increase in price or decrease in supply. The whole of the
tax is borne by the seller.
(a) (a) Is the answer because the price elasticity of supply is perfectly inelastic.
(b) (b) Is not the answer because when the demand curve is perfectly inelastic, the entire tax
is borne by the buyer.
(c) (c) Is not the answer because when the price elasticity of demand for a good is 1and price
elasticity of supply is zero, the tax cannot share equally by the buyer and seller.
(d) (d) Is not the answer because when the price elasticity of demand for a good be 1and
price elasticity of supply is zero it is not true that tax is shared to an unspecified degree by
both the buyer and the seller
(e) (e) Is not the answer because none of the above cannot be the answer.
2. Answer : (c) < TOP
>
Reason : The equilibrium condition for a consumer maximizing satisfaction is (MU X/PX) = (MUY/PY)
and all income is spent. We only know that (MU+/P Y) > (MU+/PX). That is, we know that the
consumer is receiving more utility per dollar from Y than X. therefore, the consumer should
purchase more of Y, which the consumer could do by either spending income that has not been
allocated to the purchase of X or reducing purchases of X and using that income for the
purchase of more Y.
(a) (a) Is not the answer because the consumer cannot maximize his total utility by buying
less of both X and Y.
(b) (b) Is not the answer because the consumer cannot maximize his total utility by buying
more of both X and Y
(c) (c) Is the answer because the consumer maximize his total utility by buying more of Y
and less of X
(d) (d) Is not the answer because the consumer cannot maximize his total utility by buying
more of X and less of Y
(e) (e) Is not the answer because the consumer cannot maximize his total utility by buying
more of Y only.

3. Answer : (a) < TOP

>
Reason : In competitive equilibrium, all firms operate where price equals marginal cost. Since they all
set marginal cost equal to the same price, their marginal costs must be equal. All of the other
components of cost can be individually specific to given firms depending upon size, even
though the usual competitive model assumes that all firms are identical. Unless fixed costs are
zero, P* = min AC> AVC.
(a) (a) Is the answer because if a perfectly competitive industry is in long-run equilibrium,
all firms have equal marginal costs.
(b) (b) Is not the answer because if a perfectly competitive industry is in long-run
equilibrium, all firms have not identical supply curves.
(c) (c) Is not the answer because if a perfectly competitive industry is in long-run
equilibrium, all firms do not operate at the point where marginal cost just covers all
variable costs
 (d) (d) Is not the answer because if a perfectly competitive industry is in long-run
equilibrium, all firms do not have identical plant sizes.
(e) (e) Is not the answer because option (b) is not true.

4. Answer : (d) < TOP

>
Reason : A monopolist does not have a supply curve. A supply curve always answers the question:
“Given the price, what quantity will be supplied?” For a monopolist, the answer to that
question is always “It depends on the demand curve. A different quantity is supplied even
though the same price maximizes profits (i.e. sets marginal revenue equal to marginal cost).
(a) (a) Is not the answer because the supply curve of a monopolist is not more elastic than
the supply curve for a perfectly competitive industry.
(b) (b) Is not the answer because the supply curve of a monopolist is not less elastic than the
supply curve for a perfectly competitive industry
(c) (c) Is not the answer because the supply curve of a monopolist is not steeper than the
monopolist’s average cost curve in the relevant region
(d) (d) Is the answer because the supply curve of a monopolist is undefined because the
price-output decision of a monopolist depends upon market demand
(e) (e) Is not the answer because none of the above cannot be the answer.
5. Answer : (c) < TOP
>
Reason : The decision to increase (or decrease) output is a marginal one. If price is greater than
marginal cost, then the sale of one more unit of output may net more revenue than it will cost.
The one possible problem occurs when price falls sufficiently with the increase in the quantity
demand to cause marginal revenue (the increase in total revenue attributable to the sale of one
more unit) to fall below marginal cost.. Notice that profits are zero and MC=MR. If other
firms would not follow, though, then a reduction in price would increase sales dramatically
and profits would increase .
(a) (a) Is not the answer because in monopolistic competition, firms desire to sell more
output at equilibrium because price at equilibrium is not greater than average cost
(b) (b) Is not the answer because in monopolistic competition, firms desire to sell more
output at equilibrium because price at equilibrium is not greater than average variable cost
(c) (c) Is the answer because in monopolistic competition, firms desire to sell more output
at equilibrium because price at equilibrium is greater than marginal cost
(d) (d) Is not the answer because in monopolistic competition, firms desire to sell more
output at equilibrium because price at equilibrium is not equal to marginal revenue
(e) (e) Is not the answer because in monopolistic competition, firms desire to sell more
output at equilibrium because price at equilibrium is not less than average cost.

6. Answer : (e) < TOP

>
Reason : In a dominant firm model, firms in the competitive fringe are price takers that stay in business
as long as pure economic profits are non-negative. In the long run with a stable market, one
might expect zero pure economic profit, but certainly not negative pure economic profit. Just
as in perfect competition, negative pure economic profit implies that firms should and would
leave the market.
(a) (a) Is not the answer because in the dominant firm model, the profits of the competitive
fringe are not always negative because the dominant firm is trying to run them out of
business
(b) (b) Is not the answer because in the dominant firm model, the profits of the competitive
fringe are not always zero because of the competitive nature of the fringe
(c) (c) Is not the answer because in the dominant firm model, the profits of the competitive
fringe are not always positive because the fringe is more efficient than the dominant firm
 (d) (d) Is not the answer because in the dominant firm model, the profits of the competitive
fringe are not any of the above options depending upon the circumstances
(e) (e) Is the answer because in the dominant firm model, the profits of the competitive
fringe are either positive or zero, but never negative.
7. Answer : (c) < TOP
>
Reason : The profit maximizing monopolist produces where marginal cost equals marginal revenue.
Revenues are maximized where marginal revenue equals zero. As long as marginal costs are
positive, therefore, the profit maximizing monopolist will produce less than the output at
which the revenue is maximized. If, by some quirk of nature, marginal costs are zero, then the
profit maximizing monopolist will, in fact, choose to produce an output that maximizes
revenue. Marginal costs can never be negative, though, so the monopolist will never produce
an output greater than the output that would maximize revenue.
(a) (a) Is not the answer because the profit maximizing output for a monopolist with positive
variable cost is not always greater than the revenue maximizing output
(b) (b) Is not the answer because the profit maximizing output for a monopolist with positive
variable cost is not always equal to the revenue maximizing output
(c) (c) Is the answer because the profit maximizing output for a monopolist with positive
variable cost is not always less than the revenue maximizing output
(d) (d) Is not the answer because the profit maximizing output for a monopolist with positive
variable cost is not always greater than the competitive output
(e) (e) Is not the answer because the profit maximizing output for a monopolist with positive
variable cost is not always equal to the competitive output unless fixed costs are positive as
well.
8. Answer : (d) < TOP
>
Reason : In a perfectly competitive industry, a single firm can not influence price.
(a) (a) Is not the answer because in an industry characterized by perfect competition, there is
ease of entry and exit
(b) (b) Is not the answer because in an industry characterized by perfect competition, there
are many buyers and sellers
(c) (c) Is not the answer because in an industry characterized by perfect competition, the
firm’s demand curve is horizontal
(d) (d) Is the answer because in an industry characterized by perfect competition, a single
firm cannot influence price
(e) (e) Is not the answer because in an industry characterized by perfect competition, the
marginal revenue curve is horizontal.
9. Answer : (b) < TOP
>
Reason : The demand curve facing the individual oligopolistic firm is kinked because other firms are
likely to follow a price decrease, but not a price increase.
(a) (a) Is not the answer because the downward kinked demand curve facing the individual
oligopolist does not imply that There is continuity in the marginal revenue curve
(b) (b) Is the answer because the downward kinked demand curve facing the individual
oligopolist does imply that competitors have a tendency to follow price decreases but not
price increases
(c) (c) Is not the answer because the downward kinked demand curve facing the individual
oligopolist does not imply that oligopolists face price certainty
(d) (d) Is not the answer because the downward kinked demand curve facing the individual
oligopolist does not imply that if the firm drops its price, its share of market will increase
(e) (e) Is not the answer because the downward kinked demand curve facing the individual
oligopolist does not imply that total revenue remains the same even if a firm increases
prices.
10. Answer : (d) < TOP
Reason : Long run profit is maximized because MR=MC and at the same time the plant is operating at >
its minimum possible long run average cost. Note: The seller is not operating at the lowest
level of LRAC (point B) because the downward sloping demand (AR) curve for
monopolistically competitive markets makes this point impossible to achieve. Attempts to
operate at point B would be unprofitable because average revenue (price) is less than average
cost at this point. The firm is not earning excess profits because price is equal to average cost,
(E).

(a) (a) Is not the answer because at point A, the seller is not operating at the lowest level of
long run average cost.
(b) (b) Is not the answer because at point A, attempts has not been made to produce at point
B
p
(c) (c) Is not the answer because at point A, MR ≠ .
(d) (d) Is the answer because at point A, long run profit is maximized
(e) (e) Is not the answer because at point A, the seller is not earning excess profits.
11. Answer : (d) < TOP
Reason : The expansion path shows increases in production, as factor inputs and budgets increase. >
(a) Is not the answer because it would show changes in market equlibrium.
(b) Is not the answer because it is an isoquant,
(c) Is not the answer because it is an expansion path which can show increasing, decreasing, or
constant returns to scale.
(d) Is the answer because an expansion path is A locus of points showing tangency between
short-run isocost and isoquant curves
(e) Is not the answer because none of the above cannot be the answer.
12. Answer : (b) < TOP
Reason : Point B is an inflection point, at which the rate of change changes. The curve peaks at C, >
therefore, this would be a more appropriate decision at point C. In the range (D), returns to
scale are decreasing. From A to B producers experience increasing returns to scale.
(a) (a) Is not the answer because The marginal product curve peaks at point C
(b) (b) Is the answer because at point B, total product begins to increase at a decreasing
rate
(c) (c) Is not the answer because at point B, producers might not want to consider building
larger capacity
(d) (d) Is not the answer because returns to scale are not increasing from C to D
(e) (e) Is not the answer because from A to B, the producer is experiencing increasing
returns to scale.
13. Answer : (c) < TOP
Reason : When the price elasticity of demand for a good is inelastic consumers are not very responsive >
to price change. That is, a change in price does not result in much change in quantity
demanded. Therefore, if there is a decrease in price consumers are not very responsive to that
price change. They do not increase quantity demanded all that much. With the lower price
multiplied by a relatively small increased quantity, the total revenue falls.
(a) (a) Is not the answer because if the price elasticity of demand for a good is inelastic, a
decrease in its price leads to change in demand.
(b) (b) Is not the answer because if the price elasticity of demand for a good is inelastic, a
decrease in its price does not lead to a decrease in demand
(c) (c) Is the answer because if the price elasticity of demand for a good is inelastic, a
decrease in its price results in a decrease in total revenue
(d) (d) Is not the answer because if the price elasticity of demand for a good is inelastic, a
decrease in its price does not result in an increase in total revenue
(e) (e) Is not the answer because if the price elasticity of demand for a good is unitary
elastic, a decrease in its price result in no change in total revenue.
14. Answer : (c) < TOP
Reason : Because a monopoly’s demand curve lies above its MR curve, a monopoly firm which will >
equate MC and MR will charge a higher price and produce a smaller output than a purely
 competitive firm which will also equate MC with MR, but MR is the competitive firm’s
demand curve.
(a) (a) Is not the answer because if a purely competitive firm and a monopoly firm have
the same cost structure, face an upward sloping MC curve, and the industry has a
downward sloping demand curve, then the competitive firm will not produce a smaller
output at a lower price
(b) (b) Is not the answer because If a purely competitive firm and a monopoly firm have
the same cost structure, face an upward sloping MC curve, and the industry has a
downward sloping demand curve, the competitive firm will not produce a larger output at a
higher price
(c) (c) Is the answer because If a purely competitive firm and a monopoly firm have the
same cost structure, face an upward sloping MC curve, and the industry has a downward
sloping demand curve, the competitive firm will produce a larger output at a lower price

(d) (d) Is not the answer because If a purely competitive firm and a monopoly firm have
the same cost structure, face an upward sloping MC curve, and the industry has a
downward sloping demand curve, the competitive firm will not produce a smaller output at
a higher price
(e) (e) Is not the answer because none of the above cannot be the answer.
15. Answer : (a) < TOP
Reason : If marginal revenue exceeds marginal cost for any firm, that firm should increase its output. >
Because any increase in output increases revenue faster than it increases cost, so profits go up.
The price should fall a bit as quantity climbs, but that effect is already included in the
construction of marginal revenue, so it does not mitigate against this result.
(a) Is the answer because if a firm’s marginal revenue exceeds its marginal cost, profit-
maximizing rules require that firm to Increase its output in both perfect and imperfect
competition.
(b) Is not the answer because if a firm’s marginal revenue exceeds its marginal cost, profit-
maximizing rules does not require that firm to increase its output in perfect but not
necessarily in imperfect competition.
(c) Is not the answer because if a firm’s marginal revenue exceeds its marginal cost, profit-
maximizing rules does not require that firm to increase its output in imperfect but not
necessarily in perfect competition
(d) Is not the answer because if a firm’s marginal revenue exceeds its marginal cost, profit-
maximizing rules does not require that firm to decrease its output, in both perfect and
imperfect competition
(e) Is not the answer because if a firm’s marginal revenue exceeds its marginal cost, profit-
maximizing rules does not require that firm to increase price, not output, in both perfect
and imperfect competition.
16. Answer : (e) < TOP
Reason : Consumer equilibrium is the highest indifference curve attainable with a given budget >
constraint.
(a) (a) Is not the answer because consumer’s optimal equilibrium is not determined by the
equality of supply and demand in the product market.
(b) (b) Is not the answer because consumer’s optimal equilibrium is not determined by the
equality of supply and demand in the labor market
(c) (c) Is not the answer because consumer’s optimal equilibrium is not determined by a
point on the next highest indifference curve
(d) (d) Is not the answer because consumer’s optimal equilibrium is not determined by a
point on the indifference curve that indicates consumer satisfaction
(e) (e) Is the answer because consumer’s optimal equilibrium is determined by a point at
which the indifference curve is tangent to the budget constraint.
17. Answer : (e) < TOP
Reason : The law of demand states that if price falls, quantity demanded rises. >
(a) (a) Is not the answer because health care study does not imply that the current price of
doctor visits is too high
(b) (b) Is not the answer because health care study does not imply that there is a shortage of
 doctors
(c) (c) Is not the answer because health care study does not imply that there are too many
doctors that specialize and not enough that do check-ups
(d) (d) Is not the answer because health care study does not imply that there is a price ceiling
on doctor visits
(e) (e) Is the answer because health care study implies that the doctor visits obey the law of
demand.
Answer : (e) < TOP
18. >
Reason : When the budget line is tangent to the indifference curve, the utility-maximizing rule is
satisfied; that is, the consumer buys the combination of X and Y that maximizes utility.
(a) (a) Is not the answer because the point where the consumer buys 3 units of good X and
4 units of good Y, utility is maximized and the consumer have exhausted entire income
(b) (b) Is not the answer because the point where the consumer buys 3 units of good X and
4 units of good Y, the consumer's income has been exhausted and the utility-maximizing
rule may satisfied
(c) (c) Is not the answer because the point where the consumer buys 3 units of good X and 4
units of good Y, utility could not increase by buying more of good X and less of good Y
(d) (d) Is not the answer because the point where the consumer buys 3 units of good X and 4
units of good Y, utility could not increase by buying more of good Y and less of good X

(e) (e) Is the answer because the point where the consumer buys 3 units of good X and 4
units of good Y, the utility maximizing-rule holds, and the combination of goods chosen is
the optimal combination.
< TOP
19. Answer : (d) >
Reason : When the firm has built the optimal scale of plant for producing a given level of output, all
(a), (b) and (c) happens. So the answer is (d).
(a) (a) It is a true statement that when the firm has built the optimal scale of plant for
producing a given level of output, Long-run marginal cost and short-run marginal cost are
equal
(b) (b) It is a true statement that when the firm has built the optimal scale of plant for
producing a given level of output, Long-run average cost and short-run average cost are
equal
(c) (c) It is a true statement that when the firm has built the optimal scale of plant for
producing a given level of output, Long-run marginal cost and short-run average cost are
equal
(d) (d) Is the answer because all (a), (b) and (c) are true.
(e) (e) Is not the answer because (a) and (b) alone can not complete the answer.
20. Answer : (c) < TOP
>
Reason : At point C, the firm is experiencing dis-economies of scale. So the long run average cost is
increasing.
(a) (a) Is not the answer because if the firm is operating at point C on its long-run average
total cost curve, it does not experience economies of scale
(b) (b) Is not the answer because if the firm is operating at point C on its long-run average
total cost curve, it does not experience constant returns to scale
(c) (c) Is the answer because if the firm is operating at point C on its long-run average total
cost curve, it does not experience diseconomies of scale
(d) (d) Is not the answer because if the firm is operating at point C on its long-run average
total cost curve, it does not experience increasing marginal product
(e) (e) Is not the answer because if the firm is operating at point C on its long-run average
total cost curve, it does not experience increasing return to scale.
21. Answer : (b) < TOP
>
 Reason : The firms in perfect competition will enjoy economic profits, if AR > ATC, economic losses, if
AR < ATC and normal profits, if AR=ATC. In the above diagram, AR < ATC indicating that
the firms are incurring economic losses.
(a) (a) Is not the answer because in this cost and revenue structures, the firm is not earning
an economic profit
(b) (b) Is the answer because in this cost and revenue structures, the firm is earning an
economic loss
(c) (c) Is not the answer because in this cost and revenue structures, the firm is not earning
zero economic profit
(d) (d) Is not the answer because in this cost and revenue structures, the firm is not at its
long-run equilibrium position
(e) (e) Is not the answer because in this cost and revenue structures, the firm is not at its
short-run equilibrium position.
22. Answer : (c) < TOP
>
Reason : When input prices for a perfectly competitive industry remain constant as the output of the
industry expands, it is a case of constant cost industry. In this case the supply curve is
horizontal.
(a) (a) Is not the answer because the industry supply curve is not positively sloped
(b) (b) Is not the answer because the industry supply curve is not negatively sloped
(c) (c) Is the answer because the industry supply curve is horizontal
(d) (d) Is not the answer because the industry supply curve is not vertical
(e) (e) Is not the answer because the industry supply curve is not rectangular hyperbola.
23. Answer : (e) < TOP
>
Reason : A monopolist firm can decide either how much output to produce or what price to be charge.
So the answer is (e).
(a) (a) Is not the answer because a monopolist cannot alone decide how much output to
produce
(b) (b) Is not the answer because a monopolist cannot alone decide what price to charge
(c) (c) Is not the answer because a monopolist does not decide how to produce output
(d) (d) Is not the answer because a monopolist does not decide how much to demand in each
input market
(e) (e) Is the answer because a monopolist can decide either how much output to produce or
what price to charge.
24. Answer : (b) < TOP
>
Reason : Strategic considerations are most important in oligopoly market structures. The firms are
aware of their interdependence and always consider their rivals’ reactions when selecting
prices, output goals, advertising budgets, and other business policies.
(a) (a) Is not the answer because strategic considerations are not important in monopolistic
competition
(b) (b) Is the answer because strategic considerations are most important in oligopoly
(c) (c) Is not the answer because strategic considerations are not important in pure
competition
(d) (d) Is not the answer because strategic considerations are not important in pure monopoly
(e) (e) Is not the answer because strategic considerations are not important in bilateral
monopoly.
25. Answer : (a) < TOP
>
Reason : The main determinants of price elasticity of demand is nature of the good cover i.e. whether
 the good is durable-use or single- use good, the level of income and the availability of
substitutes. So, the answer is (a).
I. I. The price elasticity of demand is influenced by the nature of the good, whether
the good is durable-use or single- use good.
II. II. The price elasticity of demand is influenced by the total income. of
households.
III. III. The price elasticity of demand is not influenced by whether the good is easily
altered or not.
IV. IV. The price elasticity of demand is influenced by availability of substitutes of
the goods.
So, the answer is (a).
26. Answer : (a) < TOP
>
Reason : When the indifference curve is of horizontal straight line, parallel to X axis , it would mean
that the amount of the good X is increased, while the amount of good Y remained the same,
the consumer is saturated with commodity X only.
(a) (a) Is the answer because an indifference curve is horizontal (assume X is measured
along the horizontal axis and Y along the vertical axis), the consumer is saturated with
commodity X only.
(b) (b) Is not the answer because an indifference curve is horizontal (assume X is measured
along the horizontal axis and Y along the vertical axis), the consumer is not saturated with
commodity Y only
(c) (c) Is not the answer because an indifference curve is horizontal (assume X is measured
along the horizontal axis and Y along the vertical axis), the consumer is not saturated with
both commodity X and commodity Y
(d) (d) Is not the answer because an indifference curve is horizontal (assume X is measured
along the horizontal axis and Y along the vertical axis), the consumer is not saturated with
neither commodity X nor commodity Y
(e) (e) Is not the answer because none of the above cannot be the answer.

27. Answer : (a) < TOP

>
Reason : The combination of inputs will yield the lowest cost for producing a given output is essentially
a choice among the technologically efficient combinations.And also it depends on the relative
prices of inputs.So, the answer is (a).
I. I. It ia a true statement that the determinaton of least cost output is
essentially a choice among the technologically efficient combinations.
II. II. It ia a true statement that the determinaton of least cost output depends
on the relative prices of inputs.
III. III. It is a false statement that the determinaton of least cost output depends on the
price of the products.
IV. IV. It is a false statement that the determinaton of least cost output depends on the
profits made.
So, the answer is (a).
28. Answer : (a) < TOP
>
Reason : A perfectly competitive firm is in equilibrium only when P = MR =MC because in perfect
competition, MR = P.
(a) Is the answer because a perfectly competitive firm is in equilibrium only when P = MR
=MC.
(b) Is not the answer because a perfectly competitive firm is not in equilibrium when P =
MR, but MR > MC.
(c) Is not the answer because a perfectly competitive firm is not in equilibrium when P =
 MC, but MR < MC.
(d) Is not the answer because a perfectly competitive firm is not in equilibrium when MR =
MC, but P < MR.
(e) Is not the answer because a perfectly competitive firm is not in equilibrium when
MR= MC, but P > MR.
29. Answer : (a) < TOP
>
Reason : AC curve and MC curve is based on the assumptions of the operations of the law of
diminishing returns. A U-shaped marginal cost means that average cost curve first declines,
reaches a minimum then begins to rise.
(a) (a) Is the answer because a U-shaped marginal cost curve means that the average cost
curve first declines, reaches a minimum then begins to rise
(b) (b) Is not the answer because a U-shaped marginal cost curve means that the average cost
curve does not decline when marginal costs decline, rises when marginal costs rise, and
reaches a minimum when marginal cost is at minimum
(c) (c) Is not the answer because a U-shaped marginal cost curve means that the average cost
curve does not rise throughout
(d) (d) Is not the answer because a U-shaped marginal cost curve means that the average cost
curve does not decline throughout
(e) (e) Is not the answer because none of the above cannot be the answer.
30. Answer : (a) < TOP
>
Reason : Blocked entry are factors which make it hard for new firms to enter the industry. Because of
this, the monopolist earns profit.
(a) (a) Is the answer because in long-run equilibrium the monopolist can make profit
because of blocked entry.
(b) (b) Is not the answer because in long-run equilibrium the monopolist can make profit
not because of high prices he charges
(c) (c) Is not the answer because in long-run equilibrium the monopolist can make profit
not because of low long run average costs
(d) (d) Is not the answer because in long-run equilibrium the monopolist can make profit
not because of advertising
(e) (e) Is not the answer because in long-run equilibrium the monopolist can make profit
not because of price discrimination.
< TOP
31. Answer : (c) >
Reason : Third degree price-discrimination involves separating consumers or markets in terms of their
price elasticity of demand. If both the markets have identical demand curves for his
commodity, the monopolist cannot increase his TR and total profits.
(a) (a) Is not the answer because it is a false statement that a monopolist with identical
demand curves for his commodity in two separate markets will increase his TR and total
profit
(b) (b) Is not the answer because it is a false statement that a monopolist with identical
demand curves for his commodity in two separate markets can increase his TR and total
profits
(c) (c) Is the answer because a monopolist with identical demand curves for his commodity
in two separate markets cannot increase his TR and total profits
(d) (d) Is not the answer because a monopolist with identical demand curves for his
commodity in two separate markets will not charge a different price in different markets
(e) (e) Is not the answer because none of the above cannot be the answer.
32. Answer : (d) < TOP
 Reason : All the options (a), (b) and (c) are true for a centralized cartels. So, the answer is (d). >

(a) (a) It is a true statement that the centralized cartel leads to the monopoly solution
(b) (b) It is a true statement that the centralized cartel behaves as the multiplant monopolist
if it wants to minimise the total cost of production
(c) (c) It is a true statement that the centralized cartel is illegal in India.
(d) (d) Is the answer because (a), (b) and (c) above are true.
(e) (e) Is not the answer because (a) and (b) above cannot complete the answer.

33. Answer : (c) < TOP

>
Reason : In Cournot’s model, the output level is the sole parameter of actions. Both the seller adjusts the
level of price to maximize profits. So it is a false statement that each duopolist assumes that
the other will keep its price constant.
(a) (a) Is not the answer because in Cournot’s model of oligopoly, the duopolists do not
recognize their interdependence
(b) (b) Is not the answer because in Cournot’s model of oligopoly, Each duopolist assumes
that the other will keep its quantity constant
(c) (c) Is the answer because in Cournot’s model of oligopoly, each duopolist assumes that
the other will keep its price constant
(d) (d) Is not the answer because in Cournot’s model of oligopoly, the solution is stable
(e) Is not the answer because while (c) above is false, (d) above is true.
34. Answer : (e) < TOP
>
Reason : A perfectly competitive firm earns abnormal profits when its demand curve and marginal
revenue curve lies above the average cost curve as the demand curve and marginal revenue
curve is the same for a perfectly competitive firm.
(a) Is not the answer because a perfectly competitive firm earns negative profits when
average cost curve lies above its demand curve.
(b) Is not the answer because a perfectly competitive firm earns normal profits when average
revenue curve is tangent to average cost curve.
(c) It is true that a perfectly competitive firm earns abnormal profits when its demand curve
lies above the average cost curve.
(d) It is true that a perfectly competitive firm earns abnormal profits when its marginal
revenue curve lies above the average cost curve.
(e) Is the answer because in (c) and (d) above, a perfectly competitive firm earns
abnormal profits
35. Answer : (d) < TOP
>
Reason : Out-of-pocket (explicit) costs, indirect costs, private costs and fixed costs are all recorded in
the books of accounts of the company as payments are made to outsiders who supply labor
services, materials, power, transportation, etc. Implicit costs are not entered in the books of
accounts, which include costs of self-owned, self-employed resources and time cost, etc.
(a) Out-of-pocket (explicit) costs are those costs that require payment of money to
outsiders. All out-of-pocket costs are entered in the books of accounts of a
company.
(b) Indirect costs: The costs/expenses that cannot easily and accurately be separated
and attributed to individual units of production, except on arbitrary basis are called
indirect costs. Although they are indirect, they are recorded in the books since
payment is made.
(c) Private costs are those that accrue directly to the individuals/firms engaged in a
business activity. All private costs excluding implicit costs are recorded in the
books.
(d) Implicit costs: include costs of self-owned, self-employed resources and time costs.
 They are not recorded in the books because no payment is made towards these
costs.
(e) Fixed costs are explicit in nature and are recorded in the books.
Hence, (d) is the answer
36. Answer : (d) < TOP
>
Reason : There exists large number of buyers and sellers in a perfectly competitive industry. When there
are large number of buyers and sellers no individual seller, however large, can influence the
price by change the output. Since the firm is operating in a perfectly competitive market, the
price remains the same even if the firm doubles its output.
(a) (a) Is not the answer because in a perfectly competitive industry, if the firm doubles its
output during the year, then price of the product does not fall more than proportionately
(b) (b) Is not the answer because in a perfectly competitive industry, if the firm doubles its
output during the year , price of the product does not fall less than proportionately
(c) (c) Is not the answer because in a perfectly competitive industry, if the firm doubles its
output during the year price of the product does not fall proportionately
(d) (d) Is the answer because in a perfectly competitive industry, if the firm doubles its
output during the year, price of the product remains same
(e) (e) Is not the answer because insufficient data cannot be the answer.

37. Answer : (c) < TOP

>
Reason : Consumers expenditure increases when he buys same amount of goods even after the
increased price. This is possible when the demand of the consumer is inelastic (i.e. less than
one).
(a) (a) Is not the answer because when the elasticity of demand is infinity, change in total
revenue is indeterminate
(b) (b) Is not the answer because when the elasticity of demand is greater than one, there is a
decrease in total revenue
(c) (c) Is the answer because when the elasticity of demand is less than one, there is an
increase in total revenue
(d) (d) Is not the answer because when the elasticity of demand is equal to one, there is no
change in total revenue
(e) (e) Is not the answer because none of the above cannot be the answer.
38. Answer : (e) < TOP
>
w
MPL
Reason : (a) True. MC = . As the wage rate (w) is a constant, MC will be at its lowest when
MPL is highest.

w
APL
(b) True. AVC = . When APL is maximum, AVC is at its minimum.
(c) True. As long as MPL > APL, APL is increasing hence AVC is decreasing.
(d) True. When APL is increasing, MPL > APL and MC < AVC
(e) Not True. There is no exact relation between MP L and AVC. MPL may be increasing or
decreasing (but > APL) as the AVC is decreasing.

39. Answer : (e) < TOP

>
Reason : (a) A convex isoquant indicates substitutability of factors of production
(b) A concave isoquant denotes increasing MRTS, which is not feasible
(c) (c) A straight line isoquant with a negative slope indicates that inputs are perfect
substitutes
 (d) (d) A straight line isoquant with a positive slope is not feasible
(e) When two inputs are used in fixed proportion there is no substitutability between the
inputs and the isoquant is L-shaped.
40. Answer : (a) < TOP
>
Reason : A firm can maximize profits or minimize losses only when the MC is equal to MR. If MR >
MC marginal profit is positive and the firm can improve profitability by increasing
productivity. On the other hand if MR < MC the firm can improve profitability by decreasing
output.
(a) (a) Is the answer because a perfectly competitive firm is operating at an output where
price is greater than marginal cost, the firm should increase its output so as to maximize
profit
(b) (b) Is not the answer because a perfectly competitive firm is operating at an output
where price is greater than marginal cost, the firm should not reduce its output so as to
maximize profit
(c) (c) Is not the answer because a perfectly competitive firm is operating at an output
where price is greater than marginal cost, the firm may not make profits
(d) (d) Is not the answer because a perfectly competitive firm is operating at an output
where price is greater than marginal cost the firm is not incurring losses
(e) (e) Is not the answer because both (a) and (c) above are not true statement.

41. Answer : (a) < TOP

>
Reason : Arc price elasticity of demand = ∆Q/∆P × (P 0+ P1/Q0+Q1)
= ( –5/1) × (7/15)
= 2.33.

42. Answer : (d) < TOP

>
Reason : : 100 – P = - 20 + 3P
or P = Rs.30
Q = 100 – P = 100 – 30 = 70 units.
43. Answer : (a) < TOP
>
Reason : Elasticity of demand coefficient = (% change in Q) / (% change in P)
= - 10/20
= -1/2

44. < TOP

Answer : (b) >
Reason : If the consumer's income is Rs.20, and she can buy a maximum of 10 units of good Y with that
income, the price of good Y must be Rs.2 = Rs.20/10. At point b, the consumer buys 4 units of
good Y; thus she spends Rs.2 × 4 = Rs.8. If the remaining income (Rs.12 = Rs.20 - Rs8) is
sufficient to buy 3 units of good X, the price of X = Rs.12/3. = Rs.4.
45. Answer : (d) < TOP
>
Reason : AFC = TFC/Q
Average Fixed Cost of Producing 4 units
= 100/4 =Rs.25
46. Answer : (c) < TOP
>
Reason : The slope of isocost line, when labor is taken on horizontal axis and capital on vertical axis, is
–(w/r). Therefore, -(20/25) = -4/5.
47. Answer : (d) < TOP
 Reason : Marginal cost = Change in Total Cost/Change in Output >

Total cost at 150 units of output = 150*15 =Rs.2, 250

Total cost at 300 units of output=300*30 = Rs.9, 000
Change in total cost = 9,000-2,250 = Rs.6,750
Change in Output = 300-150 =150
Marginal cost = 6,750/150 = Rs.45
48. Answer : (d) < TOP
>
Reason : The concentration ratio in this industry = 30 + 20 + 20 + 10 = 80 %.
49. Answer : (a) < TOP
>
Reason : MR = P(1 - 1/|E|)
10 = p [1– ½]
10 = p (0.5)
p = Rs. 20.
50. Answer : (d) < TOP
>
Reason : Learner Index of monopoly power is L = (P – MC) / P
0.33 = (12 – MC)/12
4 = 12 – MC
MC = 12 – 4 = Rs. 8.
51. Answer : (c) < TOP
>
Reason : TC = 3Q
MC = 3
P = 10– 0.5Q
TR = 10Q – 0.5Q2
MR = 10 – Q
Profit-maximizing level of output is achieved when MR =MC.
10 – Q = 3.
Q = 7.
Profit = TR – TC
= 10Q – 0.5Q2 – 3Q
= 10(7) – 0.5(7)2 – 3(7)
= 70 – 24.5 – 21 = Rs. 24.50.
52. Answer : (c) < TOP
>
Reason : Qd = 10,000 – 4P
Qs = 3,000 + 6P
Equilibrium price is determined where,
Qs = Qd
3,000 + 6P = 10,000 – 4P
6P + 4P = 10,000 – 3,000
10P = 7000
P = 700.
If the govt. imposes a sales tax of Rs.200 per units
Qs = 3,000 + 6 (P – 200)
= 3,000 + 6P – 1200
= 1800 + 6P.
∴Equilibrium price is determined, when Qs = Qd
∴ 1800 + 6P = 10,000 – 4P
 6P + 4P = 10,000 – 1800
10P = 8200
P = 820
∴ Change in Price = 820 – 700 = Rs.120 (increase)
53. Answer : (b) < TOP
>
Reason : For all straight line demand is elastic in the upper left portion than in the lower right portion.
This is consequence of the arithmetic properties of the elasticity measure. The demand
becomes inelastic once the elasticity is unitary elastic. The demand is unit elastic when MR =
0.
TR = 200Q – Q2
MR = 200 – 2Q
When MR = 0, 200 – 2Q = 0
Or, Q = 100
When Q =100, P = 200 – 100 = 100.
Thus, the range of prices where the demand is inelastic is Rs.0 to Rs.100. Note: price cannot be
negative
54. Answer : (e) < TOP
MU A MU B >
=
PA PB
Reason :
500 1000
=
PA 200

100000
1000
∴ PA = = Rs.100.
55. Answer : (a) < TOP
>
Reason : When the demand is perfectly elastic, entire tax burden will be borne by the producer. That
means, price remains at Rs.40. When price remains same there will not be any change in
consumer surplus.
56. Answer : (e) < TOP
>
Reason : First stage of production function ends when APL is highest and second stage ends when
MPL = 0. APL is highest when APL = MPL.
Q = 36L2 – L3
APL = Q/L = 36L – L2
MPL = ∂Q/∂L = 72L – 3L2
By equating APL and MPL,
36L – L2 = 72L – 3L2
2L2 = 36L
Or, L = 18
Thus, first stage of production is over the range of labor input 0 to 18.
At the end of the second stage of production function,
MPL = 0
72L – 3L2 = 0
Or, L = 24.
Thus, the second stage of production function is over the range of labor input 18 < L <
24.
A rational firm would operate only in the second stage of production function. This is because of
increasing APL in the first stage and negative MPL in the third stage.
57. Answer : (b) < TOP
Reason : TP (when labor = 100 units) = 100 x 50 = 5000 >
TP (When labor = 52 units) = 104 x 48 = 4992
Thus, MP = (4992 – 5000)/(104– 100) = -8/4= -2 unit.
58. Answer : (d) < TOP
Reason : Expansion path indicate the optimum ratio of these two inputs. >

5
2
Expansion path is L = K
2
5
If L = 6, K = 6 × = 2.4
∴ L = 6, K = 2.4 is the optimum input combination on the expansion path
59. Answer : (b) < TOP
Reason : The production function for a firm Q = 100L – 0.1L2 >

Q 100L − 0.1L2
=
L L
APL = = 100 –0.1 L.
When L = 10, APL = 100 – 0.1(10) = 100 – 1 = 99 units.
60. Answer : (b) < TOP
Reason : Ratio of prices of X and Y = Px/Py = Absolute slope of the budget line = 0.25. >
Or, 0.25Py = Px
Or, Py = 4Px
Budget constraint: 100 = Px. Qx + Py. Qy
We know that Qx = Qy (Given)
100 = Px. Qx + 4Px. Qx
100 = 5Px. Qx
Or, Px Qx = 20 (Amount spent on good X).
61. Answer : (c) < TOP
Reason : AC = TC/Q = 36 – 0.60Q + 0.020Q 2 >

AC is minimum when AC/ Q=0

∂ ∂

= – 0.60 + 0.040Q = 0
0.040Q = 0.60
Q = 15
. At Q = 15, AC = 36 – 0.60(15) + 0.020(15) 2 = 36 –9+4.5 = Rs.31.50
62. Answer : (d) < TOP
Reason : Profit = TR – TC >
TR = P x Q
P = 100 – Q
Hence, TR = (100 – Q) Q = 100Q – Q2
Hence, profit = 100Q – Q2 – (100 – 5Q + 2Q2)
Average profit function: 100 – Q – 100 /Q +5 – 2Q
Thus, if current output is 5 units, average profit will be 100 – 5 – 20 +5 – 10 = 70.
63. Answer : (a) < TOP
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 = 50 - 625Q + 25Q2 LTC = 50Q - 625Q2 + 25Q3
∂ LTC
∂Q
LMC = = 50 – 1250Q + 75Q2
LAC is minimum, when LMC =LAC
Thus, 50 - 1250Q + 75Q2 = 50 - 625Q + 25Q2
Or, 625Q = 50Q2
Or, 50Q = 625
Or, Q = 12.5
64. Answer : (e) < TOP
>
Reason : TC = 500 + 5Q
VC = 5Q; FC = 500
 5Q
Q
AVC = =5
FC 500
(P − AVC) (7 − 5)
BEP = = = 250
∴ BE Sales revenue = 250 x 7
= Rs.1750.
65. Answer : (c) < TOP
Reason : Revenue = Profits + Total Cost >
= -15Q2 + 200Q – 200 + (200 + 10Q)
= -15Q2 + 210Q
Revenue will be maximum, when ∂R/∂Q = 0
∂R/∂Q = -30Q + 210 = 0
Or, Q = 210/30 = 7 units.
66. Answer : (b) < TOP
Reason : For a firm operating in a perfectly competitive industry, the MC curve above the AVC curve is >
the supply curve of the firm.
MC = ∂TC/∂Q = - 50 + 4Q = P
Or, 4Q = P + 50
Or, Q = 0.25P + 12.5
There are 200 firms, hence Qs = 200x Q = 50P + 2500
Equilibrium price is where, Qs = Qd
3000 – 200P = 50P + 2500
Or, 250P = 500
Or, P = Rs.2.
67. Answer : (b) < TOP
Reason : A firm will shut down its operations if the price is less than average variable cost. Since under >
perfect competition, price is also equal to marginal revenue, the firm will continue operations
in the short run so long as price is at least equal to average variable cost. Thus the minimum
price, which the firm will shut down, is the minimum average variable cost.
AVC = 350 – 40Q + 2Q2
Minimum average variable cost: AVC/ Q=0
∂ ∂

Thus, -40 + 4Q = 0
Or, Q = 10
When the firm is producing 10 units, then
AVC = 350 – 40(10) + 2(100) =R 150.
Thus, if price falls below Rs.150, the firm has to shut-down its operation in the short run.
68. Answer : (d) < TOP
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 (d).
69. Answer : (b) < TOP
Reason : Alpha Ltd. and Gamma Ltd. are the two firms operating in a market. The cost functions of >
Alpha Ltd. and Gamma Ltd. are CA = 10QA and CG = 0.5QG2. The demand function of the
industry is Q = 200 – 4P.
Q = 200 – 4P
Or, 4P = 200 – Q
Or, P = 50 – 0.25Q
But, we know that Q = QA + QG
Hence, P = 50 – 0.25QA – 0.25QG
Thus, TRA = P x QA = QA(50 – 0.25QA – 0.25QG)
Thus, TRA = 50QA – 0.25QA2 – 0.25QAQG
Thus, MRA = 50 – 0.5QA – 0.25QG
MRA = MCA
50 – 0.5QA – 0.25QG= 10
Or, 40 – 0.5QA = 0.25QG
Or, 160 – 2QA = QG
TRG = P x QG = QG(50 – 0.25QA – 0.25QG)
TRG= 50QA – 0.25QG2 – 0.25QAQG
MRG = 50 – 0.5QG – 0.25QA
But, MRG = MCG
50 – 0.5QG – 0.25QA = QG
Or, 50 - 0.25QA = 1.5QG
Or, 50 – 0.25QA = 1.5(160 – 2QA)
Or, 50 – 0.25QA = 240 – 3QA
Or, 2.75QA = 190
Or, QA = 69
QG = 160 – 2(69) = 22
Q = QA + QG= 69 + 22 = 91 units.
70. Answer : (a) < TOP
Reason : The profit maximizing output is where MC = MR >
30 – 40Q + 3Q2 = 30 – 4Q
Or, 3Q2 = 36Q
Or, Q = 12
At output of 12 units, total cost = 5000 + 30(12) – 20(12)2 + (12)3 = 5000 + 360 – 2880 + 1728 =
Rs.4208.
71. Answer : (a) < TOP
Reason : When price discrimination is not practiced by the monopolist, PK = PA. >
PK = 40 – 2.5QK
2.5QK = 40 – PK
QK = 16 – 0.4PK
PA = 120 – 10QA
10QA = 120 – PA
QA = 12 – 0.1PA
Total output sold by the monopolist = Q = QA + QK
Thus, Q = 16 – 0.4PK + 12 – 0.1PA
Q = 28 – 0.5P
TR = P x Q = P(28 – 0.5P) = 28P – 0.5P2
Maximum TR: TR/ Q=0
∂ ∂

28 – P = 0
 Or, P = 28
When P = 28, Q = 28 – 0.5(28) = 14 units.
72. Answer : (e) < TOP
>
Reason : Qs = 1000P + 500
Qd = 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.
73. Answer : (c) < TOP
>
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 : (c) < TOP
>
Reason : The long run equilibrium of a monopolistically competitive firm is where P = LAC.
16000 – 8Q = 16000 – 14Q + 0.004Q2
Or, 0.004Q2 = 6Q
Or, 0.004Q = 6
Or, Q = 1500 units.
Optimum output is where the LAC is minimum.
Min. LAC is where ∂LAC/∂Q = 0
-14 + 0.008Q = 0
Or, Q = 14/0.008 = 1750 units.
Excess capacity = 1750 – 1500 = 250 units.
75. Answer : (d) < TOP
>
Reason : Increase in sales because of increase in per capita income = 2 x 2.5 = 5 percent
Decline in sales because of reduction in prices of competitor’s goods = 0.5 x – 5 = 2.5 percent
Thus, increase in sales because of decline in price = 10 – 5 – (-2.5) = 7.5
Price elasticity of demand = % Change in Quantity demanded/% Change in Price = 7.5/ (-10) =
(-0.75).

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