Macro ECONOMIC

Introductory
Microeconomics
Workbook
Class
XII
4323/3, Ansari Road, Darya Ganj, New Delhi-110002

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Contents
Worksheet 1
Introduction
Worksheet 2
Consumer Equilibrium and Demand
Worksheet 3A
Producer Behaviour and Supply
17
Worksheet 3B
Cost and Revenue
25
Worksheet 4
Forms of Market and Price Determination
31
Solutions
CBSE Question Papers2011 (Solved)
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Introduction
QUESTION SETI
Define the following concepts:
1. Microeconomics.
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2. Economy.
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3. Scarcity.
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4. Central problems of an economy.
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5. Mixed economy.
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6. Market economy.
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7. Centrally planned economy.
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8. Production possibility curve.
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9. Opportunity cost.
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Introductory Microeconomics
EconomicsXII
10. Marginal opportunity cost.

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11. Marginal rate of transformation.
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12. Macroeconomics.
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13. Macro variables.
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QUESTION SETII
Defend or refute the following statements. Write yes or no with reason:
1. Microeconomics does not deal with aggregates.
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2. Opportunity cost refers to explicit cost of production.
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3. Production possibility curve may sometimes be convex to the origin.
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4. Central problems of an economy are found only in those economies which are not governed or
regulated by the government.
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5. Scarcity exists even when certain goods are available at zero price.
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6. Marginal opportunity cost falls as resources are shifted from Use-1 to Use-2.
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7. PPC is drawn on the assumption of constant technology.
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8. Economising the use of resources means saving the resources for future use.
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9. If resources are not efficiently utilised, we are outside PPC.
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10. An economy produces goods and services in a manner such that it always operates on the PPC.
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QUESTION SETIII
Write your comment on each of the following statements in a sentence or two:
1. Choice between consumer goods and capital goods refers to the problem of how to produce.
_________________________________________________________________________________________
_________________________________________________________________________________________
2. Choice between labour intensive technology and capital intensive technology refers to the problem of
what to produce.
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3. Choice between production for the poor and production for the rich refers to the problem of what to
produce.
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4. In a market economy, the central problems are solved by the central authority of the government.
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EconomicsXII
5. In a centrally planned economy, the central problems are solved by the forces of supply and demand.
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6. In a mixed economy, only public sector is engaged in the process of production.
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7. Problem of resource allocation is automatically solved in a mixed economy.
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8. Production possibility curve shows possibilities of production when different technologies are used.
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9. Economic activity would not exist if resources were not scarce.
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10. A point below PPC points to under utilisation of resources.
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QUESTION SETIV
Complete the following sentences:
1. Mixed economy is the one in which __________________________________________________________ .
2. In a capitalist economy, the problem of resource allocation is solved by ____________________________ .
3. In a centrally planned economy, the decision regarding resource allocation is taken by the ___________
_________________________________________________________________________________________ .
4. Marginal opportunity cost refers to the loss of output of Good-1 when ____________________________ .
5. Growth of resources causes a shift in PPC to the _______________________________________________ .
6. When an economy is operating inside the PPC, it is a situation of _________________________________ .
7. In a state of economic slowdown (or recession) when there is massive unemployment and the economy
fails to operate on the PPC, it tends to operate _________________________________________________ .
8. Destruction of resources causes a shift in PPC to the____________________________________________ .
9. Discovery of resources (or new technology) causes a shift in PPC to the____________________________ .
EconomicsXII
NUMERICALS
1. Find opportunity cost, given the following possibilities of employment of Mr. X.
Possibility 1:
employment in firm-A at the wage of 1,500 P.M.
Possibility 2:
employment in firm-B at the wage of 2,500 P.M.
Possibility 3:
employment in firm-C at the wage of 4,000 P.M.
Ans. ________________________________________________________________________________________
2. Find marginal rate of transformation, given the following information:
Output of Good-Y
Output of Good-X
200
200
160
220
Ans. ________________________________________________________________________________________
3. Find marginal opportunity cost, given the following situation when some resources are shifted from
Use-2 to Use-1.
Loss of output in Use-2 : 600 units
Gain of output in Use-1 : 300 units
Ans. ________________________________________________________________________________________
4. Find marginal opportunity cost of watches when production of watches increases from 10 units to
15 units while the production of shoes decreases from 500 units to 100 units.
Ans. ________________________________________________________________________________________
5. The table shows production possibilities of two goods. Find marginal opportunity cost at different
levels of the production of Good-1.
Good-1
Good-2
100
90
75
55
30
Ans. ________________________________________________________________________________________
HOTS (Higher Order Thinking Skills)

Write true or false with a reason:
1. With an efficient utilisation of resources, an economy can shift to point beyond the PPC.
_________________________________________________________________________________
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EconomicsXII
2. When output of Good-1 increases from 100 units to 110 units and output of Good-2
decreases from 400 units to 350 units, marginal opportunity cost = 50 units.
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_________________________________________________________________________________
3. When an economy moves from a situation of underemployment to full employment, PPC
curve shifts to the right.
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4. Marginal rate of transformation refers to the slope of PPC.
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5. Convexity of PPC to the origin points to increasing slope of PPC and increasing marginal
opportunity cost.
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6. Problem of resource allocation would not arise if resources had not alternative uses.
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7. If a country is operating inside the PPC, it is saving its resources for future growth.
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8. If an economy is operating inside the PPC, it is possible to increase the production of
Good-1 without any decrease in the production of Good-2.
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9. Opportunity cost is an avoidable cost.
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10. Even when resources and technology are constant, an economy may not operate on the PPC.
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Consumer Equilibrium and Demand
QUESTION SETI
1. Demand and quantity demanded.
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2. Marginal utility and total utility.
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3. Indifference curve.
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4. Budget line/price line.
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5. Consumers equilibrium.
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6. Law of diminishing marginal utility.
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7. Law of demand.
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8. Price elasticity of demand.
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9. Individual demand schedule and market demand schedule.
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10. Demand curve.

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11. Demand function.
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12. Substitute goods and complementary goods.
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13. Normal goods, inferior goods, and giffen goods.
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14. Extension and contraction of demand.
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15. Increase and decrease in demand.
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16. Movement along the demand curve and shift in demand curve.
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QUESTION SETII
1. Demand for a commodity can exist independent of its price.
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2. Quantity demanded is a specific amount of a commodity that the consumer is ready to buy against a
specific price, while demand is not.
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3. Demand for a commodity refers to the entire demand schedule.
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EconomicsXII
4. It is quantity demanded (and not demand for a commodity) that changes with respect to its own price.
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5. Marginal utility of each unit of a commodity adds up to total utility.
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6. Total utility will increase even when marginal utility decreases.
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7. Total utility is maximum when marginal utility starts declining.
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8. Increase in demand refers to extension of demand.
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9. Decrease in demand refers to contraction of demand.
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10. In case of inferior goods, law of demand fails.
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11. Giffen goods must be inferior goods, while inferior goods, may or may not be giffen goods.
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12. In case of substitute goods, a fall in price of Good-X causes a fall in demand for Good-Y.
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13. In case of complementary goods, a rise in price of Good-X causes a rise in demand for Good-Y.
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14. Indifference curve is not convex to the origin.
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EconomicsXII
15. MRS (marginal rate of substitution) along an indifference curve tends to diminish.
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16. All attainable combinations of Good-X and Good-Y are below the budget line of a consumer.
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MUX
= MUM.
PX
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17. A consumer strikes his equilibrium when:
_________________________________________________________________________________________
MUX
MUY
=
= MUM.
PX
PY
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18. A consumer strikes his equilibrium when:
_________________________________________________________________________________________
PX
.
PY
_________________________________________________________________________________________
19. A consumer strikes his equilibrium when: MRS =
_________________________________________________________________________________________
PX
P
is better than when MRS = X .
PY
PY
_________________________________________________________________________________________
20. A situation when MRS >
_________________________________________________________________________________________
PX MUX
P
MUX
is better than when X =
>
.
PY MUY
PY MUY
_________________________________________________________________________________________
21. A situation when
_________________________________________________________________________________________
QUESTION SETIII
1. MU must diminish as more and more standard units of a commodity are continuously consumed.
_________________________________________________________________________________________
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2. Cross price effect occurs in case of substitute goods, and not in case of complementary goods.
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3. In an indifference curve map, higher IC always points to higher level of satisfaction.
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EconomicsXII
4. Changes in income causes a shift in demand curve, while change in price does not.
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5. Even when PX remains constant, QX may increase or decrease.
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6. Elasticity of demand refers to change in quantity consequent upon change in price of the commodity.
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7. When total expenditure on the commodity remains constant, price elasticity of demand also remains
constant, no matter what the change in price is.
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8. Elasticity of demand (with respect to price of the commodity) is constant along a straight line demand
curve.
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9. If price elasticity of demand is zero, it means expenditure on the commodity does not change with
change in price of the commodity.
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10. A commodity showing high elasticity of demand often has a large number of close substitutes in the
market.
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11. Elasticity of demand tends to be high over a short period of time than the long period.
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12. Complementary goods often exhibit low elasticity of demand.
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13. Luxuries of life often exhibit low elasticity of demand.
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14. Higher the price level, higher should be the elasticity of demand.
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15. A horizontal straight line demand curve shows zero elasticity of demand.
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16. A vertical straight line demand curve shows that demand rises to infinity even when price remains
constant.
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17. Price elasticity of demand is identical with slope of demand curve.
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18. From a point of intersection, a flatter demand curve shows greater elasticity of demand than a steeper
demand curve.
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19. In case of normal goods, income effect is positive, while in case of inferior goods, it is negative.
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20. In case of giffen goods, income effect is always greater than the substitution effect.
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QUESTION SETIV
1. When price of the commodity increases, demand for the commodity _____________________________ .
2. When demand for the commodity increases, demand curve_____________________________________ .
3. When demand curve shifts, price of the commodity____________________________________________ .
4. In case of normal goods, there is a positive relationship between_________________________________ .
5. Moving along an indifference curve, we find that MRS tends to__________________________________ .
14
EconomicsXII
6. Moving along a price line, we find that price ratio (PX /PY ) remains________________________________ .
7. In case of IC analysis, a consumer strikes his equilibrium when___________________________________.
8. In case of utility analysis (and one-commodity case) a consumer strikes his equilibrium when
_________________________________________________________________________________________.
9. In case of utility analysis (and 2-commodity case) a consumer strikes his equilibrium when _______
________________________________________________________________________________________ .
10. Demand curve slopes downward because of the law of__________________________________________ .
11. Downward sloping demand curve shows the law of_____________________________________________ .
12. Convexity of IC to the origin shows__________________________________________________________ .
13. Elasticity of demand (with respect to price of the commodity) shows______________________________ .
14. Law of demand fails in situations of (i) ______________, (ii) ______________ , and (iii) _______________ .
15. Demand curve shifts to the right because of (i) ________________________, (ii) _____________________,
and (iii) ______________________ .
16. When price of tea increases, demand for sugar will tend to ______________________________________ .
17. Even when price of the concerned commodity remains constant, people tend to buy less of it, because
(i) ________________________, (ii) _________________________, and (iii) _________________________ .
18. If demand curve is a rectangular hyperbola, elasticity of demand = _______________________________ .
19. At the mid-point of straight line downward sloping demand curve, elasticity of demand = ___________ .
20. In case of a perfectly elastic demand, demand curve for the concerned commodity is________________ .
21. In case of a perfectly inelastic demand, demand curve for the concerned commodity is ______________ .

1. If 5% increase in PX causes 5% increase in expenditure on Good-X, elasticity of demand = 1.
_________________________________________________________________________________
_________________________________________________________________________________
2. If 5% increase in PX is accompanied with constant expenditure on the commodity, elasticity
of demand = 1.
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EconomicsXII
3. If slope of two demand curves is the same, they show the same elasticity of demand.
_________________________________________________________________________________
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4. When slope of demand curve = 0, price elasticity of demand =
_________________________________________________________________________________
_________________________________________________________________________________
5. When slope of demand curve = , price elasticity of demand = 0.
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EconomicsXII
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3A
Producer Behaviour and Supply
QUESTION SETI
1. Production function.
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2. Producers equilibrium
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3. Supply and quantity supplied.
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4. Individual supply schedule and market supply schedule.
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5. Law of supply.
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6. Contraction of supply and decrease in supply.
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7. Extension of supply and increase in supply.
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8. TP, AP and MP.
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9. Returns to a factor.
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10. Law of variable proportions.

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11. Increasing returns to a factor.
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12. Diminishing returns to a factor.
_________________________________________________________________________________________
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13. Movement along the supply curve and shift in supply curve.
_________________________________________________________________________________________
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14. Joint supply and composite supply
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15. Price elasticity of supply.
_________________________________________________________________________________________
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16. Perfectly elastic and perfectly inelastic supply.
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17. Elastic and inelastic supply.
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18. Market period, short period and long period.
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19. Fixed factors and variable factors.
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20. Supply and stock.
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EconomicsXII
QUESTION SETII
1. Production function is only a technical relationship between physical inputs and physical output.
_________________________________________________________________________________________
_________________________________________________________________________________________
2. A producer strikes his equilibrium when the difference between TR and TC is maximised.
_________________________________________________________________________________________
_________________________________________________________________________________________
3. Supply may remain constant even when quantity supplied changes.
_________________________________________________________________________________________
_________________________________________________________________________________________
4. Contraction of supply causes a shift in supply curve.
_________________________________________________________________________________________
_________________________________________________________________________________________
5. Extension and contraction of supply are related to factors other than price of the concerned commodity.
_________________________________________________________________________________________
_________________________________________________________________________________________
6. Supply increases in response to increase in price of the concerned commodity.
_________________________________________________________________________________________
_________________________________________________________________________________________
7. TP is maximum only when MP = 0.
_________________________________________________________________________________________
_________________________________________________________________________________________
8. MP can be negative, but not the AP.
_________________________________________________________________________________________
_________________________________________________________________________________________
9. Law of variable proportions must operate, even when all factors of production are variable.
_________________________________________________________________________________________
_________________________________________________________________________________________
10. Diminishing returns to a factor occur simply because supply of the factor cannot be increased.
_________________________________________________________________________________________
_________________________________________________________________________________________
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EconomicsXII
11. AP and MP tend to be U-shaped.

_________________________________________________________________________________________
_________________________________________________________________________________________
12. Stage of increasing returns (when MP is increasing) is economically redundant, because the producer
will not strike his equilibrium in this stage.
_________________________________________________________________________________________
_________________________________________________________________________________________
13. The producer strikes his equilibrium only when MP is diminishing.
_________________________________________________________________________________________
_________________________________________________________________________________________
14. In the short period, production is done only by using the variable factors.
_________________________________________________________________________________________
_________________________________________________________________________________________
15. Law of variable proportions operates only if factor ratio happens to change.
_________________________________________________________________________________________
_________________________________________________________________________________________
16. If a straight line upward sloping supply curve shoots from the origin, elasticity of supply is always equal
to one.
_________________________________________________________________________________________
_________________________________________________________________________________________
17. If a straight line upward sloping supply curve shoots from the Y-axis, elasticity of supply < 1.
_________________________________________________________________________________________
_________________________________________________________________________________________
18. If a straight line upward sloping supply curve shoots from the X-axis, elasticity of supply > 1.
_________________________________________________________________________________________
_________________________________________________________________________________________
19. Stages of production are the consequences of the law of variable proportions.
_________________________________________________________________________________________
_________________________________________________________________________________________
20. Price elasticity of supply measures the change in quantity supplied in response to a change in price of the
commodity.
_________________________________________________________________________________________
_________________________________________________________________________________________
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EconomicsXII
QUESTION SETIII
1. MP must cut AP from its top.
_________________________________________________________________________________________
_________________________________________________________________________________________
2. If AP is falling, AP > MP.
_________________________________________________________________________________________
_________________________________________________________________________________________
3. If AP is rising, AP < MP.
_________________________________________________________________________________________
_________________________________________________________________________________________
4. If AP is falling, MP must also fall.
_________________________________________________________________________________________
_________________________________________________________________________________________
5. If AP is rising, MP must also rise.
_________________________________________________________________________________________
_________________________________________________________________________________________
6. TP must rise as more and more units of a variable factor are combined with the fixed factor.
_________________________________________________________________________________________
_________________________________________________________________________________________
7. MP is the rate of TP.
_________________________________________________________________________________________
_________________________________________________________________________________________
8. When MP is decreasing, TP increases at a constant rate.
_________________________________________________________________________________________
_________________________________________________________________________________________
9. When MP is increasing, TP increases at a decreasing rate.
_________________________________________________________________________________________
_________________________________________________________________________________________
10. When MP is constant, TP is also constant.
_________________________________________________________________________________________
_________________________________________________________________________________________
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EconomicsXII
11. Increasing returns to a factor occur because the variable factor is abundantly used in production.
_________________________________________________________________________________________
_________________________________________________________________________________________
12. Diminishing returns to a factor occurs because fixed factor cannot be used as much as the variable factor.
_________________________________________________________________________________________
_________________________________________________________________________________________
13. Diminishing returns to a variable factor occur because the producer fails to buy the variable factor in the
required quantity.
_________________________________________________________________________________________
_________________________________________________________________________________________
14. Supply never changes unless price changes.
_________________________________________________________________________________________
_________________________________________________________________________________________
15. It is more profitable for the producer to be in a stage of increasing returns than the stage of diminishing
returns.
_________________________________________________________________________________________
_________________________________________________________________________________________
16. In a state of equilibrium, firms MC should be rising.
_________________________________________________________________________________________
_________________________________________________________________________________________
17. A producer supplies more of a commodity only at a higher price.
_________________________________________________________________________________________
_________________________________________________________________________________________
18. At a point of intersection of two supply curves, flatter curve shows higher elasticity of supply.
_________________________________________________________________________________________
_________________________________________________________________________________________
19. In the long period, elasticity of supply tends to be lower than in the short period.
_________________________________________________________________________________________
_________________________________________________________________________________________
20. If elasticity of supply = 0, supply curve becomes a horizontal straight line.
_________________________________________________________________________________________
_________________________________________________________________________________________
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EconomicsXII
QUESTION SETIV
1. Variable factors are those factors ____________________________________________________________ .
2. Fixed factors are those factors _______________________________________________________________ .
3. In a state of equilibrium, the producer maximises ______________________________________________ .
4. Break-even point occurs when ______________________________________________________________ .
5. Shut-down point occurs when ______________________________________________________________ .
6. MP is the rate of __________________________________________________________________________ .
7. MP = 0, when ____________________________________________________________________________ .
8. TP starts declining when ___________________________________________________________________ .
9. TP increases at increasing rate when _________________________________________________________ .
10. TP increases at diminishing rate when _______________________________________________________ .
11. Increase in supply is caused by (i) ________________, (ii) ________________, and (iii) ________________ .
12. Decrease in supply is caused by (i) ________________, (ii) ________________, and (iii) ________________ .
13. Extension of supply is caused by _____________________________________________________________ .
14. Contraction of supply is caused by ___________________________________________________________ .
15. Upward movement along a supply curve occurs because of ______________________________________ .
16. Downward movement along a supply curve occurs because of ___________________________________ .
17. Two examples of technological progress causing a shift in supply curve are (i) _____________________,
and (ii) ______________________ .
18. Owing to improvement in technology, firms supply curve will shift to the _________________________ .
19. If price of inputs rises, firms supply curve will shift to the________________________________________.
20. Increase in excise tax will shift the firms supply curve to the _____________________________________.
21. When a cost saving technology is introduced, firms supply curve shifts to the ______________________.
22. During short period, production can be increased _____________________________________________ .
23. During long period, production can be increased ______________________________________________ .
24. Production does not respond to any change in price when elasticity of supply = ____________________.
25. When farm productivity reduces owing to natural calamity, farmers supply curve shifts to the
_________________________________________________________________________________________ .
26. Three important factors affecting supply of a commodity are (i) ________________________________,
(ii) ________________________________, and (iii) ________________________________.
27. Law of variable proportions operates because (i) _____________________, (ii) _____________________,
and (iii) _____________________ .
23
EconomicsXII

1. Draw a diagram showing that MR = MC when the difference between TR and TC is maximum.
2. Find TP when 10 units of the variable factor are combined with 05 units of the fixed factor and MP
remains constant at 10 units.
_________________________________________________________________________________________
_________________________________________________________________________________________
3. At the existing level of output, MP = AP = 10 units. Would AP be equal to MP when production is
increased and law of variable proportions is in operation?
_________________________________________________________________________________________
_________________________________________________________________________________________
4. Introduction of new technology increases MP. How would it affect supply curve of a firm?
_________________________________________________________________________________________
_________________________________________________________________________________________
5. How would you explain a situation when supply of a commodity increases without any increase in
price of the commodity?
_________________________________________________________________________________________
_________________________________________________________________________________________
6. Write an equation for a short period production function. Give an example.
_________________________________________________________________________________________
_________________________________________________________________________________________
7. Why should TP be maximum when MP = 0.
_________________________________________________________________________________________
_________________________________________________________________________________________
8. If there is change in any other determinant of supply (other than price of the concerned commodity),
the supply curve must shift to the right or left. Do you agree? Give reason.
_________________________________________________________________________________________
_________________________________________________________________________________________
9. Why a situation of increasing returns to a factor not sustainable? Give two reasons.
_________________________________________________________________________________________
_________________________________________________________________________________________
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EconomicsXII
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3B
Cost and Revenue
QUESTION SETI
1. Fixed cost and variable cost.
_________________________________________________________________________________________
_________________________________________________________________________________________
2. Total cost, average cost and marginal cost.
_________________________________________________________________________________________
_________________________________________________________________________________________
3. Explicit cost and implicit cost.
_________________________________________________________________________________________
_________________________________________________________________________________________
4. Money cost and real cost.
_________________________________________________________________________________________
_________________________________________________________________________________________
5. Private cost and social cost.
_________________________________________________________________________________________
_________________________________________________________________________________________
6. Prime cost and supplementary cost.
_________________________________________________________________________________________
_________________________________________________________________________________________
7. Total revenue and marginal revenue.
_________________________________________________________________________________________
_________________________________________________________________________________________
QUESTION SETII
1. Fixed cost is constant even when output is zero.
_________________________________________________________________________________________
_________________________________________________________________________________________
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EconomicsXII
2. Variable cost is incurred before production is started.

_________________________________________________________________________________________
_________________________________________________________________________________________
3. Fixed cost must be greater than variable cost when output is zero.
_________________________________________________________________________________________
_________________________________________________________________________________________
4. Variable cost reduces as output increases.
_________________________________________________________________________________________
_________________________________________________________________________________________
5. Average fixed cost curve is a rectangular hyperbola.
_________________________________________________________________________________________
_________________________________________________________________________________________
6. Average variable cost tends to fall, stabilise and rise as output increases.
_________________________________________________________________________________________
_________________________________________________________________________________________
7. Total fixed cost is indicated by a vertical straight line.
_________________________________________________________________________________________
_________________________________________________________________________________________
8. Marginal cost includes both fixed cost and variable cost.
_________________________________________________________________________________________
_________________________________________________________________________________________
9. Average cost includes both fixed cost and variable cost.
_________________________________________________________________________________________
_________________________________________________________________________________________
10. Total cost is the sum total of marginal costs.
_________________________________________________________________________________________
_________________________________________________________________________________________
11. Total revenue is the sum total of marginal revenues.
_________________________________________________________________________________________
_________________________________________________________________________________________
12. Average revenue is the same as market price of the commodity.
_________________________________________________________________________________________
_________________________________________________________________________________________
26
EconomicsXII
13. Marginal revenue can never be negative.

_________________________________________________________________________________________
_________________________________________________________________________________________
14. When price is constant, AR > MR.
_________________________________________________________________________________________
_________________________________________________________________________________________
15. When price reduces as output increases, AR = MR.
_________________________________________________________________________________________
_________________________________________________________________________________________
16. Under perfect competition, AR and MR curves tends to slope downward.
_________________________________________________________________________________________
_________________________________________________________________________________________
17. Under monopoly, AR and MR curves are indicated by horizontal straight lines.
_________________________________________________________________________________________
_________________________________________________________________________________________
18. TR curve always shoots from the origin.
_________________________________________________________________________________________
_________________________________________________________________________________________
19. AR curve never shoots from the origin.
_________________________________________________________________________________________
_________________________________________________________________________________________
20. When MR = 0, TR is maximum.
_________________________________________________________________________________________
_________________________________________________________________________________________
QUESTION SETIII
1. AC curve tends to be U-shaped.
_________________________________________________________________________________________
_________________________________________________________________________________________
2. MC is greater than AC when production is in a state of diminishing returns.
_________________________________________________________________________________________
_________________________________________________________________________________________
27
EconomicsXII
3. AC is greater than MC, so long as AC is falling.

_________________________________________________________________________________________
_________________________________________________________________________________________
4. MC and AC are equal when AC tends to stabilise.
_________________________________________________________________________________________
_________________________________________________________________________________________
5. TC and TVC curves are parallel to each other.
_________________________________________________________________________________________
_________________________________________________________________________________________
6. The distance between AVC and AFC curves tends to reduce as output increases.
_________________________________________________________________________________________
_________________________________________________________________________________________
7. The distance between AC and AVC curves tends to increase at higher levels of output.
_________________________________________________________________________________________
_________________________________________________________________________________________
8. Short period TC curve starts from Y-axis.
_________________________________________________________________________________________
_________________________________________________________________________________________
9. Long period TC curve starts from the origin.
_________________________________________________________________________________________
_________________________________________________________________________________________
10. AFC continuously reduces as output increases.
_________________________________________________________________________________________
_________________________________________________________________________________________
11. Greater production always means greater revenue.
_________________________________________________________________________________________
_________________________________________________________________________________________
12. AR is always greater than MR under monopoly.
_________________________________________________________________________________________
_________________________________________________________________________________________
13. ATC and AVC tend to intersect at some level of output.
_________________________________________________________________________________________
_________________________________________________________________________________________
28
EconomicsXII
14. When MC > ATC, ATC must rise.

_________________________________________________________________________________________
_________________________________________________________________________________________
15. Area under MC curve = TVC.
_________________________________________________________________________________________
_________________________________________________________________________________________
16. TR curve under perfect competition is a straight line, sloping upward from the origin.
_________________________________________________________________________________________
_________________________________________________________________________________________
17. Under monopoly, TR curve increases only at a diminishing rate.
_________________________________________________________________________________________
_________________________________________________________________________________________
18. Under perfect competition, rate of TR never declines, but under monopoly and monopolistic
competition, it can.
_________________________________________________________________________________________
_________________________________________________________________________________________
19. AR = 0, when TR is maximum.
_________________________________________________________________________________________
_________________________________________________________________________________________
20. MR tends to fall even when AR is constant.
_________________________________________________________________________________________
_________________________________________________________________________________________
QUESTION SETIV
1. TFC = __________________________________________________________________________________ .
2. TVC = __________________________________________________________________________________ .
3. TC = ___________________________________________________________________________________ .
4. ATC is U-shaped, because of _______________________________________________________________ .
5. AFC is a rectangular hyperbola, because _____________________________________________________ .
6. ATC and AVC never intersect each other, because _____________________________________________ .
7. Area under MC curve = TVC, because _______________________________________________________ .
8. ATC is always above AVC, because ___________________________________________________________ .
29
EconomicsXII
9. Three examples of fixed costs are (i) _______________________, (ii) ________________________, and
(iii) ________________________ .
10. Three examples of variable costs are (i) _______________________, (ii) ________________________, and
(iii) ________________________ .
11. TFC curve is parallel to X-axis, because ______________________________________________________ .
12. Average and marginal cost tend to fall as output rises, because ___________________________________ .
13. The concept of fixed cost is not relevant in the long period, because ______________________________ .
14. Under perfect competition, both AR and MR are indicated by the same horizontal straight line, because
_________________________________________________________________________________________ .
15. AR curve is above MR curve under monopoly because __________________________________________ .
16. MR is the rate of __________________________________________________________________________ .
17. When TR is increasing at a decreasing rate, MR should be ______________________________________ .
18. When TR is increasing at a constant rate, MR should be ________________________________________ .
19. When price is constant, TR increases at a _____________________________________________________ .
20. When MR is negative, TR __________________________________________________________________ .

1. Draw TC and TR curves in one diagram. Show that MR = MC only when TR and TC are parallel to
each other.
_________________________________________________________________________________________
_________________________________________________________________________________________
2. MC is always variable cost. Why?
_________________________________________________________________________________________
_________________________________________________________________________________________
30
EconomicsXII
WO
ET
S
RK HE
Forms of Market and Price Determination
QUESTION SETI
1. Pure competition and perfect competition.
_________________________________________________________________________________________
_________________________________________________________________________________________
2. Monopoly and monopolistic competition.
_________________________________________________________________________________________
_________________________________________________________________________________________
3. Oligopoly and duopoly.
_________________________________________________________________________________________
_________________________________________________________________________________________
4. Equilibrium price and equilibrium quantity.
_________________________________________________________________________________________
_________________________________________________________________________________________
5. Market and market equilibrium.
_________________________________________________________________________________________
_________________________________________________________________________________________
6. Homogeneous product and product differentiation.
_________________________________________________________________________________________
_________________________________________________________________________________________
7. Normal profits, extra-normal profits and extra-normal losses.
_________________________________________________________________________________________
_________________________________________________________________________________________
8. Break-even price, market price and normal price.
_________________________________________________________________________________________
_________________________________________________________________________________________
9. Patent rights and cartels.
_________________________________________________________________________________________
_________________________________________________________________________________________
31
EconomicsXII
10. Excess demand and excess supply.

_________________________________________________________________________________________
_________________________________________________________________________________________
11. Economic viability and non-viability of an industry.
_________________________________________________________________________________________
_________________________________________________________________________________________
12. Control price and support price.
_________________________________________________________________________________________
_________________________________________________________________________________________
QUESTION SETII
1. There is a large number of buyers both under monopoly and monopolistic competition.
_________________________________________________________________________________________
_________________________________________________________________________________________
2. A monopoly firm is a price maker.
_________________________________________________________________________________________
_________________________________________________________________________________________
3. A firm under perfect competition has no control over price of the product.
_________________________________________________________________________________________
_________________________________________________________________________________________
4. Price of the product never changes under perfect competition.
_________________________________________________________________________________________
_________________________________________________________________________________________
5. Firms demand curve is indeterminate under oligopoly.
_________________________________________________________________________________________
_________________________________________________________________________________________
6. Product differentiation allows partial control over price.
_________________________________________________________________________________________
_________________________________________________________________________________________
7. A monopolist can exercise price discrimination.
_________________________________________________________________________________________
_________________________________________________________________________________________
32
EconomicsXII
8. A monopolist fixes price of his product on the basis of elasticity of demand for his product.
_________________________________________________________________________________________
_________________________________________________________________________________________
9. For a perfectly competitive firm, there are only normal profits in the long run.
_________________________________________________________________________________________
_________________________________________________________________________________________
10. A firm under monopolistic competition makes only normal profits in the long run.
_________________________________________________________________________________________
_________________________________________________________________________________________
11. There are no selling costs in perfect competition and monopoly forms of the market.
_________________________________________________________________________________________
_________________________________________________________________________________________
12. Firms demand curve under perfect competition is a horizontal straight line.
_________________________________________________________________________________________
_________________________________________________________________________________________
13. Firms demand curve under monopolistic competition is more elastic than under monopoly.
_________________________________________________________________________________________
_________________________________________________________________________________________
14. A firm under monopolistic competition cannot influence market price.
_________________________________________________________________________________________
_________________________________________________________________________________________
15. Under perfect competition, equilibrium price is determined by the forces of market demand and
market supply.
_________________________________________________________________________________________
_________________________________________________________________________________________
QUESTION SETIII
1. A firm under perfect competition gets only a break-even price in the long run.
_________________________________________________________________________________________
_________________________________________________________________________________________
2. Freedom of entry and exit ensures only normal profits in the long run.
_________________________________________________________________________________________
_________________________________________________________________________________________
33
EconomicsXII
3. A perfectly competitive firm operates at the lowest point of AC curve in the long run.
_________________________________________________________________________________________
_________________________________________________________________________________________
4. There is a high degree of interdependence among firms in oligopoly form of the market.
_________________________________________________________________________________________
_________________________________________________________________________________________
5. In case of excess demand, equilibrium price must rise.
_________________________________________________________________________________________
_________________________________________________________________________________________
6. For a non-viable industry, supply curve is placed above the demand curve.
_________________________________________________________________________________________
_________________________________________________________________________________________
7. Equilibrium price may not change even when market demand happens to change.
_________________________________________________________________________________________
_________________________________________________________________________________________
8. Equilibrium price never changes in a situation of perfectly elastic supply, no matter what the demand is.
_________________________________________________________________________________________
_________________________________________________________________________________________
9. In a situation when productivity increases owing to improvement in technology, equilibrium price tends
to fall.
_________________________________________________________________________________________
_________________________________________________________________________________________
10. In a situation of war when people are fearing shortage of rice, equilibrium price of rice tends to rise.
_________________________________________________________________________________________
_________________________________________________________________________________________
11. Market price is always equal to or greater than the support price of a commodity.
_________________________________________________________________________________________
_________________________________________________________________________________________
12. In a situation when import of inputs becomes expensive, equilibrium price of the commodity tends to
rise.
_________________________________________________________________________________________
_________________________________________________________________________________________
34
EconomicsXII
13. In case of inferior goods, a rise in income of the buyers causes a fall in equilibrium price of the
commodity.
_________________________________________________________________________________________
_________________________________________________________________________________________
14. Equilibrium price may fall even when market demand tends to rise.
_________________________________________________________________________________________
_________________________________________________________________________________________
15. In a state of recession, when there is a substantial cut in production, and supply curve shifts to the left,
equilibrium price may fall.
_________________________________________________________________________________________
_________________________________________________________________________________________
QUESTION SETIV
1. Three important features of perfect competition are (i) ___________________ , (ii) __________________ ,
and (iii) ___________________ .
2. Two basic characteristics of monopoly are (i) ______________________ , and (ii) _____________________ .
3. Three notable features of monopolistic competition are (i) ______________________________________ ,
(ii) ______________________________________ , and (iii) ________________________________________ .
4. Two distinct features of oligopoly are (i) ________________________ , and (ii) _______________________ .
5. Price line under perfect competition _________________________________________________________ .
6. Price line under monopolistic competition is more elastic than under _____________________________ .
7. A perfectly competitive firm cannot make extra-normal profits __________________________________ .
8. In a state of perfectly elastic demand, increase or decrease in supply does not affect _________________ .
9. Owing to a forward shift in demand curve, equilibrium price tends to ____________________________ .
10. Rise in production cost owing to rise in input price, shifts the supply curve ________________________ .
11. Common features of monopoly and monopolistic competition are (i) ___________________________ ,
(ii) _______________________ , and (iii) ________________________ .
12. Common features of perfect competition and monopolistic competition are (i) _____________________,
and (ii) ______________________ .
13. Price is equal to MC in a situation of __________________________________________________________ .
14. Price is greater than MC in a situation of ______________________________________________________ .
15. In case of increase in excise tax, equilibrium price tends to ______________________________________ .
35
EconomicsXII

1. Firms demand curve as a horizontal straight line under perfect competition shows that an
individual producer has no control over price of his product.
_________________________________________________________________________________
_________________________________________________________________________________
2. A monopoly producer cannot control both price as well as quantity of his product.
_________________________________________________________________________________
_________________________________________________________________________________
3. It is because of high degree of interdependence that firms demand curve remains
indeterminate under oligopoly.
_________________________________________________________________________________
_________________________________________________________________________________
4. A situation of excess demand or excess supply is automatically corrected under perfect
competition.
_________________________________________________________________________________
_________________________________________________________________________________
5. In a situation of constant demand, equilibrium quantity does not change even when supply
increases or decreases.
_________________________________________________________________________________
_________________________________________________________________________________
6. A monopoly firm can make abnormal profits in the long run, but not a firm under
monopolistic competition.
_________________________________________________________________________________
_________________________________________________________________________________
7. Price exceeds MC under monopoly, but not under perfect competition.
_________________________________________________________________________________
_________________________________________________________________________________
36
EconomicsXII
SOLUTIONS
Worksheet1
Unit-1: Introduction
QUESTION SET-I
1. Microeconomics is that branch of economics which studies economic problems (or economic issues)
relating to individual economic units like a consumer or a producer.
2. Economy is the sum total of economic activities directed towards the satisfaction of unlimited wants
using the scarce means.
3. Scarcity is a situation when demand for a good exceeds its supply even at a zero price.
4. Central problems are those problems which arise in every economy. At the micro level, these problems
are:
(i) What to produce? (ii) How to produce? and (iii) For whom to produce?
At the macro level, these are (i) problem of fuller utilisation of resources, and (ii) problem of
growth of resources.
5. Mixed economy is the one in which both private and public sectors play a significant role in production
activity. Free play of the market forces is allowed but not without checks and balances by the
government.
6. Market economy is the one in which decisions regarding what, how and for whom to produce are left to
the market forces of supply and demand.
7. Centrally planned economy is the one in which decisions regarding what, how and for whom to
produce are taken by some central authority.
8. Production possibility curve (or transformation curve) is a curve showing different possibilities of
producing a set of two goods with (i) the given resources, and (ii) given technology.
9. Opportunity cost refers to value of a factor in its next best (or second best) alternative use.
10. Marginal opportunity cost refers to loss of output of Good-Y for producing an additional unit of
Good-X, some resources are shifted from Good-Y to Good-X.
11. Marginal rate of transformation (MRT) is the same as marginal opportunity cost. It is estimated as
under:
when some resources
Y Loss of output of Y
MRT=
=
are shifted from Y to X
X Gain of output of X
12. Macroeconomics is the study of economic relationships, economic problems or economic issues at the
level of economy as a whole, like the problem of inflation or of unemployment.
13. Those economic variables which are studied at the level of economy as a whole are known as macro
variables. Examples: GDP, Disposable Income, Household consumption, etc.
QUESTION SET-II
1. No. Microeconomics does deal with the aggregates. Example: market demand is the aggregation of
individual demand.
2. No. Opportunity cost is the value of a factor in its second best alternative use. It is implicit cost, not an
explicit cost. Explicit cost is paid-out cost.
3. No. PPC is always concave to the origin, as marginal opportunity cost (indicating slope of the curve)
must rise as more and more resources are shifted from Good-2 (on Y-axis) to Good-1 (on X-axis).
4. No. Every economy faces the central problems, though these are solved differently in different
economies. Because, scarcity of resources is common to all economies.
5. Yes. Scarcity is a situation when demand for a good exceeds its supply even at a zero price.
39
EconomicsXII
6. No. Marginal opportunity cost increases as resources are shifted from Use-1 to Use-2. This is in
accordance with the law of variable proportions.
7. Yes. PPC is drawn on the assumption of constant technology. Which is why PPC shifts in response to a
shift in technology.
8. No. Economising the use of resources means that resources are to be used in a manner such that
maximum output is realised per unit of input. It also means optimum utilisation of resources.
9. No. If resources are not fully utilised, total output in the economy will be less than the potential output
and we are inside the PPC.
10. No. If resources are not fully utilised (or are under-utilised) an economy may as well be inside the PPC.
QUESTION SET-III
1. No. Choice between consumer goods and capital goods refers to the problem of what to produce.
2. No. Choice between labour intensive technology and capital intensive technology refers to the problem
of how to produce.
3. No. Choice between production for the poor and production for the rich refers to the problem of for
whom to produce. It is a problem relating to choice of users of goods and services.
4. No. In a market economy central problems are solved through the free play of the market forces.
5. No. In a centrally planned economy decisions relating to what, how and for whom to produce are
taken by some central authority of the government.
6. No. In a mixed economy both private and public sectors are engaged in the process of production.
7. In a mixed economy, problem of resource allocation, finds its solution through the market forces of
supply and demand, but not without checks and balances by the government.
8. No. Production possibility curve shows different combinations of two goods which can be produced
with the given resources on the assumptions that (i) resources are fully and efficiently utilised, and (ii)
technique of production remains constant.
9. Yes. Because economic activity is related to the use of scarce means for the satisfaction of human wants.
10. Yes. A point below PPC points to under utilisation of resources. In such a situation actual output is less
than potential output.
QUESTION SET-IV
1. both private as well as public sectors play a significant role in production activity.
2. free play of the market forces.
3. central authority or the government.
4. a unit more of Good-2 is produced by shifting the resources from Good-1 to Good-2.
5. right.
6. under utilisation or inefficient utilisation of resources.
7. inside the PPC.
8. left.
9. right.
40
EconomicsXII
NUMERICALS
1. Opportunity cost = 2,500 P.M.
2. Marginal rate of transformation = 2.
3. Marginal opportunity cost = 2 units.
4. Marginal opportunity cost = 80 units.
5. 10, 15, 20, 25, 30.

1. False. With an efficient or fuller utilisation of resources, the economy operates on the PPC and cannot
shift to point beyond the PPC because PPC shows attainable combinations of two goods with given
resources and technology.
2. False. Marginal opportunity cost = 5 units. Because,
Loss of output of Good - 2
Marginal opportunity cost =
Gain of output of Good - 1
when some resources are shifted from Good-2 to Good-1.
3. False. When an economy moves from a situation of underemployment to full employment, the
economy is on PPC.
4. True. MRT is the same as marginal opportunity cost which is the slope of PPC.
5. False. Convexity of PPC to the origin points to decreasing slope of PPC and decreasing marginal
opportunity cost. However, PPC is always concave to the origin. Because marginal opportunity cost
must rise as more and more resources are shifted from Use-1 to Use-2.
6. True. Problem of resource allocation arises because resources have alternative uses.
7. False. If a country is operating inside the PPC, it corresponds to under utilisation or inefficient
utilisation of resources.
8. True. It is possible to increase the production of Good-1 without any decrease in the production of
Good-2. Because, being inside the PPC points to a situation when resources are not fully utilized (or are
not efficiently utilised).
9. False. Opportunity cost is the cost of a factor in its best alternative use. Accordingly, it is the minimum
cost of a factor, and therefore unavoidable.
10. Yes. Because resources may not be efficiently utilised.
41
EconomicsXII
Worksheet2
Unit-2: Consumer Equilibrium and Demand
QUESTION SET-I
1. Demand refers to various quantities of a commodity that the consumer is ready to buy at different
possible prices of that commodity.
Quantity demanded refers to a specific quantity to be purchased against a specific price of the
commodity.
2. Marginal utility is the utility derived from an additional unit of a commodity.
Total utility is the sum total of marginal utilities from the consumption of different units of a commodity.
3. Indifference curve is a curve showing different combinations of a set of 2-Goods, each combination
offering the same level of satisfaction to the consumer.
4. Budget line is a line showing different combinations of a set of 2-Goods that the consumer can buy,
given his income and prices of the goods. It is also called price line, as it shows price ratio between
Good-X and Good-Y.
5. A consumer is in a state of equilibrium when he maximises his satisfaction by spending his given income
on different goods and services, with a given set of prices.
6. The law of diminishing marginal utility states that marginal utility derived from the consumption of a
commodity declines as more units of that commodity are consumed at a point of time.
7. Law of demand states that, other things remaining constant, more of a commodity is purchased in
response to decrease in its price.
8. The price elasticity of demand is the degree of responsiveness of quantity demanded of a commodity to
the change in its price.
9. Individual demand schedule is a table showing various quantities of a commodity which a consumer is
ready to buy at different possible prices of the commodity at a point of time.
Market demand schedule is a schedule showing various quantities of a commodity which all the buyers
in the market are ready to buy at different possible prices of the commodity at a point of time.
10. Demand curve is a graphic presentation of demand schedule, showing inverse relationship between
price and quantity demanded of a commodity.
11. Demand function shows the relationship between demand for a commodity and its various determinants.
12. Substitute goods are those goods which can be substituted for each other.
Complementary goods are those goods which complete the demand for each other.
13. A normal good is that good in case of which there is a positive relationship between consumers income
and quantity demanded. Implying that income effect is positive.
An inferior good is that good in case of which there is a negative relationship between consumers
income and quantity demanded.
A giffen good is that good in case of which income effect is negative as well as greater than substitution
effect. Implying that the law of demand fails.
14. When quantity demanded of a commodity changes due to change in own price of the commodity, other
factors remain constant, it is a situation of extension and contraction of demand.
15. When quantity demanded of a commodity changes owing to a change in other factors, other than price
of the concerned commodity, it is a situation of increase and decrease in demand.
16. Movement along the demand curve occurs when quantity demanded is related to changes in price of
the commodity.
Shift in demand curve occurs when demand for a commodity is related to factors other than price of the
commodity.
42
EconomicsXII
QUESTION SET-II
1. No. Demand for a commodity is always expressed with reference to price.
2. Yes. Because demand refers to various quantities of a commodity that the consumer is ready to buy
against different possible prices.
3. Yes. Demand for a commodity refers to the entire demand schedule showing various quantities of the
commodity that the buyers in the market are ready to buy at different possible prices at a point of time.
4. Yes. It is quantity demanded of a commodity that changes in response to change in its own price.
Change in demand occurs even when price of the commodity remains constant.
5. Yes. Total utility is the sum total of marginal utilities. TU = SMU.
6. Yes. We know TU = MU. Accordingly TU will increase so long as MU is positive, even when it is
decreasing.
7. No. When marginal utility starts declining, total utility increases at a diminishing rate. Total utility is
maximum when marginal utility is zero.
8. No. Increase in demand refers to increase in quantity demanded of a commodity at its existing price. It
is a situation of forward shift in demand curve, not of extension of demand.
9. No. Decrease in demand refers to decrease in quantity demanded of a commodity at its existing price. It
is a situation of backward shift in demand curve, not of contraction of demand.
10. No. In case of inferior goods, law of demand fails only when negative income effect is greater than
substitution effect. When negative income effect is less than substitution effect law of demand does not fail.
11. Yes. Because giffen goods by definition are those inferior goods in case of which two conditions are
satisfied: (i) income effect is negative, and (ii) income effect is greater than substitution effect. In case of
inferior goods, on the other hand, only one condition needs to be satisfied: that income effect is negative.
12. Yes. Because, cheaper good replaces the one which is more expensive.
13. No. In case of complementary goods, a rise in price of Good-X causes a fall in demand for Good-Y.
Because consumption of both goods X and Y goes together.
14. No. Indifference curve is convex to the origin, in accordance with the general law that MRS tends to
diminish.
15. Yes. As we move along the indifference curve marginal rate of substitution (MRS) tends to diminish.
Because when we have less of a commodity, intensity of its desire increases. Accordingly, less and less of
it is sacrificed for every additional unit of the other commodity.
16. No. All attainable combinations of Good-X and Good-Y are below as well as along the budget line.
MU X
17. Yes. A consumer attains his equilibrium when
= MUM, in case of single commodity.
PX
18. Yes. A consumer attains his equilibrium when
MU X MU Y
= MUM in case of two commodities.
=
PX
PY
19. Yes. In terms of indifference curve approach, a consumer strikes his equilibrium when:
Slope of IC = Slope of Price Line
Or
P
MRS = X
PY
20. No. A consumer attains his equilibrium only when: MRS =
PX
. It is a point of maximum satisfaction.
PY
21. No. A consumer attains his equilibrium only when:
PX MU X
. It is a situation of maximum satisfaction.
=
PY MU Y
43
EconomicsXII
QUESTION SET-III
1. Yes. MU must diminishes as more and more standard units of a commodity are continuously
consumed. This is in accordance with the law of diminishing marginal utility.
2. No. Cross price effect can occurs in case of substitute goods as well as in case of complementary goods.
Because substitute goods as well as complementary goods are related to each other.
3. Yes. Higher indifference curve shows higher level of satisfaction. Because, higher IC corresponds to
higher level of income of the consumer or higher level of consumption of both goods X and Y.
4. Yes. Shift in demand curve occurs due to change in factors other than own price of the commodity such
as change in income of the consumer, tastes or preferences.
5. Yes. QX may increase or decrease due to change in other determinants of demand even when PX
remains constant.
6. No. Elasticity of demand is always measured as a percentage change in quantity demanded in response
to a percentage change in price.
7. Yes. When total expenditure on the commodity remains constant, price elasticity of demand also
remains constant (which is equal to one), no matter price of the commodity increases or decreases.
8. No. Price elasticity of demand along a straight line demand curve is different at different points on the
lower segment
demand curve. Because, at a particular point on the demand curve, Ed =
, which tends
upper segment
to change from point to point.
9. No. When Ed = 0, demand remains constant, no matter what the price is. Implying that total
expenditure may increase/decrease, but not the quantity demanded.
10. Yes. Elasticity of demand is high in case of goods with close substitutes. Because availability of close
substitutes makes it possible for the consumer to switch from one commodity to the other in response to
change in the relative price structure.
11. No. Elasticity of demand tends to be high over longer period of time. Because, during short periods
consumers tend to be more sticky with regard to their consumption pattern.
12. Yes. Complementary goods often exhibit low elasticity of demand. Because, increase or decrease in the
demand for Good-1 causes a simultaneous increase or decrease in the demand for Good-2 even when
price of Good-2 has not changed.
13. No. Luxuries of life have greater elasticity of demand. Change in their prices has a great effect on their
demand. Because, these goods are not essentials of life.
14. Yes. Elasticity of demand will be high at higher level of price of the commodity. Because corresponding
lower segment
to higher level of PX, the ratio
tends to be high.
upper segment
15. No. A horizontal straight line demand curve parallel to X-axis shows infinite elasticity of demand
(Ed = ).
16. No. A vertical straight line demand curve parallel to Y-axis shows no change in the demand irrespective
of change in price.
Q
P
17. No. We know Ed =
P
Q
P
Slope of the demand curve =
Q
1
P
So that, Ed =
Slope of Demand Curve Q
44
EconomicsXII
18. Yes. From a point of intersection of the demand curve, flatter the curve, more elastic it is. Because, for a
given change in PX, (at the point of intersection) flatter demand curve shows greater change in QX.
19. Yes. Income effect is positive when increase in income causes increase in demand. It occurs in case of
normal goods. It is negative when increase in income causes decrease in demand. It occurs in case of
inferior goods.
20. Yes. In case of giffen goods, income effect is higher than the substitution effect. Implying law of
demand fails in case of giffen goods.
QUESTION SET-IV
1. contracts.
2. shifts to the right.
3. remains constant.
4. income of the consumer and demand.
5. diminish.
6. constant.
7. IC and price line are tangent to each other.
MU X
8.
= MUM.
PX
MU X MU Y
9.
= MUM.
=
PX
PY
10. diminishing marginal utility.
11. demand.
12. diminishing marginal rate of substitution.
13. percentage change in quantity demanded due to percentage change in price of the commodity.
14.
(i) articles of distinction

(ii) ignorance of the buyer
(iii) giffen goods.
15.
(i) increase in income of the consumer

(ii) increase in price of substitute good
(iii) decrease in price of complementary good.
16. decrease.
17.
(i) fall in income

(ii) decrease in price of substitute good
(iii) increase in price of complementary good.
18. 1 (one).
19. 1 (one).
20. horizontal straight line parallel to X-axis.
21. vertical straight line parallel to Y-axis.
45
EconomicsXII

1. False. It is a situation of zero price elasticity of demand. Because, when expenditure on the commodity
is increasing proportionate to increase in price, total purchase of the commodity remains constant.
Constant purchase means zero elasticity of demand.
2. True. Because increase in price is not causing any change in expenditure on the commodity. This is in
accordance with expenditure method of measuring elasticity.
1
P
3. False. Because Ed =

When slope of two demand curves is the same, elasticity of demand depends on the initial price and
initial quantity of the commodity.
4. True. We know
Ed =
=
1
P

1 P
0 Q
=
5. True. We know
Ed =
=
1
P

1 P
=0
46
EconomicsXII
Worksheet3A
Unit-3A: Producer Behaviour and Supply
QUESTION SET-I
1. Production function refers to the functional relationship between physical inputs and physical output.
2. Producers equilibrium refers to the situation in which he maximises his profits.
3. Supply refers to the schedule showing various quantities of a commodity offered for sale at its different
possible prices.
Quantity supplied refers to a specific amount offered for sale at a specific price of the commodity.
4. Individual supply schedule is a table showing different quantities of a commodity that an individual
firm is ready to sell at different prices.
Market supply schedule is a table showing different quantities of a commodity that all the firms in a
market are willing to sell at different prices of that commodity at a given time.
5. The law of supply states that, other things being equal, quantity supplied increases with increase in
price and decreases with decrease in price of a commodity.
6. When a fall in price of a commodity causes a decrease in its quantity supplied, it is called contraction of
supply.
If quantity supplied falls due to factors other than own price of the commodity, it is a situation of
decrease in supply.
7. When a rise in the price of a commodity causes an increase in its quantity supplied, it is called
expansion/extension of supply.
If the quantity supplied increases in the market due to factors other than own price of the commodity, it
is a situation of increase in supply.
8. Total product (TP) is the total quantity of a commodity produced in a given period.
Marginal product (MP) is additional quantity of the commodity produced by using an additional unit of
a variable factor.
Average product (AP) is the output per unit of the variable factor.
9. Returns to a factor refer to the behaviour of physical output owing to change in physical input of a
variable factor, fixed factors remaining constant.
10. Law of variable proportions states that as more and more of the variable factor is combined with the
fixed factor, marginal product (MP) of the variable factor may initially increase and subsequently
stabilise, but must finally decrease.
11. Increasing returns to a factor occur when, due to increasing application of the variable factor, marginal
product (MP) of the factor tends to rise.
12. Diminishing returns to a factor occur when, due to increasing application of the variable factor,
marginal product (MP) of the factor tends to diminish.
13. The movement along the supply curve represents expansion and contraction of supply due to change
in own price of the commodity.
Shift in the supply occurs due to factors other than change in own price of the commodity.
14. Joint supply refers to supply of goods produced and sold jointly like cotton and cotton seeds.
Composite supply refers to supply of a commodity through its different sources.
15. Price elasticity of supply is a percentage change in quantity supplied in response to a percentage change
in price of the commodity.
16. Perfectly elastic supply refers to a situation when a slight change in price causes infinite change in
quantity supplied of a commodity. The supply curve is parallel to X-axis.
47
EconomicsXII
Perfectly inelastic supply refers to a situation when the quantity supplied remains unchanged whatever
be the price of the commodity. The supply curve is parallel to Y-axis.
17. Supply is said to be elastic when Es > 1.
Supply is said to be inelastic when Es < 1.
18. Market period is a period when supply of a product can be increased only upto the extent of its existing
stock.
Short period is a period of time when output can be increased only through greater application of the
variable factors.
Long period is a period of time when production can be increased through greater application of all
factors of production.
19. Fixed factors are those factors of production, the application of which does not change with the change
in output.
Variable factors are those factors of production, the application of which changes with the change in
output.
20. Supply refers to various quantities of a commodity that the producers wish to sell at different possible
prices of the commodity at a point of time.
Stock of a commodity refers to the total quantity of that commodity available with the producers (at a
point of time) for present or future sale.
QUESTION SETII
1. Yes. Production function is only a technical relationship between physical inputs and physical output.
This tells us how best resources can be utilised for maximising output.
2. Yes. A producer strikes his equilibrium when he produces that amount of output at which the
difference between total revenue and total cost is maximum. Because, gross profit = TR TC.
3. Yes. Because, supply refers to the entire supply schedule (or supply curve) while quantity supplied
refers to a specific point on the supply curve which changes with change in own price of the commodity.
4. No. Contraction of supply causes a downward movement along a supply curve.
5. No. Extension and contraction of supply are related to own price of the commodity, other factors
remaining constant.
6. No. Supply expands in response to increase in price of the concerned commodity. It increases in
response to factors other than price of the concerned commodity.
7. Yes. When TP is maximum, change in TP= zero. Implying, MP (which measures the change in TP)
must be zero when TP is maximum.
8. Yes. MP can be zero or negative but AP is never. Because, AP is the ratio between TP and units of the
variable factor (which is always positive) while MP is change in TP. (owing to an additional unit of the
variable factor) which can be zero or negative.
9. No. Law of variable proportions operates basically because of the fixity of factors of production.
10. Yes. It is because some factors are fixed that output is increased by using more and more units of the
variable factor. It disturbs the ideal factor ratio and diminishing returns set in.
11. No. AP and MP tend to be inverse U-shaped.
12. Yes. Because in a stage of increasing returns, cost of producing even additional unit of output tends to
fall. Accordingly, it would be irrational for the producer to stop production in this stage.
13. Yes. A producer strikes his equilibrium only when MP is diminishing. Because, diminishing MP means
rising MC. The producer stops production when rising MC matches with MR. Beyond this point, rising
MC would exceed MR, causing loss of profit.
48
EconomicsXII
14. No. In the short period production is done by using the both fixed and variable factors of production.
In fact, short period is a period of time when some factors are fixed.
15. Yes. Factor ratio ought to change in case of law of variable proportions. It is precisely because the
proportion of factors varies that the law is named as the law of variable proportions.
16. Yes. When a straight line upward sloping supply curve passes through the origin (no matter what the
angle it forms), the elasticity of supply is equal to one.
17. No. When a straight line upward sloping supply curve shoots from the Y-axis, Es>1.
18. No. When a straight line upward sloping supply curve shoots from the X-axis, Es<1.
19. Yes. Stages of production are the consequences of the law of variable proportions.
Percentage Change in Quantity Supplied
20. Yes. Price elasticity of supply =
Percentage Change in Price
QUESTION SETIII
1. Yes. This is because, when AP rises, MP > AP; when AP falls, MP < AP. Accordingly, it is only when AP is
constant at its top, that AP = MP. Implying that MP curve cuts AP curve from its top.
2. Yes. When AP is falling, AP>MP. See AP and MP corresponding to output range MN in the diagram.
AP, MP
AP=MP
AP
O
UNITS OF LABOUR
MP
3. Yes. When AP is rising, AP<MP. See AP and MP corresponding to output range OQ in the diagram.
AP, MP
AP=MP
AP
UNITS OF LABOUR
Q
MP
4. Yes. If AP is falling, MP must also fall. Because, unless MP

(showing additions to TP) is falling, AP (showing average
output) will not fall.
AP, MP
AP
5. No. AP can rise even when MP is falling. See AP and MP

corresponding to LQ range of output in the diagram.
MP
O
UNITS OF LABOUR
49
EconomicsXII
6. As more and more units of the variable factor are combined with the fixed factor, TP will rise only so
long as MP is positive. Once MP becomes negative, TP will start falling.
7. Yes. Increasing MP implies TP is increasing at increasing rate. Diminishing MP implies that TP is
increasing at diminishing rate.
8. No. When MP is decreasing, TP increases at a diminishing rate.
9. No. When MP is increasing, TP increases at an increasing rate.
10. No. Constant MP implies that TP is increasing at a constant rate.
11. Increasing returns to a factor occur because fixed factor is abundantly used in production.
12. Yes. As more and more units of a variable factor are combined with the fixed factor, the latter gets over
utilised. Hence, the diminishing returns.
13. No. Diminishing returns to a variable factor occur because the producer fails to maintain the ideal ratio
between fixed and variable factors. Because the use of fixed factors, by definition, cannot be changed
during the short period.
14. No. Supply can change due to factors other than price of the concerned commodity such as technology
and input prices.
15. No. A producer would maximise his profits only in the stage of diminishing returns when MP is
declining but is still positive.
16. Yes. Falling MC means that the cost of producing an additional unit of output tends to reduce. In a
situation when price is constant (as under perfect competition) this would mean a situation when the
difference between the firms TR and TVC tends to increase. This means a situation when firms gross
profit (TR TVC) tends to rise. Why should a firm not increase output when its gross profits are rising?
Certainly it will. Therefore, it is only when MC is rising that the firm will find its equilibrium output.
17. Yes. More of a commodity is offered at a higher price because other things remaining constant, higher
price implies higher profit. Accordingly, the producer is induced to produce more and sell more.
18. Yes. Flatter curve shows high elasticity of supply at the point of intersection of two supply curves.
Because, corresponding to a given change in price at the point of intersection) flatter curve shows
greater change in quantity.
19. No. Longer the time period, greater will be the elasticity of supply. Because, over a long period of time,
more and more factors are easily available and their input can be changed to increase (or decrease)
output of the commodity.
20. No. If elasticity of supply = 0, supply curve becomes a vertical straight line parallel to Y-axis.
QUESTION SET-IV
1. of production the application of which changes with change in output.
2. of production the application of which does not change with the change in output.
3. profits.
4. TR = TC or AR = AC.
5. TR = TVC or AR = AVC.
6. TP.
7. TP is maximum.
8. MP is negative.
9. MP is increasing.
10. MP diminishes.
50
EconomicsXII
11.
(i) technological improvement

(ii) decrease in input prices
(iii) increase in number of firms.
12.
(i) increase in input prices

(ii) decrease in number of firms.
(iii) shift in goal of the firm from sales maximisation to profit maximisation.
13. increase in price of the concerned commodity.

14. decrease in price of the concerned commodity.
15. rise in price of the commodity.
16. fall in price of the commodity.
17.
(i) use of computers

(ii) use of diesel engines in place of steam engines.
18. right.
19. left.
20. left.
21. right.
22. through greater application of variable factors.
23. through greater application of all the factors of production.
24. 0 (zero).
25. left.
26.
(i) price of the concerned commodity

(ii) technology
(iii) input prices.
27.
(i) factors of production are use-specific which compounds their scarcity

(ii) some factors are fixed
(iii) factors of production cannot always be substituted for each other.

Y
A
Q1
b
TR
TC
(a)
COST, REVENUE
AND PROFIT
1.
Note: The difference between TR and TC

is maximum only when MR = MC
d
B (Maximum
P
Profit)
Q2
(b)
REVENUE AND COST
X
TP
MC
MR = MC
MR
O
Q1
Q
OUTPUT
Q2
51
EconomicsXII
2. When MP remains constant at 10 units, and 10 units of the variable factor are used, TP = 10 + 10 + 10
+ 10 + 10 = 50.
(Q TP = MP)
3. False. When production is increased beyond a point where MP = AP (implying AP is at its top) MP and
AP should start declining. Fall in MP should be faster than the fall in AP. So that AP > MP.
4. Introduction of new technology increase MP. It implies a fall in MC. Accordingly supply curve of a firm
shift to the right which shows that the producers are now willing to offer more quantity of a commodity
at its existing price.
5. When supply of a commodity increases without any increase in price of the commodity, it is known as
the situation of increase in supply. Increase in supply occurs when quantity supplied increases due to
determinants other than price of the concerned commodity.
6. QX = f (L, K)
Where, QX = Output of good-X
L = Labour, a variable factor
K = Capital, a fixed factor.
Example: 25X = f (4L, 2K)
From the above equation, it is clear that K is constant at 2 units. Output of commodity-X (25 units) can
be produced by combining 4 units of L with 2 units of K.
7. MP is the rate of TP. When MP = 0, there is no change (or addition) in TP. Implying that TP should be
maximum when MP = 0.
8. True. Shift in the supply curve occurs due to factors other than price of the concerned commodity.
When other factors change in a positive direction, the supply curve shifts to the right, showing increase
in supply; and when the changes occur in the negative direction, the supply curve shifts to the left
showing a decrease in supply.
9. A situation of increasing returns to a factor is not sustainable owing to the following reasons:
(i) some factors are fixed in supply. So that their use cannot be increased proportionate to the variable
factors.
(ii) factors of production are not perfect substitutes of each other.
52
EconomicsXII
Worksheet 3B
Unit-3B: Cost and Revenue
QUESTION SET-I
1. Fixed cost refers to the expenditure incurred on the fixed factors of production like plant and
machinery.
Variable cost refers to the expenditure incurred on the variable factors of production like casual
workers.
2. Total cost refers to all expenses incurred by the producer to produce a given quantity of output.
Average cost is the cost per unit of output produced.
Marginal cost is the change in total cost by producing one more or less unit of output.
3. Explicit costs are those cash payments which a firm makes to others for the purchase of goods and
services. Examples: (i) wages paid to labourers, (ii) payment made for the purchase of raw material.
Implicit costs are opportunity costs of self-owned and self-employed resources. Examples: (i) interest
on entrepreneurs own capital, (ii) rent on entrepreneurs own land used in business.
4. Money cost refers to the sum of monetary expenses incurred by the producer for producing a
commodity.
Real cost refers to the pains, the discomfort and disutility involved in supplying the factors of
production by their owners.
5. Private cost refers to the expenditure incurred by an individual firm for producing a commodity.
Social cost is the total cost to society of a production activity. Like the cost the society has to bear on
account of water pollution and noise pollution.
6. Prime or variable costs are those costs which change as the level of output changes.
Fixed or supplementary costs are those costs which do not change with change in the level of output.
7. Total revenue is the sum total of money receipts by a firm from the sale of its total output.
TR = Price Quantity
Marginal revenue is the change in total revenue as a result of selling one more or less unit of output.
MR = TRn TRn1
Or
TR
MR =
Q
QUESTION SET-II
1. Yes. Because fixed costs are incurred even before output actually starts.
2. No. Variable costs are the expenditure incurred by the producer on the use of variable factors of
production. These are incurred only after output actually starts.
3. Yes. Because fixed costs are incurred even when output is zero, while variable costs are incurred only
after output actually starts (so that variable costs are zero when output is zero).
4. No. As the output increases, variable cost also increases. Because variable costs are largely the costs of
raw material.
5. Yes. Average fixed cost (AFC) curve is a rectangular hyperbola. Because TFC does not change with
output.
53
EconomicsXII
6. Yes. Average variable cost tends to fall, stabilise and rise as output
increase due to the law of variable proportions. See diagram.
AVC
AVC
OUTPUT
7. No. Total fixed cost is indicated by a horizontal straight line

parallel to X-axis. See diagram.
TOTAL FIXED COST
TFC
20
10
OUTPUT
8. No. Marginal cost covers only the variable cost. Because, MC is an additional cost and it cannot be a
fixed cost.
9. Yes. AC = AFC + AVC.
10. No. Sum total of marginal costs (MC) corresponding to different units of output become total variable
cost (TVC). TVC = SMC. Because, marginal costs are variable costs only.
11. Yes. Sum total of marginal revenues for all the units of output is equal to total revenue.
TR = MR
12. Yes. We know that:
AR =
We also know that TR = P.Q
TR
Q
(Where P = Price, and Q = Quantity or Output sold.)
Relating the two equations, we can write that:

TR
AR =
= P.
Q
Thus, it is proved that AR = Price.
13. No. MR can be negative, though only when price is declining as under monopoly and monopolistic
competition.
14. No. When price is constant, AR is constant. Constant AR implies MR is also constant. Thus, when price
is constant, AR = MR.
15. No. When price (= average revenue) reduces as output increases,
MR declines faster than AR. So that AR > MR.
16. No. Under perfect competition, AR and MR curves coincide and

are a horizontal straight line parallel to X-axis.
17. No. Under monopoly, AR and MR curves slope downward, as in the
diagram:
AR/MR
AR
MR
O
54
OUTPUT
EconomicsXII
18. Yes. TR curve can shoots from the origin as TR = 0 when output is zero.
19. Yes. AR (= price) curve never shoots from the origin, because price of a commodity is often not zero.
20. Yes. MR is addition to TR. When MR = 0, addition to TR is zero, implying that TR is maximum.
QUESTION SETIII
1. Yes. AC curve is U-shaped in accordance with the law of variable proportions: it tends to fall owing to
increasing returns to a factor, it tends to stabilise owing to constant returns to a factor, and it tends to rise
owing to diminishing returns to a factor.
2. Yes. When the production is in a state of diminishing returns, MC will be rising in accordance with
falling MP. AC is rising, with the rising MC but less than MC or MC > AC.
3. Yes. AC is greater than MC or MC is less than AC when AC falls. See AC
and MC till point E in the diagram. In the diagram, AC is falling till
point E and MC continues to be lower than AC.
AC, MC
MC
AC
OUTPUT
MC
AC, MC
4. Yes. MC and AC are equal when AC tends to stabilise or when AC is

constant, MC = AC. See AC and MC corresponding to point E in the
diagram where AC = MC.
AC
OUTPUT
5. Yes, it is true. TC and TVC curves are parallel to each other. Because the difference between TC and
TVC is equal to TFC which is constant at all levels of output.
Y
AVC
AVC, AFC
6. No, it is not true. Initially as output increases the distance between AVC
and AFC curves may tend to reduce but once the two curves cross each
other (as in the diagram), the difference between the two tends to
increase. Because, while AVC tends to rise after a certain level of
output, AFC continuously falls.
AFC
O
55
OUTPUT
EconomicsXII
8. Yes. TC = TFC + TVC and TFC remains constant even at zero level of
output.
At zero level of output, TVC = 0
AC
AVC
AC, AVC
7. No. The distance between AC and AVC curves tends to reduce as

output increases. This is because as output increases the component of
AVC in AC tends to increase while the component of AFC in AC tends
to decrease. See diagram.
OUTPUT
TC = TFC
Accordingly, TC curve starts from the Y-axis in the short period.
9. Yes. Long period total cost (TC) curve starts from the origin (or zero) because in the long period, all
costs are variable costs and variable costs always vary with output, so that when output is zero, variable
costs are also zero.
10. Yes. AFC continuously reduces as output increases. Because TFC remains constant at all levels of
output.
11. No. Greater production does not always mean greater revenue (TR). Price (AR) may fall so much that
higher output yields lower TR.
12. Yes. AR>MR under monopoly because AR tends to fall, and falling AR implies falling MR at a higher
rate.
Y
14. Yes. When MC > ATC, ATC rises. See AC and MC beyond point E in
the diagram. In the diagram, AC starts rising from point E and after
that point E, MC > AC.
MC
AC, MC
13. No. Because ATC is the sum of AFC and AVC. Since AFC can never be
zero, AVC can never be equal or greater than ATC. Thus, ATC always
remains above AVC.
AC
15. Yes. Total variable cost is the area covered under MC curve
corresponding to a given level of output. In the diagram area
OLKM is total variable cost when output is OL.
OUTPUT
MC
MC
L
OUTPUT
16. Yes. Under perfect competition, AR and MR are constant.

Constant MR implies TR increases at a constant rate. Therefore, TR is shown as a straight line sloping
upward from the origin and it shoots from the origin. When Output= 0, TR = 0.
17. Yes. TR curve increases only at a diminishing rate because a monopolist can sell more only if he lowers
the price of his product.
18. Yes. Because rate of TR is equal to MR which is constant under perfect competition, but tends to decline
under monopoly and monopolistic competition.
19. No. When TR is maximum, MR = 0 even when AR is declining as under monopoly and monopolistic
competition.
20. No. When AR is constant, MR is also constant and AR = MR.
56
EconomicsXII
QUESTION SET-IV
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
TC TVC.
TC TFC.
TFC + TVC.
law of variable proportions.
TFC remains constant at all levels of output.
AVC is only a component of AC.
MC covers only variable costs.
ATC = AFC + AVC.
(i) rent of building
(ii) cost of plant and machinery
(i) purchase of raw material
(ii) wages of daily workers
it is constant at all levels of output.
of increasing returns to a factor.
all factors are variable factors in the long period.
AR is constant.
when AR is decreasing, MR must be decreasing faster than AR.
TR.
decreasing.
constant.
constant rate, because constant price (AR) implies that AR = MR.
starts declining.
(iii) wages of permanent staff.

(iii) payment of electricity bill.

1.
Y
COST, REVENUE
AND PROFIT
Q1
b
TR
TC
(a)
Q2
(b)
REVENUE AND COST
Note: The difference between TR and TC

is maximum only when MR = MC
d
B (Maximum
P
Profit)
X
TP
MC
MR = MC
MR
O
Q1
Q
OUTPUT
Q2
Profit is maximised when the difference between TR and TC is maximum and when MR = MC.
Distance between TR and TC curves is measured by drawing tangents on these curves. The distance is
maximum when the tangent lines are parallel to each other.
2. Marginal cost is an additional cost and additional cost cannot be fixed cost, it can be variable cost.
Accordingly, the sum total of marginal costs corresponding to different units of output become TVC.
SMC = TVC.
57
EconomicsXII
Worksheet 4
Unit-4: Forms of Market and Price Determination
QUESTION SET-I
1. A firm is said to be operating under conditions of pure competition when there are many firms,
producing a homogeneous commodity with freedom of entry and exit, independent decision-making.
Perfect competition is said to exist, when besides conditions of pure competition, two more conditions
are satisfied, viz (i) there is perfect knowledge of the market conditions among buyers and sellers, and
(ii) there is perfect mobility of factors of production.
2. Monopoly is a market form with a single seller and many buyers of a commodity.
Monopolistic competition is a form of the market with many buyers and sellers, where differentiated
product is sold with a partial control over price.
3. Oligopoly is a form of the market in which there is a large number of buyers, but only a few big sellers of
a commodity.
4.
5.
6.
7.
8.
9.
10.
Duopoly is a form of market in which there are two sellers of a commodity with many buyers.
Equilibrium price is the price which corresponds to the equality between market demand and market
supply of a commodity.
Equilibrium quantity is the quantity which corresponds to the equilibrium price in the market.
Market refers to the mechanism of sale and purchase of goods and services.
Market equilibrium is a situation of zero excess demand and zero excess supply. Or, it is a situation
where: market demand = market supply.
Homogeneous product refers to a product of which all units are identical in all respects.
Product differentiation is a situation when different producers in the market try to differentiate their
product (with respect to size, weight, packaging, etc.) with a view to attracting the buyers and exercising
partial control over price.
Profits are said to be normal when: TR = TC or AR = AC.
Profits are said to be extra-normal or abnormal when: TR > TC or AR > AC.
Extra-normal or abnormal losses occur when: TR < TC or AR < AC.
Price which is equal to average cost is known as break-even price.
Market price is the price that exists in the market at a particular point of time.
Normal price is the price that prevails in the long period.
Patent rights is the official recognition of the originators of a new product or technology. No one else
can use their technology without obtaining a license.
A cartel is a formal collusive agreement among rival firms in the market under oligopoly. Firms collude
to avoid competition.
When market demand exceeds market supply of a commodity at a given price it is known as excess
demand.
Excess supply means market supply of a commodity is more than market demand for a commodity at
the given price.
11. Economic viability of an industry refers to the situation when demand and supply curves of the industry
meet at some positive level of output.
Non-viability of an industry refers to a situation when demand curve and supply curve do not intersect
each other at any positive quantity. In such a situation, supply curve lies above the demand curve.
12. Control price means price of the good is fixed below its equilibrium price with a view to ensuring some
minimum supply of the essential commodities to a targeted group of people.
Support price is fixed by the government above the equilibrium price with a view to ensuring some
minimum income to the farmers.
58
EconomicsXII
QUESTION SET-II
1. Yes. In case of monopoly, there is single seller and large number of buyers. Under monopolistic
competition, there are large numbers of both buyers and sellers.
2. Yes. Monopolist is a price maker because he is the single seller of a commodity with no close substitutes.
3. Yes. Under perfect competition, there are large number of buyers and sellers of a homogeneous
product. No single seller by changing his supply can influence the price.
4. No. Under perfect competition, an individual firm cannot change the price. But market price can
change owing to changes in demand and supply.
5. Yes. Firms demand curve is indeterminate or cannot be drawn under oligopoly because of high degree
of interdependence between the firms.
6. Yes. Because of product differentiation, each firm can decide its price policy independently. So that
each firm has a partial control over price of its product.
7. Yes. A monopolist can charge different prices for the same commodity from different buyers because of
no close substitutes of his product.
8. Yes. Often, higher price is fixed when elasticity of demand is low. Low price is fixed when elasticity of
demand is high.
9. Yes. Under perfect competition, only normal profits prevail in the long run because of freedom of entry
and exit of the firms in the market.
10. Yes. A firm makes only normal profits in the long run under monopolistic competition because of
freedom of entry and exit of the firms in the market.
11. Yes. It is because homogeneous products are sold at a uniform price under perfect competition and
because monopoly product has no close substitutes in the market.
12. Yes. Because price of the product is given to a firm under perfect competition.
13. Yes. Firms demand curve under monopolistic competition is more elastic than under monopoly
because of availability of close substitutes under monopolistic competition.
14. No. A firm under monopolistic competition has partial control over the price owing to product
differentiation.
15. Yes. Under perfect competition, equilibrium price is determined at the point of intersection of market
demand and market supply. An individual firm cannot change it.
QUESTION SET-III
1. Yes. A firm under perfect competition gets only a break-even price in the long run. It is a price which
corresponds to normal profits in the long run.
2. Yes. It is due to the freedom of entry and exit feature of the market that normal profits prevail in the
long run under perfect competition and under monopolistic competition.
3. Yes. A perfectly competitive firm makes only normal profits(AR= AC) in the long run which happens
only at the lowest point on the AC curve.
Y
5. No. In case of excess demand, market price is less than equilibrium

price. Excess demand will push the market price back to its equilibrium
level. i.e., equilibrium price is restored in the economy.
6. Yes. In case of non-viable industry, supply curve is entirely above the
demand curve. These curves do not meet anywhere. See diagram.
PRICE
4. Yes. Because there is only a small number of big firms in the market.
Non-viable industry:
supply curve is above
the demand curve S
D
D
59
SUPPLY/DEMAND
EconomicsXII
7. Yes. Because market supply may change proportionate to market demand.

8. Yes. Equilibrium price will remain unchanged when supply is perfectly elastic whether demand
increases or decreases. See diagram. Here price remains constant at OP when demand increases to
D1D1 and also remains constant at OP when demand decreases to D2D2.
D1
PRICE
D2
S
D1
D
D2
QUANTITY
9. Yes. Owing to improvement in technology supply of the good in the market will increase causing a
rightward shift of the supply curve. Accordingly, equilibrium price will decrease.
10. Yes. Because, fearing shortage, demand curve for rice will shift forward, causing a rise in equilibrium
price.
11. Yes. In a situation of support price (which is the minimum price assured to the producers) market price
ought to be equal or greater than the support price.
12. Yes. When import of inputs become expensive, the supply of the commodity reduces and supply curve
shifts to the left. Accordingly, equilibrium price of the commodity tends to rise.
13. Yes. The income effect for an inferior good is negative. It implies that for an increase in income of its
buyers, the demand for the good falls. Diagrammatically, demand curve, DD, as shown in the diagram
shifts leftward, i.e., from DD to D1D1. The new equilibrium struck at point E1. The equilibrium price
decreases from OP to OP1.
Y
PRICE
D1
D
S
E
E1
P1
S
D
D1
Q1 Q
QUANTITY
14. Yes. Because supply may rise proportionately greater than the rise in demand. See diagram.
Y
D1
D2
S1
PRICE
S2
P1
P2
D1
O
Q
QUANTITY
60
D2
X
EconomicsXII
15. No. With a substantial cut in production, supply curve shifts to the left and equilibrium price will
increase. See diagram.
Y
PRICE
S1
S
P1
E
P
S1
S
O
Q1 Q
QUANTITY
QUESTION SET-IV
1.
(i) large number of buyers and sellers

(ii) homogeneous product
(iii) freedom of entry and exit of firms.
2.
(i) single seller and large number of buyers

(ii) no close substitutes.
3.

(ii) product differentiation
(iii) freedom of entry and exit of firms.
4.
(i) a few firms

(ii) large number of buyers.
5. is a horizontal straight line parallel to X-axis.

6. monopoly.
7. in the long run.
8. equilibrium price.
9. increases.
10. to the left.
11.
(i) not a uniform price

(ii) imperfect knowledge of market condition
(iii) imperfect mobility of factors.
12.

(ii) freedom of entry and exit of firms.
13. perfect competition.

14. monopoly.
15. increase.
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EconomicsXII
HOTS
1. True. Under perfect competition, demand curve of the firm is a horizontal straight line parallel to
X-axis. It implies the firm will sell the product at the prevailing price which is determined by the
industry. The individual firm cannot influence the price.
Y
PRICE
Firms Demand Curve

under Perfect Competition
AR=MR
Q2
Q1
OUTPUT
2. True. As a single seller he can fix whatever price he wishes to fix for his product. But he can sell more
only by lowering the price of his product.
3. True. Firms demand curve is indeterminate under oligopoly because there is a high degree of
interdependence between the firms. Price and output policy of one firm has a significant impact on the
price and output policy of the rival firms in the market. When one firm lowers its price, the rival firms
may also lower the price. And, when one firm raises the price, the rival firms may not do it. Accordingly,
it becomes very difficult to estimate change in firms sales caused by a change in price. Implying that a
precise relationship between price and sales cannot be established. Or, that the firms demand curve
cannot be drawn.
4. True. In a situation of excess supply, supply is more than demand. Excess supply forces the market
price to slide down to its equilibrium level. In a situation of excess demand, demand is more than
supply. Shortage of supply shall push the price to its equilibrium level.
5. True. In a situation of constant demand or perfectly inelastic demand, increase or decrease in supply
causes a full impact on price of the commodity but equilibrium quantity does not change.
6. True. A monopoly firm can make abnormal profits in the long run because of lack of freedom of entry
and exit of firms in the market. Due to freedom of entry and exit of firms under monopolistic
competition, a producer cannot earn abnormal profits in the long run.
7. True. Because under perfect competition AR = MR, while under monopoly AR > MR. While
equilibrium in both cases is struck when MR = MC.
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EconomicsXII
CBSE Question Papers2011

(Delhi, All India & Foreign)
CBSE QUESTION PAPERS2011

INTRODUCTORY MICROECONOMICS
1 MARK QUESTIONS
1. What is a market economy?
Ans. A market economy is the one in which decisions regarding what, how and for whom to produce are
governed by the market forces of supply and demand.
2. When is a firm called price-taker?
Ans. A firm is called price-taker when it sells its output at the given price as determined by the market
forces of supply and demand.
3. Define budget set.
Ans. Budget set is the attainable combinations of a set of two goods, given the prices of goods and income of
the consumer.
4. What is meant by increase in supply?
Ans. Increase in supply refers to increase in quantity supplied of a commodity at its existing price. It implies
a shift in supply curve to the right.
5. Define supply.
Ans. Supply refers to various quantities of a commodity that a seller is willing to sell corresponding to
different possible prices at a given point of time.
6. What is a planned economy?
Ans. A planned economy is the one in which decisions regarding what, how and for whom to produce are
taken by some central authority appointed by the government.
7. When is a firm called price maker?
Ans. A firm is called a price maker when it can fix whatever price it wishes to fix for its product. Example:
Monopoly firm.
8. Define a budget line.
Ans. Budget line is a line showing different combinations of a set of 2-Goods that the consumer can buy,
given his income and prices of the goods.
9. What is decrease in supply?
Ans. Decrease in supply occurs when quantity supplied decreases at the existing price of the commodity.
Supply curve shifts to the left.
10. Define production function.
Ans. Production function studies the functional relationship between physical inputs and physical output
of a commodity.
11. Define an economy.
Ans. Economy is a system comprising all economic activities directed towards the satisfaction of unlimited
wants using the scarce means.
12. Define macroeconomics.
Ans. Macroeconomics deals with such issues or problems which are concerned with the economy as a
whole. Example: Problem of unemployment, inflation and deflation.
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EconomicsXII
13. Define microeconomics.

Ans. Microeconomics studies economic relationships or economic issues at the level of an individualan
individual firm, an individual household or an individual consumer.
14. What is market equilibrium?
Ans. Market equilibrium is a situation where market demand is exactly equal to its supply.
15. Define market demand.
Ans. Market demand is the total demand by all buyers of a commodity in the market.
16. Give meaning of Change in quantity supplied.
Ans. Expansion and contraction in quantity supplied due to change in the own price of the commodity is
known as change in the quantity supplied.
17. Define Revenue.
Ans. Revenue refers to the money receipts of a firm from the sale of its output.
18. What is opportunity cost?
Ans. Opportunity cost is the value of a factor in its second best alternative use.
3 MARKS QUESTIONS
1. Why is a production possibilities curve concave? Explain.
loss of Y
Ans. Production possibility curve is concave to its origin because marginal opportunity cost
gain of X
of shifting resources from commodity-Y to commodity-X tends to rise. And, marginal opportunity cost
tends to rise because of the law of diminishing returns. When more and more resources are applied to
X, additional gain of output (per unit of input) tends to decrease; and as more and more resources are
withdrawn from Y, additional loss of output tends to rise.
2. 8 units of a good are demanded at a price of ` 7 per unit. Price elasticity of demand is ()1. How
many units will be demanded if the price rises to ` 8 per unit? Use expenditure approach of price
elasticity of demand to answer this question.
Ans.
Price
(`)
Demand
(Units)
Total Expenditure
(`)
56
56
Given, Ed = () 1.
When price rises to ` 8 per unit, quantity demanded will be 7 units. In this case, when elasticity of
demand is () 1, total expenditure will remain constant, i.e., ` 56. In other words, rise or fall in price of a
commodity make no change in its total expenditure.
3. Giving examples, explain the meaning of cost in economics.
Ans. Cost is the expenditure incurred by the producer on account of the production of a commodity. Often,
costs are split as fixed costs and variable costs. Fixed costs remain fixed irrespective of the level of
output. Example: Cost incurred on the installation of plant and machinery. Variable costs rise when
the level of output rises, and fall when the level of output falls. Example: Cost incurred on the
purchase of raw material. Costs are also classified as explicit costs and implicit costs. Explicit costs refer
to expenditure incurred on the purchase of inputs from the market. Example: Purchase of cloth by
the Garment factory. Implicit costs are incurred on account of the use of self-owned inputs. Example:
Use of family labour.
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EconomicsXII
4. Draw average revenue and marginal revenue curves in a single diagram of a firm which can sell
more units of a good only by lowering the price of that good. Explain.
Ans. Fig. 1 represent average and marginal revenue curves of a firm which are downward sloping. It means
that if the seller intends selling more units of the commodity, he will have to lower the price. Hence, a
downward sloping AR curve of a firm. In case, AR slopes downward, MR slopes downward faster than
AR. In case of a straight line AR curve (sloping downward, as in Fig. 1), slope of MR curve will be twice
the slope of AR curve. Such situations are found when there is monopoly and monopolistic
competition in the market.
Fig. 1
REVENUE
Note: AB = BC, implying

that the slope of MR is
twice the slope of AR.
AR
MR
O
OUTPUT
5. Explain the implication of freedom of entry and exit to the firms under perfect competition.
Or
Explain the implication of perfect knowledge about market under perfect competition.
Ans.
(i) In case of perfect competition, a firm can enter or leave the industry in the long run. By definition,
short period is too short for the new firms to enter the industry or for the existing firms to leave the
industry.
(ii) Because of free entry and exit, firms in the long run earn only normal profits (TR = TC or AR =
AC). In case extra-normal profits are earned, new firms will join the industry. Market supply will
increase. Market price will fall. Extra-normal profits will be wiped out. In case of extra-normal
losses, some of the existing firms will leave the industry. Market supply will decrease. Market price
will increase. Extra-normal losses will be wiped out.
Or
Under perfect competition, buyers and sellers are fully aware of the price prevailing in the market.
They are also aware of the fact that homogeneous product is being sold by all the firms. The buyers
would not pay a price higher than the price dictated by the market. The sellers would not sell at a price
below than that dictated by the market. Accordingly, uniform price prevails in the market. Price
discrimination and exploitation of the consumers are ruled out.
6. A consumer buys 10 units of a good at a price of ` 6 per unit. Price elasticity of demand is () 1. At
what price will he buy 12 units? Use expenditure approach of price elasticity of demand to answer
this question.
Ans.
Price
(`)
Demand
(Units)
Total Expenditure
(`)
10
60
12
60
Given, Ed = () 1.
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EconomicsXII
At ` 5, the consumer will buy 12 units. Because in this case, elasticity of demand is () 1, therefore, total
expenditure will remain constant, i.e., ` 60. In other words, rise or fall in price of a commodity makes
no change in its total expenditure.
7. When the price of a good changes to ` 11 per unit, the consumers demand falls from 11 units to
7 units. The price elasticity of demand is ()1. What was the price before change? Use expenditure
approach of price elasticity of demand to answer this question.
Ans.
Price
(`)
Demand
(Units)
Total Expenditure
(`)
11
77
11
77
Given, Ed = () 1.
Price before change was ` 7. Because in this case, elasticity of demand is () 1 and therefore, total
expenditure remain constant even after the change in price, i.e., ` 77.
8. How is production possibility curve affected by unemployment in the economy? Explain.
Ans. PPC is drawn on the assumption that the given resources are fully as well as efficiently utilised.
Unemployment is a situation when resources are not fully utilised. Or, it is a situation of
under-utilisation of resources. It would mean that the economy is not operating on the PPC but
somewhere inside the PPC. PPC showing only technical possibilities of production, would not shift.
Fig. 2 illustrates the situation:
Fig. 2
Y
P
GOOD-Y
Unemployment or underutilisation of resources

A
PPC showing fuller and efficient

utilisation of resources with the
given technology
O
GOOD-X
9. When price of a good is ` 13 per unit, the consumer buys 11 units of that good. When price rises to
` 15 per unit, the consumer continues to buy 11 units. Calculate price elasticity of demand.
Ans. Given, P = ` 13; P1 = ` 15; P = P1 P = ` 15 ` 13 = ` 2
Q = 11 units; Q1 = 11 units; Q = Q1 Q = (11 11) units = 0
Q P
0 13
Ed = ()
=0
= ()
2 11
P Q
Here, price elasticity of demand is zero. In other words, we can say that increase in price has no effect
on quantity demanded. Hence, demand is perfectly inelastic or Ed = 0.
10. Distinguish between explicit cost and implicit cost and give examples.
Ans. Explicit costs are those costs which a firm incurs on account of the purchase of inputs from the market.
Example: Expenditure incurred on the purchase of raw material. Implicit costs are those costs which a
firm incurs on account of the use of self-owned inputs. Example: Use of family labour.
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EconomicsXII
11. Draw in a single diagram the average revenue and marginal revenue curves of a firm which can sell
any quantity of the good at a given price. Explain.
Ans. Average revenue and marginal revenue curves of a firm which can sell any quantity of the good at a
given price are shown as a horizontal straight line, as in Fig. 3. It refers to a situation of perfect
competition in which price (AR) is constant for a firm. Constant AR implies constant MR, and also AR
= MR.
Fig. 3
PRICE/AR/MR
AR=MR
OUTPUT
12. Explain the implications of the feature large number of buyers in a perfectly competitive market.
Or
Explain the implications of the feature homogeneous products in a perfectly competitive market.
Ans. The number of buyers of a commodity is very large under perfect competition. It is so large that by
varying its demand, an individual buyer cannot affect total market demand for a commodity.
Accordingly, an individual buyer cannot affect market price. He can buy any quantity at the existing
price of the commodity. An individual buyer is a price taker.
Or
A product being perfectly homogeneous implies that all units of a commodity are identical in size,
quality, shape, colour, weight, etc. In a state of perfect competition, a perfectly homogeneous product
is sold in the market at a uniform price. If ever an individual firm tries to charge higher price, it would
lose all its buyers to a large number of other sellers in the market. In a perfectly competitive
environment, homogeneous product does not allow a firm any control over its price. A firm is a price
taker.
13. When price of a good is ` 12 per unit, the consumer buys 24 units of that good. When price rises to
` 14 per unit, the consumer buys 20 units. Calculate price elasticity of demand.
Ans. Given, P = ` 12; P1 = ` 14; P = P1 P = ` 14 ` 12 = ` 2
Q = 24 units; Q1 = 20 units; Q = Q1 Q = (20 24) units = () 4 units
Q P
4 12
Elasticity of Demand (Ed) = ()
=1
= ( )
P Q
2 24
Elasticity of demand = 1.
14. From the following data calculate price elasticity of demand:
Price
(`)
Demand
(Units)
100
150
Ans. Given, P = ` 9; P1 = ` 9; P = P1 P = ` 9 ` 9 = 0
Q = 100 units; Q1 = 150 units; Q = Q1 Q = (150 100) units = 50 units
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EconomicsXII
Elasticity of Demand (Ed) = ()
Q P
50
9
450
=
=
=
0 100
0
P Q
Elasticity of demand = .
15. Explain how a production possibility curve is affected when resources are inefficiently employed
in an economy.
Ans. Production possibility curve is drawn on the assumption that the given resources are fully as well as
efficiently utilized, along with the given technology. If resources are inefficiently employed in an
economy, it implies that the economy is not maximising its output with the given resources. It is a
situation when the concerned economy is NOT operating on the production possibility curve, but is
somewhere within the production possibility curve. So that, it is possible to increase the level of output
of Good-X, or Good-Y, or both X and Y.
Diagrammatic Illustration:
Fig. 4
GOOD-Y
P
PPC, indicating level of output of
Good-X and Good-Y when
resources are fully as well as
efficiently utilized, along with the
given technology.
Points like A and B (within the
Production Possibility Frontier)
indicate that the resources are
inefficiently utilized.
A
B
P2
GOOD-X
16. A consumer buys 17 units of a good at a price of ` 10 per unit. When price falls to ` 8 per unit the
consumer buys 23 units. Using the expenditure approach, what will you say about price elasticity of
demand of the good?
Ans.
Price (`)
Demand (Units)
Total Expenditure (`)
10
17
170
23
184
Price elasticity of demand of the good in this case will be greater than unitary elastic because with fall in
price of the commodity, total expenditure increases.
17. Giving examples, distinguish between fixed cost and variable cost.
Ans. Fixed costs are those costs which do not change with the change in output of a good. They remain
constant at all levels of output. Fixed costs never become zero. These costs remain unchanged even if
output of a good is zero. Examples: Salary of the permanent staff and rent of the factory building, etc.
Variable costs are those costs which change with the change in output of a good. If output is zero, these
costs are also zero. As output of the good increases, these costs also increase. Examples: Costs incurred
on raw materials, electricity, etc.
18. Draw total revenue curve and marginal revenue curve of a firm which is free to sell any quantity of
the good at a given price. Explain.
Ans. A firm under perfect competition is free to sell any quantity of the good it produces at a given price. A
firm is a price taker implying that AR is constant under perfect competition. In case AR is constant, MR
is also constant. Implying that TR increases at a constant rate. Hence, TR forms a straight line sloping
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EconomicsXII
upward and starting from the point of origin as shown in Fig. 5 and MR in this case will be a horizontal
straight line parallel to X-axis.
Y
AVERAGE AND MARGINAL
REVENUE (`)
Fig. 5
TOTAL REVENUE (`)
TR
T
L
OUTPUT (Units)
Fig. A
L
OUTPUT (Units)
AR=MR
Fig. B
19. Explain the implication of the feature freedom of entry and exit to firms under perfect
competition.
Or
Explain the implication of the feature large number of sellers under perfect competition.
Ans. Under perfect competition, there is no legal restriction on the entry or exit of the firms. A firm can
enter and leave any industry, any time. Thus, whenever there are extra-normal profits some new firms
will enter the industry and whenever there are extra-normal losses, some existing firms will leave the
industry. Consequently, under perfect competition only normal profits prevail in the long run.
Or
The number of sellers of a commodity is very large under perfect competition. The number of firms
selling a particular commodity is so large that an individual seller contributes only a small fraction to
the market supply. Thus, any increase or decrease in supply by an individual firm hardly impacts the
total market supply and consequently, an individual firm cannot impact market price of the
commodity.
20. A consumer buys 19 units of a good at a price of ` 11 per unit. When price rises to ` 13 per unit the
demand of the good?
Ans.
Price
(`)
Demand
(Units)
Total Expenditure
11
19
209
13
17
221
Price elasticity of demand of the good in this case will be less than unitary elastic because with the rise in
price of the commodity, total expenditure on the commodity also rises.
21. A consumer buys 9 units of a good at a price of `11 per unit. When price falls to ` 9 per unit the
demand of the good?
Ans.
Price ()
Demand (Units)
Total Expenditure ()
11
99
11
99
Price elasticity of demand of the good in this case will be unity, because change in price has no effect on
total expenditure.
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EconomicsXII
4 MARKS QUESTIONS
1. A consumer consumes only two goods X and Y. State and explain the conditions of consumers
equilibrium with the help of utility analysis.
Ans. A consumer is in a state of equilibrium when he maximises his satisfaction by spending his given income on
different goods and services.
In case of two commodities, consumer attains equilibrium when:
MU X MU Y
=
= MUM
PX
PY
Here,
MU X and MU Y = Marginal utilities of X and Y respectively.

PX and PY = Price of X and Y respectively.
MUM = Marginal utility of money.
The equilibrium equation implies that in case of each commodity rupee worth of satisfaction actually
MU X
MU Y
is equal to rupee worth of satisfaction that the consumer wishes to achieve
received
or
PY
PX
(MUM).
2. Explain how the demand for a good is affected by the prices of its related goods. Give examples.
Ans. Related goods are of two types:
(i) Substitute goods, and (ii) Complementary goods.
(i) Substitute Goods: When price of the substitute goods increases, demand curve for Good-X shifts
to the right, implying quantity demanded increases from PK to PS even when price of Good-X
continues to be OP and vice versa.
(ii) Complementary Goods: When price of the complementary goods increases, demand curve for
Good-X shifts to the left, implying quantity demanded decreases from PK to PL even when price
of Good-X continues to be OP and vice versa.
Fig. 6 illustrates the effect of change in price of the related goods.
Y
Fig. 6
D2
D1
Initial demand curve
PX
Demand curve
shifts to the left
(from DD to D2D2)
when price of the
complementary good
increases
S
Demand curve shifts to the right
(from DD to D1D1) when price of the
substitute good increases
D2
QX
D1
X
3. Define Market-supply. What is the effect on the supply of a good when Government imposes a tax
on the production of that good? Explain.
Or
What is a supply schedule? What is the effect on the supply of a good when Government gives a
subsidy on the production of that good? Explain.
Ans. Market supply refers to supply of a good by all the firms in the market.
When government imposes a tax on the production of the good, marginal and average costs of the
production tend to rise. Accordingly, producers will supply less of the good at the existing price, or
they will sell the same quantity only at a higher price. This implies a backward shift in supply curve or
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EconomicsXII
decrease in supply as shown in Fig. 7. S1S1 is the initial supply curve. When government imposes tax,
supply curve will shift backward from S1S1 to S2S2.
Y
Fig. 7
S2
PRICE
Supply curve
after tax
S1
Supply curve
before tax
T
S2
S1
QUANTITY
Or
Supply schedule is a table showing different quantities of a commodity offered for sale corresponding
to different possible prices of that commodity.
When government gives a subsidy on the production of a good, marginal and average costs of the
production tend to fall. Accordingly, supply curve shift forward or to the right implying more supply
at the same price or same supply at the lower price. Fig. 8 illustrates this situation. S1S1 is the initial
supply curve. When government gives subsidy, supply curve will shift forward from S1S1 to S2S2.
Y
Fig. 8
PRICE
Supply curve
before subsidy
S1
S2
Supply curve
after subsidy
S1
O
S2
X
QUANTITY
4. Explain the conditions determining how many units of a good the consumer will buy at a given
price.
Ans. In case of one commodity, equilibrium is struck when
MU X
= MUM
PX
In case of two commodities, equilibrium is struck when
MU X
MU Y
=
= MUM
PX
PY
Where,
MU X
MU Y
=
= Rupee worth of additional satisfaction.
PX
PY
MUM = Marginal utility of money.
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EconomicsXII
In both the situations, the conditions determining consumers equilibrium are:

MU X
from the consumption of a unit of a good is equal to
(i) rupee worth of additional satisfaction
PX
marginal utility of money (MUM ).
(ii) marginal utility of money is constant.
(iii) law of diminishing marginal utility holds good.
5. Derive the law of demand from the single commodity equilibrium condition marginal utility =
price.
Or
Derive the inverse relation between price of a good and its demand from the single commodity
equilibrium condition Marginal utility = Price.
Ans. Fig. 9 shows consumer equilibrium in case of a single commodity, when
Marginal Utility (MU) = Price (P).
Y
30
30
PRICE (`)
MARGINAL UTILITY (MU)
Fig. 9
20
10
2
3
1
QUANTITY (Units)
X
MUX
20
10
DD Curve
2
3
1
QUANTITY (Units)
When MU = P = 10; quantity purchased by the consumers is 3 units. When price (= marginal utility)
rises to 20, quantity purchased by the consumers is 2 units and further when price rises to 30, the
quantity purchased by the consumers falls to 1 unit. Thus, demand curve is derived by joining all the
points corresponding to price and quantity purchased.
6. A consumer consumes only two goods X and Y. At a consumption level of these two goods, he finds
that the ratio of marginal utility to price in case of X is higher than in case of Y. Explain the reaction
of the consumer.
Ans. Equilibrium of the consumer occurs when:
MU X
MU Y
=
= MUM
PX
PY
Given,
MU X
MU Y
>
PX
PY
The consumer will increase the consumption of Good-X in place of Good-Y. Accordingly, MUX would
start declining while MUY would start rising. The process of substituting X for Y would continue till
MU X
MU Y
(rupee worth of MUX) and
(rupee worth of MUY) are equal and the equilibrium is
PX
PY
achieved.
7. Explain how rise in income of a consumer affects the demand of a good. Give examples.
Ans. Effect of rise in income of a consumer on demand is different in case of normal goods and inferior
goods, as under:
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EconomicsXII
Normal Goods: When income rises, demand curve for the normal goods shifts to the right. For
example, milk is a normal good. Demand curve for milk shifts (forward) from D1D1 to D2D2 when
consumers income increases.
Inferior Goods: When income rises, demand curve for inferior goods shifts to the left. For example,
coarse grain is an inferior good. Demand curve for coarse grain shifts (backward) from D1D1 to D2D2
when consumers income increases.
Fig. 10 illustrates these situations.
(a)
Fig. 10
(b)
Y
PRICE OF COARSE GRAIN
PRICE OF MILK
D2
D1
P
D2
D1
O
Q1
Q2
DEMAND FOR MILK
D1
D2
P
D1
D2
O
Q2
Q1
DEMAND FOR COARSE GRAIN
8. Define marginal cost. Explain its relation with average cost.

Or
Define variable cost. Explain the behaviour of total variable cost as output increases.
Ans. Marginal cost is the change in total cost when a unit more of a commodity is produced.
Or,
MCn = TCn TCn1

TC
MC =
Q
Relation between AC and MC is explained with reference to Fig. 11.

Y
Fig. 11
AC, MC
MC
AC
>
MC
AC
<
AC
AC=MC
OUTPUT
Observations:
(i) When AC is falling, AC > MC.
(ii) When AC is constant, AC = MC.
(iii) When AC is rising, AC < MC.
(iv) MC curve cuts AC curve at its lowest point.
(v) Both AC and MC curves are U shaped.
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EconomicsXII
Or
Variable costs are the expenditure incurred on the use of variable factors. When output changes, these
costs also change. As the output increases, these costs also increase and as the output decreases, these
costs also decrease. When output is zero, these costs are also zero. The following table and Fig. 12
explain the behaviour of variable costs.
Total Variable Cost
(`)
10
18
24
28
32
38
Total Variable Cost
Y
TOTAL VARIABLE COST (`)
Fig. 12
Units of
Output
TVC
40
30
20
10
O
5
4
2
3
OUTPUT (Units)
9. A consumer consumes only two goods X and Y. At a certain consumption level of these goods, he
finds that the ratio of marginal utility to price in case of X is lower than in case of Y. Explain the
reaction of the consumer.
Ans. Equilibrium condition in case of two commodities:
MU X
MU Y
=
= MUM
PX
PY
Given,
MU X
MU Y
<
PX
PY
The consumer would react to this situation by increasing the consumption of Y in place of X, because
MU Y
MU X
is greater than in case of X =
. As
rupee worth of satisfaction in case of Y =
PY
PX
consumption of X is reduced, MUX would start rising. Likewise, increase in the consumption of Y
would cause a fall in MUY. The process of substituting Y for X would continue till
MU X MU Y
, when
=
PX
PY
the consumer maximises his satisfaction.

76
EconomicsXII
10. Explain the law of diminishing marginal utility with the help of a total utility schedule.
Ans. The law of diminishing marginal utility states that the marginal utility derived from the consumption
of a commodity must decline as more and more units of that commodity are consumed at a point of
time. Two basic assumptions of the law are: (i) only standard units of the commodity are consumed, like
a cup of tea (not a spoon of tea) or a glass of water (not a drop of water), and (ii) consumption of the
commodity is continuous. This law can be explained with the help of the following schedule:
Total Utility Schedule
Units of Commodity-X
MUX
25
20
15
10
The given schedule reveals that as the consumer consumes more of commodity-X, the marginal utility
diminishes. Accordingly, marginal utility curve (MU) slopes downward from left to right.
11. Explain how a fall in prices of the related goods affects the demand for the given good. Give
example.
Ans. The relation between the demand for a good and price of related goods is different in case of substitute
goods and complementary goods. This is explained with reference to Fig. 13.
Y
Fig. 13
D2
D1
Initial demand curve
PX
P
L
Demand curve
shifts to the left
(from DD to D2D2) when
price of the substitute
good decreases
S
Demand curve shifts to the right
(from DD to D1D1) when price of the
complementary good decreases
D2
D1
X
QX
(i) Substitute Goods: When price of the substitute goods decreases, demand curve for Good-X shifts
to the left, implying quantity demanded decreases from PK to PL even when price of Good-X
continues to be OP.
(ii) Complementary Goods: When price of the complementary goods decreases, demand curve for
Good-X shifts to the right, implying quantity demanded increases from PK to PS even when price
of Good-X continues to be OP.
12. What is a supply schedule? Explain how does change in technology of producing a good affect the
supply of that good.
Or
Define supply curve. How does fall in price of an input affect the supply of the good using that
input?
Ans. Supply schedule is a table showing a relationship between price and quantity supplied of a commodity.
A cost saving technological progress will reduce the marginal cost of production. So the marginal cost
curve shifts downward. Since MC curve is the same as supply curve of the firm, downward shift in MC
curve implies a downward shift in supply curve. It means supply curve shifts to the right, signifying
increase in supply. Fig. 14 illustrates this situation.
77
EconomicsXII
Fig. 14
PRICE
Supply c urve
prior t o t echnological
improvement
S1
S2
Supply curve after

technological improvement
S1
S2
QUANTITY
Or
Supply curve is a graphic presentation of supply schedule, showing positive relationship between
price of a commodity and its quantity supplied.
Fall in input price shifts the marginal cost curve downward. Accordingly, supply curve shifts
downward or to the right implying more supply at the same price. Fig. 15 illustrates this situation. S1S1
is the initial supply curve. When input price decreases, supply curve will shift to the right from S1S1 to
S2S2.
Y
PRICE
Fig. 15
S1
S2
Supply curve shifts to the right in

case of decrease in the input price
S1
S2
QUANTITY
13. Explain the relation between total utility and marginal utility.
Ans. The relation between total utility and marginal utility is as follows:
(i) Marginal utility of all units of consumption, when added, will be total utility.
(ii) When MU decreases, TU increases at a diminishing rate.
(iii) When MU is zero, total utility is maximum.
(iv) When marginal utility is negative, total utility diminishes.
14. What is marginal utility? Explain the law of diminishing marginal utility with the help of a utility
schedule.
Ans. Marginal utility is the utility derived from the consumption of an additional unit of a commodity.
The law of diminishing marginal utility states that the marginal utility derived from the consumption
of a commodity must diminish as more units of that commodity are consumed at a point of time. Two
basic assumptions of the law are: (i) only standard units of the commodity are consumed, like a cup of
tea (not a spoon of tea) or a glass of water (not a drop of water), and (ii) consumption is continuous.
78
EconomicsXII
Utility Schedule
Units of Commodity X
MUX
50
40
30
20
10
10
The above schedule and Fig. 16 reveal that as the consumer consumes more of commodity-X, the
marginal utility diminishes. Accordingly, marginal utility (MU) curve slopes downwards from left to
right. MU curve cuts across X-axis implying that MU may even be zero or negative.
Y
Fig. 16
50
40
MUX 30
20
10
O
10
Units of X
Zero Utility
X
7
MU ( ve)
6 MARKS QUESTIONS
1. Explain the three properties of indifference curves.
Ans. The three principal properties of indifference curves are as follows:
(i) Indifference curves are negatively sloped or they slope downward: An indifference curve slopes
downwards from left to right. It shows that more of one commodity implies less of the other, so
that total satisfaction (at any point on IC) remains the same.
(ii) Indifference curves are convex to the point of origin: An indifference curve will ordinarily be
convex to the point of origin. This is because of diminishing marginal rate of substitution.
(iii) Indifference curves never touch or intersect each other: Each indifference curve represents a
different level of satisfaction. So their intersection is ruled out.
2. Market for a good is in equilibrium. There is an increase in demand for this good. Explain the
chain of effects of this change. Use diagram.
Or
Distinguish between collusive and non-collusive oligopoly. Explain how the oligopoly firms are
interdependent in taking price and output decisions.
Ans. Effect of increase in demand for a commodity on equilibrium price and equilibrium quantity is
discussed with reference to Fig. 17.
79
EconomicsXII
D1
Fig. 17
P2
S
D
E1
PRICE
P1
P
E
D1
D
S
Q2
Q Q1
QUANTITY
In Fig. 17, DD and SS are the initial demand curve and supply curve respectively. E is the initial
equilibrium where supply and demand curves intersect each other. OQ is the equilibrium quantity
and OP is the equilibrium price.
Increase in demand implies a shift in demand curve to the right. It is indicated by D1D1. This sets in
motion the following Chain of Effects:
Increase in demand implies that more is demanded at the existing price. Given the supply, price of the
commodity will tend to increase, from OP to OP2: same quantity (OQ) will now be demanded at the
price OP2. Or, at the price of OP, only OQ2 quantity will now be offered for demand. Rise in price will
cause contraction of demand and extension of supply. This process of extension and contraction will
continue till quantity demanded is equal to quantity supplied (OQ1). The equilibrium price is struck at OP1.
Or
Collusive oligopoly is a form of the market in which there are few firms in the market and all decide to
avoid competition through a formal agreement. They collude to form a cartel, and fix for themselves
output quota and market price. Sometimes a leading firm in the market is accepted by the cartel as a
price leader. Members of the cartel accept the price as fixed by the price leader.
Non-collusive oligopoly is a form of the market in which there are few firms in the market and each
firm pursues its price and output policy independent of the rival firms. Each firm tries to increase its
market share through competition. Competition is preferred to collusion as a means of profit
maximisation. Because there are only a few big firms in the market, there is a cut-throat competition.
Price and output policy of one firm has a significant impact on the price and output policy of the rival
firms in the market. When one firm lowers its price, the rival firms may also lower the price. And, when
one firm raises the price, the rival firms may not do it. Accordingly, it becomes very difficult to estimate
change in firms sales caused by a change in price. Implying that a precise relationship between price
and sales cannot be established. Or, that the firms demand curve cannot be drawn.
3. Explain the concept of Marginal Rate of Substitution (MRS) by giving an example. What happens to
MRS when consumer moves downwards along the indifference curve? Give reasons for your answer.
Ans. Marginal rate of substitution of X for Y (MRSXY) is defined as the amount of Y, the consumer is willing
to forego for a unit more of X
Y
MRSXY =
X
AE
BF
In Fig. 18 at point A, MRS XY =
. At point B, MRS XY =
, and so on. When the consumer moves
EB
FC
from point A to point B he gives up 3 units of Good-Y to obtain one unit of Good-X. In this situation,
consumers marginal rate of substitution is 3 : 1. When he moves from B to C, he gives up only 2 units
of Good-Y to get one additional unit of Good-X. The marginal rate of substitution now drops to 2 : 1.
Implying that MRSXY tends to diminish as the consumer moves downwards along the IC. Why should
MRSXY diminish? It is because, as the consumers gives up more and more of Good-Y, his intensity of
desire for Y tends to rise. On the other hand, as the consumer gets more and more of Good-X, his
intensity of desire for X tends to fall.
80
EconomicsXII
Fig. 18
GODO-Y
8
7
6
5
4
Diminishing
MRSXY
10
MRSXY
3:1
MRSXY
2:1
MRSXY
1:1
IC
2
O
3
4
GOOD-X
4. What are monotonic preferences? Explain why is an indifference curve (i) downward sloping from
left to right and (ii) convex.
Ans. Monotonic preferences mean that a rational consumer always prefers more of a commodity as it offers
him a higher level of satisfaction.
(i) An indifference curve slopes downwards from left to right, or that, its slope is negative. Because if
a consumer uses more quantity of one good he will use less quantity of the other, then only he will
have equal satisfaction from their different combinations. This is true in the context of the
assumption that the consumer has monotonic preferences.
(ii) An indifference curve will ordinarily be convex to the point of origin. Convexity of the curve
means that it bows inward to the origin. This implies that the slope of an indifference curve tends
to fall as the consumer moves downward along the curve. The slope of the indifference curve is
called the marginal rate of substitution because it indicates the rate at which the consumer is
willing to substitute one good for the other. The falling slope of IC thus implies that MRSXY tends
to fall as the consumer moves downward along the curve. In other words, it is because of the
diminishing MRSXY that the IC is convex to the origin.
5. What is producers equilibrium? Explain the conditions of producers equilibrium through the
marginal cost and marginal revenue approach. Use diagram.
Ans. Producer is said to be in equilibrium when he maximises his profits or minimises his losses.
According to marginal cost and marginal revenue approach, producer strikes his equilibrium when
two conditions are satisfied:
(i) MR = MC, and
(ii) MC is rising (or MC curve cuts MR curve from below).
The following table and Fig. 19 illustrate producers equilibrium, according to the marginal cost
and marginal revenue approach.
MR, MC Schedule and Producers Equilibrium
Output
(Units)
MR
(`)
MC
(`)
20
16
20
14
20
12
20
16
20
20
20
26
Note: The table is drawn on the assumption that Price (AR) is constant, so that MR is constant (= ` 20). We are
assuming a situation of perfect competition.
81
EconomicsXII
The table shows that the two conditions of equilibrium are satisfied only when 5 units of output are
produced. It is here that (i) MR = MC = ` 20, and (ii) MC is rising.
Likewise Fig. 19 shows that the producer strikes his equilibrium at point Q when 5 units of output are
produced. Note carefully that it is only when 5 units of output are produced that MC = MR = ` 20, and
that MC curve is rising.
Fig. 19
28
Y Firms equilibrium (Perfect competition)

MC
MR/MC (`)
24
20
AR=MR (= ` 20)
16
12
8
4
O
4 5 6
OUTPUT (Units)
[Note: The diagram is not exactly according to table.]
6. Explain the conditions of consumers equilibrium with the help of the indifference curve analysis.
Ans. Consumers equilibrium refers to a situation when a consumer maximises his satisfaction spending his
given income across different goods and services.
In terms of IC analysis, a consumer attains equilibrium when:
(i) IC and price line are tangent to each other.
Or
Slope of IC and slope of price line are equal to each other.
(ii) IC is convex to the origin, at the point of equilibrium.
In Fig. 20 AB is the budget or price line. IC1, IC2 and IC3 are indifference curves. A consumer can buy
any of the combinations, A, B, C, D and E of Good-X and Good-Y shown on the price line AB. He
cannot get any combination on IC3 as it is away from price line AB. He can buy those combinations
which are not only on price line AB but also coincide with the highest indifference curve which is IC2 in
this case. Out of A, B, C, D and E combinations, the consumer will be in equilibrium at combination E,
because at this point price line (AB) is tangent to the highest indifference curve IC2. Also, at E, IC is
convex to the origin. No doubt, the consumer can buy C or D combinations as well but these will not
give him maximum satisfaction being located on lower indifference curve IC1. It means consumers
equilibrium point is the point of tangency of price line and indifference curve.
Y
Fig. 20
GOOD-Y
Consumers Equilibrium
E
L
IC3
IC2
D
O
M
GOOD-X
Slope of Indifference Curve

= Slope of Budget or Price
P
Line or MRSXY = X ,
PY
and at the point of equilibrium,
IC is convex to the origin.
IC1
X
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EconomicsXII
In a state of equilibrium, the consumer is buying OL amount of Good-Y and OM amount of Good-X. It
is here that he is maximising his satisfaction. Any departure from this point would only mean lesser
satisfaction.
7. Market for a good is in equilibrium. There is increase in supply of the good. Explain the chain of
effects of this changes. Use diagram.
Or
Distinguish between non-collusive and collusive oligopoly. Explain the following features of
oligopoly:
(i) Few firms
(ii) Non-price competition.
Ans. Market equilibrium is a situation where market demand is equal to market supply.
Effect of increase in supply of a good on equilibrium price and equilibrium quantity is discussed with
reference to Fig. 21.
Y
Fig. 21
S1
E
PRICE
P
E1
P1
P2 S
D
S1
O
Q Q1 Q2
QUANTITY
Increase in supply implies a shift in supply curve to the right. It is indicated by S1S1. This sets in motion
the following Chain of Effects:
Increase in supply implies that more is supplied at the existing price. Given the demand, price of the
commodity will tend to decrease, from OP to OP2: same quantity (OQ) will now be supplied at the
price OP2. Or, at the price of OP, only OQ2 quantity will now be offered for sale. Fall in price will cause
extension of demand and contraction of supply. This process of extension and contraction will
continue till quantity demanded is equal to quantity supplied (OQ1). The equilibrium price is struck at
OP1.
Or
Collusive oligopoly is a form of the market in which there are few firms in the market and all decide to
avoid competition through a formal agreement. They collude to form a cartel, and fix for themselves
output quotas and market price. Whereas, non-collusive oligopoly is a form of the market in which
there are few firms in the market, and each firm pursues its price and output policy independent of the
rival firms. Each firm tries to increase its market share through competition.
(i) Few Firms: A few firms, but large in size, dominate the market for a commodity. Each firm
commands a significant share of the market: it can impact market price of the product through its
independent price-output policy. Since the number of firms is small, they try to avoid price
competition by forming cartels.
83
EconomicsXII
(ii) Non-price Competition: Under oligopoly, firms tend to avoid price competition. Example: In
India both Coke and Pepsi drinks sell at the same price. However, in order to enhance its share of
the market, each firm tries to resort to non-price competition. Example: Coke and Pepsi sponsor
different games and sports; they also offer lucrative schemes (like of maintenance of school
garden) when bulk purchases are made on regular basis.
8. Explain the concepts of (i) marginal rate of substitution and (ii) budget line equation with the help of
numerical examples.
Ans.
(i) Marginal rate of substitution (MRS) is the rate at which a consumer is willing to substitute Good-1
for Good-2. Or, it is the rate at which a consumer is willing to give up Good-2 for a unit more of
Good-1.
Good-2
It is estimated as
at any point on IC.
Good-1
The concept of MRS is explained with the help of given table.
Marginal Rate of Substitution
Combination
Apples
Oranges
MRS
10
3:1
2:1
1:1
Above table indicates that the consumer will give up 3 oranges for getting the second apple, 2
oranges for getting the third apple and 1 orange for getting the fourth apple. In other words,
marginal rate of substitution of apples for oranges goes on diminishing. It is because of the
diminishing MRS that the IC becomes convex to the origin.
(ii) The budget line shows all the different combinations of the two commodities that a consumer can
purchase, given his money income and the price of two commodities.
The equation of a budget line is given by
M = PX . Q X + PY . Q Y
Where, M = Money income of the consumer.
PX = Price of Good-X.
PY = Price of Good-Y.
QX = Quantity of Good-X.
QY = Quantity of Good-Y.
Supposing a consumer has an income of ` 40 to be spent on apples and oranges. Price of a orange
is ` 5 and a apple is ` 10. With his given income and given prices of apples and oranges, the
different combinations that a consumer can get of these two goods are shown in the given table.
Combination
Income
(M)
Apples
Oranges
40
40
40
40
40
84
EconomicsXII
Fig. 22
ORANGES
8 A
B
2
O
E
4
3
APPLES
A consumer can purchase any of the above combinations in accordance with the budget line equation.
9. Giving reason, explain the behaviour of total product under the Law of Variable Proportions. Use
diagram.
Ans. Law of variable proportions states that as more and more of the variable factor is used with the fixed
factors, a stage must come when marginal product (MP) of the variable factor starts diminishing.
Diminishing MP may become zero or negative.
Of course, initially, MP may rise owing to better coordination between the factors and better utilisation
of the fixed factor. Thus, broadly, we have situations of increasing MP, decreasing MP and negative MP
when the law of variable proportions is in operation. In a situation when MP is increasing, TP should
be increasing at an increasing rate. When MP is decreasing, TP should be increasing at a decreasing
rate. And, when MP is negative, TP should be declining. Of course TP should be maximum when MP = 0.
Diagrammatic Illustration:
Y
Fig. 23
TOTAL PRODUCT
TP
K
MARGINAL PRODUCT
O
Y Increasing
Returns
S
Diminishing
Returns
S ve
MP
UNITS OF THE VARIABLE FACTOR
Diagram shows that:

(i) MP tends to rise till OL units of the variable factor are used with the constant application of the
fixed factor. This corresponds to point E on the MP curve. This is a situation of increasing returns
to a factor.
(ii) When MP is rising, TP tends to rise at an increasing rate. This occurs till point K on the TP curve.
This corresponds to the situation of increasing returns to a factor.
85
EconomicsXII
(iii) Beyond OL units of the variable factor, MP tends to decline, and TP increases only at diminishing
rate. This occurs between E and S on MP curve, and between K and T on TP curve. This
corresponds to a situation of diminishing returns to a factor.
(iv) Beyond OS units of the variable factor, MP becomes negative. Now TP starts declining.
Economists sometimes refer to this situation as a situation of negative returns.
10. Market for a good is in equilibrium. Supply of the good decreases. Explain the chain of effects of
this change. Use diagram.
Or
Distinguish between cooperative and non-cooperative oligopoly. Explain the following features
of oligopoly:
(i) Barriers to the entry of firms.
(ii) Non-price competition.
Ans. Effect of decrease in supply of a commodity on its equilibrium price and equilibrium quantity is
discussed with reference to Fig. 24.
Y
Fig. 24
P2
S1
PRICE
S
P1
E1
E
P
S1
D
S
O
Q2
Q1 Q
QUANTITY
Decrease in supply implies a shift in supply curve to the left. It is indicated by S1S1. This sets in motion
the following Chain of Effects:
Decrease in supply implies that less is supplied at the existing price. Given the demand, price of the
commodity will tend to increase, from OP to OP2: same quantity (OQ) will now be supplied at the price
OP2. Or, at the price of OP, only OQ2 quantity will now be offered for sale. Rise in price will cause
contraction of demand and extension of supply. This process of extension and contraction will
continue till quantity demanded is equal to quantity supplied (OQ1). The equilibrium price is struck at
OP1.
Or
Cooperative (or collusive) oligopoly is a form of the market in which there are few firms in the market
and all decide to avoid competition through a formal agreement. They collude to form a cartel, and fix
for themselves output quota and market price. Whereas, non-cooperative (or non-collusive) oligopoly
is a form of the market in which there are few firms in the market, and each firm pursues its price and
output policy independent of the rival firms. Each firm tries to increase its market share through
competition.
(i) Barriers to the Entry of Firms: There are various barriers to the entry of new firms. These
barriers are almost similar to those under monopoly. Patent-rights is the most important form of
entry-barrier. Entry of the new firms is extremely difficult, if not impossible.
86
EconomicsXII
(ii) Non-price Competition: Under oligopoly, firms tend to avoid price competition. Example: In
India both Coke and Pepsi drinks sell at the same price. However, in order to enhance its share of
the market, each firm tries to resort to non-price competition. Example: Coke and Pepsi sponsor
different games and sports; they also offer lucrative schemes (like of maintenance of school
garden) when bulk purchases are made on regular basis.
11. Explain the concept of Marginal Rate of Substitution. Explain the reaction of the consumer when
Marginal Rate of Substitution is higher than the ratio of prices.
Ans. Marginal rate of substitution between Good-X and Good-Y (briefly MRSXY) is the rate at which the
consumer is ready to sacrifice Good-Y for a unit more of Good-X. This is in accordance with the
Y
preferences of the consumer, and is expressed as
. This is the same as the slope of IC.
X
P
We know the consumer strikes this equilibrium when MRSXY = X .
PY
PX
P
, equilibrium of the consumer is disturbed. On the assumption that X
PY
PY
remains constant (and also income of the consumer is constant) equilibrium can be struck only when
P
MRSXY starts falling and becomes equal to X . This happens only when the consumer starts
PY
consuming more of X in place of Y. That is, he moves downward to the right along the IC. Convexity of
the IC ensures that as the consumer moves downward to the right along his IC, MRSXY tends to fall.
P
Briefly, when MRSXY > X , the consumer would react to this situation by substituting X for Y so that
PY
MRSXY declines and becomes equal to price ratio.
In a situation when MRSXY>
zzz
87
EconomicsXII

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Introductory

4323/3, Ansari Road, Darya Ganj, New Delhi-110002

Consumer Equilibrium and Demand

Producer Behaviour and Supply

Cost and Revenue

Forms of Market and Price Determination

10. Marginal opportunity cost.

employment in firm-A at the wage of 1,500 P.M.

employment in firm-B at the wage of 2,500 P.M.

employment in firm-C at the wage of 4,000 P.M.

Gain of output in Use-1 : 300 units

HOTS (Higher Order Thinking Skills)

Consumer Equilibrium and Demand

10. Demand curve.

17. A consumer strikes his equilibrium when:

18. A consumer strikes his equilibrium when:

19. A consumer strikes his equilibrium when: MRS =

20. A situation when MRS >

21. A situation when

HOTS (Higher Order Thinking Skills)

Producer Behaviour and Supply

10. Law of variable proportions.

11. AP and MP tend to be U-shaped.

HOTS (Higher Order Thinking Skills)

Cost and Revenue

2. Variable cost is incurred before production is started.

13. Marginal revenue can never be negative.

3. AC is greater than MC, so long as AC is falling.

14. When MC > ATC, ATC must rise.

HOTS (Higher Order Thinking Skills)

Forms of Market and Price Determination

10. Excess demand and excess supply.

HOTS (Higher Order Thinking Skills)

HOTS (Higher Order Thinking Skills)

Unit-2: Consumer Equilibrium and Demand

21. No. A consumer attains his equilibrium only when:

Slope of Demand Curve Q

(i) articles of distinction

(i) increase in income of the consumer

(i) fall in income

HOTS (Higher Order Thinking Skills)

Slope of Demand Curve Q

Slope of Demand Curve Q

Slope of Demand Curve Q

Unit-3A: Producer Behaviour and Supply

4. Yes. If AP is falling, MP must also fall. Because, unless MP

5. No. AP can rise even when MP is falling. See AP and MP

(i) technological improvement

(i) increase in input prices

13. increase in price of the concerned commodity.

(i) use of computers

(i) price of the concerned commodity

(i) factors of production are use-specific which compounds their scarcity

HOTS (Higher Order Thinking Skills)

Note: The difference between TR and TC

REVENUE AND COST

Unit-3B: Cost and Revenue

7. No. Total fixed cost is indicated by a horizontal straight line

TOTAL FIXED COST

Relating the two equations, we can write that:

16. No. Under perfect competition, AR and MR curves coincide and

4. Yes. MC and AC are equal when AC tends to stabilise or when AC is

7. No. The distance between AC and AVC curves tends to reduce as

16. Yes. Under perfect competition, AR and MR are constant.