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The document is a workbook on introductory microeconomics that contains various question sets and exercises related to key microeconomic concepts. The first section summarized includes definitions of concepts related to consumer equilibrium and demand such as demand, quantity demanded, marginal utility, indifference curves, budget lines, consumer equilibrium, laws of demand, price elasticity of demand, demand curves and functions, substitute and complementary goods, and normal, inferior and Giffen goods. It also includes questions to test understanding of these concepts.

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Introductory Microeconomics Workbook Class XII 4323/3, Ansari Road, Darya Ganj, New Delhi-110002 Ph: 91-11-23250105, 23250106 Fax: 91-11-23250141 mail@vkpublications.com www.vkpublications.com
Contents Worksheet 1 Introduction 3 Worksheet 2 Consumer Equilibrium and Demand 9 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 Papers–2010 (Solved)
S RK HE Introduction WO 1 ET QUESTION SET–I Define the following concepts: 1. Microeconomics. _________________________________________________________________________________________ _________________________________________________________________________________________ 2. Economy. _________________________________________________________________________________________ _________________________________________________________________________________________ 3. Scarcity. _________________________________________________________________________________________ _________________________________________________________________________________________ 4. Central problems of an economy. _________________________________________________________________________________________ _________________________________________________________________________________________ 5. Mixed economy. _________________________________________________________________________________________ _________________________________________________________________________________________ 6. Market economy. _________________________________________________________________________________________ _________________________________________________________________________________________ 7. Centrally planned economy. _________________________________________________________________________________________ _________________________________________________________________________________________ 8. Production possibility curve. _________________________________________________________________________________________ _________________________________________________________________________________________ 9. Opportunity cost. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 3 Economics–XII
10. Marginal opportunity cost. _________________________________________________________________________________________ _________________________________________________________________________________________ 11. Marginal rate of transformation. _________________________________________________________________________________________ _________________________________________________________________________________________ 12. Positive economic analysis. _________________________________________________________________________________________ _________________________________________________________________________________________ 13. Normative economic analysis. _________________________________________________________________________________________ _________________________________________________________________________________________ QUESTION SET–II Defend or refute the following statements. Write ‘yes’ or ‘no’ with reason: 1. Microeconomics does not deal with aggregates. _________________________________________________________________________________________ _________________________________________________________________________________________ 2. Opportunity cost refers to explicit cost of production. _________________________________________________________________________________________ _________________________________________________________________________________________ 3. Production possibility curve may sometimes be convex to the origin. _________________________________________________________________________________________ _________________________________________________________________________________________ 4. Central problems of an economy are found only in those economies which are not governed or regulated by the government. _________________________________________________________________________________________ _________________________________________________________________________________________ 5. Scarcity exists even when certain goods are available at zero price. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 4 Economics–XII
6. Marginal opportunity cost falls as resources are shifted from Use-1 to Use-2. _________________________________________________________________________________________ _________________________________________________________________________________________ 7. PPC is drawn on the assumption of constant technology. _________________________________________________________________________________________ _________________________________________________________________________________________ 8. Economising the use of resources means saving the resources for future use. _________________________________________________________________________________________ _________________________________________________________________________________________ 9. If resources are not efficiently utilised, we are outside PPC. _________________________________________________________________________________________ _________________________________________________________________________________________ 10. An economy produces goods and services in a manner such that it always operates on the PPC. _________________________________________________________________________________________ _________________________________________________________________________________________ QUESTION SET–III 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’. _________________________________________________________________________________________ _________________________________________________________________________________________ 3. Choice between ‘production for the poor’ and ‘production for the rich’ refers to the problem of what to produce. _________________________________________________________________________________________ _________________________________________________________________________________________ 4. In a market economy, the central problems are solved by the central authority of the government. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 5 Economics–XII
5. In a centrally planned economy, the central problems are solved by the forces of supply and demand. _________________________________________________________________________________________ _________________________________________________________________________________________ 6. In a mixed economy, only public sector is engaged in the process of production. _________________________________________________________________________________________ _________________________________________________________________________________________ 7. Problem of resource allocation is automatically solved in a mixed economy. _________________________________________________________________________________________ _________________________________________________________________________________________ 8. Production possibility curve shows possibilities of production when different technologies are used. _________________________________________________________________________________________ _________________________________________________________________________________________ 9. Economic activity would not exist if resources were not scarce. _________________________________________________________________________________________ _________________________________________________________________________________________ 10. A point below PPC points to under utilisation of resources. _________________________________________________________________________________________ _________________________________________________________________________________________ QUESTION SET–IV 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____________________________ . Introductory Microeconomics 6 Economics–XII
NUMERICALS 1. Find opportunity cost, given the following possibilities of employment of Mr. X. Possibility 1: employment in firm-A at the wage of Rs 1,500 P.M. Possibility 2: employment in firm-B at the wage of Rs. 2,500 P.M. Possibility 3: employment in firm-C at the wage of Rs. 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 0 100 1 90 2 75 3 55 4 30 5 0 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. _________________________________________________________________________________ _________________________________________________________________________________ Introductory Microeconomics 7 Economics–XII
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. _________________________________________________________________________________ _________________________________________________________________________________ 3. When an economy moves from a situation of underemployment to full employment, PPC curve shifts to the right. _________________________________________________________________________________ _________________________________________________________________________________ 4. Marginal rate of transformation refers to the slope of PPC. _________________________________________________________________________________ _________________________________________________________________________________ 5. Convexity of PPC to the origin points to increasing slope of PPC and increasing marginal opportunity cost. _________________________________________________________________________________ _________________________________________________________________________________ 6. Problem of resource allocation would not arise if resources had not alternative uses. _________________________________________________________________________________ _________________________________________________________________________________ 7. If a country is operating inside the PPC, it is saving its resources for future growth. _________________________________________________________________________________ _________________________________________________________________________________ 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. _________________________________________________________________________________ _________________________________________________________________________________ 9. Opportunity cost is an avoidable cost. _________________________________________________________________________________ _________________________________________________________________________________ 10. Even when resources and technology are constant, an economy may not operate on the PPC. _________________________________________________________________________________ _________________________________________________________________________________ Introductory Microeconomics 8 Economics–XII
S RK HE Consumer Equilibrium and Demand WO 2 ET QUESTION SET–I Define the following concepts: 1. Demand and quantity demanded. _________________________________________________________________________________________ _________________________________________________________________________________________ 2. Marginal utility and total utility. _________________________________________________________________________________________ _________________________________________________________________________________________ 3. Indifference curve. _________________________________________________________________________________________ _________________________________________________________________________________________ 4. Budget line/price line. _________________________________________________________________________________________ _________________________________________________________________________________________ 5. Consumer’s equilibrium. _________________________________________________________________________________________ _________________________________________________________________________________________ 6. Law of diminishing marginal utility. _________________________________________________________________________________________ _________________________________________________________________________________________ 7. Law of demand. _________________________________________________________________________________________ _________________________________________________________________________________________ 8. Price elasticity of demand. _________________________________________________________________________________________ _________________________________________________________________________________________ 9. Individual demand schedule and market demand schedule. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 9 Economics–XII
10. Demand curve. _________________________________________________________________________________________ _________________________________________________________________________________________ 11. Demand function. _________________________________________________________________________________________ _________________________________________________________________________________________ 12. Substitute goods and complementary goods. _________________________________________________________________________________________ _________________________________________________________________________________________ 13. Normal goods, inferior goods, and giffen goods. _________________________________________________________________________________________ _________________________________________________________________________________________ 14. Extension and contraction of demand. _________________________________________________________________________________________ _________________________________________________________________________________________ 15. Increase and decrease in demand. _________________________________________________________________________________________ _________________________________________________________________________________________ 16. Movement along the demand curve and shift in demand curve. _________________________________________________________________________________________ _________________________________________________________________________________________ QUESTION SET–II Defend or refute the following statements. Write ‘yes’ or ‘no’ with reason: 1. Demand for a commodity can exist independent of its price. _________________________________________________________________________________________ _________________________________________________________________________________________ 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. _________________________________________________________________________________________ _________________________________________________________________________________________ 3. Demand for a commodity refers to the entire demand schedule. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 10 Economics–XII
4. It is quantity demanded (and not demand for a commodity) that changes with respect to its own price. _________________________________________________________________________________________ _________________________________________________________________________________________ 5. Marginal utility of each unit of a commodity adds up to total utility. _________________________________________________________________________________________ _________________________________________________________________________________________ 6. Total utility will increase even when marginal utility decreases. _________________________________________________________________________________________ _________________________________________________________________________________________ 7. Total utility is maximum when marginal utility starts declining. _________________________________________________________________________________________ _________________________________________________________________________________________ 8. Increase in demand refers to extension of demand. _________________________________________________________________________________________ _________________________________________________________________________________________ 9. Decrease in demand refers to contraction of demand. _________________________________________________________________________________________ _________________________________________________________________________________________ 10. In case of inferior goods, law of demand fails. _________________________________________________________________________________________ _________________________________________________________________________________________ 11. Giffen goods must be inferior goods, while inferior goods, may or may not be giffen goods. _________________________________________________________________________________________ _________________________________________________________________________________________ 12. In case of substitute goods, a fall in price of Good-X causes a fall in demand for Good-Y. _________________________________________________________________________________________ _________________________________________________________________________________________ 13. In case of complementary goods, a rise in price of Good-X causes a rise in demand for Good-Y. _________________________________________________________________________________________ _________________________________________________________________________________________ 14. Indifference curve is not convex to the origin. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 11 Economics–XII
15. MRS (marginal rate of substitution) along an indifference curve tends to diminish. _________________________________________________________________________________________ _________________________________________________________________________________________ 16. All attainable combinations of Good-X and Good-Y are below the budget line of a consumer. _________________________________________________________________________________________ _________________________________________________________________________________________ MUX 17. A consumer strikes his equilibrium when: = MUM. PX _________________________________________________________________________________________ _________________________________________________________________________________________ MUX MUY 18. A consumer strikes his equilibrium when: = = MUM. PX PY _________________________________________________________________________________________ _________________________________________________________________________________________ PX 19. A consumer strikes his equilibrium when: MRS = . PY _________________________________________________________________________________________ _________________________________________________________________________________________ PX P 20. A situation when MRS > is better than when MRS = X . PY PY _________________________________________________________________________________________ _________________________________________________________________________________________ PX MUX P MUX 21. A situation when > is better than when X = . PY MUY PY MUY _________________________________________________________________________________________ _________________________________________________________________________________________ QUESTION SET–III Write your comment on each of the following statements in a sentence or two: 1. MU must diminish as more and more standard units of a commodity are continuously consumed. _________________________________________________________________________________________ _________________________________________________________________________________________ 2. Cross price effect occurs in case of substitute goods, and not in case of complementary goods. _________________________________________________________________________________________ _________________________________________________________________________________________ 3. In an indifference curve map, higher IC always points to higher level of satisfaction. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 12 Economics–XII
4. Changes in income causes a shift in demand curve, while change in price does not. _________________________________________________________________________________________ _________________________________________________________________________________________ 5. Even when PX remains constant, QX may increase or decrease. _________________________________________________________________________________________ _________________________________________________________________________________________ 6. Elasticity of demand refers to change in quantity consequent upon change in price of the commodity. _________________________________________________________________________________________ _________________________________________________________________________________________ 7. When total expenditure on the commodity remains constant, price elasticity of demand also remains constant, no matter what the change in price is. _________________________________________________________________________________________ _________________________________________________________________________________________ 8. Elasticity of demand (with respect to price of the commodity) is constant along a straight line demand curve. _________________________________________________________________________________________ _________________________________________________________________________________________ 9. If price elasticity of demand is zero, it means expenditure on the commodity does not change with change in price of the commodity. _________________________________________________________________________________________ _________________________________________________________________________________________ 10. A commodity showing high elasticity of demand often has a large number of close substitutes in the market. _________________________________________________________________________________________ _________________________________________________________________________________________ 11. Elasticity of demand tends to be high over a short period of time than the long period. _________________________________________________________________________________________ _________________________________________________________________________________________ 12. Complementary goods often exhibit low elasticity of demand. _________________________________________________________________________________________ _________________________________________________________________________________________ 13. Luxuries of life often exhibit low elasticity of demand. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 13 Economics–XII
14. Higher the price level, higher should be the elasticity of demand. _________________________________________________________________________________________ _________________________________________________________________________________________ 15. A horizontal straight line demand curve shows zero elasticity of demand. _________________________________________________________________________________________ _________________________________________________________________________________________ 16. A vertical straight line demand curve shows that demand rises to infinity even when price remains constant. _________________________________________________________________________________________ _________________________________________________________________________________________ 17. Price elasticity of demand is identical with slope of demand curve. _________________________________________________________________________________________ _________________________________________________________________________________________ 18. From a point of intersection, a flatter demand curve shows greater elasticity of demand than a steeper demand curve. _________________________________________________________________________________________ _________________________________________________________________________________________ 19. In case of normal goods, income effect is positive, while in case of inferior goods, it is negative. _________________________________________________________________________________________ _________________________________________________________________________________________ 20. In case of giffen goods, income effect is always greater than the substitution effect. _________________________________________________________________________________________ _________________________________________________________________________________________ QUESTION SET–IV Complete the following sentences: 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__________________________________ . Introductory Microeconomics 14 Economics–XII
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 ______________ . HOTS (Higher Order Thinking Skills) Write ‘true’ or ‘false’ with a reason: 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. _________________________________________________________________________________ _________________________________________________________________________________ Introductory Microeconomics 15 Economics–XII
3. If slope of two demand curves is the same, they show the same elasticity of demand. _________________________________________________________________________________ _________________________________________________________________________________ 4. When slope of demand curve = 0, price elasticity of demand = ¥ _________________________________________________________________________________ _________________________________________________________________________________ 5. When slope of demand curve =¥ , price elasticity of demand = 0. __________________________________________________________________________________ __________________________________________________________________________________ Introductory Microeconomics 16 Economics–XII
S RK HE Producer Behaviour and Supply WO 3A ET QUESTION SET–I Define the following concepts: 1. Production function. _________________________________________________________________________________________ _________________________________________________________________________________________ 2. Producer’s equilibrium _________________________________________________________________________________________ _________________________________________________________________________________________ 3. Supply and quantity supplied. _________________________________________________________________________________________ _________________________________________________________________________________________ 4. Individual supply schedule and market supply schedule. _________________________________________________________________________________________ _________________________________________________________________________________________ 5. Law of supply. _________________________________________________________________________________________ _________________________________________________________________________________________ 6. Contraction of supply and decrease in supply. _________________________________________________________________________________________ _________________________________________________________________________________________ 7. Extension of supply and increase in supply. _________________________________________________________________________________________ _________________________________________________________________________________________ 8. TP, AP and MP. _________________________________________________________________________________________ _________________________________________________________________________________________ 9. Returns to a factor. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 17 Economics–XII
10. Law of variable proportions. _________________________________________________________________________________________ _________________________________________________________________________________________ 11. Increasing returns to a factor. _________________________________________________________________________________________ _________________________________________________________________________________________ 12. Diminishing returns to a factor. _________________________________________________________________________________________ _________________________________________________________________________________________ 13. Movements along the supply curve and shift in supply curve. _________________________________________________________________________________________ _________________________________________________________________________________________ 14. Joint supply and composite supply _________________________________________________________________________________________ _________________________________________________________________________________________ 15. Price elasticity of supply. _________________________________________________________________________________________ _________________________________________________________________________________________ 16. Perfectly elastic and perfectly inelastic supply. _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ 17. Elastic and inelastic supply. _________________________________________________________________________________________ _________________________________________________________________________________________ 18. Market period, short period and long period. _________________________________________________________________________________________ _________________________________________________________________________________________ 19. Fixed factors and variable factors. _________________________________________________________________________________________ _________________________________________________________________________________________ 20. Supply and stock. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 18 Economics–XII
QUESTION SET–II Defend or refute the following statements. Write ‘yes’ or ‘no’ with reason: 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. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 19 Economics–XII
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 proportion 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. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 20 Economics–XII
QUESTION SET–III Write your comment on each of the following statements in a sentence or two: 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. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 21 Economics–XII
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, firm’s 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. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 22 Economics–XII
QUESTION SET–IV Complete the following sentences: 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, firm’s supply curve will shift to the _________________________ . 19. If price of inputs rises, firm’s supply curve will shift to the________________________________________. 20. Increase in excise tax will shift the firm’s supply curve to the _____________________________________. 21. When a cost saving technology is introduced, firm’s 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, farmer’s 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) _____________________ . Introductory Microeconomics 23 Economics–XII
HOTS (Higher Order Thinking Skills) 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. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 24 Economics–XII
S RK HE Cost and Revenue WO 3B ET QUESTION SET–I Define the following concepts: 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 SET–II Defend or refute the following statements. Write ‘yes’ or ‘no’ with reason: 1. Fixed cost is constant even when output is zero. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 25 Economics–XII
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. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 26 Economics–XII
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 SET–III Write your comment on each of the following statements in a sentence or two: 1. AC curve tends to be U-shaped. _________________________________________________________________________________________ _________________________________________________________________________________________ 2. MC is greater than AC when production is in a state of diminishing returns. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 27 Economics–XII
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. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 28 Economics–XII
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 SET–IV Complete the following sentences: 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 ___________________________________________________________ . Introductory Microeconomics 29 Economics–XII
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 __________________________________________________________________ . HOTS (Higher Order Thinking Skills) 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? _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 30 Economics–XII
S RK HE Forms of Market and Price Determination WO 4 ET QUESTION SET–I Define the following concepts: 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. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 31 Economics–XII
10. Excess demand and excess supply. _________________________________________________________________________________________ _________________________________________________________________________________________ 11. Economic viability and non-viability of an industry. _________________________________________________________________________________________ _________________________________________________________________________________________ 12. Control price and support price. _________________________________________________________________________________________ _________________________________________________________________________________________ QUESTION SET–II Defend or refute the following statements. Write ‘yes’ or ‘no’ with reason: 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. Firm’s demand curve is indeterminate under oligopoly. _________________________________________________________________________________________ _________________________________________________________________________________________ 6. Product differentiation allows partial control over price. _________________________________________________________________________________________ _________________________________________________________________________________________ 7. A monopolist can exercise price discrimination. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 32 Economics–XII
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. Firm’s demand curve under perfect competition is a horizontal straight line. _________________________________________________________________________________________ _________________________________________________________________________________________ 13. Firm’s 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 SET–III Write your comment on each of the following statements in a sentence or two: 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. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 33 Economics–XII
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. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 34 Economics–XII
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 SET–IV Complete the following sentences: 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 ______________________________________ . Introductory Microeconomics 35 Economics–XII
HOTS (Higher Order Thinking Skills) Write ‘true’ or ‘false’ with a reason: 1. Firm’s 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 firm’s 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. _________________________________________________________________________________ _________________________________________________________________________________ Introductory Microeconomics 36 Economics–XII
SOLUTIONS Introductory Microeconomics
Worksheet–1 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: DY Loss of output of Y é when some resources ù MRT= = êare shifted from Y to X ú DX Gain of output of X ë û 12. Positive economic analysis refers to such issues which are verifiable, or which can be verified against the facts. 13. Normative economic analysis refers to such issues which are suggestive in nature and are not verifiable. Introductory Microeconomics 39 Economics–XII
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. 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 utilized (or are under-utilized) 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. Introductory Microeconomics 40 Economics–XII
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. NUMERICALS 1. Opportunity cost = Rs 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. Introductory Microeconomics 41 Economics–XII
HOTS (Higher Order Thinking Skills) 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. Introductory Microeconomics 42 Economics–XII
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Microeconomics

  • 1. Introductory Microeconomics Workbook Class XII 4323/3, Ansari Road, Darya Ganj, New Delhi-110002 Ph: 91-11-23250105, 23250106 Fax: 91-11-23250141 mail@vkpublications.com www.vkpublications.com
  • 2. Contents Worksheet 1 Introduction 3 Worksheet 2 Consumer Equilibrium and Demand 9 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 Papers–2010 (Solved)
  • 3. S RK HE Introduction WO 1 ET QUESTION SET–I Define the following concepts: 1. Microeconomics. _________________________________________________________________________________________ _________________________________________________________________________________________ 2. Economy. _________________________________________________________________________________________ _________________________________________________________________________________________ 3. Scarcity. _________________________________________________________________________________________ _________________________________________________________________________________________ 4. Central problems of an economy. _________________________________________________________________________________________ _________________________________________________________________________________________ 5. Mixed economy. _________________________________________________________________________________________ _________________________________________________________________________________________ 6. Market economy. _________________________________________________________________________________________ _________________________________________________________________________________________ 7. Centrally planned economy. _________________________________________________________________________________________ _________________________________________________________________________________________ 8. Production possibility curve. _________________________________________________________________________________________ _________________________________________________________________________________________ 9. Opportunity cost. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 3 Economics–XII
  • 4. 10. Marginal opportunity cost. _________________________________________________________________________________________ _________________________________________________________________________________________ 11. Marginal rate of transformation. _________________________________________________________________________________________ _________________________________________________________________________________________ 12. Positive economic analysis. _________________________________________________________________________________________ _________________________________________________________________________________________ 13. Normative economic analysis. _________________________________________________________________________________________ _________________________________________________________________________________________ QUESTION SET–II Defend or refute the following statements. Write ‘yes’ or ‘no’ with reason: 1. Microeconomics does not deal with aggregates. _________________________________________________________________________________________ _________________________________________________________________________________________ 2. Opportunity cost refers to explicit cost of production. _________________________________________________________________________________________ _________________________________________________________________________________________ 3. Production possibility curve may sometimes be convex to the origin. _________________________________________________________________________________________ _________________________________________________________________________________________ 4. Central problems of an economy are found only in those economies which are not governed or regulated by the government. _________________________________________________________________________________________ _________________________________________________________________________________________ 5. Scarcity exists even when certain goods are available at zero price. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 4 Economics–XII
  • 5. 6. Marginal opportunity cost falls as resources are shifted from Use-1 to Use-2. _________________________________________________________________________________________ _________________________________________________________________________________________ 7. PPC is drawn on the assumption of constant technology. _________________________________________________________________________________________ _________________________________________________________________________________________ 8. Economising the use of resources means saving the resources for future use. _________________________________________________________________________________________ _________________________________________________________________________________________ 9. If resources are not efficiently utilised, we are outside PPC. _________________________________________________________________________________________ _________________________________________________________________________________________ 10. An economy produces goods and services in a manner such that it always operates on the PPC. _________________________________________________________________________________________ _________________________________________________________________________________________ QUESTION SET–III 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’. _________________________________________________________________________________________ _________________________________________________________________________________________ 3. Choice between ‘production for the poor’ and ‘production for the rich’ refers to the problem of what to produce. _________________________________________________________________________________________ _________________________________________________________________________________________ 4. In a market economy, the central problems are solved by the central authority of the government. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 5 Economics–XII
  • 6. 5. In a centrally planned economy, the central problems are solved by the forces of supply and demand. _________________________________________________________________________________________ _________________________________________________________________________________________ 6. In a mixed economy, only public sector is engaged in the process of production. _________________________________________________________________________________________ _________________________________________________________________________________________ 7. Problem of resource allocation is automatically solved in a mixed economy. _________________________________________________________________________________________ _________________________________________________________________________________________ 8. Production possibility curve shows possibilities of production when different technologies are used. _________________________________________________________________________________________ _________________________________________________________________________________________ 9. Economic activity would not exist if resources were not scarce. _________________________________________________________________________________________ _________________________________________________________________________________________ 10. A point below PPC points to under utilisation of resources. _________________________________________________________________________________________ _________________________________________________________________________________________ QUESTION SET–IV 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____________________________ . Introductory Microeconomics 6 Economics–XII
  • 7. NUMERICALS 1. Find opportunity cost, given the following possibilities of employment of Mr. X. Possibility 1: employment in firm-A at the wage of Rs 1,500 P.M. Possibility 2: employment in firm-B at the wage of Rs. 2,500 P.M. Possibility 3: employment in firm-C at the wage of Rs. 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 0 100 1 90 2 75 3 55 4 30 5 0 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. _________________________________________________________________________________ _________________________________________________________________________________ Introductory Microeconomics 7 Economics–XII
  • 8. 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. _________________________________________________________________________________ _________________________________________________________________________________ 3. When an economy moves from a situation of underemployment to full employment, PPC curve shifts to the right. _________________________________________________________________________________ _________________________________________________________________________________ 4. Marginal rate of transformation refers to the slope of PPC. _________________________________________________________________________________ _________________________________________________________________________________ 5. Convexity of PPC to the origin points to increasing slope of PPC and increasing marginal opportunity cost. _________________________________________________________________________________ _________________________________________________________________________________ 6. Problem of resource allocation would not arise if resources had not alternative uses. _________________________________________________________________________________ _________________________________________________________________________________ 7. If a country is operating inside the PPC, it is saving its resources for future growth. _________________________________________________________________________________ _________________________________________________________________________________ 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. _________________________________________________________________________________ _________________________________________________________________________________ 9. Opportunity cost is an avoidable cost. _________________________________________________________________________________ _________________________________________________________________________________ 10. Even when resources and technology are constant, an economy may not operate on the PPC. _________________________________________________________________________________ _________________________________________________________________________________ Introductory Microeconomics 8 Economics–XII
  • 9. S RK HE Consumer Equilibrium and Demand WO 2 ET QUESTION SET–I Define the following concepts: 1. Demand and quantity demanded. _________________________________________________________________________________________ _________________________________________________________________________________________ 2. Marginal utility and total utility. _________________________________________________________________________________________ _________________________________________________________________________________________ 3. Indifference curve. _________________________________________________________________________________________ _________________________________________________________________________________________ 4. Budget line/price line. _________________________________________________________________________________________ _________________________________________________________________________________________ 5. Consumer’s equilibrium. _________________________________________________________________________________________ _________________________________________________________________________________________ 6. Law of diminishing marginal utility. _________________________________________________________________________________________ _________________________________________________________________________________________ 7. Law of demand. _________________________________________________________________________________________ _________________________________________________________________________________________ 8. Price elasticity of demand. _________________________________________________________________________________________ _________________________________________________________________________________________ 9. Individual demand schedule and market demand schedule. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 9 Economics–XII
  • 10. 10. Demand curve. _________________________________________________________________________________________ _________________________________________________________________________________________ 11. Demand function. _________________________________________________________________________________________ _________________________________________________________________________________________ 12. Substitute goods and complementary goods. _________________________________________________________________________________________ _________________________________________________________________________________________ 13. Normal goods, inferior goods, and giffen goods. _________________________________________________________________________________________ _________________________________________________________________________________________ 14. Extension and contraction of demand. _________________________________________________________________________________________ _________________________________________________________________________________________ 15. Increase and decrease in demand. _________________________________________________________________________________________ _________________________________________________________________________________________ 16. Movement along the demand curve and shift in demand curve. _________________________________________________________________________________________ _________________________________________________________________________________________ QUESTION SET–II Defend or refute the following statements. Write ‘yes’ or ‘no’ with reason: 1. Demand for a commodity can exist independent of its price. _________________________________________________________________________________________ _________________________________________________________________________________________ 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. _________________________________________________________________________________________ _________________________________________________________________________________________ 3. Demand for a commodity refers to the entire demand schedule. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 10 Economics–XII
  • 11. 4. It is quantity demanded (and not demand for a commodity) that changes with respect to its own price. _________________________________________________________________________________________ _________________________________________________________________________________________ 5. Marginal utility of each unit of a commodity adds up to total utility. _________________________________________________________________________________________ _________________________________________________________________________________________ 6. Total utility will increase even when marginal utility decreases. _________________________________________________________________________________________ _________________________________________________________________________________________ 7. Total utility is maximum when marginal utility starts declining. _________________________________________________________________________________________ _________________________________________________________________________________________ 8. Increase in demand refers to extension of demand. _________________________________________________________________________________________ _________________________________________________________________________________________ 9. Decrease in demand refers to contraction of demand. _________________________________________________________________________________________ _________________________________________________________________________________________ 10. In case of inferior goods, law of demand fails. _________________________________________________________________________________________ _________________________________________________________________________________________ 11. Giffen goods must be inferior goods, while inferior goods, may or may not be giffen goods. _________________________________________________________________________________________ _________________________________________________________________________________________ 12. In case of substitute goods, a fall in price of Good-X causes a fall in demand for Good-Y. _________________________________________________________________________________________ _________________________________________________________________________________________ 13. In case of complementary goods, a rise in price of Good-X causes a rise in demand for Good-Y. _________________________________________________________________________________________ _________________________________________________________________________________________ 14. Indifference curve is not convex to the origin. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 11 Economics–XII
  • 12. 15. MRS (marginal rate of substitution) along an indifference curve tends to diminish. _________________________________________________________________________________________ _________________________________________________________________________________________ 16. All attainable combinations of Good-X and Good-Y are below the budget line of a consumer. _________________________________________________________________________________________ _________________________________________________________________________________________ MUX 17. A consumer strikes his equilibrium when: = MUM. PX _________________________________________________________________________________________ _________________________________________________________________________________________ MUX MUY 18. A consumer strikes his equilibrium when: = = MUM. PX PY _________________________________________________________________________________________ _________________________________________________________________________________________ PX 19. A consumer strikes his equilibrium when: MRS = . PY _________________________________________________________________________________________ _________________________________________________________________________________________ PX P 20. A situation when MRS > is better than when MRS = X . PY PY _________________________________________________________________________________________ _________________________________________________________________________________________ PX MUX P MUX 21. A situation when > is better than when X = . PY MUY PY MUY _________________________________________________________________________________________ _________________________________________________________________________________________ QUESTION SET–III Write your comment on each of the following statements in a sentence or two: 1. MU must diminish as more and more standard units of a commodity are continuously consumed. _________________________________________________________________________________________ _________________________________________________________________________________________ 2. Cross price effect occurs in case of substitute goods, and not in case of complementary goods. _________________________________________________________________________________________ _________________________________________________________________________________________ 3. In an indifference curve map, higher IC always points to higher level of satisfaction. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 12 Economics–XII
  • 13. 4. Changes in income causes a shift in demand curve, while change in price does not. _________________________________________________________________________________________ _________________________________________________________________________________________ 5. Even when PX remains constant, QX may increase or decrease. _________________________________________________________________________________________ _________________________________________________________________________________________ 6. Elasticity of demand refers to change in quantity consequent upon change in price of the commodity. _________________________________________________________________________________________ _________________________________________________________________________________________ 7. When total expenditure on the commodity remains constant, price elasticity of demand also remains constant, no matter what the change in price is. _________________________________________________________________________________________ _________________________________________________________________________________________ 8. Elasticity of demand (with respect to price of the commodity) is constant along a straight line demand curve. _________________________________________________________________________________________ _________________________________________________________________________________________ 9. If price elasticity of demand is zero, it means expenditure on the commodity does not change with change in price of the commodity. _________________________________________________________________________________________ _________________________________________________________________________________________ 10. A commodity showing high elasticity of demand often has a large number of close substitutes in the market. _________________________________________________________________________________________ _________________________________________________________________________________________ 11. Elasticity of demand tends to be high over a short period of time than the long period. _________________________________________________________________________________________ _________________________________________________________________________________________ 12. Complementary goods often exhibit low elasticity of demand. _________________________________________________________________________________________ _________________________________________________________________________________________ 13. Luxuries of life often exhibit low elasticity of demand. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 13 Economics–XII
  • 14. 14. Higher the price level, higher should be the elasticity of demand. _________________________________________________________________________________________ _________________________________________________________________________________________ 15. A horizontal straight line demand curve shows zero elasticity of demand. _________________________________________________________________________________________ _________________________________________________________________________________________ 16. A vertical straight line demand curve shows that demand rises to infinity even when price remains constant. _________________________________________________________________________________________ _________________________________________________________________________________________ 17. Price elasticity of demand is identical with slope of demand curve. _________________________________________________________________________________________ _________________________________________________________________________________________ 18. From a point of intersection, a flatter demand curve shows greater elasticity of demand than a steeper demand curve. _________________________________________________________________________________________ _________________________________________________________________________________________ 19. In case of normal goods, income effect is positive, while in case of inferior goods, it is negative. _________________________________________________________________________________________ _________________________________________________________________________________________ 20. In case of giffen goods, income effect is always greater than the substitution effect. _________________________________________________________________________________________ _________________________________________________________________________________________ QUESTION SET–IV Complete the following sentences: 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__________________________________ . Introductory Microeconomics 14 Economics–XII
  • 15. 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 ______________ . HOTS (Higher Order Thinking Skills) Write ‘true’ or ‘false’ with a reason: 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. _________________________________________________________________________________ _________________________________________________________________________________ Introductory Microeconomics 15 Economics–XII
  • 16. 3. If slope of two demand curves is the same, they show the same elasticity of demand. _________________________________________________________________________________ _________________________________________________________________________________ 4. When slope of demand curve = 0, price elasticity of demand = ¥ _________________________________________________________________________________ _________________________________________________________________________________ 5. When slope of demand curve =¥ , price elasticity of demand = 0. __________________________________________________________________________________ __________________________________________________________________________________ Introductory Microeconomics 16 Economics–XII
  • 17. S RK HE Producer Behaviour and Supply WO 3A ET QUESTION SET–I Define the following concepts: 1. Production function. _________________________________________________________________________________________ _________________________________________________________________________________________ 2. Producer’s equilibrium _________________________________________________________________________________________ _________________________________________________________________________________________ 3. Supply and quantity supplied. _________________________________________________________________________________________ _________________________________________________________________________________________ 4. Individual supply schedule and market supply schedule. _________________________________________________________________________________________ _________________________________________________________________________________________ 5. Law of supply. _________________________________________________________________________________________ _________________________________________________________________________________________ 6. Contraction of supply and decrease in supply. _________________________________________________________________________________________ _________________________________________________________________________________________ 7. Extension of supply and increase in supply. _________________________________________________________________________________________ _________________________________________________________________________________________ 8. TP, AP and MP. _________________________________________________________________________________________ _________________________________________________________________________________________ 9. Returns to a factor. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 17 Economics–XII
  • 18. 10. Law of variable proportions. _________________________________________________________________________________________ _________________________________________________________________________________________ 11. Increasing returns to a factor. _________________________________________________________________________________________ _________________________________________________________________________________________ 12. Diminishing returns to a factor. _________________________________________________________________________________________ _________________________________________________________________________________________ 13. Movements along the supply curve and shift in supply curve. _________________________________________________________________________________________ _________________________________________________________________________________________ 14. Joint supply and composite supply _________________________________________________________________________________________ _________________________________________________________________________________________ 15. Price elasticity of supply. _________________________________________________________________________________________ _________________________________________________________________________________________ 16. Perfectly elastic and perfectly inelastic supply. _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ 17. Elastic and inelastic supply. _________________________________________________________________________________________ _________________________________________________________________________________________ 18. Market period, short period and long period. _________________________________________________________________________________________ _________________________________________________________________________________________ 19. Fixed factors and variable factors. _________________________________________________________________________________________ _________________________________________________________________________________________ 20. Supply and stock. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 18 Economics–XII
  • 19. QUESTION SET–II Defend or refute the following statements. Write ‘yes’ or ‘no’ with reason: 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. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 19 Economics–XII
  • 20. 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 proportion 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. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 20 Economics–XII
  • 21. QUESTION SET–III Write your comment on each of the following statements in a sentence or two: 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. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 21 Economics–XII
  • 22. 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, firm’s 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. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 22 Economics–XII
  • 23. QUESTION SET–IV Complete the following sentences: 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, firm’s supply curve will shift to the _________________________ . 19. If price of inputs rises, firm’s supply curve will shift to the________________________________________. 20. Increase in excise tax will shift the firm’s supply curve to the _____________________________________. 21. When a cost saving technology is introduced, firm’s 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, farmer’s 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) _____________________ . Introductory Microeconomics 23 Economics–XII
  • 24. HOTS (Higher Order Thinking Skills) 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. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 24 Economics–XII
  • 25. S RK HE Cost and Revenue WO 3B ET QUESTION SET–I Define the following concepts: 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 SET–II Defend or refute the following statements. Write ‘yes’ or ‘no’ with reason: 1. Fixed cost is constant even when output is zero. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 25 Economics–XII
  • 26. 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. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 26 Economics–XII
  • 27. 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 SET–III Write your comment on each of the following statements in a sentence or two: 1. AC curve tends to be U-shaped. _________________________________________________________________________________________ _________________________________________________________________________________________ 2. MC is greater than AC when production is in a state of diminishing returns. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 27 Economics–XII
  • 28. 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. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 28 Economics–XII
  • 29. 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 SET–IV Complete the following sentences: 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 ___________________________________________________________ . Introductory Microeconomics 29 Economics–XII
  • 30. 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 __________________________________________________________________ . HOTS (Higher Order Thinking Skills) 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? _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 30 Economics–XII
  • 31. S RK HE Forms of Market and Price Determination WO 4 ET QUESTION SET–I Define the following concepts: 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. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 31 Economics–XII
  • 32. 10. Excess demand and excess supply. _________________________________________________________________________________________ _________________________________________________________________________________________ 11. Economic viability and non-viability of an industry. _________________________________________________________________________________________ _________________________________________________________________________________________ 12. Control price and support price. _________________________________________________________________________________________ _________________________________________________________________________________________ QUESTION SET–II Defend or refute the following statements. Write ‘yes’ or ‘no’ with reason: 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. Firm’s demand curve is indeterminate under oligopoly. _________________________________________________________________________________________ _________________________________________________________________________________________ 6. Product differentiation allows partial control over price. _________________________________________________________________________________________ _________________________________________________________________________________________ 7. A monopolist can exercise price discrimination. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 32 Economics–XII
  • 33. 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. Firm’s demand curve under perfect competition is a horizontal straight line. _________________________________________________________________________________________ _________________________________________________________________________________________ 13. Firm’s 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 SET–III Write your comment on each of the following statements in a sentence or two: 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. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 33 Economics–XII
  • 34. 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. _________________________________________________________________________________________ _________________________________________________________________________________________ Introductory Microeconomics 34 Economics–XII
  • 35. 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 SET–IV Complete the following sentences: 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 ______________________________________ . Introductory Microeconomics 35 Economics–XII
  • 36. HOTS (Higher Order Thinking Skills) Write ‘true’ or ‘false’ with a reason: 1. Firm’s 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 firm’s 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. _________________________________________________________________________________ _________________________________________________________________________________ Introductory Microeconomics 36 Economics–XII
  • 38.
  • 39. Worksheet–1 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: DY Loss of output of Y é when some resources ù MRT= = êare shifted from Y to X ú DX Gain of output of X ë û 12. Positive economic analysis refers to such issues which are verifiable, or which can be verified against the facts. 13. Normative economic analysis refers to such issues which are suggestive in nature and are not verifiable. Introductory Microeconomics 39 Economics–XII
  • 40. 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. 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 utilized (or are under-utilized) 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. Introductory Microeconomics 40 Economics–XII
  • 41. 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. NUMERICALS 1. Opportunity cost = Rs 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. Introductory Microeconomics 41 Economics–XII
  • 42. HOTS (Higher Order Thinking Skills) 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. Introductory Microeconomics 42 Economics–XII