QUESTION BANK FOR STUDENTS OF ECONOMICS
SESSION 2016-17
Unit-I :Introduction to Micro Economics
Q1. PPC is a straight line in case of :
a)rising marginal opportunity cost
b)falling marginal opportunity cost
c)constant marginal opportunity cost
d)none of these
Ans. 1 c) constant marginal opportunity cost
Q2. Concavity of PPC implies :
a)increasing slope
b)decreasing slope
c)constant slope
d)none of these
Ans.2 a ) increasing slope
Q3. When an economy is operating on the PPC, it indicates :
(a)potential output > actual output
(b)potential output = actual output
(c)potential output < actual output
(d)none of these
Ans. 3 b) potential output =actual output
Q4. Increase (growth) of resources implies that production possibility curve :
(a)shifts to the right
(b)shifts to the left
(c)rotates to the right
(d)none of these
Ans 4 a) shift to the right
Q5. Define economics. (1)
Ans 5 Economics is the study of the problem arising out of scarcity of resources at micro and macro levels in relation to alternative uses of resources.
Q6. What is meant by an economic problem ? (1)
Ans. 6 Economics problem is regarded as a problem of choice due to unlimited wants and resources are limited with alternative uses .
Q7. Give meaning of an economy . (1)
Ans. 7 An economy is a system in which and by which people get a living to satisfy their wants through the process of production, consumption, exchange and investment .
Q8. Define micro economics. (1)
Ans. 8 Micro economics is that branch of economics which deals with economic issues at the level of an individual like individual household and firms etc.
Q9. Define macro economics. (1)
Ans 9.Macro economics is that branch of economics which deals with behavior of the economy as whole i.e. aggregate like inflation, unemployment etc.
Q10. What are economic agents ? (1)
Ans. 10 Economic agents are the producers household and the government who take economic decisions in the economy.
Q11. State the two characteristics of resources. (1)
Ans. 11 Two characteristic of resources are -1. Resources are scarce in relation to our needs 2 Resources have alternative uses.
Q12. Define opportunity cost . (1)
Ans.12 Opportunity cost refers to the value of a factor in its next best alternative use.
Q13. Why does an economic problem arise ?Explain . (3)
Ans 13. An economic problem or problem of choice arise due to unlimited wants and resources are limited with alternative uses . e.g.land, may be used in various purposes.
Q14. State two principal differences between micro economics and macro economics. (3)
Ans. 14
Micro economics / Macro economicsMicro economics deals with an individual units / Macro economics deals with aggregates
Allocation of resources to different uses is the central issue in micro economics / Raising the level of output and growth is the central issue in macro economics
Ex. Individual demand / Ex. Aggregate demand
Q15. Explain the problem of ‘What to produce’ . (3)
Ans 15. What to produce is the central problem of an economy which is related to choice of a commodity to produce whether necessary or luxury. Or capital and consumer good with available resources. (Elaborate the answer)
Q16. Explain the central problem of “How to produce” . (3)
Ans 16 How to produce is the problem of the choice of technique whether to use labour intensive or capital intensive. (explanation with example)
Q17. With the help of suitable example, explain the problem of “for whom to produce” ? (3)
Ans.17 For whom to produce is central problem of an economy which deals with factoral distribution of income and personal distribution of goods and services to whole sections of society. The government desire to have more and more resources allocated to the production of goods for poorer section of the society so that social welfare is maximized and equity is promoted.
Q18. Why is a production possibility curve downward sloping ? Explain. (3)
Ans 18 The PPC curve is downward sloping from left to right because more of good X can be produce only with the less of good Y in a situation when the given resources are assumed to be fully and efficiently utilized, using the given technology.
Q19. Explain, giving reason , why production possibility curve is concave ? (3)
Ans. 19 PPC is concave to its origin because of increasing MOC = Loss of output of goods Y/ gain of goods X of shifting resources from commodity Y to commodity X tends to rise.(explanation)
Q20. When can PPC be a straight line ? (3)
Ans.20 PPC is a straight line when MOC or MRTxy is constant (Explanation with schedule and diagram)
Q21. “Massive unemployment shifts the PPC to the left .” Defend or refute. (3)
Ans. 21 Defend : unemployment is related with less resources used in the economy. Which shifts the ppc to the left . (explanation)
Q22. “Make in India” campaign would shift the PPC to the right .How ? (3)
Ans.22 Make in india shift the ppc to the right due to investment, employment will be increased in the economy which result the high production.(explanation)
Q23. What is meant by production possibility curve ? Illustrate with the help of a table and diagram . (4)
Ans 23. Production possibility curve showing different possibilities of production of two goods in a given resources and technology.
Goods X / Goods Y / MRTxy0 / 10 / -
1 / 9 / 1/1
2 / 7 / 2/1
3 / 4 / 3/1
4 / 0 / 4/1
Good x
Goods Y
Q24. Explain the concept of marginal opportunity cost with the help of an example. (4)
Ans 24 The marginal opportunity cost is the rate at which the quantity of output of a goods is sacrificed to produce one more unit of the other goods.
Shirts (in millions) / Cars (in thousands) / MRTxy Or MOC0 / 200 / -
1 / 190 / 10:1=10
2 / 170 / 20:1=20
3 / 140 / 30:1=30
4 / 100 / 40:1=40
5 / 50 / 50:1=50
MOC when four million shirts are produced
140-100/4-3=40/1
So MOC = 40
Q25. Draw a production possibility curve and indicate the following situations on the diagram (6)
(a)Fuller and efficient utilization of resources
(b)Under utilization of resources and
(c)Growth of resources
Ans 25 y Growth of resources
Goods YUnder utilizationOf resources
Fuller utilization of resources
O Goods Xx
CONSUMER’S EQUILIBRIUM AND DEMAND
Q26. Marginal utility of a particular commodity at the point of saturation is :
(a)zero
(b)unity
(c)greater than unity
(d)less than unity
Ans. 26 - (A) Zero
Q27. A shift in budget line , when prices are constant , is due to :
(a)change in demand
(b)change in income
(c)change in preferences
(d)change in utility
Ans. 27 -(b) change in income
Q28. MRS is determined by :
(a)satisfaction level of the consumer
(b)income of the consumer
(c)tastes of the consumer
(d)preferences of the consumer
Ans . 28 -(a) satisfaction level of the consumer
Q29. If two goods are complementary then rise in the price of one results in :
(a)rise in demand for the other
(b)fall in demand for the other
(c)rise in demand for both
(d)none of these
Ans. 29 -(b) fall in demand for other
Q30. On all points of a rectangular hyperbola demand curve, elasticity of demand is :
(a)equal to unity
(b)zero
(c)greater than unity
(d)less than unity
Ans . 30 -(a) equal to unity
Q31. In case of Giffen ‘s paradox, the slope of demand curve is :
(a)negative
(b)positive
(c)parallel to X-axis
(d)parallel to Y-axis
Ans. 31 -(b) positive
Q32. Define utility. (1)
Ans .32 -The want satisfying power of a commodity is called utility.
Q33. What is meant by Consumer’s equilibrium ? (1)
Ans. 33 -It is a situation in which a consumer gets maximum level of satisfaction.
Q34. What is law of diminishing marginal utility ? (1)
Ans. 34 -MU declines with the consumption of every additional unit of commodity.
Q35. What is ordinal utility ? (1)
Ans. 35 -In this approach we can measure our level of satisfaction in terms of ranks.
Q36. Define indifference map. (1)
Ans. 36 -A set of indifference curve is known as indifference curve.
Q37. What does an indifference curve show ? (1)
Ans 37 – An indifference curve shows combination of two goods which give same level of satisfaction to the consumer.
Q38. What is meant by monotonic preferences ? (1)
Ans 38- monotonic preference means that a rational consumer always prefer more of a commodity as it offer him higher level of satisfaction .
Q39. Name two determinants of consumer’s demand for a commodity. (1)
Ans 39- (i) income of consumer
(ii) price of related goods
Q40. When is the demand for a good said to be inelastic ? (1)
Ans 40 – when %change in quantity demanded is less than % change in price.
Q41. When is demand called perfectly inelastic ? (1)
Ans 41- when there is no change in quantity demanded in response to change In price
Q42. What is meant by price elasticity of demand ? (1)
Ans 42 – it is the ratio between % change in quantity demanded and % change in price.
Q43. Explain the relationship between TU and MU with the help of a diagram . (3)
Ans 43 – (i) when MU is positive TU increases
(ii) when MU is zero TU is maximum
(iii) when MU is negative TU falls
Q44. Explain the three properties of indifference curves. (3)
Ans 44 – (i) IC never intersects with each other
(ii) IC never touches X or Y axis
(iii) higher IC shows higher level of satisfaction
Q45. What is budget set ? Explain what can lead to change in budget set ? (3)
Ans 45- it an attainable combinations of a set of two goods, given the prices of goods and income of the consumer.
Change in income of consumer and change in price leads to change in budget set.
Q46. Define a budget line. What can it shift to the right ? (3)
Ans 46- Budget line is the combination of two goods which the consumer can purchase two goods by spending his entire income, given the price of two goods.
Budget line shifts to the right-
When income of the consumer increases
When prices of both the goods decreases in same ratio
Q47. What is market demand for a good ? Name the factors determining market demand . (3)
Ans 47- Market demand is demand of a commodity by all the consumers at different price levels.
Factors determining market demand are-number of consumers, income level, price of related good, price of the commodity.
Q48. Explain the difference between an inferior good and a normal good. (3)
Ans 48- Normal goods are directly related to income whereas inferior goods are inversely related to income.
Q49. A consumer spends Rs. 60 on a good priced at Rs. 5 per unit. When price falls by 20 percent , the consumer continues to spend Rs. 60 on the good. Calculate price elasticity of demand by percentage method. (3)
Ans 49- P T.E Q
5 6012
46015 (because price falls by 20%)
Ed= % change in quantity demanded/ %change in price
25/20=1.25
Q50. When the price of a good rises from Rs. 10 to Rs. 12 per unit, its demand falls from 25 units to 20 units. What can you say about price elasticity of demand of the good through the “expenditure approach” . (3)
Ans-50
P / QD / T.E10 / 20 / 200
12 / 25 / 300
Ed<1 because there is direct relation between price and total expenditure.
Q51. Explain the concept of marginal rate of substitution with the help of a numerical example. (4)
Ans-51. MRS is the rate at which a consumer is willing to substitute good 1 for good 2. It is estimated as change in good -2/change in good- 1 at any point on IC.
COMBINATIONS / X / Y / MRSA / 1 / 10 / -
B / 2 / 7 / 3Y:1X
C / 3 / 5 / 2Y:1X
D / 4 / 4 / 1Y:1X
Q52. Explain the distinction between “change in demand” and “change in quantity demanded”. (4)
Ans-52
Change in quantity demand / Change in demandMovement along the curve / Shift in curve
Due to change in price and other factors remains constant / Due to change in other factors like income, taste and preference, price of related good and price of the commodity remains constant.
Extension and contraction / Increase and decrease
P Q
10 5
5 10 / P Q
10 5
10 10
Diagram
/ Diagram
Q53. Explain the change in demand for a good on account of change in prices of related goods. (4)
Ans -53 we can expain it in two cases:
a)In case of substitute goods: there is direct relationship between price of substitute goods and demand of other good.
b)In case of complementary goods: there is inverse relationship between price of complementary goods and demand of other good.
Q54. What happens to the demand for a good when consumer’s income changes ? Explain. (4)
Ans -54 we can expain it in two cases:
a)In case of superior goods: there is direct relationship between income of consumer and demand of good.
b)In case of inferior goods: there is inverse relationship between income of consumer and demand of good.
Q55. How is price elasticity of demand measured with the help of the point method ? (4)
Ans-55. Ed= Lower segment of demand curve / Upper segment of demand curve
(related diagram and explanation)
Q56. Explain the relation between price elasticity of demand and total expenditure. (4)
Ans-56. We can explain it in three cases:
a)If there is direct relationship between price and total expenditure then Ed would be less than one
b)If there is inverse relationship between price and total expenditure then Ed would be more than one
c)If there is no change in total expenditure in response to change in price the Ed=1
Q57. How is price elasticity of demand affected by – (4)
- Number of substitutes available for the good.
- Nature of the good
Ans-57. A)If number of substitutes are available for the good- then demand will be elastic and vice versa.
B) In case of luxury goods demand will be elastic and in case of essential commodities demand will be inelastic.
Q58. Explain the consumer’s equilibrium in case of a single commodity with the help of a utility schedule. (6)
Ans- 58. Consumer is said to be in equilibrium when he or she will get maximum level of satisfaction out of his limited income and he has no tendency to change in his existing expenditure.
Conditions:
MUx/Px=Mum
Explaination with the help of schedule and diagram
Units / MUx / Px / MUm1 / 3 / 1 / 1
2 / 2 / 1 / 1
3 / 1 / 1 / 1
4 / 0 / 1 / 1
According to schedule the consumer will e in equilibrium at third unit because at this point MUx/Px=Mum(related diagram and explanation is also required.)
Q59. A consumer consumes only two goods. Explain consumer’s equilibrium with the help of utility analysis. (6)
Ans-59. In order to get maximum level of satisfaction the consumer will spend his limited income on two commodities in such a way so that MU derived from each commodity is equal and is also equal to MUm.
Condition: MUx/Px= MUy/Py=Mum
Explaination with the help of schedule and diagram
Units / MUx / MUy / Px / Py / Mum1 / 3 / 4 / 1 / 1 / 1
2 / 2 / 3 / 1 / 1 / 1
3 / 1 / 2 / 1 / 1 / 1
4 / 0 / 1 / 1 / 1 / 1
Consumer will be in equilibrium when he will consume three units of X and 4 units of Y (related diagram and explanation is also required)
Q60. State the conditions of consumer’s equilibrium in the indifference curve analysis and explain the rationale behind these conditions. (6)
Ans-60. In terms of IC analysis a consumer attains equilibrium when
Definition: In the indifference curve approach, consumer’s equilibrium is achieved at the point at which the budget line is tangent to a particular indifference curve. This is the point of maximum satisfaction.
a)MRS=Px/Py
b)IC is convex to the point of origin.
Diagram:
A
p
qIC3
R IC1 1
O Good x B X
Explanation of the diagram:
i) ‘AB’ is the budget line.
ii) It is sure that consumer’s equilibrium will lie on some point on ‘AB’
iii) Indifference map (set of IC1, IC2, IC3) shows consumers scale of preferences between different combinations of good ‘x’ and good ‘y’
iv) Consumers’ equilibrium will achieve where budget line (AB) is tangent to the IC2.
Essential conditions for consumers equilibrium:
i) Budget line must be tangent to indifference curve i.e., MRS xy = Px / Py
ii) Indifference curve must be convex to the origin or MRS xy should decrease.
Consumers cannot achieve the following:
i) P and R points on budget line give satisfaction but they lie on lower indifference curve IC1. Choosing point ‘q’ puts him on a higher IC which gives more satisfaction.
ii) He cannot move on IC3, as it is beyond his money income.
PRODUCER’S BEHAVIOUR AND SUPPLY
ONE MARK QUESTIONS:
Q1. Price elasticity of supply of a good if the supply curve passing through the origin is:-
(1) Equal to one (2) less than one
(3) More than one (4) zero
Ans1. Equal to One
Q2. In the second phase of production:-
(1) TP increases at a decreasing rate(2) MP Falls
(3) AP Falls (4) All of these
Ans2. All of these
Q3. The total cost at 5 units of output is Rs. 30. The fixed cost is Rs. 5. The average variable cost at 5 units of output is-
1) Rs. 25(2) Rs. 6
(3) Rs. 5(4) Rs. 1
Ans3. Rs. 5
Q4. Government decided to increase excise duty on the production of a given good. What will be its impact on the supply of a given good:-
(1) Supply curve of rice will shift towards left
(2) Supply curve of rice will shift towards right
(3) Supply curve of rice will remain the same
(4) There will be downward movement along the supply curve of rice
Ans4. Supply curve of rice will shift towards left
Q5. Price line is the same as:-
(1) Budget line(2) firm’s demand curve
(3) Firm’s AR curve(4) both (b) and (c)
Ans5. Both (b) and (c)
Q6. Point of Inflexion refers to that point from where:-
(1) Slope of TP changes
(2) TP stops increasing at an increasing rate
(3) TP is increasing at a constant rate
(4) TP is decreasing at a constant rate
Ans6. Slope of TP changes
Q7. When MP cuts AP at its highest point-
(1) MP>AP(2) MP<AP
(3) MP=AP(4) All of these
Ans7. MP=AP
Q8. In case of Break Even Point, a firm covers-
(1). Variable cost only(2) average variable cost only
(3) Both fixed cost and variable cost(4) none of these
Ans8. Both fixed cost and variable cost
Q9. Under Monopoly, MR can be negative only when-
(1) AR is increasing(2) AR is decreasing
(3) AR is constant (4) AR is zero
Ans9. AR is decreasing
Q10. Imposition of a unit tax shifts the supply curve:-
(1) To the right (2) To the left
(3) To the right as well as to the left (4) none of these
Ans10. To the left
QUESTIONS OF 3 MARKS:
Q11.Draw Average total cost, average variable cost and marginal cost curves in a single diagram. Also explain the relationship between ATC and AVC?
Ans11. Both ATC and AVC initially decreases due to increasing returns to scale and productivity is high but gradually the productivity declines and decreasing returns to scale start operating so both ATC and AVC increases.(Refer to the text book for Diagram)
Q12.A producer borrows money and opens a shop. The shop premises is owned by him. Identify the implicit and explicit cost by this information?
Ans12. The shop premises is owned by producer – Implicit cost. Implicit cost is the expenditure on the use of self – owned inputs.
Borrowing money for opening a shop - Explicit cost. Expenditure incurred by the producer on the purchase of inputs from the market is called explicit cost.
Q13. What is the relationship between marginal revenue and average revenue under perfect competition and monopoly?
Ans13. Under perfect competition – Price is constant implying AR is constant, then MR should also be constant. (AR being equal to MR)
Under Monopoly – When AR is decreasing, MR should also be decreasing faster than AR. Downward sloping MR curve is below the downward sloping AR curve. Accordingly MR< AR.
Q14. Explain the significance of ‘Minus sign’ attached to the measure of price elasticity of Demand of a normal good in comparison to the ‘Plus sign ‘attached to the measure of price elasticity of supply?
Ans14. Owing to inverse relationship between price and quantity demanded, elasticity of demand ought to be negative. We prefix (-) sign to the formula of elasticity of demand.
Owing to positive relationship between price and quantity supplied, elasticity of supply ought to be positive. We prefix (+) sign to the formula of elasticity of supply.
Q15. Define Average revenue? Show that average revenue and price are same?
Ans15. Average Revenue – It refers to revenue per unit of output.
AR = TR / Q
We also know that TR = P * Q, P = Price Q = Quantity or Output sold.