Economics : 2017 : CBSE : [Delhi] : Set II

Market demand is defined as the total quantity of a commodity which all the consumers in the market are ready to purchase at a given price within a given period of time.

Correct Answer is option (d) All market forms.

Average revenue is the proportion of total revenue to the total units of good sold. Thus, it is the revenue which is generated on every unit of good sold i.e. the price of the good.

AR = TR/Q = (Price X Quantity) /Quantity = Price

Prices in an oligopoly are rigid which means that the market price does not move freely in responses to change in demand. This is because there are only few firm in the industry which compete with each other in producing homogenous goods.

Correct Answer is option (c) Decrease in expenditure on it.

The change in expenditure ∆E = ∆p[q(1+ed)]

When price elasticity of demand is inelastic ed > -1. This implies that (1+ed) is positive. Thus the change in expenditure would have the same sign as the change in price. Since price fall,  ∆p will be negative and hence ∆E will also be negative  i.e. the expenditure on the good will fall.

Correct Answer is option (b) Goes on Falling.

When the price of a good is high, a fall in its price results in a large percentage increase in quantity demanded, because people shift to buying its substitutes to buying this good. But as the price of the good keeps on falling along the linear demand curve, the percentage increase in quantity demanded becomes smaller and smaller because it becomes less and less possible to substitute this good for other goods.

What to produce may be defined as the problem of allocation of resources or the problem of choice between different commodities i.e., consumer goods or capital goods, that can be produced. It also deals with the problem that in what quantity the goods should be produced with the scarce resources.

As additional units of a commodity are consumed the intensity of want decreases and the consumer gets less and less marginal (additional) utility. Also, the consumer would consume additional unit of a good only if the price of that additional unit is equal to the marginal (additional) utility obtained from that good.

Thus additional units of a good are demanded by a consumer only when the price of the commodity falls. This is the reason behind the law of inverse relation between the demand of a commodity and its price.

An indifference curve is negatively sloped because of the assumption that the preferences are monotonic.

Monotonic preferences imply that between two bundles the consumer always prefers that bundle which has more of at least one good and no less quantity of other goods. Since the level of utility (satisfaction) obtained from bundles on an indifference curve should be always equal, in order to have two bundles A and B on the same indifference curve, if  bundle A has more of good X than bundle B then bundle A should certainly have less of good Y compared to bundle B. This would make the slope of the indifference curve negative.

If this is not the case and among any two pair of bundle, at least one good is more in say bundle A and the second good is equal in the both bundle A and B then according to the law of monotonic preferences bundle A will definitely give more utility and will be preferred to bundle B. This would contradict the fact that they lie on the same indifference curve.

Production possibility frontier or curve (PPC) is defined as the curve which represents all possible combinations of two commodities that can be produced with the given quantity of available resources.

PPC has the following characteristics : -

(1) It slopes downwards: PPC curve slopes downwards from left to right. This is because production of one commodity can be increased only by taking away resources from another commodity i.e. by reducing the production of another commodity.

(2) It is concave to the origin: PPC is concave to the origin because it is based on the concept of increasing marginal opportunity cost.

(3) It represents the production frontier of the economy: PPC is based on thorough and efficient utilisation of resources due to which it represents maximum production level that can be achieved.

Consumer equilibrium in case of two commodities explains how a consumer can get maximum satisfaction from his expenditure on different goods.
Consumer equilibrium is achieved at the level of consumption where the ratio of MU derived by the consumer from the consumption of commodity X to its price becomes equal to marginal utility of money. Hence in case of commodity X the consumer equilibrium condition will be derived as

               MU_X / P_X   =   MU_M

Similarly the consumer equilibrium condition in case of commodity Y will be derived as

               MU_Y / P_Y        =        MU_M

Since marginal utility of money remains constant, consumer equlibrium in case of two commodities, X and Y can be represented as

              MU_X / P_X         =        MU_Y / P_Y       

If the ratio of MU to price of commodity X is greater than the ratio of MU to price of commodity Y, then the consumer will prefer to consume more of commodity X. The consumer will prefer commodity X till the point where the ratios of marginal utility to its price becomes equal.  Similarly if the ratio of MU to price of commodity Y is greater than the ratio of MU to price of the commodity X, then the consumer will prefer to consume more units of commodity Y. The consumer will prefer commodity Y till the point where the ratios of marginal utility to its price becomes equal.

Hence the equilibrium level will be achieved at a level where the ratios of MU to price of both the commodities are equal.