I

DEMAND & ELASTICITY OF DEMAND

2005 R
1. Calculate the cross price elasticity of demand from the given data:
Price of wheat (Rs. Per kg) Demand for Rice (kg)
How are these products related?
22.00
12,000
27.50
18,000
(3)
2. Prove that amount spent on a commodity varies directly with the change in price when its price
elasticity of demand is less than one, and inversely with the price when price elasticity of demand is
greater than one.
(3)
3. Show that the fraction of a consumers income spent on a good, whose income elasticity of demand is
greater than one, increases when the consumers income increases. (4)
2005 E
4. How would you differentiate between own price elasticity of demand and cross price elasticity of
demand? (5)
5. Why is it said that when two commodities are substitutes for each other, the cross elasticities of
demand between them is positive while they are complements, it is negative? (4)
6. Is the slope of the demand curve the same as its elasticity? (5)
7. For the market demand schedule given ahead, find the price elasticity of demand for a movement
from: (i) point A to C, (ii) point C to A; and (iii) midway between A and C.
(4)
Point
A
B
C
D
E
PX (Rs.)
7
6
5
4
3
2006R
QX (Rs.)
500
750
1250
2000
3250
8. Distinguish between a
substitute and a complement of a good. When both the price of a substitute and a complement of a
good X rise, the demand for X (i) rises, (ii) falls, (iii) remains unchanged, or (iv) all of the above are
possible. Explain which one is the correct alternative. (3)
9. Table I gives three demand schedules using only the total expenditure criterion, determine if these
demand curves are elastic or inelastic or unitary elastic.
(3)
Price
6
5
4
3
2
1
QX
200
240
300
400
600
1200
QY
200
220
250
300
400
700
QZ
200
260
350
500
800
1700
10. What is price elasticity of demand? Enumerate the factors affecting the price elasticity of demand for
a good. (5)
11. A Giffen good must be an inferior good, but an inferior good need not be a Giffen good. Explain this
statement fully, using the concepts of income and substitution effects. (6)
2006 E
12. What are the determinants of price elasticity of demand? (3)

13. What is income elasticity of demand? If the income elasticity of demand is positive:
i. What will be the slope of the Engel curve? And
ii. Which way will the demand curve shift if income of the consumer were to increase? (6)
14. Suppose a consumer spends his entire income on the purchase of two commodities X and Y. If the
consumers own price elasticity of demand for X was less than one, then prove that X and Y are
complements. (6)
15. Prove that on a straight line demand curve, price elasticity varies from infinity to at the price axis to
zero at the quantity axis.
(6)
II

SUPPLY & ELASTICITY OF SUPPLY

2006R
1. From the market supply function QSX=-5000+5000PX, derive the market supply curve. Prove
geometrically that at each point on this supply curve elasticity is greater than one. (3)
2006 E
2. What is the value of elasticity of supply for a straight line supply curve passing through origin? (3)

III

REVENUE & ELASTICITY OF DEMAND

2005E
1. How is MR related to elasticity of demand? (6)
2. Why does MR curve lie below the demand curve? (6)
2006 E
3. If the demand curve is a rectangular hyperbola, what will be the value of marginal revenue? (3)

IV

APPLICATIONS OF DEMAND & SUPPLY

2005R
1. Compare the effect of a per unit tax with that of percentage tax on the supply and demand curves as
seen from the point of view of the consumers price and producers price respectively. What will be
the effect of either tax on the quantity transacted and price paid and received by the consumers and
producers respectively. (6)

V
2005 R

INDIFFERENCE CURVES

1. Suppose a consumer faces a zero price for commodity X. What does the budget line relating other
goods and commodity X look like? Can there be any equilibrium in which MRS equals the ratio of
the price of X to the price of other goods in which a finite amount of X is consumed in such a case?
(4
2. Srishti likes mangoes more than apples. What do Srishtis indifference curves relating mangoes and
apples look like? Do they imply that Srishti will only eat mangoes?
(4
3. Draw a set of indifference curves relating two economic bads such as pollution and work. What
characteristics do these curves have?(4)
4. Are prices and quantities of all other goods kept constant or not kept constant in deriving the demand
curve for the commodity X? Is there a connection or there is no connection between MRS between X
and other commodities (MRSXO) and the height of the demand curve? Explain. (4)
5. What is the relationship between Engel curve and demand curve? Explain the said relationship for a
normal good and for an inferior good. (5)
6. Explain the relationship between the slope of PCC and the elasticity of demand. (5)
2005E
7. What do you mean by consumers surplus? (5)
8. Given the information below:
i. Draw the Engel curve; and
ii. Comment on the nature of the commodity.
Point
A
B
C
Income(Rs/yr)
400
600
800
Qty(Kg/yr)
10
20
30

D
1000
35

E
1200
38

F
1400
39

G
1600
35

H
1800
25
(4)

9. Explain the relationship between PCC and price elasticity of demand. (5)
10. Suppose that the price of a commodity Y is Re.1 per unit and the price of commodity X is Rs.2 per
unit. Suppose further that an individuals money income is Rs.16 per time period and all is spent on X
and Y.
i. Draw the budget line for the consumer.
ii. Find the slope of the budget line.
Iii. Write the equation of the budget line. (4)
2006R
11. Suppose a consumer spends her entire income on purchase of two goods. Explain why a consumer
will choose a market basket so that the MRS between the two goods is equal to price ratio. (5)
12. Derive consumers surplus. Show it in a diagram containing a consumers demand curve. Also show
it in a diagram containing a consumers budget line and indifference curves. (6)
13. What is an Engel curve? From the Income Quantity relationship in the table below, sketch the Engel
curve and determine if this good is a necessity, a luxury or an inferior good between points (i) A to B,
(ii) C to D and (iii) E to F:
(5)
Point
A
B
C
D
E
F
Income(Rs/yr)
2000
4000
6000
8000
10000
12000
Qty(Kg/yr)
100
300
500
650
700
600

2006 E
14. Why are indifference curves convex to the origin? (3)
15. What are economic bads and neuter goods? (3)
16. Explain the equilibrium of a consumer using indifference curve analysis. (6)
17. Draw indifference curve for commodities X and Y which are perfect substitutes. Explain the shape of
these indifference curves and the behaviour of marginal rate of substitution of X for Y (MRS XY). (3)
18. A Giffen good must be an inferior good, but an inferior good need not be a Giffen good. Explain this
statement using the concepts of income and substitution effects of a price change. (8)
19. Is it possible that a consumer with convex indifference curve maximizes satisfaction by consuming
only one good? Explain with diagram. (6)
20. Ranjan spends his entire income of Rs.800 on clothes and food. If the price of clothing is Rs.40 and
price of food is Rs.16, then:
i. Draw the budget line (Y-axis clothing; X-axis food)
ii. Calculate the slope of the budget line. (6)

VI

APPLICATIONS OF INDIFFERENCE CURVES

2005 R
1. Will low income families of school students prefer subsidized note-books and stationery or an equal
amount of cash grant? What will education authorities prefer to give? (4)
2005 E
2. Is the consumer better off with a lump sum subsidy or with an excise subsidy? (6); (5)[2006R]
2006 E
3. Explain with the help of indifference curves the difference in the welfare effects of a lump sum
subsidy and an equal excise subsidy. (7)
VII

REVEALED PREFERENCE THEORY

2005R
1. Explain the law of demand with the help of revealed preference hypothesis. (6)[2005E]
VIII
2005R

PRODUCTION FUNCTION & ISOQUANTS

1. Why does production takes place only in the second stage of production for labour, where the average
production for labour is decreasing, instead of the first stage of production for labour where the
average production of labour is increasing?
(3)
2. Why is the marginal product of labour likely to increase and then decline in the short run? Discuss.
(3)
3. To produce more output, we must have more of all factors. Is this statement likely to be correct?
Illustrate your answer with isoquants. (4
4. What is linear homogeneous production function? What determines the marginal product of labour
and capital in such a function and consequently what will the expansion path (isocline) be like? (6)
5. Explain why, for a least cost combination of inputs, a firm requires that the MRTS be equal to the
input price ration. What is the importance of convexity assumption in this analysis? (5)
2005E
6. What do you mean by the expansion path of a firm? (5)
7. What do you mean by Cobb-Douglas production function? (6)
8. In which stage of production does a producer produce and why? (4)
9. What condition does a producer need to satisfy to attain equilibrium? (6)
10. Explain the concept of isocline. (5)
11. When the marginal product of land (MP Land) is negative, then in which stage of production is the
producer? (4)
2006R
12. Isoquants can be convex, linear or L-shaped. What does each of these shapes tell you about the MRTS
between two inputs? What does each of these shapes tell you about the nature of the production
function? (5)
13. Show increasing, constant or decreasing returns to scale with the help of isoquant map. Can a firm
have a production function that exhibits initially increasing returns to scale, then constant returns and
eventually diminishing returns to scale? (5)
14. When AP of labour is positive but declining, the MP of labour could be (i) declining, (ii) zero, (iii)
negative, or (iv) any of the above. Which one is the correct alternative? Explain with the help of a
diagram. (5)
15. Assuming for simplicity, that labour is the only variable input in the short run and that price of labour
is constant, explain the U-shape of the AVC curve and MC curve in terms of the shapes of the AP and
MP of labour curves respectively. (4)
16. What are ridge-lines? Only those portions of the isoquants lying between the ridge lines are relevant
to production. Explain. (4)
2006 E
17. Explain Ridge Lines. What do these indicate? (3)

18. Explain using isoquants, the optimal combination of inputs which the producer would choose. (7)
19. Show that for a linear homogeneous production function, the average and marginal products depend
upon the ratio in which their inputs are combined. (7)
20. Explain how one can derive the total product curve for a factor of production from an isoquant
diagram and from that total product curve obtain average and marginal product curves.

IX

COST

2005R
1. How do economies and diseconomies of scale affect the firms long-run MC curve? Why?(4)
2. Why do we assume that the prices of inputs are constant when we draw a firms cost curves? How
does a change in prices of fixed and variable inputs affect the average and marginal cost curves? (6)
3. Suppose that a wheat producers total cost function is: TC= 300 + 3Q + 0.02Q2 where TC = total cost;
Q=units of wheat produced. What are corresponding TFC, AFC, TVC and AVC functions? Plot these
curves as well as MC curve for the first six units of output. (6)
4. Why and how do firms obtain economies of scope, and how is the degree of the economies of scope
measured? (5)
2005E
5. Explain the concept of economies of scope. (5)
6. How can you derive the LAC from SAC? (6)
7. What happens to TVC when the law of variable proportions operate? (4)
8. What is the difference between the Accounting cost and Economic cost? (5)
9. Explain the relationship between MC, AC and AVC. (6)
10. Can the short run total cost be less than the long run total cost? Why or why not? (4)
2006R
11. What is Sunk Cost? Explain why a sunk cost should not influence a firms decision. (2)
12. Derive the LRTC curve for a firm from its expansion path. (3)
13. What is the difference between economies of scale, economies of scope and the reduction in average
costs as a result of learning?
(8)
2006 E
14. If the marginal cost of the firm is rising, does it mean that its average cost is also rising? (3)

15. What are the economies of scope? (3)

16. State the relationship between the production function and cost curves.
17. Explain how total variable cost curve can be derived from a total product curve.
18. State the relationship between Average Variable Cost and Marginal Cost Curves and the
corresponding Average Product and Marginal Product Curves.
X

PERFECT COMPETITION

2005R
1. Industry X is perfect competitive industry, every firm is earning zero economic profit. If the product
price falls, no firm can survive. Do you agree or disagree? Discuss.
(5)
2. An increase in the demand for a product also increases wages for its employees. Is the long run
supply curve for the product likely to be horizontal or upward sloping? Explain. (5)
3. A sales tax of Re.1.00 per unit of output is placed on one firm whose product sells for Rs.5.00 in a
competitive industry.
i. How does this tax affect the cost curves of the firm?
ii. What will happen to price, output and profit? (6)
2005E
4. Explain the shape of LR supply curve of a constant cost industry. (5)
5. What is the relevance of the concepts of (i) AR and AC; (ii) MR and MC? (4)
6. LR equilibrium for a firm under perfect competition takes place when price is equal to the minimum
LRAC. Explain. (6)
7. What do you mean by dead weight loss? (4)
8. Explain the concept of stable and unstable equilibrium as given by Marshall. (5)
9. How does a price ceiling by the government affect the producer surplus? (6)
2006R
10. A producers positively sloped supply curve for a commodity represents in one sense a maximum and
in another sense a minimum boundary of the producers intentions. Explain. (3)
11. If price exceeds MC, the firm should cut the price until the two are equal. Does this statement
describe the way a competitive firm maximizes profit? (3)
12. In long-run equilibrium, all firms in a perfectly competitive industry earn zero economic profit. Why
is this true? Explain using diagrams in each of the following cases:
i. firms having identical costs
ii. firms having different costs.
(8)
13. i.

Show the effects of a per unit tax on a competitive firms output when only the output of that firm

is taxed. Will you answer be different if output of all the firms in the industry is taxed? (5)
ii. Derive the short run supply curve of a firm and the industry under perfect competition. (6)
14. i.

What is a subsidy? Explain how the benefit of a subsidy is split between buyers and sellers in a
competitive market. (5)
ii. Suppose a competitive industry faces an increase in demand. What are the steps by which a
competitive market ensures increased output? Explain in case of:
(i) constant cost and (ii) increasing cost industry. (6)

2006 E
15. Use a diagram to show how an industrys short-run supply curve is derived. Using the market demand
curve, also show:
i. how the market price is determined, and
ii. how much an individual firm will supply in the short run. (8)