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Abstract
Friends, till now we were uploading support material in content areas from the week-wise
syllabus from July, 2011.In this section we intend to give you different types of questions
based on Board pattern along with expected Answers /Solutions. Hope this will enable you
to prepare students accordingly. As preparing test - items for a balanced question paper is
an art, answering appropriately and precisely is also a skill which we have to equip our
children with. Understanding the question and using appropriate terminology. Language
for framing answers is very important for high scoring in examinations. This requires
practice and teachers play an important role in providing this skill in class rooms. This is
an exemplar, try your own question- bank preparation based on small section of content
covered.
8 “At Producers’ Equilibrium Marginal Cost should be falling.” True/ False. Give reason.
9 What happens to Supply of a Good when price of inputs used rise while producing the same ?
10 The vertical distance between ATC and AVC should fall or rise or remain constant with the
increase in output? Give reason.
Output 1 2 3 4 5
AR 10 9 8 7 6
TC 10 11 14 18 25
5 Define Marginal Revenue. Explain the relationship between Average and Marginal
Revenue when price is constant at all levels of output.
Output(in 0 1 2 3 4 5 6
units)
Total 20 25 28 30 36 45 60
Cost(Rs)
10 Using diagrams explain the difference between Contraction and Decrease in Supply.
11 In the diagram given below state the nature of Elasticity of Supply of the different
Supply Curve
12 A 20% rise in the price of commodity A leads to a rise in its supply from 400 to 500
units. Calculate its Elasticity of Supply and comment on it.
13 The Price elasticity of Supply of a commodity is 2. When its price falls from Rs 10 to
8 per unit, its Quantity Supplied falls by 500 units. Calculate the Quantity Supplied at
reduced price.
14 Using a diagram explain how a relatively flatter Supply curve has a higher Elasticity
of Supply for a given rise in price?
2. Explain three factors that influence the Supply of Ice Creams in the market.
3. Using a hypothetical example, explain how the Market Supply Curve is determined
from Individual Supply Curve of three firms?
4. a) Explain the effect of technical progress on the supply of a good. Use diagram.
b) Using diagram explain the impact of drought on the Market Supply of wheat.
Answer/Solution
7. TVC Curve
Note:
• The vertical distance between ATC & AVC should decreases with increase in
output.
• MC should cut AVC and ATC at its minimum point.
• The Minimum Point of AVC should come before minimum point of ATC.
4
Output AR TC TR MC MR
1 10 10 10 - 10
2 9 11 18 1 8 MR>MC
3 8 14 24 3 6
4 7 18 28 4 4 Equilibrium MR= MC
5 6 25 30 7 2 MC>MR
At output level of 4 unit, the project is maximum as here MC = MR
Since a Firm’s Price is constant, Marginal Revenue is also constant and AR also
remains constant and is equal to MR at all output levels. (P = AR). The AR and MR
curves are the same and are parallel to x- axis. (AR=MR=Price)
AR/MR AR = MR
0 x
Output
6 Output TVC AVC MC
∑ MC = TVC or TVC TVC
AVC x Q Q Output
1 10 10 10
2 16 8 6
3 27 9 11
4 40 10 13
Formula Used:
TC = TFC + TVC
I. False, AC can fall even when MC is rising when MC < AC and MC rising.
II. False, at an output of one unit ATC is equal to TC and MC is less than ATC as
MC is change in TVC only.
III. False, Total Revenue rising at diminishing rate when MR is falling but is positive.
TR falls only when MR is negative.
9. Three causes of Rightward Shift of the Supply Curve.
I. Fall in Input Price
II. Improvement in Technology
III. Reduction in Taxation Rate
There is a downward movement from A There is leftward shift of supply curve from SS
to B. When the price falls, from P to P1 to SS’ because of change in factors other than
and quantity supply at falls from Q to Q1. price.
11 y
SA
Price SB
SC
Quantity Supplied X
12
Elasticity of Supply = % Change in Quantity Supplied
% Change in Price
Where –
q1 – New Quantity
q0 – Old quantity
q1 – q0 X 100
q0
% Change in Price
OR
500-400
X 100
400
20
= 25 = 1.25
20
Given -
ES = 2
= - 2 (8 – 10)
= 500
New Supply - ?
q0 = 1250 Where
q0 = Original quantity
14
In the above diagram SA and SB are two Supply Curves. SB Curve is more flatter.
Elasticity of Supply measures impact of change in price on change in quantity
supplied. When price rises from OP to OP 1 than according to law of supply, supply
increases from Q to Q2 for Supply Curve SA and from Q to Q 1 for SB. Change in
Quantity Supplied is greater (Q – Q1) for the flatter supply curve SB.
Long Answers
1. The effect on output when only one input is increased and all other inputs are held
Constant relates to short period production function which is better known as Law of
Variable Proportion.
Statement
As additional units of a variable factor are combined with a given level of fixed factors
and technology, the marginal product of the variable factor first increases and then
decreases.
Improvement in Technology
Any betterment in the technology of producing ice cream will lead to reduction in
cost and increase in production and supply.
The various Indirect Taxes by the government on the production and sales of goods
affect the cost of production. More Taxes less Supply and Less Taxes more
supply.
Ans : 3
Market Supply is the collective supply of all individual firms of a given commodity at a
given price at a given time period.
20 5 20 25
30 10 30 40
40
40 15 40 55
55
Quantities of firm A & B has been horizontally added to find Market Supply
Market Supply Curve
The betterment of technology reduces the cost per unit of production. This leads to
firm’s profit maximization and there is increase in the supply.
4 (b) Impact of Drought on Market Supply of Wheat: The drought will result in less
production of wheat which further cause less supply. So the supply S Curve will shift
leftwards to S1.
5. Producer’s Equilibrium is the level of output produced and sold by a firm that
maximizes its profit.
According to MC- MR Approach, the level of output that maximizes the profit should
fulfill two conditions.
Condition-2
Marginal Cost should be rising – As long as Marginal Cost is falling producers’ keep on
maximising profit. So it is only when MC rises and becomes more than MR, producer’s start
incurring loss.
6 (a) False . Diminishing Returns to factor starts when the Marginal Cost start falling. At
this point Average Cost is rising because MC>AC.
(b) True. AC and AVC curve can not intersect each other though the vertical distance
between them keeps on reducing with Increase in output. The reason behind this is falling
AFC which can not be zero as TFC cannot be zero.
(C) True . Supply remains constant in the Market Period because Market Period is the
time period when supply can not be changed to any change in the price level. The time is
very short for any changes.
QUESTIONS ON MARKET COMPETITION AND MARKET
b) Homogeneous Product
ANSWERS OF PERFECT COMPETITION AND MARKET
3. Equilibrium Price is the price of a commodity at which its quantity demanded equals
to quantity supplied in the market.
4. The situation of Excess supply arise when at a given price, the market supply of a
commodity is more than its market demand.
5. The firm maximises profit in perfect competition where MR = MC since AR = MR in
perfect competition. So we can also say P = AR = MR = MC
iii) Free Entry and Exit: Buyers and sellers are free to enter or leave the market
at any time they like large profit will induce firms into the market and loss exit if any.
In the schedule given above, at the price of Rs 40 per unit the demand and supply are equal to
each other. Before this point there is competition among the buyers and therefore prices rise
till Demand and Supply are not equal once again. In case of Excess supply, there is
competition amongst sellers which leads to the fall in the price till it reach to equilibrium
level.
In the above diagram initial market equilibrium is achieved at E point where market
price is OP and Market equilibrium quantity OQ. When supply decreases and shifts to
left new equilibrium point is achieved at E1 point where Market Price OP remains
same but the quantity is reduced from OQ to OQ1.
Any increase in the rate of excise duty by the government will increase cost of production for
the producer. This will result in decrease in supply.
The decrease in supply creates the situation of Excess Demand. Competition amongst buyers
raises the price till Demand and Supply are once again equal. Price rise results in extension in
supply and contraction in demand. New Market equilibrium establishes at E1 point.
There is large number of buyers and sellers, each firm or seller in a Perfectly
Competitive market- forms an insignificant part of the market. So, no single seller
has the ability to determine or influence the price at which commodity is sold.
The forces of market demand and supply determine the price. So a firm is a Price
Taker while an industry is Price Maker.
1. With the increase in the price of steel the marginal cost of production of car will
increase. This will result in decrease in supply. Assuming that Demand for the car
remains constant the market equilibrium price will rise.
In the above diagram with Left ward shift of supply curve the price goes up from
OP to OP1 and quantity falls to OQ to OQ1.
2. With a rise in the Income Levels of the consumer, the demand for the product will
increase. This will result in a rightward shift of demand curve. Assuming supply to be
constant, the rise in demand creates excess demand. This will cause competition
among the buyers and sellers.
The price will rise till demand and Supply are once again equal. So the Market
Equilibrium price as well as quantity will rise. In diagram initial equilibrium price OP
rises to OP1 and quantity OQ to Q2.
3. There is a simultaneous change in demand and supply of a commodity and
equilibrium price increases. This can happen in following two situations-
a. When the supply of a commodity increases less than the increase in demand, then
the equilibrium price Increases (P-P1) and the equilibrium quantity also increases
(Q-Q1).
b. When the supply of a commodity decreases more than the decrease in demand,
then equilibrium price (P-P1) increases and equilibrium quantity decreases (Q-Q1)
There are a very large number of buyers and sellers in this form of market. No
individual buyer can influence the market price. Similarly, each firm or seller in a
perfectly competitive market forms an insignificant part of the market. So, no single
seller has the ability to determine the price at which the commodity is sold. It is the
market forces of Demand and Supply that determine the price of a commodity, so firms
become price taker and industry becomes price maker.