[2015 JUNE – UGC NET/JRF Commerce Paper II]
1. (b)
Explanation:
Rectangular hyperbola is a curve such that every rectangle drawn under it has equal area. The area of a rectangle is the product of the length and breadth (i.e. the product of variable measured along the x-axis and y-axis) of the rectangle. Under the demand curve area of rectangle is the product of quantity (variable on x-axis) and price (variable on y-axis) which represents total expenditure.
Thus a rectangular hyperbola demand curve represents different price levels at which expenditure of the consumer remains constant. Hence a rectangular hyperbola demand curve represents unit elastic (e = 1) demand.
2. (d)
Explanation:
A firm operates at the output level which maximizes the profit. In the figure, OQ is the profit maximizing output level where MR = MC and MC is rising.
At this level, firm earns abnormal or supernormal profits (shown by the shaded region) when AR > AC.
Corresponding to OQ output level, it can be clearly seen that MC > AC
3. (b)
Explanation:
Statement (a) is correct as demand curve slopes downward to the right due to inverse relationship between price and quantity demanded.
Statement (c) is correct. For optimization i.e. profit maximization, MR = MC is a necessary condition but it is alone not sufficient. MC curve must be rising where MR = MC.
Statement (d) is correct. Law of variable proportions or Returns to Factor analyses the behavior of total product when units of one factors are increased keeping others constant. Since some factors are constant in short-run, Law of variable proportions describes the input-output relationship in the short-run.
4. (b)
Explanation:
(a) Law of diminishing marginal utility – (iii) Cardinal approach
Cardinal approach to explain consumer behavior uses Law of diminishing marginal utility to ascertain consumer equilibrium.
(b) Relationship between price of one commodity and demand for other commodity – (i) Cross demand
Cross demand is the quantity of a commodity which is affected the price of some other commodity which can be its substitute or complementary good
(c) Skimming the cream policy – (ii) Low Price Elasticity
Skimming pricing refers to setting up a high price initially and gradually reducing it. This practice is successful only in a market where demand has low price elasticity i.e. demand is inelastic.
(d) Price rigidity – (iv) Pioneer pricing
Price rigidity is the condition where seller does not have any incentive to change the price of his products due to fear of the rival firms’ reactionary policies.
Pioneer pricing is the practice of setting up an initial or base price for a new product.
There is no relationship between these two concepts. But among the given options, this is the most appropriate answer.
5. (a)
Explanation:
Demand: P = 12 + 0.3 Q and Supply: P = 40 – 0.4 Q
Equilibrium price is determined where Demand = Supply.
Therefore, 12 + 0.3 Q = 40 – 0.4 Q
0.7Q = 28
Q = 40
P = 12 + 0.3 × 40 = 24
[2015 JUNE – UGC NET/JRF Commerce Paper II]
1. (c)
Explanation:
Marginal rate of substitution of X for Y i.e. MRSYX is given by:
MRSYX = or .
2. (b)
Explanation:
Price elasticity of Demand = i.e. , where is the differential coefficient.
Q = 50 – 5P .
When P = 5 Q = 25
Thus, Price elasticity = = 1
3. (c)
Explanation:
A two-factor Cobb-Douglas production function can be expressed as:
Q = A La Kb
where
Q is the output,
L is the amount of labour employed,
K is the amount of capital employed and
A is a positive constant called the efficiency parameter.
The sum of exponents of factors in the Cobb-Douglas production function i.e. a + b measures returns to scale.
If a + b = 1, returns to scale are constant.
If a + b > 1, returns to scale are increasing.
If a + b < 1, returns to scale are decreasing.
4. (d)
Explanation:
A monopoly firm faces downward sloping revenue curves i.e. AR and MR curves. Monopoly firm attains equilibrium at output level OQ (as shown in figure) where MR = MC. Corresponding to this level of output, AR = AC i.e. firm is earning normal profits only.
It can be clearly seen that at this level of output, MC < AC.
5. (a)
Explanation:
Ramsey pricing is the practice of pricing products which are inelastic in nature with higher markup component. Here even with increase in prices customers are willing to buy such products as they are inelastic in nature. In a monopolistic markets such pricing are implemented to maximize its profit.
Peak Load Pricing is a pricing strategy that implies price will be set at the highest level during times when demand is at a peak.
Value Pricing or Value-based pricing is the setting of a product or service’s price based on the consumer’s perception of benefits from consumption of the product.
Two-part Tariff is a price discrimination technique in which the price of a product or service is composed of two parts – a lump-sum fee as well as a per-unit charge.
[2015 JUNE – UGC NET/JRF Commerce Paper II]
1. (b)
Explanation:
All the given options are assumptions of the Marshallian utility analysis. Of these constant or given marginal utility of money is the least valid assumption. As a consumer spends his income, he is left with lesser amount of money than before. Thus the marginal utility of money left with the consumer increases as he spends more and more units of money. Thus, marginal utility of money is not constant.
2. None of the options is correct
Explanation:
The correct match should be:
(a) Convexity of the indifference curves to origin – (iii) Substitutability/Complementarity of the two goods
Convexity of indifference curves depends on the substitutability/complementarity of the two goods. The more easily goods can be substituted for one another, less convex will be the indifference curve. When the goods are perfect complements the indifference curve become L-shaped i.e. the most convex shape.
(b) Quantity of certain goods sacrificed for a large quantity of other goods – (iv) Marginal rate of substitution
Marginal rate of substitution specifies the quantity of one good that needs to be sacrificed to get one unit of another good.
(c) Equality of the ratio of the marginal utilities with that of the prices of the two goods – (ii) Consumer’s equilibrium
At equilibrium: Slope of indifference curve = Slope of budget line
Slope of indifference curve = MRSYX =
Slope of budget line =
Thus, at equilibrium:
(d) Separation of substitution and income effects from the total price effect – (i) Indifference curve analysis
Under indifference curve analysis, there are two approaches viz. Hicksian Approach and Slutsky Approach to break up Price Effect into Substitution and Income Effects.
3. (d)
Explanation:
Cost plus pricing is a cost-based method for setting the prices of goods and services. Under this approach, the direct material cost, direct labor cost, and overhead costs for a product are added up and added to a markup percentage (to create a profit margin) in order to derive the price of the product.
Marginal Pricing or marginal cost pricing is the practice of setting the price of a product to equal the extra cost of producing an extra unit of output.
Skimming pricing or Price skimming is a pricing strategy in which a marketer sets a relatively high initial price for a product or service at first, then lowers the price over time.
Product line pricing strategy is used for a number of products (more than one) within one product line. For example, a base price may be charged for a basic model, the next product up might have more features or be a better quality – it would be a higher price, and so on throughout the line (e.g. beds and the number of coils, or the type of cover, etc. or televisions with size and the number of pixels as a differentiation in the product line).
4. (a)
Explanation:
Assertion (A) is correct. In the short-run there is no entry or exit of the firms to or from the market. If existing firms are earning supernormal profits, new firms get attracted to the market in the long-run. This increases the supply of the product and consequently the price starts to fall. Finally, the price reaches a level where firms earn only normal profits.
Similarly, when firms are incurring losses, marginal firms leave the industry. This reduces supply of the product and consequently price begins to rise. Finally, the price rises to a level where firms earn only normal profits.
Reason (R) is also correct. The firms operate at minimum average cost at the level of normal profits. Thus, at equilibrium: AR = AC.
5. (b)
Explanation:
(a) Substitute Goods – (iii) Positive Cross Elasticity
(b) Complementary Goods – (i) Negative Cross Elasticity
Cross elasticity is the degree of responsiveness of demand due to a change in price of related goods.
Cross elasticity is positive for substitute goods and negative for complementary goods.
(c) Giffen Goods – (iv) Positive Price Elasticity
Giffen Goods are an exception to the law of demand because their demand rises with a rise in their price. Thus, price and demand for a Giffen goods are positively related and therefore they have positive price elasticity.
(d) High Income Group consumption Goods – (ii) Low Price Elasticity
High income group consumption goods generally have high price, e.g. clothes of prestigious brands. Even with a rise in their price their demand show only a little fall. Thus, these goods have low price elasticity or they have inelastic demand.
Similarly, goods with very low price, e.g. matchbox, have low price elasticity.
[2015 DECEMBER – UGC NET/JRF Commerce Paper III]
1. (c)
Explanation:
Assertion (A) is incorrect because demand does not invariably respond inversely to changes in price. The inverse relationship between price and demand is not true for all the goods. There are certain exceptions to the law of demand, like Giffen goods, where demand and price are directly or positively related.
Reason (R) is correct because Price Effect = Substitution Effect + Income Effect
2. (d)
Explanation:
Economic capacity or optimum capacity of a plant is the quantity of output at which average cost is minimum. Since AC = MC when AC is minimum, therefore economic capacity corresponds to this level of output.
3. (a)
Explanation:
(a) Excess capacity – (i) Cost reduction with output expansion
Excess capacity refers to unutilized capacity of plants which enables a firm to expand output with reduced per unit cost. When firm is operating on the falling part of average cost curve and expands the level of output further, it will experience cost reduction and operate on a lower point on AC.
(b) Resorting to New Technology – (iii) Internal economies
When a firm resorts to new technology it enjoys internal economies of scale.
(c) Setting up of the Training Institutions – (iv) External economies
When training institutes are set up to proved skilled manpower in the economy, all the firms get benefit from such initiatives. Therefore, these enable firms to enjoy external economies of scale.
(d) Reserve Capacity of the plant – (ii) Constant cost with output expansion
Firms install reserve capacity in anticipation of increase in demand for their output. Thus, when required, firms can easily increase output to meet sudden rise in demand (like in festival seasons) without increasing their per unit cost.
4. (d)
Explanation:
The relationship between AR, MR and elasticity of demand (e) is given by:
When e = 1, i.e. MR = 0
5. (b)
Explanation:
(a) Trade Channel Discount – (iii) Differential Pricing
Differential pricing refers to charging different prices to different segments of consumers. One way for practicing differential pricing is charging higher price from retail customers and providing trade channel discounts to wholesalers and distributors.
(b) Loss Leadership – (iv) Product-Line Pricing
Loss leadership is the method in which one of the complementary products (shaving razor, for example) is priced low to achieve maximum sales volume, (without cost or profit considerations) to stimulate the demand for the other product (razor blades). Since, this is a practice of pricing different products of the same firm, it is an example of product line pricing.
(c) Pricing being non-responsive to changes in the demand and the cost – (i) Oligopoly Pricing
In oligopoly market situation, pricing of goods becomes a difficult decision due to expected reactionary policies of the rivals. Thus, an oligopolistic firm faces price rigidity and is unable to change price in response to changing demand or cost.
(d) Basing Point Pricing – (ii) Locational Price differentials
Basing point pricing is the strategy of pricing goods where price includes the freight charges depending upon the location of the customer.
[2016 JULY – UGC NET/JRF Commerce Paper II]
1. (c)
Explanation:
Ordinal utility analysis is superior to Cardinal utility analysis as it enables us to split Price Effect into Income and Substitution effects. This enables us to analyse the consumer behavior towards Giffen goods and Inferior goods.
2. (d)
Explanation:
Assertion (A) is correct. A price reduction leads to increase in quantity demanded of a commodity due to inverse relation between the quantity demanded of the commodity and its price.
Reason (R) is correct. Price reduction enables the entry of those customers who were not able to buy it at higher price earlier. But there are some other factors too which result in increased demand due to price reduction. These are:
i. Law of diminishing marginal utility
ii. Income effect and substitution effect
iii. Multiple uses of a commodity.
Therefore, Reason (R) offers only a partial explanation to the Assertion (A).
3. (c)
Explanation:
Long-run Average Cost (LAC) curve for a linear production function will be a straight line without a minimum point.
Long-run Average Cost (LAC) curve for a normal production function will be U-shaped with a definite minimum point.
Planning curve and Envelope curve are other names for Long-run Average Cost (LAC) curve for a normal production function.
4. (d)
Explanation:
Monopolies are considered socially undesirable because even at normal profit level they produce at OQ level of output which is lower than the economic or optimum capacity OQO and charge price OP which is much higher than marginal cost OM corresponding to the output level OQ.
5. (b)
Explanation:
Product line pricing strategy is used for two or more products or services offered by a firm within one product line. Product line is a group of related products and their pricing strategy involves segregating products into different categories to cater to the perceived value in the minds of the customers.
Public Utility Pricing does not employ product line pricing as public utility is the offering by government undertakings like postal service. Such offerings do not create perceived differentials in the minds of the customers.
Complementary Goods pricing employs product line pricing for the products for joint consumption like razors and blades.
Spare Parts pricing also employs product line pricing while offering same products with different specifications or quality ranges.
Load factor pricing or peak load pricing or surge pricing employs product line pricing when it charges higher prices when the demand is at peak level. For example, cab services charge higher price during rush hours.
[2016 JULY – UGC NET/JRF Commerce Paper III]
1. (b)
Explanation:
a. Postage stamp pricing – iv. Differential pricing
Postage stamp pricing is a variation of location based pricing in which product price includes freight charges. Under this all customers are charged the same freight charges. Since, Location based pricing come under differential pricing, this would be the correct match among the given options.
b. Loss leader – iii. Product line pricing
Loss leadership is the method in which one of the complementary products (shaving razor, for example) is priced low to achieve maximum sales volume, (without cost or profit considerations) to stimulate the demand for the other product (razor blades). Since, this is a practice of pricing different products of the same firm, it is an example of product line pricing.
c. Economic capacity – i. Equality of marginal and average cost
Economic capacity or optimum capacity denotes the output level corresponding to the lowest average cost. At this level, AC = MC.
d. Reserve capacity – ii. Constant average and marginal cost
When average cost remains constant over a range of output, AC curve becomes horizontal. Thus, output increases without increasing the cost. This occurs when firm maintains a reserve capacity to meet the sudden rise in demand. In this way it is capable of increasing production without increasing the cost. Since AC is constant corresponding to such output levels, MC is also constant.
2. (a)
Explanation:
Assertion (A) is correct. When launching new products, generally firm price them low to penetrate the market and get a foothold.
Reason (R) is also correct. Normally, firms with reserve capacity develop and market new products to gain economies of scale.
Although the Reason (R) is correct it does not completely explain Assertion (A).
3. (d)
Explanation:
Assertion (A) is incorrect. Gossen’s first law of consumption or law of diminishing marginal utility is applicable under certain assumptions like there must be no time gap between the consumption of successive units of the good. Therefore, it is NOT invariably applicable in case of individuals’ consumption behavior.
Reason (R) is correct. Gossen’s first law of consumption is used to explain the Law of demand.
4. (d)
Explanation:
Production Function is based on the following assumptions:
– Substitutability
The factors of production or inputs are substitutes of one another which make it possible to vary the total output by changing the quantity of one or a few inputs, while the quantities of all other inputs are held constant.
– Complementarity
The factors of production are also complementary to one another, that is, the two or more inputs are to be used together as nothing will be produced if the quantity of either of the inputs used in the production process is zero.
– Specificity
It reveals that the inputs are specific to the production of a particular product. Machines and equipment’s, specialized workers and raw materials are a few examples of the specificity of factors of production.
[2016 SEPTEMBER – UGC NET/JRF Commerce Paper II]
1. (b)
Explanation:
Changes in demand due to change in price of the product itself is called Change in Quantity Demanded. Change in quantity demanded is called Expansion when the quantity demanded increases due to price reduction. It is called Contraction when the quantity demanded reduces due to rise in price of the product.
2. (b)
Explanation:
a. Cardinal Utility Analysis – ii. Alfred Marshall
Cardinal Utility Analysis was given by Alfred Marshall in 1870. According to Marshall, utility can be expressed in definite or cardinal numbers. He explained consumers’ equilibrium and law of demand with the help of cardinal utility.
b. Ordinal Utility Analysis – i. J.R. Hicks and R.G.D. Allen
Ordinal Utility Analysis was propounded by Hicks and Allen in 1934, which explains consumers’ equilibrium and law of demand with the help of indifference curves. Their analysis is superior to Marshall’s ordinal utility as they explained breaking up of price effect into income and substitution effect with the help of indifference curves.
c. Revealed Preference Analysis – iv. Paul A. Samuelson
Revealed Preference was propounded by Paul Samuelson in 1938 to explain strong ordering of preferences as against weak ordering explained in indifference curves analysis.
d. Logical Ordering Analysis – iii. J.R. Hicks
In 1956, Hicks revised his demand analysis without the use of indifference curves. He assumed Preference Hypothesis in which he states that consumer chooses a preference out of all the alternatives available, depending on market condition. Under one market condition consumer chooses one combination while in some other market condition he chooses another combination. He called this logical ordering.
3. (c)
Explanation:
Producer’s equilibrium, using isoquants and iso-cost line, is established at a point where iso-cost line is tangent to the isoquant. This is possible under the following circumstances:
– when isoquant is convex to the origin
– the iso-cost line is tangent to the portion of isoquant lying within the ridge lines (i.e. economically feasible region of isoquant), and
– isoquant for perfectly complementary inputs (i.e. L-shaped isoquants)
4. (b)
Explanation:
Variations in price affect elasticity of demand as well as elasticity of supply. While demand is inversely related to price, supply is directly or positively related to price. Therefore, the effect of price variation will take place in inverse or opposite directions for demand and supply elasticities.
5. (b)
Explanation:
Cost-plus pricing is the practice of charging a price which includes a fixed percentage of profit. The price under cost-plus pricing is calculated as:
Price = AC + m × AC where AC = Average Cost and m = Percentage of Profit (or markup)
Product Tailoring refers to providing customized products to the customers. For example, a tailor stitches garments according to the specifications of the customer. Under this practice, the seller or service provider practices Cost-plus pricing.
Refusal Pricing refers to offering a discounted price to a customer who had initially refused the previous offer of the firm. Here, again the firm adopts Cost-plus pricing.
Monopsony Pricing refers to pricing of products in a market with only one buyer. The sellers will adopt cost-plus pricing in a monopsony market.
Under monopoly, the firm does calculate the price of its product as a fixed profit percentage. It may charge higher profit to one customer and a lower profit to another. Since profit percentage is not fixed, it does not adopt cost-plus pricing.
[2016 SEPTEMBER – UGC NET/JRF Commerce Paper III]
1. (a)
Explanation:
Assertion (A) is correct as heavy promotional expenditure is necessary to introduce a product in the market. To absorb the promotional expenditure, the new product will be priced high.
Reason (R) is incorrect because demand for new product will be highly elastic as consumers might not be aware of the new product or new product faces competition from the rival firms.
2. (c)
Explanation:
a. Producer’s equilibrium range – iv. Ridge lines
Producer attains equilibrium on the portion of an isoquant which lies within Ridge Lines because such portion depicts the economically feasible region of the isoquant.
b. Possible input use – iii. Isoquant curve
Any point on an isoquant shows the combinations of two inputs that yield a given level of output. Thus an isoquant shows all the possible combinations of inputs for a specific level of output.
c. New price equilibrium after change in demand is set through price adjustment – i. Leon Walras’s approach*
In Walrasian equilibrium the adjustment of price is analysed when it shifts from its initial equilibrium position. If the original price is restored, the equilibrium is considered to be stable.
d. New price equilibrium after change in demand is set through quantity adjustment – ii. Alfred Marshall’s approach*
In Marshallian equilibrium the adjustment of quantity is analysed when it shifts from its initial equilibrium position. If the original quanitty is restored, the equilibrium is considered to be stable.
* Not in syllabus
3. (c)
Explanation:
Gossen’s Second Law of Consumption or Law of Equi-marginal Utility states that the consumer is in equilibrium when marginal utilities of the two goods, obtained from the last unit of money are equal i.e. MU1 = MU2 = MU3 =… = MUN.
Thus, it is based on equality of marginal utility and NOT on comparability of the utilities.
4. (c)
Explanation:
The features common to Perfect Competition and Monopolistic Competition are:
– Freedom for entry into or exit from the market.
– Level of knowledge of the market.
– Number of buyers and sellers in the market.
Nature of goods bought and sold is different in the two markets. In perfect competition, the goods of different firms are homogeneous or identical while they are differentiated in monopolistic competition.
[2017 JANUARY – UGC NET/JRF Commerce Paper II]
1. (c)
Explanation:
a. Hypothesis of Sales Revenue Maximization – i. W.J. Baumol
In his Hypothesis of Sales Revenue Maximisation, Baumol stressed that after attaining a certain level of profits the management seeks to increase the sales revenue as their incentives depend on the level of revenue.
b. Hypothesis of Maximization of Firm’s Growth Rate – ii. Robin Marris
According to Marris’ Hypothesis Maximization of Firm’s Growth Rate, the management strives to attain a steady growth rate that ensures maximization of market value of firm’s share, reasonable return to the shareholders and avoid any hostile takeover of the firm.
c. Hypothesis of Maximization of Managerial Utility Function – iii. O.E. Williamson
In his Hypothesis of Maximisation of Managerial Utility, also known as Managerial Discretion Theory, Williamson argues that management first seeks to attain a certain level of profits to satisfy the owners’ interests. After this they seek to maximise their own utility which includes discretionary expenditure on staff and their increased salary. This discretionary expenditure benefits the management in terms of increased power and prestige as well as increased emoluments.
d. Hypothesis of Satisfying Behaviour – iv. Cyert and March
The theory of Cyert and March is an extension of Simon’s Satisficing Theory. In addition to Simon’s arguments, Cyert and March assert that management has to satisfy the conflicting interests of a variety of groups including shareholders, employees, lenders, creditors etc. The management strives to satisfy the interest of each of these groups on the basis of past experience and their analysis of the future market conditions.
2. (b)
Explanation:
When determining price elasticity (eP)on the basis of relation between change in price and change in producer’s revenue/consumer’s expenditure, three cases arise:
– eP < 1 (inelastic demand) when price and revenue move in same direction i.e. when price falls, revenue also falls and vice versa. – eP = 1 (unit elastic demand) when revenue remains constant with fluctuation in price. – eP > 1 (elastic demand) when price and revenue move in opposite directions i.e. when price falls, revenue increases and vice versa.
3. (d)
Explanation:
Q = – L3 + 15L2 + 10L
Total Output when L = 5 QL=5 = –53 + 15 × 52 + 10 × 5 = 300
Total Output when L = 4 QL=4 = –43 + 15 × 42 + 10 × 4 = 216
Marginal Output of 5th unit of labour = 300 – 216 = 84
Therefore, Statement I is false.
Average Output = = 60
Therefore, Statement II is true.
4. (d)
Explanation:
Paul Sweezy propounded the Kinked Demand Curve model to explain the condition of price rigidity in an Oligopolistic market structure.
5. (c)
Explanation:
For the success of Penetration Policy, it is:
– desirable that short-run demand for the product has elasticity greater than unity because even a small reduction in price can significantly increase the demand.
– desirable that economies of large scale production are available because this will reduce cost and help to set a low price.
– desirable that consumers easily accept and adapt the product
– not desirable that the product has very low cross elasticity because even a large reduction in price of the product will not much affect the demand for its substitutes.
[2017 JANUARY – UGC NET/JRF Commerce Paper III]
1. (c)
Explanation:
(a) Non-price quantity relationship of demand – (iii) Increase and decrease in demand
Increase and Decrease in demand takes place due to factors other than price of the product, like price of substitutes, income of the consumer etc. Thus, increase and decrease in demand show non price quantity relatioship
(b) Income effect of a price rise greater than its substitution effect – (iv) Giffen goods
Giffen Goods are an exception to the law of demand with negative price effect (i.e. price and demand show direct or positive relationship). Price effect is negative due to negative income effect which is greater than the positive substitution effect.
Price Effect for Giffen Goods = Strong negative Income Effect + Weak positive Substitution Effect
(c) Transitivity and consistency of choices – (ii) Ordinal utility approach
Transitivity and consistency of choices are two of the assumptions of Ordinal utility approach.
(d) Price quantity relationship of demand – (i) Extension and contraction of demand
Extension (or Expansion) and Contraction of demand take place due to change in the price of the product. Therefore, extension and contraction of demand show price-quantity relationship.
2. (b)
Explanation:
The level of output is optimum where Average Cost (AC) is minimum.
TC = 200 + 5Q + 2Q2
AC = =
AC is minimum where = 0 and > 0.
Now, = 0
And
Therefore, Q = 10 is the optimum level of output.
3. (c)
Explanation:
Demand function : Q = 100 – 0.2P
Price function : P = 500 – 5Q
Total Revenue (TR) = P × Q = P ×(100 – 0.2P) = 100P – 0.2P2
= 100 (500 – 5Q) – 0.2(500 – 5Q)2 = 500Q – 5Q2
Hence, Marginal Revenue (MR) = = 500 – 10Q
Cost function : TC = 50 + 20Q + Q2
Marginal Cost (MC) = 20 + 2Q
For Profit maximising output in a pure monopoly MR = MC
500 – 10Q = 20 + 2Q Q = 40
4. (c)
Explanation:
Under perfect competition, firms are price takers. Therefore, they cannot set a price higher than the prevailing price.
Under condition of high cross elasticity, even a small rise in price can lead to significant rise in demand for rival firms’ products. Therefore, a firm cannot set the price of its product higher than the prevailing price.
When product reaches the stage of maturity and saturation, it is not possible for the firm to set price higher than the prevailing price.
Thus, a price higher than the prevailing price can be set in a market where consumers are willing to spend more for a prestigious good.
[2017 NOVEMBER – UGC NET/JRF Commerce Paper II]
1. (c)
Explanation:
Statement (I) is correct because business firms operate in a dynamic environment to attain their goals, which makes situation complex and chaotic.
Statement (II) is incorrect because business decisions can be rational only after applying economic logic i.e. considering the changes that take place in the business environment.
2. (a)
Explanation:
Pure Profit is economic profit.
Economic Profit (Pure Profit) = Revenue – Explicit Cost – Opportunity Cost
= Accounting Profit – Opportunity Cost i.e. Return – Opportunity Cost
Hence, option (a) is true.
Accounting Profit = Revenue – Explicit Cost. Therefore Option (b) is not true.
Profit Maximisation is not the sole objective of modern business firms. They can pursue the objective of sales maximization, growth, social welfare etc. along with profit maximization. Therefore, option (c) is not true.
Profit is maximum when MR = MC or difference between TR and TC (i.e. TR – TC) is maximum. Thus, option (d) is not true.
3. (b)
Explanation:
Cardinal utility approach to consumer behavior is based on the following assumptions:
– Consumer is rational
– Marginal utility from consumption of successive units goes on diminishing.
– Marginal utility of money is constant.
– Utility is measurable i.e. it can be expressed in cardinal numbers.
4. (c)
Explanation:
Statement (I) is correct because price elasticity (e) can be measured by the formula: .
Statement (II) is incorrect as formula for measuring price elasticity is given by:
Slope of demand curve (m) = .
Therefore, e = .
Price elasticity is the product of inverse of the slope of demand curve and the ratio between corresponding price and quantity.
5. (b)
Explanation:
The properties of an indifference curve are:
i. It slopes downward to the right (i.e. it has negative slope)
ii. It is convex to the origin.
iii. Two indifference curves never intersect each other.
iv. A higher indifference curve represents higher level of satisfaction.
Clearly, ‘(b) Indifference curves of two imperfect substitutes are concave to the point of origin’ is not the property of indifference curves.
[2017 NOVEMBER – UGC NET/JRF Commerce Paper III]
1. (c)
Explanation:
Statement (I) is true because the least-cost combination (producer’s equilibrium) is attained where:
Slope of isoquant = Slope of Iso-cost line
Slope of Isoquant = MRTS = and Slope of Isocost line =
Here, K = units of Capital, L = units of Labour, w = Price of labour and r = Price of capital.
Thus, equilibrium is established where .
Statement (II) is not true because if TP = Q = −L3 + 15 L2 + 10 L,
MP = .
2. (a)
Explanation:
(a) Technological advantages – (iv) Economies in production
Technological advantage enjoyed by a firm can be categorized in Production related economies.
(b) Large scale purchase of material inputs – (iii) Economies in marketing
Bulk purchase of raw materials comes under commercial and marketing economies.
(c) Specialized departments under specialized personnel – (i) Managerial economies
Large scale firms can employ skillful personnel to manage different departments. This advantage is categorized under Managerial economies.
(d) Oil companies having their own fleet of tankers – (ii) Economies in transport and storage
When a firm has its own fleet of vehicle to transport its product, it enjoys transport and storage related economies.
3. (a)
Explanation:
In India there is a large number of sellers offering TV and refrigerators, each with some distinct features (i.e. differentiated products). Thus, it is an example of Monopolistic competition.
4. (c)
Explanation:
Statement I is correct as setting price at par with rival firms’ is the best strategy to adopt in a highly competitive market.
Statement II is incorrect as consumers assume higher priced goods to be prestigious goods of superior quality.