[2018 JULY – UGC NET/JRF Commerce Paper II]
1. (a)
Explanation:
Explicit Costs refer to cash payments made by the firms for factor and non-factor inputs, depreciation etc. Accounting costs include payments made to outsiders, the expenses incurred in acquiring an asset etc.
Implicit Cost or Opportunity cost of an input employed for production of goods is the value of next best opportunity available to it. Thus the opportunity cost of a factor producing a commodity X is the amount of another commodity Y that could have been produced by employing this factor in the production of Y.
Accounting Costs = Explicit costs, but
Economic costs = Explicit costs + Implicit Costs.
Therefore, Accounting profit = Total revenue – Explicit costs
And, Economic profit = Total revenue – (Explicit costs + Implicit costs) or Total revenue – Total cost.
Therefore, both the statements are correct.
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. (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.
4. (b)
Explanation:
When labour is plotted on X-axis and capital is plotted on Y-axis and an isoquant is prepared:
– MRTSYX = Slope of the isoquant
– MRTSYX =
– MRTSYX = . But according to statement (iii) MRTSYX = , which is not true.
5. (c)
Explanation:
(a) Economies of scale – (ii) mean lowering of costs of production by producing in bulk
Economies of scale are the advantages that accrue to a firm when it expands its scale of operations. These are the cost advantages that a business can exploit by expanding its scale of production in the long run. Their effect reduces the long run average costs of production and it leads to increasing returns to scale. They not only lead to lower prices but also higher profits, consumers and producers will both benefit.
(b) Internal economies – (iii) arise when cost per unit depends on size of the firm
Internal economies of scale arise from the growth of the firm itself. These accrue to the firm due to its efforts.
(c) External economies – (iv) arise when cost per unit depends on the size of the industry, not the firm
External economies are the advantages that accrue to the all the firms in the industry due to expansion of level of production of the whole industry irrespective of the efforts of the firm.
(d) Economies of scope – (i) arise with lower average costs of manufacturing a product when two complementary products are produced by a single firm
Economies of scope exist if a single firm can produce any combination of two products more cheaply than two independent firms each producing a single product.
Let the total cost of producing good X and Y be C(X, Y) and the cost of producing good X alone be C(X) while that of producing good Y be C(Y).
Economies of Scope exist when C(X, Y) < C(X) + C(Y).
6. (b)
Explanation:
Transfer Pricing is an accounting practice of valuing the transfer of goods and services from one division of an organization to another like subsidiaries, affiliates etc.
Going Rate Pricing is the strategy of setting price in par with the prevailing market price to meet competition.
Product Bundling is grouping of two or more product as a single package offered at a comparatively lower price. It used to lure customers into more products.
Full Cost Pricing is the practice of calculating price as the sum of the cost of the product plus a fixed markup. It is also known as Cost-plus Pricing.
7. (d)
Explanation:
Under Perfect competition: MR = AR.
A firm operates at the level of output which yields maximum profits i.e. MR = MC.
In the long run, a firm under perfect competition earns only normal profits, i.e. AR = AC.
Putting the above three relations together: AR = MR =AC = MC
[2018 DECEMBER - UGC NET/JRF Commerce Paper II]
1. (b)
Explanation:
(a) Income elasticity less than unity – (iii) Superior goods
Income elasticity is less than unit for Necessities. But out of all the given options, this is the most appropriate because all other matches are correct.
(b) Cross elasticity less than unity – (i) Competitive goods
Cross elasticity is less than unity (i.e. positive) for substitutes or competitive goods because demand for a good is positively related to the price of substitutes.
(c) Cross elasticity less than zero – (iv) Complementary goods
Cross elasticity is less than zero i.e. negative for complementary goods because demand for a good is inversely related to the price of complementary goods.
(d) Income elasticity less than zero – (ii) Inferior goods
Income elasticity is less than zero i.e. negative for inferior goods because demand for inferior goods falls as income rises.
2. (c)
Explanation:
Reasons for operation of the Law of demand (i.e. the inverse relationship between the variation in the price and the variation in the quantity demanded) are:
– Price Effect,
– Entry of new customers or exit of existing customers
– Law of diminishing marginal utility (i.e. Gossen’s First Law of Consumption)
Law of substitution or the Law of Equi-marginal Utility or Gossen’s Second Law of Consumption states that a rational consumer spends his entire income on several goods in such a way that marginal utilities obtained from last rupee spent on various goods are equal. This does not offer an explanation of the Law of Demand.
3. (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.
Public Utility Pricing refers to pricing of products or services offered by the government to the general public, like postal service. Cost-plus pricing is adopted in this case too.
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.
Under monopoly, the firm does not 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.
4. (a)
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.
5. (b)
Explanation:
Cardinal utility approach to consumer behavior is based on the following assumptions:
– Utility is measurable i.e. it can be expressed in cardinal numbers.
– Marginal utility of money is constant.
– Marginal utility from consumption of successive units goes on diminishing (Gossen’s First Law of Consumption).
– Utilities of various goods are independent. That is, utility derived from consumption of one good does not affect the utility of any other good.
Thus, the statement (iii) Utilities of different goods are interdependent is incorrect.
6. (c)
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.
7. (c)
Explanation:
Assertion (A) is correct. Under imperfect competition firms operate on the falling part of their AC curve indicating underutilization of the plant or excess capacity. The situation is same whether the firm earns supernormal profit, normal profit or even incurs loss. Thus, there exists excess capacity of the production for the firms if these incur losses.
Reason (R) is also true. The firms, in order to maximize profits, operate at a non-optimal level of output. Thus, their production level has to remain below their economic capacity level to maximize profits. Reason (R), therefore offers correct explanation of the Assertion (A).
[2019 JUNE - UGC NET/JRF Commerce Paper II]
1. (a)
Explanation:
We know that: .
It is given that, AR = Price = Rs10, and e = 2 (ignoring the negative sign)
MR = = Rs.5.
2. (c)
Explanation:
a. Risk theory of profit – iii. Hawley
Hawley was of the view that entrepreneur who assumes the risk qualifies to earn profits.
b. Innovation theory of profit – i. Schumpeter
According to Joseph A. Schumpeter, an entrepreneur earns economic profit as a result of introduction of his successful innovations.
c. Rent theory of profit – ii. Walker
According to Prof. Francis A. Walker, the profit is earned by an entrepreneur according to his ability to successfully run a business. He compared profit to the rent. Just as different stretches of land command different rent decided by their productivity, entrepreneurs command different profits as decided by their competitiveness and ability.
d. Dynamic theory of profit – iv. Clark
According to Prof. John B. Clark, an entrepreneur makes pure profit over and above normal profit when he takes advantage of the changes taking place in a dynamic economy.
3. (c)
Explanation:
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 stronger negative income effect than the weaker positive substitution effect.
Therefore, Price Effect for Giffen Goods = Strong negative Income Effect + Weak positive Substitution Effect. Due to this, demand curve for Giffen goods is positively sloped.
4. (a)
Explanation:
Assertion (A) is correct. Long-run average cost (LAC) curve is U-shaped due to operation of economies of scale.
Reason (R) is also correct. Decreasing returns to scale occur when size of the firm and scale of operations becomes so large that it becomes difficult to manage them. This causes per unit cost to rise and LAC becomes U-shaped.
Reason (R) correctly explains the Assertion (A).
5. (c)
Explanation:
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.
Incremental Pricing Policy is followed by firms when they recovered their fixed cost from a certain level of sales. To utilize their excess capacity they price further output as variable cost plus profit. It is also known as Variable Cost Pricing.
Skimming pricing refers to setting up a high price initially and gradually reducing it. This practice is successful only in a market where demand is highly inelastic. This means, a considerable change in price will lead to only a small change in quantity.
Penetrating pricing is the practice of charging low price initially to gain market share and gradually increasing it. This policy is adopted when operating in a market with elastic demand.
6. (a)
Explanation:
a. Maximisation of firm’s growth rate – ii. Marris hypothesis
Robin Marris developed his hypothesis of Firm’s Growth Maximisation in his book “The Economic Theory of ‘Managerial’ Capitalism”. According to this theory, 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. In this way they secure their job as well as serve the interest of the owners.
b. Managerial utility function – iii. Williamson hypothesis
In his theory of Managerial Utility Maximisation, 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.
c. Satisfying behavior – iv. Cyert-March hypothesis
The theory of Cyert and March is an extension of Simon’s Satisficing Theory. They 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.
d. Sales maximization – i. Baumol’s hypothesis
In his theory, Prof. William 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. In this way, management ensures a reasonable return to the owners as well as serves their own interest.
7. (d)
Explanation:
Economies of scale are the benefits that accrue to a firm when it expands its scale of operations. Thus, when long-run average cost falls continuously as the output is increased, economies of scale are said to exist.
8. (a)
Explanation:
Assertion (A) is correct. When a business firm incurs losses, it considers shutting down temporarily till the situation improves.
Reason (R) is also correct.
Figure A shows Average Cost (AC) and Average Variable Cost (AVC) curves. The rectangle under AC curve represents Total Cost (TC) and the rectangle under AVC shows Total Variable Cost (TVC). Thus, the rectangle formed between AC and AVC curve represents the difference between TC and TVC i.e. TC – TVC = TFC (Total Fixed Cost).
In figure B, Price = AC thus it covers TC. Since cost, in economics include implicit cost (which is the opportunity cost of owner owned resources), P = AC is the price at which firm earns normal profits.
In figure C, AC > Price > AVC; in this situation, the firm incurs losses as Price < AC and recovers TVC and only a part of TFC. If the firm decides to shut down it will incur losses equal to TFC but since firm is recovering a part of TFC, Loss < TFC. Hence the firm will continue its operations.
In figure D, Price = AVC; in this situation firm recovers only its variable cost. Thus, Loss = TFC. Firm will be in the same situation if it continues to operate or shut down temporarily. But if the price falls further and Price < AVC, the firm will prefer to shut down because in that situation Loss > TFC. Hence, P = AVC is the Shut-down Point.
Thus, Reason (R) correctly explains the Assertion (A).
9. (d)
Explanation:
In the first stage of Returns to a factor i.e. the Law of increasing returns:
MP first increases and then begins to fall.
AP rises throughout the first stage.
First stage ends and second stage begins where AP = MP.
In the second stage of Returns to a factor i.e. the Law of diminishing returns:
MP and AP, both fall continuously.
The second stage ends and third stage begins where MP = 0.
Thus, in essence, it is the rise and fall of AP curve which defines the first and second stages of Returns to a factor (or Law of Variable Returns). AP is rising in the first stage (law of increasing returns) and AP is falling in second stage (law of diminishing returns).
10. (b)
Explanation:
Following are the pre-requisites of Price Discrimination:
– existence of monopoly power of the firm.
– segregation of the market into two or more segments.
– different price elasticity in each of the segment of the market.
If the product of the firm has close substitutes then it will not have monopoly power and thus it cannot practice price discrimination.
11. (d)
Explanation:
Figure A shows equilibrium of the firm under imperfect competition (monopoly, monopolistic competition, oligopoly) while figure B shows equilibrium of the firm under perfect competition.
In figure A, profit maximizing output level is OQ where MR = MC. Thus firm is operating at point E on AC curve (falling portion) which corresponds to the profit maximizing level. The optimum or maximum level of output that the firm can produce using this plant is OQO which corresponds to the minimum point F on AC curve. Thus, there is excess capacity QQO.
In figure B, profit maximizing level and optimum level of output are the same. A perfectly competitive firm operates at the optimum level of output making the best utilization of the available plant. Thus, there is no excess capacity under perfect competition.
Hence, excess capacity exists in firms operating under imperfect competition. This is because their revenue curves (AR and MR) are negatively sloped which touch or intersect the falling portion of the AC curve.
[2019 DECEMBER – UGC NET/JRF Commerce Paper II]
1. (b)
Explanation:
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.
2. (d)
Explanation:
Explanation:
Cardinal utility approach to consumer behavior is based on the following assumptions:
– Consumer is rational
– Consumer has a given level of income.
– Consumer seeks to maximize his total satisfaction from the good.
– Marginal utility of money is constant.
Thus, (d) Diminishing Marginal Utility of Money is not the assumption of Cardinal Utility Analysis.
3. (b)
Explanation:
Statement I is incorrect. The price elasticity of demand at any point on a straight line demand curve is given by: .
Price elasticity at any point depends on the lengths of lower and upper segments. Thus, price elasticity is NOT equal at each point on the straight line demand curve.
Statement II is incorrect.
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 demand. It has unequal slope but equal elasticity (e = 1) at all points.
4. (a)
Explanation:
Constant Elasticity of Substitution Production Function (CES) developed by Arrow, Chenery, Minhas and Solow is given by:
Here Q, L and K denote units of output, labour and capital respectively.
The parameter A is the efficiency parameter and expresses the state of technology; A > 0
The parameter α is the distribution parameter showing relative share of each factor and α < 1.
The parameter β is the substitution parameter & determines the elasticity of substitution; β >–1
Variable Elasticity of Production Function (VES) are often generalizations of the CES production function. In contrast to CES production function, the VES production function requires that elasticity of substitution be the same along the expansion path but vary along an isoquant. Several such functions have been constructed and estimated. Some of the VES production function models are as follows:
Leontief Production Function named after Wassily Leontief is also called Fixed Proportion Production Function. It indicates a relationship between output and inputs where inputs are used in a definite proportion and cannot be substituted with each other. Thus, the inputs are perfect complements of each other.
Leontief Production Function is expressed as:
Q = min
Where Q = quantity of output
z1 and z2 are the quantities of two inputs utilized
a and b are technologically determined constants.
Cobb-Douglas Production Function involving two inputs labour (L) and capital (K) is of the form:
Q = A.La. Kb
Here A is a positive constant called the efficiency parameter,
a is the output elasticity of labour, and
b is the output elasticity of capital.
5. (a)
Explanation:
Since TFC is constant for all levels of output, ΔTFC = 0.
Also TC = TFC + TVC ΔTC = ΔTFC + ΔTVC ΔTC = ΔTVC
Therefore, statement (a) is correct.
Decrease in AFC tends to reduce AC and AC curve falls while increase in AVC causes it to rise.
Net effect of decrease in AFC and increase in AVC will determine whether AC curve falls or rises.
If decrease in AFC < increase in AVC AC increases and AC curve rises.
Therefore, statement (b) is incorrect.
If decrease in AFC = increase in AVC net effect is zero and AC remains constant.
Therefore, statement (c)is correct.
If decrease in AFC > increase in AVC AC decreases and AC curve falls.
Therefore, statement (d) is incorrect.
6. (c)
Explanation:
A monopoly firm may earn normal or supernormal profits and may even incur losses in the short-run. But in the long run, it will earn normal profits or supernormal profits.
Therefore, statement (a) is false.
Paul Sweezy propounded the Kinked Demand Curve model to explain the condition of price rigidity in an Oligopolistic market structure.
Therefore, statement (b) is true.
Under perfect competition, industry is the price maker but a firm is only a price taker.
Therefore, statement (c) is true.
Under monopolistic competition, a firm can earn normal profits or supernormal profits and may even incur losses. But in the long-run, a monopolistically competitive firm earns normal profit.
Since statement (d) does not mention if it is regarding short-run or long-run, it is false. Generally, it can earn normal or supernormal profits or incur losses.
7. (c)
Explanation:
a. Profit as rent of ability – iv. F. A. Walker
According to Prof. Francis A. Walker, the profit is earned by an entrepreneur according to his ability to successfully run a business. He compared profit to the rent. Just as different stretches of land command different rent decided by their productivity, entrepreneurs command different profits as decided by their competitiveness and ability.
b. Dynamic theory of profit – iii. J. B. Clark
According to Prof. John B. Clark, an entrepreneur makes pure profit over and above normal profit when he takes advantage of the changes taking place in a dynamic economy.
c. Risk theory of profit – i. F. B. Hawley
Hawley was of the view that entrepreneur who assumes the risk, qualifies to earn profits.
d. Innovation theory of profit – ii. Joseph A. Schumpeter
According to Joseph A. Schumpeter, an entrepreneur earns economic profit as a result of introduction of his successful innovations.
8. (b)
Explanation:
The correct sequence of requirements to determine consumer’s equilibrium using indifference curves is:
– Indifference map (b)
– Budget line (a)
– Slope of indifference curve = Slope of budget line (d)
– Budget line is tangent to the indifference curve (c)
9. (a)
Explanation:
Assertion (A) is correct. At the minimum point of AC curve, MC = AC i.e. MC curve cuts AC curve at its minimum point.
Reason (R) is also correct. Initially, MC curve falls and then starts rising when AC is falling continuously. At its minimum point, AC is constant. At this point, MC curve intersects AC curve i.e. MC = AC.
Therefore, Reason (R) correctly explains Assertion (A).
[2020 OCTOBER – UGC NET/JRF Commerce Paper II – Shift I]
1. (c)
Explanation:
Leontief Production Function represents production as a function of factors which are used in fixed proportion i.e. complementary factors. The factors Capital (K) and Labour (L) pose a restriction on the level of output i.e. they are the binding constraints. The production depends on the availability of both capital and labour in a definite ratio.
2. (c)
Explanation:
Constraint optimization is closely related to ‘satisfying behaviour’ of the management. It refers to optimizing in the given set of restrictions or constraints where management does not have complete information. Therefore, it has to satisfy for the optimum profit possible in the given circumstances with incomplete information.
Sales maximization assumes a definite and certain environment which allows management to earn profit sufficient to satisfy the owners and then seek sales maximization.
Profit maximization assumes management has perfect knowledge about anticipated MR and MC over a large range of output.
Rent seeking behavior refers to growth in wealth of the business through manipulation and lobbying with the government. This has negative impact on the society and is not considered an ethical objective of the business.
3. (a)
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. (a)
Explanation:
Skimming pricing refers to setting up a high price initially and gradually reducing it. This practice is successful only in a market where demand is highly inelastic. This means, a considerable change in price will lead to only a small change in quantity.
Penetrating pricing is the practice of charging low price initially to gain market share and gradually increasing it. This policy is adopted when operating in a market with elastic demand.
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.
Dumping is the practice of a firm to charge a higher price for its products in domestic market and a lower price in the foreign market. A monopoly adopting the policy of price discrimination practices dumping.
5. (c)
Explanation:
First Degree Price Discrimination
In this situation, monopolist charges maximum price that the customer is willing to pay. Thus he charges each customer a different price.
Thus First Degree Price Discrimination is the situation in which the consumer’s surplus is zero.
Second Degree Price Discrimination
In this situation, monopolist charges a different price for different units of the same commodity. For example, Electric corporations charge different units of the electric power consumed at different rates. Thus, Second Degree Price Discrimination is the situation in which the consumer enjoys some surplus.
Third Degree Price Discrimination
In this situation monopolist divides the entire market into different sub-markets or sub-groups and charges different price from each sub-market or sub-group. For example - dumping.
The given situation describes Price Discrimination of Third Degree. It can generally be called Price Discrimination.
6. (b)
Explanation:
Declining slope of indifference curve refers to its convex to the origin shape. An indifference curve is convex to the origin because of:
– Ordinal measurement of utilities. All the combinations with same utility lie on the same indifference curve, those with greater utilities lie on higher indifference curves and the ones with lesser utilities lie on the lower indifference curves.
– Diminishing Marginal Rate of Substitution between commodities
7. (d)
Explanation:
Following are the conditions for Price Discrimination:
– existence of monopoly power of the firm.
– different price elasticity in each of the segment of the market.
– segregation of the market into two or more segments.
Free entry and exit of firms will result in loss of monopoly power and it will not be possible to practice price discrimination.
8. (d)
Explanation:
In economics, a rational consumer:
– shows non-satiation i.e. he always wants more of a commodity
– has clear preferences i.e. he is not doubtful about his preferences
– shows self-interest and economically selfish motives
– possesses information about the market and the goods that he wishes to purchase
9. (c)
Explanation:
A Perfect Competition – III Increase market size
Since the firms under perfect competition sell identical product, the role of advertising is limited to market expansion.
B Monopoly – IV Intimation of product or service
The product of a monopolist firm has no close substitute therefore the role of advertising is to inform the potential consumers about the product.
C Monopolistic Competition – II Influencing buyer behavior
Under monopolistic competition, the firms sell differentiated products. Thus, the role of advertising is to establish the superiority of the product over the product of the rivals and influence the consumer.
D Oligopoly – I Sustained survival of firm
Under oligopoly, the few firms sell either homogeneous product (pure oligopoly) or differentiated products (impure or differentiated oligopoly). The firms advertise to survive the competition.
10. (a)
Explanation:
Among the given products: Necessities have the lowest price elasticity of demand and homogeneous products have the highest price elasticity of demand.
There are two options (i.e. (a) and (d)) that assign lowest price elasticity to necessities. Among these (a) is the most appropriate.
[2020 OCTOBER - UGC NET/JRF Commerce Paper II - Shift II]
1. (c)
Explanation:
Penetration pricing is the practice of charging low price initially to gain market share and gradually increasing it. This policy is adopted when operating in a market with elastic demand.
2. (a)
Explanation:
Allocative efficiency is maximised under perfect competition as both the consumer and producer surplus are maximised under this market situation. But in the case of monopoly there is inefficient allocation of resources implying a low level of output than that under perfect competition leading to dead weight loss.
In a competitive market, the price equals marginal cost. But under monopoly, price exceeds cost leading to lower consumer and producer surplus.
Figure shows AR, MR and MC curves of a monopolist. If MC curve is assumed to be the supply curve of a perfectly competitive firm, then EP is its point of equilibrium. The equilibrium price and quantity under perfect competition are represented by OPP and OQP.
Under Perfect Competition:
Consumer Surplus = area AEPPP
Producer Surplus = area BEPPP
Total Surplus = area ABEP.
Under monopoly, price exceeds marginal cost. MR intersects MC at point EM which is the point of equilibrium under monopoly. Corresponding to this point OPM and OQM are the equilibrium price and quantity. Since,
OQM < OQP, there is loss of surplus.
Under Monopoly:
Consumer Surplus = area ACPP
Producer Surplus = area BEMCPP
Total Surplus = area ABEMC.
Loss in consumer surplus = area AEPPP – area ACPP
= area of rectangle PMPPDC + area CDEP.
Out of this loss of consumer surplus, the area of rectangle PMPPDC is appropriated by the monopolist as he charges a higher price than perfect competition. But the area CDEP is a net loss i.e. the dead weight loss to the society.
Although, monopolist succeeds in parting away a portion of the consumer surplus, still it loses the area DEMEP, which is again a dead weight loss.
Thus, total dead weight loss = area CDEP + area DEMEP.
This is an inevitable loss of monopoly power in the market.
3. (b)
Explanation:
Conditions for a firm to attain equilibrium at an output level where its profit is maximized are:
– Necessary (First Order) Condition: MR = MC
– Sufficient (Second Order) Condition: MC curve cuts MR curve from below
4. (c)
Explanation:
Price Ceiling is the maximum limit of the price set by the government for essential commodities. If price ceiling is set below the equilibrium price (where demand equals supply), it leads to shortage of commodity in the market. It would be profitable for the producers to sell at equilibrium price (the price which consumers are willing to pay because demand = supply). They will hoard the commodity and create shortage in the market. Finally, they will be indulging in black marketing.
5. (a)
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.
6. (b)
Explanation:
Bandwagon Effect refers to buying behavior of people who buy a commodity because others are also buying it to appear up-to-date or trendy.
Snob Effect refers buying behavior of people who decrease the consumption of a products because others are buying it and thus has become more common. People exhibit such behavior to be exclusive or different.
Substitution Effect is the change in quantity demanded of a product when the price of its substitute changes. For example, if the price of a substitute of good X rises, the quantity demanded of good X will rise.
Income Effect is the change in quantity demanded of a good when purchasing power of the consumer changes due to a change in the price of the good. For example: when price of X falls, people purchase more of X because their purchasing power has increased.
7. (b)
Explanation:
When a consumer, purchasing two goods, is in equilibrium and price of one of the good changes:
– Due to reduced price he will be in a position to buy more goods i.e. his purchasing power or real income will increase, and
– consumer’s level of satisfaction (total utility) will increase because he will be buying greater quantity of goods.
8. (c)
Explanation:
Shut-down point refers to the price level at which price is just sufficient to recover the variable costs. If the price falls further, the firm should temporarily shut-down its operations.
At shut down point Price or Average Marginal Cost must be equal to Average Variable Cost.
9. (b)
Explanation:
A firm can practice price discrimination (out of the given options), when:
– It has some monopoly or market power. It need not be a pure monopoly.
– It should not be possible for consumers to purchase from low-priced market and sell in the high-priced market.
10. (d)
Explanations:
Out of the given options, the features of a monopolistic competition are:
– Large number of firms so that each firm caters to only a small portion of the entire market.
– Firms can easily enter or leave the market.
11. (c)
Explanation:
A. Perfect competition – iii. Homogeneous products
Homogeneous product is one of the distinguishing features of perfect competition
B. Monopoly – iv. Price discrimination
A monopolist firm can practice price discrimination
C. Monopolistic Competition – ii. Product improvements
A firm under monopolistic competition is involved in product improvement to meet the competition.
D. Oligopoly – i. Price rigidity
A firm under oligopoly experiences price rigidity due to the uncertainty of rival firms’ reactionary policy.
12. (a)
Explanation:
A. Sunk cost – II. Value of inputs owned and used in production
These are the expenditures that have been incurred and cannot be recovered individually. Their value can be realized only after selling the finished product.
B. Marginal cost – I. Change in total cost for a unit change in output
Marginal Cost (MC) is the addition to total cost as result of production of one additional unit of output. It is calculated as:
MC = TCN – TCN – 1
Here, TCN = Total cost of producing N units and TCN – 1 = Total cost of producing N – 1units.
It can also be calculated as:
Here, ΔTC = Change in Total Cost and ΔQ = Change in total output.
C. Investment cost – IV. Total increase in costs resulting from a decision
Investment cost refers to the purchase price plus other costs related to acquisition of the asset. Whereas, total increase in costs resulting from decision to select a particular alternative is called differential cost.
Therefore, this is an incorrect match but out of all the options this is the most appropriate.
D. Implicit cost – III. Costs that are unaffected by firm decision
Implicit Costs are the non-monetary costs of utilizing an asset already owned by the firm. Implicit costs are also called Opportunity Costs or Alternative Cost. Thus, implicit costs can be described as the benefit foregone to employ producer’s own assets. Since these costs do not involve actual cash expenditure, they are not affected by the firm’s decisions.
13. (b)
Explanation:
Assertion A is correct. Equilibrium price of a commodity is determined at a level where demand equals supply.
Reason R is also correct. Whenever there is disturbance in the equilibrium (when demand and supply are not equal), the adjustment takes place and again equilibrium price is determined where demand equals supply. And this equilibrium tends to continue for time.
Thus Reason R is a correct but does not provide an explanation to Assertion A.