[2021 NOVEMBER – UGC NET/JRF Commerce Paper II – 25 Nov Shift I]
184. (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.
185. (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. 186. (a) Explanation: Non-price competition is the strategy of firms to increase sales and expand market share without reducing price of their products. Extreme case of competition in oligopoly is when firms operate as a group or cartel. Due to existence of few firms, they collude or group together to increase sales. 187. (b) Explanation: Indifference curves are convex to the origin because: – they are imperfect substitutes of each other. For perfect substitutes, the indifference curves are straight lines. – marginal rate of substitution between the commodities is diminishing. 188. (c) Explanation: (A) Ramsay pricing – (III) Price deviations from marginal cost should be inversely proportional to price elasticity of the product 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. (B) Price skimming – (I) Setting a high price when a product is first introduced and gradually lowering as it gains scale 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. (C) Cost plus pricing – (IV) It is full cost pricing strategy that also includes mark up for target returns, degree of competition, price elasticity and availability of substitutes 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. (D) Penetration pricing – (II) Firm charges lower price (than the ongoing price) to gain market entry 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. 189. (b) Explanation: Pricing power or monopoly power refers to the ability of firms to influence the price of their products. It is inversely related to the number of firms in the market and directly related to the degree of product differentiation. Firms under perfect competition have zero market power due to large number of firms with homogeneous products. Firms under monopolistic competition have very small degree of monopoly power due to product differentiation. Under oligopoly, the firms have higher pricing power due to a small number of firms in the industry. Under duopoly, the number of firms in the market is just two, due to which these firms have significant pricing power. The firm under monopoly is the single firm in the market with no substitute of its product. Due to this, the firm has highest pricing power. [2021 NOVEMBER – UGC NET/JRF Commerce Paper II – 25 Nov Shift II] 190. (a) Explanation: Statement I is correct. According to Price Leadership Model of Oligopoly, firms follow the pricing policies of the market leader and set their strategies according to leading firm’s policies. Price leadership can take the following forms: – Price leadership by a low cost firm – Price leadership by a firm with dominant market share – Barometric price leadership by an old or experienced firm – Exploitative price leadership under which price leader follows aggressive pricing strategies to eliminate the competing firms. Statement II is also correct. Firms under oligopoly are better off when they cooperate with each other. In this way each firm can make profit. But under price leadership, the dominant firm is at an advantage while the followers face the risk of losses and even elimination from the market. 191. (c) Explanation: The degree of responsiveness of demand for a commodity in response to a change in price of its related commodities is called Cross Price Elasticity or Cross Elasticity of demand. 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. 192. (b) 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 negative income effect which is greater than the positive substitution effect. Price Effect for Giffen Goods = Strong negative Income Effect + Weak positive Substitution Effect 193. (d) Explanation: The CES production function is also known as Homohighplagic production function. Ar¬row, Chenery, Minhas and Solow have developed the Constant Elasticity of Substitution (CES) func¬tion. This function consists of three variables Q, К and L, and three parameters A, α and β. It may be expressed in the form: Where: Q is the total output, К is capital, and L is labour. ‘r’ is the efficiency or scale parameter indicating the state of technology and organisational aspects of production. It shows that with technological and/or organi¬sational changes, the efficiency parameter leads to a shift in the production function, A > 0.
If r > 1, the production function exhibits increasing returns to scale.
If r < 1, the production function exhibits decreasing returns to scale.
If r = 1, the production function exhibits constant returns to scale.
α is the distribution parameter or capital intensity factor coefficient concerned with the relative factor shares in the total output, 0 < α <1 and β is the substitution parameter which determines the elasticity of substitu¬tion, β > -1
In the CES production function, the elasticity substitution is constant and not necessarily equal to unity.
194. (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.
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.
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. By this policy, a producer charges only the additional cost of materials and direct labor for each product unit sold. Firms often set prices close to marginal cost during periods of poor sales. For example, marginal cost of producing an item is Rs.1.00 and a normal selling price is Rs.2.00, the firm selling the item would reduce the price to Rs.1.10 during a period of low demand. This strategy is followed by firms as the incremental profit of 10 paise is better than no sale at all.
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.
195. (d)
Explanation:
The long-run average cost (LAC) curve of a firm is U-shaped due to operation of returns to scale. Increasing returns to scale that arise from economies of scale decrease the average cost. Due to this, LAC curve falls. Similarly, it remains constant when economies are offset by diseconomies. LAC is minimum at this point. And due to greater diseconomies, LAC starts to increase which leads to rising LAC curve.
Out of the given options, the reasons for U-shape of LAC curve are:
– greater division of labour and specialization that accrue to larger firms – option (A)
– economies of scale at smaller output level which make LAC curve fall – option (C)
– at greater levels of output (i.e. expansion of the firm), the inefficiencies make it difficult to manage the firm and LAC curve rises – option (D)
– the inefficiencies at larger output levels lead to diseconomies of scale. As a result, LAC curve starts rising – option (E).
196. (d)
Explanation:
A firm can practice price discrimination under the following conditions:
– existence of monopoly power of the firm i.e. imperfect competition
– segregation of the market into two or more segments and it should not be possible for consumers to purchase from low-priced market and sell in the high-priced market.
– different price elasticity in each of the segment of the market.
197. (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:
– 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.
– 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.
– Utility Maximising behavior of consumer is explained by the law of diminishing marginal utility. When a consumer increases his consumption of a good, the marginal utility from successive units goes on diminishing and consumer attains equilibrium where marginal utility equals price of the good.
– Risk averse behavior is attributed to an investor who wishes to avoid risk. Hence, it does not explain the law of demand.
198. (c)
Explanation:
(A) Long-run survival – (III) Rothschild, K. W.
According to Kurt W. Rothschild, apart from maximizing profit, the primary aim of a business enterprise is to survive the competition and environmental threats so as to continue operating in the long-run. Besides, a firm must also maintain its market share.
(B) Sales Revenue maximization – (IV) Baumol, W. J.
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.
(C) Firm’s Growth Rate maximization – (I) Marris, Robin
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.
(D) Managerial Utility Function maximization – (II) Williamson, D. E.
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.
199. (b)
Explanation:
Price elasticity of demand for a product is directly related to the number of its substitutes. Larger the number of substitutes, greater is the price elasticity of demand. Therefore, the correct sequence of price elasticity of demand for products in various market forms is:
– Monopoly: Very low price elasticity because there is no substitute of the product of the firm.
– Duopoly: Low price elasticity but greater than monopoly because there is only one substitute of the product of the firm.
– Oligopoly: Low price elasticity but greater than duopoly because there are a few substitutes available in the market.
– Monopolistic Competition: High degree of price elasticity because of the presence of very large number of imperfect substitutes.
– Perfect competition: Perfectly elastic demand because very large number of perfect substitutes are available in the market.
[2021 NOVEMBER – UGC NET/JRF Commerce Paper II – 26 Nov Shift I]
200. (c)
Explanation:
The degree of change in demand for a product due to a change in consumers’ income is called Income Elasticity of Demand. Income Elasticity can be calculated as:
A. Normal goods – III. Greater than zero (positive)
Demand for normal goods is directly related to the level of income, thus income elasticity for normal goods is positive.
B. Inferior goods – IV. Less than zero (negative)
Demand for inferior goods is inversely related to the level of income, thus income elasticity for inferior goods is negative.
C. Luxurious goods – I. Greater than one
Demand for luxuries is positively related to the level of income since these are a variant of normal goods. Their demand is highly elastic i.e. greater than one.
D. Necessities – II. Between zero and one
Demand for necessities is positively related to the level of income since these are also a variant of normal goods. Their demand is less elastic i.e. less than one or between zero and one.
201. (b)
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. 202. (b) 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. 203. (d) Explanation: 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. It is zero when goods are not related to each other i.e. they are independent. 204. (d) Explanation: In an oligopoly, few firm compete with each to increase their market share. They do not resort to price manipulation due to fear of price wars. Hence they compete with non-price attributes of their products. In order to increase their market share, firm adopt advance technologies and offer improved products. Thus, oligopoly leads to more technological change and product improvements than any other form of market structure. 205. (b) Explanation: A firm can practice price discrimination under the following conditions: – existence of monopoly power of the firm i.e. imperfect competition where firms have some control over the price of their products. – segregation of the market into two or more segments and it should not be possible for consumers to purchase from low-priced market and sell in the high-priced market. – different price elasticity in each of the segment of the market. 206. (d) Explanation: The long-run average cost (LAC) curve of a firm is U-shaped due to operation of returns to scale. Increasing returns to scale that arise from economies of scale decrease the average cost. Due to this, LAC curve falls. Similarly, it remains constant when economies are offset by diseconomies. LAC is minimum at this point. And due to greater diseconomies, LAC starts to increase which leads to rising LAC curve. Out of the given options, the reasons for U-shape of LAC curve are: – economies of scale at smaller output level which make LAC curve fall – option (A) – at greater levels of output (i.e. expansion of the firm), the inefficiencies make it difficult to manage the firm and LAC curve rises – option (B) – greater division of labour and specialization that accrue to larger firms – option (C) – the inefficiencies at larger output levels lead to diseconomies of scale. As a result, LAC curve starts rising – option (D). [2022 SEPTEMBER – UGC NET/JRF Commerce Paper II – 29 Sept Shift I] 207. (c) Explanation: The ordinal utility analysis is based on the following assumptions (out of the given options): – Consumer is rational – Utility can only be ranked but not measured i.e. ordinal measurement – diminishing marginal rate of substitution Safety of demand is not the assumption of ordinal utility analysis. 208. (b) Explanation: All other production functions (a), (c) and (d) are functions of only one factor i.e. labour (L) and assume capital (K) to be fixed or constant. Therefore, they represent short-run production functions. Q = AKa Lb is the only production function related to long-run as it depicts the relationship between the production and two factors, labour (L) and capital (K). 209. (b) Explanation: Following statements are true regarding price and output determination under perfect competition: – Firm is a price taker (statement A), thus price is fixed and Price = AR = MR – In the long run, firms earn only normal profit. Thus, AR = LAC Considering the equilibrium condition: MR = MC (or LMC) AR = MR = LAC = LMC (statement B) Also: – In the short-run firm is in equilibrium when: MC = MR = AR > AC : Supernormal profit
MC = MR = AR = AC: Normal profit
MC = MR = AR < AC: Losses Thus, Statement C is false. – A firm reaches shut-down point when price reaches AVC i.e. Price = AVC. Thus, Statement D is false. – A firm fixes price at an output level where profit is maximum i.e. MR = MC Thus, Statement E is false 210. (b) Explanation: Markup Pricing or 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) Target Rate of Return Pricing or Target Pricing is the strategy of deciding a rate of return on the investment and working backwards to set the price of the products. This method is adopted by the government to set price which includes a specified return that industries regulated by legislations are allowed to charge for their products. Economic-value-to-Customer Pricing or Value-based Pricing or Perceived Value Pricing is the setting of a product or service’s price based on the benefits it provides to consumers. Companies that offer unique or highly valuable features or services are better positioned to take advantage of value-based pricing than companies with products or services that are relatively indistinguishable from those of their competitors. The fashion industry is an example of a sector where value-based pricing is common. If a particular designer becomes popular, the designer can charge more for the goods they create than if they were not as popular. Competitive Pricing is setting the price of a product or service based on what the competition is charging. This pricing method is used more often by businesses selling similar products, since services can vary from business to business, while the attributes of a product remain similar. 211. (b) Explanation: Statement (A) is true. Economic rent of any factor of production is the surplus of income received in excess of its transfer earning i.e. opportunity cost. Economic Profit accrues to only a specific factor of production i.e. entrepreneur. Thus, economic profit is the excess of revenue over implicit costs or opportunity cost. In that sense, economic rent and economic profit are same. Statement (B) is false. Imputed cost is the expected rent of owner occupied building. Statement (C) is true. At its minimum point, AC equals MC. Statement (D) is false. When AC is rising, MC > AC.
Statement (E) is true. At optimum level of output (cost minimizing output level), AC is minimum. And when AC is minimum, AC = MC.
Therefore statements (B) and (D) are false.
212. (d)
Explanation:
Statement (A) is false. A monopolist fixes the price of product where profit is maximum.
Statement (B) is true. Even during short-run, when monopolist earns normal profit, he produces below the optimum capacity of plant because of negatively sloped AR and MR curves.
Statement (C) is true. Slope of MR curve = 2 × Slope of AR curve.
Statement (D) is false. Price discrimination is possible when price elasticities of demand in the two markets are different. Thus, price discrimination is possible when demand curves are different.
Statement (E) is true. Equilibrium price in monopoly is higher than that in perfect competition because:
– under perfect competition AR = MR while under monopoly AR > MR, and
– AR and MR curves are horizontal under perfect competition while AR and MR curves are negatively sloped under monopoly.
213. (d)
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.
214. (d)
Explanation:
Paul Sweezy propounded the Kinked Demand Curve model to explain the condition of price rigidity in an Oligopolistic market structure.
215. (b)
Explanation:
(A) Stackelberg model – (III) If firms are disproportionally powerful the market leader makes the first move and captures two-thirds of market share while follower firm gets only a third of the market share
Stackelberg’s Duopoly model describes the situation where one firm dominates the industry and makes the first move to set price of its products. The other firm follows the policy of the dominant firm.
(B) Nash equilibrium – (IV) A situation in which each player has chosen his/her optional strategy given the strategy chosen by the other player
Nash Equilibrium is the set of strategies such that no player can do better by unilaterally changing his or her strategy. If a player knew the strategies of the other players (and those strategies could not change), and could not benefit by changing his or her strategy, then that set of strategies represents a Nash equilibrium. Thus, it is a situation in which each player choses his/her option with a given strategy of the other player.
(C) Peter’s strategic framework – (II) Conceptualisation for identifying the structural determinants of the intensity of competition and the probability of firms in oligopolistic industries
Peter’s Strategic Framework identifies the determinants of degree of competition and probability of firms’ success in an oligopolist industry.
(D) Prisoner’s dilemma – (I) The situation in which each player in an oligopolistic markets adopts its dominant strategy but could do by cooperating
The prisoner’s dilemma is a specific type of game in game theory that illustrates why cooperation may be difficult to maintain for oligopolists even when it is mutually beneficial.
216. (c)
Explanation:
Price Ceiling is the maximum price, set by the government, to be charged by sellers for their product.
Price Matching is the strategy of determining the price of product matching that of the rivals’.
Price Lining is the practice of pricing a set of products according to some specified criteria, like quality.
Price Power or Market Power is the degree of influence that a firm has on price of its products. For example, a firm under perfect competition has zero pricing power.
Thus, the most appropriate option is Price Lining.
217. (a)
Explanation:
(A) Sales Revenue maximization – (III) 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) Maximization of Firm’s growth rate – (IV) 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) Long-term survival – (I) K.W. Rothschild
According to Kurt W. Rothschild, apart from maximizing profit, the primary aim of a business enterprise is to survive the competition and environmental threats so as to continue operating in the long-run. Besides, a firm must also maintain its market share.
(D) Satisfying behavior – (II) 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.
218. (d)
Explanation:
Philips Curve is an economic model that depicts inverse relationship between wage inflation and level of unemployment.
Misery Index, initially introduced as ‘discomfort index’, was created by Arthur Okun to serve as an indicator of economic discomfort of an average citizen. It uses level of unemployment and inflation indicate the misery of people.
Pareto Distribution, also called Pareto principle or 80-20 rule, is a continuous probability distribution to measure inequalities of income in an economy.
Okun’s Law examines the empirical relationship between unemployment and the rate of growth of GDP.
Note: These topics are not in syllabus.
[2022 SEPTEMBER – UGC NET/JRF Commerce Paper II – 29 Sept Shift II]
219. (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.
220. (b)
Explanation:
First of all, an organization sets its Pricing Objectives whether it wants profit maximization or sales maximization.
Next, the organization considers its target segment, purchasing power of the target segment, market conditions, competition etc. to determine the level of demand.
After estimating the demand, the firm considers its cost of production for various levels of production and cost of its offers.
Next, it compares its own costs with the competitors’ costs and offers.
Finally, the firm selects its pricing method.
221. (a)
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.
222. (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.
223. (a)
Explanation:
(A) Normal goods – (II) Ei greater than zero
Demand for normal goods is directly related to the level of income, thus income elasticity for normal goods is positive.
(B) Inferior goods – (IV) Ei is less than zero
Demand for inferior goods is inversely related to the level of income, thus income elasticity for inferior goods is negative.
(C) Luxury goods – (I) Ei greater than one
Demand for luxuries is positively related to the level of income since these are a variant of normal goods. Their demand is highly elastic i.e. greater than one.
(D) Necessities – (III) Ei is between zero and one
Demand for necessities is positively related to the level of income since these are also a variant of normal goods. Their demand is less elastic i.e. less than one or between zero and one.
224. (a)
Explanation:
Assertion (A) is true. Substitution effect is the effect on demand for a commodity due to a change in its price because its substitute has now become cheaper/dearer. When price falls, demand for a commodity X increases as some consumers who were consuming a substitute Y would now prefer X because it has become cheaper in relation to Y. It is positive for all the goods.
Income effect is the effect on demand for a commodity to a change in its price because consumer’s purchasing power has changed. When price falls, demand for a commodity X increases as consumers can now buy more quantity with the same amount of money. It is positive for normal goods and negative for inferior goods and Giffen goods.
Substitution effect is generally stronger than the income effect.
Reason (R) is also true. Since proportion of income spent on any one commodity is very small, therefore income effect is smaller than substitution effect.
Thus, Reason (R) is true and properly explains the Assertion (A).
225. (c)
Explanation:
When a monopolist firm practices price discrimination, it charges different price from different customers. Thus, when it charges higher price, consumers’ surplus is reduced.
226. (b)
Explanation:
Logical sequence of understanding the theory of consumer’s choice is:
– Utility Analysis, which helps to understand and measure consumer’s level of satisfaction by consuming different quantities of a commodity
– Indifference Curves Analysis, which gives a more rational approach of ordering consumer’s level of satisfaction
– Budget Line, which helps to determine the purchasing power of the consumer.
– Consumer’s Equilibrium, which helps to maximize consumer’s satisfaction by considering the utility and purchasing power of the consumer.
– Demand Analysis, which finally helps the firm in determining the level of demand for their commodity.
[2022 OCTOBER – UGC NET/JRF Commerce Paper II – 14 Oct Shift I]
227. (c)
Explanation:
Cardinal utility approach to consumer behavior is based on the following assumptions:
– Consumer is rational and seeks to maximize his satisfaction from his spending.
– Utility is measurable i.e. it can be expressed in cardinal numbers.
– Marginal utility of money is constant.
– Utility is additive. Thus, total utility is obtained by adding marginal utilities of various units. That is: TU = MU1 + MU2 + MU3 + … + MUn
Thus, Diminishing Marginal Utility of Money is not an assumption of Cardinal Utility Approach.
228. (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.
229. (b)
Explanation:
The properties of an isoquant are:
i. It slopes downward to the right (i.e. it has negative slope)
ii. It is convex to the origin.
iii. Two isoquants never intersect each other.
iv. A higher isoquant represents higher level of satisfaction.
230. (b)
Explanation:
Statement A is true. A firm under perfect competition has no influence over the price of its product. Hence, it is a price taker.
Statement B is true. In the long-run, a firm under perfect competition earns only normal profits. Thus, AR = LAC = LMC.
Statement C is false. A perfectly competitive firm can be in short-run equilibrium under any of the following cases:
– Firms earn supernormal profit i.e. MC = MR = AR > AC
– Firms earn normal profit i.e. MC = MR = AR = AC
– Firms suffer losses i.e. MC = MR = AR < AC Statement D is false. A firm reaches shut-down point when Price = AVC. Statement E is false. A firm fixes price at the profit maximizing output level i.e. when MR = MC. 231. (a) Explanation: Statement (A) is true. Economic rent of any factor of production is the surplus of income received in excess of its transfer earning i.e. opportunity cost. Economic Profit accrues to only a specific factor of production i.e. entrepreneur. Thus, economic profit is the excess of revenue over implicit costs or opportunity cost. In that sense, economic rent and economic profit are same. Statement (B) is false. Imputed cost is the expected rent of owner occupied building. Statement (C) is true. At its minimum point, AC equals MC. Statement (D) is false. When AC is rising, MC > AC.
Statement (E) is true. At optimum level of output (cost minimizing output level), AC is minimum. And when AC is minimum, AC = MC.
Therefore statements A, C and E are true.
232. (a)
Explanation:
(A) Kinked revenue curve – (III) Oligopoly
Firms under oligopoly face a kinked demand (or average revenue) curve due to price rigidity. Firms are unable to change the price of their product as if it tries to reduce the price, the rivals will follow suite and thus it will not make expected profits. If it raises the price of its products, it will lose its customers to the rivals. Therefore, the part of demand curve below the prevailing price is inelastic (as change in demand will not be significant) and that above the prevailing price is elastic. Thus, the demand curve develops a kink or a bend at the prevailing price.
(B) Infinitely elastic straight line curve – (II) Perfect competition
The firms under perfect competition face horizontal revenue (AR and MR) curves as the products of various firms are identical (i.e. perfect substitutes) and they have no control over the price of their products. A horizontal revenue or demand curve has infinite price elasticity.
(C) Relatively less elastic curve – (IV) Monopoly
The revenue curve of a monopolist firm is relatively inelastic (steeper curve) as it has no close substitutes.
(D) Relatively high elastic curve – (I) Monopolistic competition
Firms under monopolistic competition face a revenue curve which is highly elastic because of the presence of a large number of imperfect substitutes (i.e. differentiated products).
233. (d)
Explanation:
Prof. William Baumol propounded the Theory of Sales Revenue Maximisation in his book ‘Business Behaviour, Value and Growth’. In his theory, he 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 serve their own interest.
234. (a)
Explanation:
Assertion (A) is correct. Firms under perfect competition may earn supernormal profits, normal profits or incur losses in the short-run. But in the long-run, all the firms earn normal profits.
Reason (R) is also 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.
Thus, Reason (R) provides the correct explanation of Assertion (A).
235. (d)
Explanation:
Stackelberg’s model, developed in 1934, is an extension of Cournot’s model with one firm sophisticated enough to consider rival’s reaction while formulating its own strategy. Thus, sophisticated firm acts as leader and sets the policy while the other firm becomes a mere follower. The model is also known as the First-mover Advantage Model of Oligopoly as the leader has an advantage over the firm following its strategy.
Concentration Ratio is the measure of degree of competition between the firms in an industry. It gives a measure of the monopoly power enjoyed by each firm in the industry. It is obtained by adding up the sales of the largest firms and dividing it by the total industry sale. Thus,
The higher the concentration ratio, less is the competition among the firm and greater is the monopoly power enjoyed by each firm. A concentration ratio of 100% indicates absence of competition and concentration of monopoly power in the hand of a single firm. Thus, a monopolist firm has 100% concentration ratio.
Diffusion Index is a forecasting method to detect the turning points in economic activity.
Herfindahl Index or Herfindahl-Hirschman Index (HHI) is another measure of degree of competition between the firms in an industry. It is calculated by adding the squares of market share of the top-most companies. HHI for a monopoly is 1.
Elasticity Reciprocal is simply the reciprocal of price elasticity e. Thus, elasticity reciprocal is . Lerner’s index which measures monopoly power of a firm uses reciprocal of price elasticity.
Therefore, Concentration Ratio, Herfindahl Index and Elasticity Reciprocal measure the degree of monopoly power in an industry.
236. (b)
Explanation:
Philips Curve is an economic model that depicts inverse relationship between wage inflation and level of unemployment.
Consumer Price Index (CPI) is a measure of inflation. It calculates the change in price of a basket of goods consumed by an average consumer over a period of time.
GDP Deflator is a measure of changes in average price level of goods and services in an economy over a period of time. It is used in conjunction with CPI as a measure of inflation. It is calculated as: .
Misery Index, initially introduced as ‘discomfort index’, was created by Arthur Okun to serve as an indicator of economic discomfort of an average citizen. It uses level of unemployment and inflation indicate the misery of people.
Fisher Effect describes the relationship between inflation and interest rates. It shows the effect of anticipated inflation on real interest rate. The relationship defined by Fisher Effect is:
Real Interest Rate = Nominal Interest Rate – Rate of Anticipated Inflation.
Thus, only Consumer Price Index, GDP Deflator and Misery Index are measures of inflation.
Note: These topics are not in syllabus.
237. (b)
Explanation:
In case of competitive (i.e. perfectly competitive) firms, the ‘Value of Marginal Product of labour’ measures the demand for labour.
Note: This topic is not in syllabus.