2023 MARCH – UGC NET/JRF Commerce Paper II – 4 Mar Shift I
1. (d)
Explanation:
Descriptive Economics is the branch of economics which studies economic phenomena by collecting and analyzing data. It is concerned with a fact based analysis of an event or phenomenon instead of developing a theory.
Normative Economics is related to desires and moral judgement. It describes what ought to be or what should be done to fulfill the desires of people in the economy. It is concerned with opinion based analysis of what needs to be done.
Microeconomics is the branch of economics that deals with the study of individual units of economy like an individual, a household, a firm or an industry.
Macroeconomics is the branch of economics that deals with the study of the economy as a whole. It considers all the individual units as a single group. Thus, national income, unemployment, poverty, inflation etc. are the focus of study in macroeconomics.
2. (d)
Explanation:
Among the given options, demand for salt is most inelastic since an insignificant proportion of income is spent on salt.
3. (c)
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.
4. (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 demand. It has unequal slope but equal elasticity (e = 1) at all points.
5. (c)
Explanation:
Statement (A) is false. A monopolist fixes the price of product where profit is maximum.
Statement (B) is true. Slope of MR curve = 2 × Slope of AR curve.
Statement (C) is false. In the long-run, a monopoly firm is in equilibrium when:
– it earns supernormal profit i.e. AR > AC
– it earns normal profit i.e. AR = AC.
Statement (D) is true. A monopoly firm is in equilibrium at an output level where it earns maximum profit i.e. when MR = MC.
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.
6. (a)
Explanation:
Less number of firms in the industry is favourable for sustaining a cartel as large number of firms will have greater possibility of disputes among the firms.
Presence of differentiated products creates problems in formation as well as sustainability of cartels. Every firm will treat its product as superior to others and demand greater share in profits.
Different cost structures create problem in sustainability of cartels. This will create dispute regarding price determination. Low cost firm would want the price to be set low at which firms with higher cost structure would find difficult to survive.
Low frequency sale with huge amount of output would create difficulty for sustainability of cartel. When sales are less frequent with huge surplus of output, firms will differ regarding setting of price. Price will need to be reduced to increase sales, but as previously discussed, it will be not favourable for the firms with higher cost structures.
Absence of monopolies and restrictive trade practices will encourage formation of cartels. Government monitors and regulates the formation of cartels as they create an artificial shortage of goods to raise prices. It seeks to prevent formation of such cartels through legislations.
7. (b)
Explanation:
The correct sequence of steps in demand forecasting is:
– Identifying and specifying objective is the first and foremost step in demand forecasting. (option C)
– Next, the time, for which foresting is required, is determined. (option D)
– Then, the method of forecasting is decided. (option A)
– Data is collected and adjusted to suit the purpose. (option E)
– Estimation and interpretation of results is the final step. (option B)
8. (a)
Explanation:
Assertion (A) is correct. The theories of price and output determination are inapplicable in the real situations. All the theories assume firms under oligopoly to be independent. But in fact, the oligopolist firms are interdependent.
Reason (R) is also correct. The firms under oligopoly are few. They are interdependent in decision making, the industry may have barriers to entry etc. This gives rise to many situations and each theory explains a different situation ignoring one or other characteristic of the oligopolist firms.
Thus, Reason (R) provides correct explanation of the Assertion (A).
9. (b)
Explanation:
Paul Sweezy propounded the Kinked Demand Curve model to explain the condition of price rigidity in an Oligopolistic market structure.
[2023 MARCH – UGC NET/JRF Commerce Paper II – 4 Mar Shift II]
1. (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 negative income effect which is greater than the positive substitution effect.
Price Effect for Giffen Goods = Strong negative Income Effect + Weak positive Substitution Effect
2. (b)
Explanation:
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.
3. (a)
Explanation:
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.
4. (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.
5. (d)
Explanation:
Increasing returns to scale arise due to advantages that accrue to a firm. Out of the given options, all except D are the advantages enjoyed by a firm by expanding its scale.
6. (d)
Explanation:
Out of the given options, rationality of consumer implies:
– Non-satiety or non-satisfaction. This implies that consumer always desires more of a commodity.
– Transitivity of preferences i.e. if a consumer prefers combination A over combination B and combination B over C, then he will prefer A over C.
– Selfish economic motive is to obtain maximum satisfaction from his spending.
7. (c)
Explanation:
A. Explicit cost – III. costs that require any outlay of money by the firm
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.
B. Implicit cost – I. costs that do not require any outlay of money by the firm
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.
C. Total cost – IV. Market value of all input that a firm uses in production
Total cost is the amount paid to all the factors of production. Factors of production are hired from the factor markets therefore the amount paid to them is the market value of these factors.
D. Sunk cost – II. A cost that has already been committed and cannot be recovered
These are the expenditures that have been incurred and cannot be recovered individually. Their value can be realized only after selling the finished product.
8. (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.
Thus, Accounting Costs < Economic Cost
Assertion (A) is correct that Accounting cost < Economic Costs.
Reason (R) is correct and provides an explanation of the Assertion (A) by breaking up the Accounting and Economic Costs.
[2023 JUNE Shift I – UGC NET/JRF Commerce Paper II]
1. (c)
Explanation:
Even though there are many firms manufacturing a homogeneous product (like cement) or differentiated products (like cars), the transportation costs and economies of scale limit the market area for most of the firms. Thus, only a few firms compete among themselves due to these reasons. Hence, oligopoly is the most prevalent market form in the manufacturing sector.
2. (d)
Explanation:
William J. Baumol’s Theory of Contestable Markets holds that entry of new firms will constantly threaten the existing firms if:
– there are no barriers to entry or exit in the market
– there are no sunk costs, and
– each firm (even the new ones) have access to the same technology and strategic resources.
Such a market is termed as contestable market and even a Monopoly which does not possess any special technology or strategic resource is prone to turn into a contestable market.
3. (b)
Explanation:
The products of firms under Perfect Competition are homogeneous while the product of a firm under Monopoly has no close substitute.
Thus, products are differentiated and close substitutes under Monopolistic Competition, Oligopoly (Differentiated or Imperfect Oligopoly) and Duopoly.
4. (a)
Explanation:
Substitution Effect refers to the change in demand due to price change as people prefer cheaper substitutes. When price of a good falls, it becomes cheaper in relation to its substitutes and its demand increases and vice versa.
Income Effect refers to the change in demand due to price change as real income (purchasing power) of the consumer changes. When price of a good falls, people can buy same quantity for lesser amount and their purchasing power increases and vice versa.
Since income effect is the change in purchasing power due change in price of a good, it will be smaller than substitution effect. This is due to the reason, that only a small part of income is spent on any one good and thus impact of change in price of that good is small.
5. (a)
Explanation:
Inferior Goods have negative income elasticity therefore it has the lowest value.
Necessities have the least positive income elasticity among the remaining.
Normal Consumption Goods and Services are the next in the list of increasing income elasticity.
Luxuries have the highest positive income elasticity of demand.
6. (d)
Explanation:
Change in Demand is caused by change in factors other than price of the good and causes demand curve to shift leftward or rightward.
Change in Demand can be categorized as Increase in Demand or Decrease in Demand.
The reasons for Increase in Demand are:
– increase in the price of substitutes
– decrease in the price of complementary goods
– increase in the income of the consumer
– change in taste and preferences of the consumer in favour of the good.
7. (a)
Explanation:
According to the traditional concept, Long-run Average Cost (LAC) curve is U-shaped because of the operation of Returns to Scale. It falls as long as firm enjoys increasing returns due to economies of scale, reaches its minimum point showing constant returns to scale as economies are balanced by diseconomies of scale. LAC rises when firm experiences decreasing returns to scale when diseconomies outweigh the economies of scale.
But several economists, in their studies have found empirical evidence that LAC is L-shaped. It implies that initially average cost falls rapidly but after a certain level of output (at a very large scale) it either becomes constant or falls very slowly. This occurs as at a very large scale, managerial costs rise significantly but they are offset by technical or production economies.
8. (b)
Explanation:
Herfindahl Index or Herfindahl-Hirschman Index (HHI) is a 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.
The value of HHI varies from 0 to 1 (when market shares are taken as fractions) or 0 to 10,000 (when market shares are taken as percentages).
HHI = 0 indicates insignificant market share of the firms i.e. highly competitive market or perfect competition.
0 < HHI < 1,000 indicates intense competition among the firms as in monopolistic competition.
1,000 < HHI < 1,800 indicate moderate competition as in oligopoly.
1,800 < HHI < 10,000 indicates low competition as in oligopoly with the risk of formation of cartel which can further reduce the competition.
HHI = 10,000 (or 1) indicates no competition or monopoly.
[2023 JUNE Shift II – UGC NET/JRF Commerce Paper II]
1. (a)
Explanation:
Under Perfect Competition a large number of firms coexist which operate efficiently in the market. This market form allows better utilization of resources of the society as under imperfect competition firms operate at a level of output where they underutilize the resources for maximizing their profit level.
2. (b)
Explanation:
In order to maximize profits in oligopolistic markets, firms address the issues in the following order:
– First issue to address is the Threat from Substitute Products of the existing firms which can greatly affect their profitability
– Secondly, they address the issue of Threat of New Entry as it will increase competition
– Third is the Bargaining Power of Buyers which can reduce the prices
– Fourth, Bargaining Power of Suppliers can result in increased prices due to increase in the cost of inputs or raw materials
– Last, Competitive Intensity of Rival Firms or the extent of pressure put by the rival firms to affect the profit and potential of the firm
3. (a)
Explanation:
Statement I is true as greater number of substitutes increases the price elasticity of demand for the product.
Statement II is also true. Normal Goods refers to goods with positive income elasticity. They can be classified as:
– Necessities for which income elasticity (EI ) < 1 – Comforts for which income elasticity (EI ) = 1, and – Luxuries for which income elasticity (EI ) > 1
Thus, both the statements are true.
4. (b)
Explanation:
Income elasticity (EI ) measures the effect of change in income of consumer on the demand for a good.
Various measures of income elasticity are:
– EI = 0 when demand for a good is unaffected by change in the income of consumer.
– EI < 0 for inferior goods
– 0 < EI < 1 for necessities – EI = 1 for comforts – EI > 1 for luxuries
Cross elasticity or Cross-price elasticity (EXY) measures the effect of change in price of good Y on the demand for good X.
– EXY < 0 when X and Y are complementary goods, – EXY = 0 when X and Y are not related – EXY > 0 when X and Y are substitutes
5. (b)
Explanation:
Industry comprises of firms selling products which are substitutes of each other. The products of firms in the same industry have high cross elasticity.
6. (a)
Explanation:
Firms employ more units of variable factors and increase output if additional revenue generated is greater than the additional cost of production.
MRP or marginal revenue product implies additional revenue and MRC implies additional cost. Thus, firms expand output if MRP > MRC
7. (b)
Explanation:
According to the traditional concept, Long-run Average Cost (LAC) curve is U-shaped because of the operation of Returns to Scale. It falls as long as firm enjoys increasing returns due to economies of scale, reaches its minimum point showing constant returns to scale as economies are balanced by diseconomies of scale. LAC rises when firm experiences decreasing returns to scale when diseconomies outweigh the economies of scale.
But several economists, in their studies have found empirical evidence that LAC is L-shaped. It implies that initially average cost falls rapidly but after a certain level of output (at a very large scale) it either becomes constant or falls very slowly. This occurs as at a very large scale, managerial costs rise significantly but they are offset by technical or production economies.
Thus, LAC has been described as an U-shaped and an L-shaped curve only.
8. (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.
[2023 DEC – UGC NET/JRF Commerce Paper II]
1. (b)
Explanation:
The source of oligopoly is usually the same as that of monopoly market, which is barrier to entry. It is difficult to enter an oligopoly mainly due to requirement of huge capital investment. It acts as a deterrent for the new firms which seek to enter the oligopoly market.
2. (a)
Explanation:
Substitution Effect refers to the change in demand due to price change as people prefer cheaper substitutes. When price of a good falls, it becomes cheaper in relation to its substitutes and its demand increases and vice versa.
Income Effect refers to the change in demand due to price change as real income (purchasing power) of the consumer changes. When price of a good falls, people can buy same quantity for lesser amount and their purchasing power increases and vice versa.
Since income effect is the change in purchasing power due change in price of a good, it will be smaller than substitution effect. This is due to the reason, that only a small part of income is spent on any one good and thus impact of change in price of that good is small.
3. (d)
Explanation:
The correct sequence for sustainability of price leadership is:
– The dominant firm sets the price for the commodity that maximizes its profits
– Small firms in the industry are allowed to sell all they want at that price
– Dominant firm then comes in to fill the market
– Dominant firm acts as the residual supplier of the commodity
– Small firms in the industry behave as price takers
4. (b)
Explanation:
Under Third Degree Price Discrimination, 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.
Conditions necessary for practicing Third Degree Price Discrimination are:
– Existence of Monopoly Power
– Division of entire market into two or more mutually exclusive sub-markets
– Different price elasticity of demand in each market segment
– No possibility of resale by customers from low-price market to high-price market
5. (d)
Explanation:
A. Veblen effect – I. Conspicuous consumption
Veblen Effect is the name given to phenomenon of consuming luxury goods by the people to enhance or show off one’s status and prestige.
B. Snob effect – III. Negative network externality
C. Bandwagon effect – IV. Positive network externality
Network Externality is the effect on demand for a good by a section of consumers which depends on the demand for that good by others.
Negative Network Externality refers to the decrease in value (perceived by some people) of a good because its demand by others has increased. Such behavior is displayed by people who wish to be seen exclusive or special. They stop consuming goods that are more in demand and search for things that are less in demand or are exclusive. This phenomenon is referred to as Snob Effect.
Positive Network Externality refers to increase in value of a good, as perceived by people, because its demand by others has increased. Such behavior is displayed by people who want to be updated or be in sync with the trend or want to look stylish. They look for what others are buying and imitate the buying pattern. This phenomenon is referred to as Bandwagon Effect.
D. Substitution effect – II. Reduction in relative price of commodity
Substitution Effect refers to the change in demand due to price change as people prefer cheaper substitutes. When price of a good falls, it becomes cheaper in relation to its substitutes and its demand increases and vice versa. Thus, it refers to the effect of change in relative prices of two commodities.
6. (a)
Explanation:
Incremental/Differential/Marginal Analysis is a short-term decision tool to analyse various available alternatives and choose the one that would yield maximum revenue in least possible cost.
To evaluate various alternative, the relevant items are:
– Opportunity cost i.e. the benefit from one alternative sacrificed for choosing the other alternative
– Differential/Incremental cost i.e. the difference between the costs of two alternatives.
Sunk costs are irrelevant for incremental analysis as these have already been incurred and future decision will not have any effect on these costs.
7. (c)
Explanation:
The rate at which quantity of capital is sacrificed for employing one additional unit of labour to produce the same level of output as before is called Marginal Rate of Technical Substitution (MRTS).
8. i. (d) ii. (a) iii. (a) iv. (b) v. (a)