2018 previous year question PYQ with answer BBA AKU Bihar Microeconomics
Q 1. Write True or False of the following :
(a) The demand of a product is influenced by income of a consumer.
(b) A rational consumer never equates the marginal utility of all goods consumed for satisfaction maximisation.
(c) A consumer’s demand for a commodity will generally move on the same demand curve for a change in the prices of substitute commodities.
(d) If a good is price elastic, a decrease in its price will result in a decrease in the amount of money spent on it.
(e) Plant and equipment of a firm are variable in the long run.
(f) Indifference curve analysis is based on ordinal measurement of utility.
(g) Higher indifference curve represents same level of satisfaction for a consumer.
(h) The law of variable proportion represents effect on quantity produced due to change of two factors of production.
(i) Monopoly and monopolistic competition are the same market condition.
(j) Monopoly price is always a high price and provides monopoly profit.
Answer:
(a) True
The demand for a product is influenced by the income of a consumer. Higher income typically increases demand for normal goods and decreases demand for inferior goods.
(b) True
A rational consumer maximizes satisfaction by equating the marginal utility per dollar spent across all goods, not the marginal utility of all goods consumed. This means the ratio of marginal utility to price should be equal across all goods: 𝑀𝑈𝑥𝑃𝑥=𝑀𝑈𝑦𝑃𝑦
(c) False
A consumer’s demand for a commodity generally shifts to a new demand curve if the prices of substitute commodities change. The demand curve for a good is influenced by the prices of substitutes and complements, as changes in these prices affect the demand for the original good.
(d) True
If a good is price elastic, a decrease in its price will result in a proportionally larger increase in quantity demanded, leading to a decrease in the total amount of money spent on it (total revenue).
(e) True
In the long run, all factors of production, including plant and equipment, are variable. Firms can adjust all inputs to achieve the desired level of production.
(f) True
Indifference curve analysis is based on the ordinal measurement of utility, meaning it ranks preferences without assigning specific numerical values to satisfaction levels.
(g) False
A higher indifference curve represents a higher level of satisfaction for a consumer, not the same level of satisfaction. Each indifference curve represents different levels of utility.
(h) False
The law of variable proportions (or the law of diminishing returns) represents the effect on quantity produced due to a change in one factor of production while keeping other factors constant, not two factors of production.
(i) False
Monopoly and monopolistic competition are not the same market conditions. Monopoly involves a single seller with no close substitutes, whereas monopolistic competition involves many sellers offering differentiated products.
(j) False
Monopoly price is not always a high price, nor does it always provide monopoly profit. Monopoly pricing depends on the demand elasticity and cost structure. Monopolies can incur losses if the costs are too high or demand is too low.
2. Short Answer type :
Answer any three of the following :
Q2(a) Describe briefly the concept of market equilibrium,
Answer:
(a) Market Equilibrium:
Concept:
Market equilibrium occurs when the quantity demanded by consumers equals the quantity supplied by producers at a particular price level, resulting in no shortage or surplus in the market.
Conditions for Market Equilibrium:
- Demand Equals Supply: The quantity demanded equals the quantity supplied at the equilibrium price.
- No Pressure to Change: At the equilibrium price, there is no pressure for the price to rise or fall because demand and supply are balanced.
- Stable Price: The market price tends to remain stable unless there is a shift in demand or supply.
Graphical Representation:
In a supply-demand diagram, market equilibrium is where the demand curve intersects the supply curve. At this point, the quantity demanded equals the quantity supplied, determining the equilibrium price and quantity.
Q2(b) What is elasticity of demand and why is needed?
Answer:
(b) Elasticity of Demand:
Definition:
Elasticity of demand measures the responsiveness of the quantity demanded of a good or service to changes in its price.
Importance:
- Price Sensitivity: Elasticity of demand helps in understanding how consumers respond to changes in price, whether they increase or decrease their purchases.
- Revenue Maximization: Firms use elasticity to determine optimal pricing strategies for maximizing total revenue.
- Policy Implications: Governments use elasticity to assess the impact of taxes, subsidies, and regulations on consumer behavior and market outcomes.
Q2(c) whether two isoquant curve can intersect each other . give reason
Answer:
(c) Intersecting Isoquant Curves:
No, Isoquant Curves Cannot Intersect:
Isoquant curves represent different combinations of inputs that yield the same level of output. If two isoquant curves intersected, it would imply that the same combination of inputs can produce two different output levels, which is logically inconsistent.
Reason:
- Isoquants embody the principle of diminishing marginal rate of technical substitution, meaning as more of one input is substituted for another, the marginal rate of substitution diminishes. If two isoquants intersected, it would violate this principle.
Q2(d) Is fixed cost always fixed? Explain.
Answer:
(d) Fixed Cost:
Not Always Fixed:
Fixed costs are those that do not vary with the level of output in the short run. However, in the long run, all costs become variable because firms can adjust all inputs, including fixed factors like plant and equipment.
Explanation:
- In the short run, fixed costs remain constant because some inputs, like plant and equipment, cannot be adjusted quickly. However, in the long run, firms have the flexibility to change all inputs, making all costs variable.
Q2(e) Discuss briefly the concept of price leadership criteria for market analysis.
Answer:
(e) Price Leadership Criteria: Price leadership is a market situation where a dominant firm sets the price, and other firms in the industry follow suit.
Criteria for Price Leadership:
- Market Share: The price leader typically has a significant market share, giving it the power to influence market prices.
- Cost Efficiency: The price leader must have lower costs or higher efficiency than its competitors to maintain profitability while setting prices that other firms follow.
- Product Homogeneity: The products offered by different firms in the industry should be relatively homogeneous to ensure that price changes are effectively transmitted across the market.
- Stability: Price leadership works best in stable markets where firms are not constantly entering or exiting the industry.
Purpose:
Price leadership helps maintain price stability and reduces price competition in the market by coordinating pricing decisions among firms, leading to more predictable outcomes for both producers and consumers.
Long Answer Question
Q3. Express law of demand. What are its exceptions?
The law of demand is a fundamental principle in economics that describes the relationship between the price of a good or service and the quantity demanded by consumers. Specifically, it states that, all else being equal, as the price of a good or service decreases, the quantity demanded increases, and conversely, as the price increases, the quantity demanded decreases. This inverse relationship between price and quantity demanded is a core concept in economic theory and is typically illustrated with a downward-sloping demand curve on a graph.
Key Components of the Law of Demand:
- Inverse Relationship: The law of demand posits an inverse relationship between price and quantity demanded. When prices fall, consumers are more willing and able to purchase more of the good. Conversely, when prices rise, the quantity demanded typically decreases.
- Ceteris Paribus Assumption: The law of demand holds true under the ceteris paribus assumption, which means “all other things being equal.” This assumption is crucial because it isolates the effect of price on demand, excluding other factors that might influence purchasing behavior, such as changes in consumer income, tastes, or the prices of related goods.
- Demand Curve: The demand curve graphically represents the relationship between price and quantity demanded. It typically slopes downward from left to right, indicating that lower prices lead to higher quantities demanded.
- Individual and Market Demand: The law of demand applies to both individual consumers and the market as a whole. Individual demand refers to the quantity of a good a single consumer is willing to purchase at various prices. Market demand aggregates the individual demands of all consumers in the market.
Graphical Representation:
A typical demand curve is shown in the graph below:
The curve illustrates how the quantity demanded (Q) changes in response to price (P). As the price decreases from P1 to P2, the quantity demanded increases from Q1 to Q2.
Exceptions to the Law of Demand
While the law of demand is widely applicable, there are notable exceptions where the inverse relationship between price and quantity demanded does not hold. These exceptions are important for understanding the complexity of consumer behavior. Some key exceptions include:
- Giffen Goods:
- Definition: Giffen goods are inferior goods for which an increase in price leads to an increase in quantity demanded, violating the typical law of demand. This phenomenon occurs because the income effect of the price change outweighs the substitution effect.
- Example: A classic example involves staple foods like bread or rice in impoverished regions. If the price of bread rises, it may consume a larger portion of the household budget, leaving less money for other foods. Consequently, people may end up buying more bread, not less, because they cannot afford more expensive alternatives.
- Veblen Goods:
- Definition: Veblen goods are luxury items for which demand increases as the price increases, due to their status symbol value. Higher prices make these goods more desirable as they signify wealth and exclusivity.
- Example: Designer handbags, luxury cars, and high-end watches are often considered Veblen goods. For some consumers, the high price itself enhances the appeal of these items, leading to greater demand as prices rise.
- Necessities:
- Definition: Necessities are goods that people need to survive or maintain their standard of living. The demand for these goods is relatively inelastic, meaning that changes in price have little effect on the quantity demanded.
- Example: Basic utilities like electricity and water, essential medications, and staple foods like milk and bread fall into this category. Even if the prices of these goods rise, consumers will continue to purchase them because they are essential.
- Speculative Demand:
- Definition: Speculative demand occurs when consumers buy goods in anticipation of future price increases. This can create a self-fulfilling prophecy where the expectation of rising prices drives up current demand, which in turn drives prices higher.
- Example: Housing markets often exhibit speculative demand. If people expect property prices to rise, they may rush to buy homes, increasing current demand and pushing prices up even further.
- Quality Change Perception:
- Definition: Sometimes, consumers perceive a higher price as an indicator of better quality. If consumers believe that more expensive goods are superior, demand may increase with price.
- Example: Branded clothing or electronics often benefit from this perception. Consumers may equate a higher price with better quality or more advanced features, leading to increased demand as prices rise.
- Price as an Indicator of Future Scarcity:
- Definition: In some cases, a rising price may signal future scarcity or increased value, prompting consumers to buy now rather than later.
- Example: Precious metals like gold and silver often see increased demand when prices rise, as consumers anticipate future scarcity or value retention.
The law of demand is a cornerstone of economic theory, providing a clear and intuitive explanation of how price changes influence consumer behavior. By understanding that, all else being equal, lower prices lead to higher quantities demanded and higher prices lead to lower quantities demanded, economists and policymakers can predict and analyze market trends and consumer choices.
However, the exceptions to the law of demand highlight the complexity and variability of real-world markets. Giffen goods, Veblen goods, necessities, speculative demand, quality perception, and indicators of future scarcity all demonstrate scenarios where the typical inverse relationship between price and quantity demanded breaks down. Recognizing and studying these exceptions are crucial for a nuanced understanding of economic behavior and for crafting effective economic policies.
