2017 previous year question PYQ with answer BBA AKU Bihar Microeconomics

Q1. Write True or False of the following:

(a)          Prices of substitute commodities have no effect on the demand of goods in the market.

(b)          The price elasticity of demand measures the proportionate change in demand due to proportionate change in price of the product.

(c)           Geffen paradox seldom occurs.

(d)          If a good is income elastic, an increase in income will result in a decrease in the amount of money spent in it-

(e)          The demand for salt is likely to be price elastic.

(f) Utility never reflects the amount of satisfaction which an individual derives from consuming a Commodity

(g) We cannot quantity utility under marginal utility theory.

(h) a consumer is indifferent regarding choice of combination of products which lie on an indifference

(i) In short run, equilibrium price under perfect completion may be above or below average total cost.

(j) There are no rivals or direct competitors of a firm under
oligopoly.

Answer:

(a) False. Prices of substitute commodities can significantly affect the demand for a good. If a substitute’s price increases, the demand for the original good might increase as consumers switch to the (now relatively cheaper) original good.

(b) True. The price elasticity of demand is exactly this: the proportionate change in quantity demanded divided by the proportionate change in price.

(c) True. The Geffen paradox is a rare situation where a good’s demand increases when its price goes up. It’s more common for demand to decrease with a price increase.

(d) False. Income elasticity refers to the change in demand for a good due to a change in income. If a good is income elastic and income increases, the amount spent on that good will likely also increase (assuming it’s a normal good).

(e) True. Salt is a necessity with few close substitutes, so a price increase might not significantly reduce demand.

(f) False. Utility, in economics, represents the level of satisfaction a consumer derives from consuming a good or service.

(g) False. Marginal utility theory allows us to measure the additional satisfaction gained from consuming one more unit of a good, providing a way to quantify utility to some extent.

(h) True. By definition, an indifference curve represents combinations of goods that provide the same level of satisfaction to a consumer. They are indifferent between points on that curve.

(i) True. In the short run, perfect competition may lead to a price above or below average total cost due to fixed costs and the inability of firms to immediately adjust production capacity.

(j) False. Oligopoly is a market structure with a few dominant firms that are rivals and compete with each other.

Short Answer Type

Q2.  Answer any three of the following:

2(a) Explain individual demand and market demand.

Answer:

(a) Individual Demand and Market Demand

Individual Demand:

Individual demand refers to the quantity of a good or service that a single consumer is willing and able to purchase at various prices over a specific period. It is influenced by several factors including price, income, tastes, preferences, and expectations. The law of demand states that there is an inverse relationship between the price of a good and the quantity demanded, ceteris paribus. In other words, as the price of a good decreases, the quantity demanded increases, and vice versa, assuming other factors remain constant.

Individual demand curves typically slope downwards from left to right on a graph, reflecting this inverse relationship. Each consumer has their own demand curve, representing their unique preferences and budget constraints. Changes in factors such as income or preferences can shift the entire demand curve, while changes in price result in movements along the curve.

Market Demand:

Market demand, on the other hand, represents the sum total of all individual demands for a particular good or service within a specific market at various prices over a given period. It is obtained by horizontally summing the individual demand curves of all consumers in the market. Essentially, market demand shows the total quantity of a product that all consumers in the market are willing and able to purchase at different price levels.

Market demand curves also slope downwards due to the law of demand, reflecting the aggregate behavior of consumers in the market. Changes in factors such as population size, consumer preferences, or income levels can shift the entire market demand curve.

While individual demand focuses on the behavior and preferences of individual consumers, market demand provides insights into the overall demand dynamics within a market. Understanding both individual and market demand is crucial for businesses and policymakers to make informed decisions regarding pricing strategies, resource allocation, and market interventions.

2(b) How is law of demand related to the law of diminishing marginal utility?

Answer:

The law of demand and the law of diminishing marginal utility are interconnected because the latter explains why consumers buy more of a good as its price decreases. As a consumer consumes additional units of a good, the additional satisfaction (marginal utility) gained decreases. Therefore, to continue purchasing more units, the price must drop to match the declining marginal utility, making it worthwhile for consumers to buy more. This relationship underlies the inverse relationship between price and quantity demanded, forming the basis of the downward-sloping demand curve observed in the law of demand.

2(c)  What is isocost? Explain.

Answer:

An isocost line represents all combinations of inputs (typically labor and capital) that yield the same total cost for a firm. It is used in production theory to analyze cost minimization and optimal input choices. The equation for an isocost line is 𝐶=𝑤𝐿+ 𝑟𝐾, where $C$ is the total cost, $w$ is the wage rate of labor $L$, and $r$ is the rental rate of capital $K$. The slope of the isocost line, −𝑤/𝑟 indicates the rate at which the firm can substitute labor for capital without changing the total cost.

2(d)  What do you know by discriminating monopoly?

Answer:

Discriminating Monopoly: Understanding the Concept

A discriminating monopoly, also known as price discrimination, occurs when a monopolistic firm charges different prices to different customers or groups of customers for the same product or service, based on their willingness to pay. Unlike in a traditional monopoly, where the monopolist charges a single price to all customers, price discrimination allows the monopolist to capture more consumer surplus and potentially increase its profits.

Types of Price Discrimination:

1. First-Degree Price Discrimination: Also known as perfect price discrimination, occurs when the monopolist charges each customer the maximum price they are willing to pay. This results in the monopolist capturing all consumer surplus and maximizing its profits.
2. Second-Degree Price Discrimination: Involves charging different prices based on the quantity consumed. For example, bulk discounts or quantity discounts.
3. Third-Degree Price Discrimination: Occurs when the monopolist charges different prices to different market segments based on factors such as age, income, location, or time of purchase. This is the most common form of price discrimination.

Implications and Criticisms:

Price discrimination can lead to increased profits for the monopolist by capturing more consumer surplus. However, it can also lead to allocative inefficiency by distorting consumer choices and reducing overall welfare. Critics argue that price discrimination can exacerbate income inequality by charging higher prices to customers with less purchasing power.

2(e)  Is prefect competition a real market condition? Explain

Answer:

Perfect competition is an idealized market condition characterized by several features: numerous small firms, identical products, perfect information, free entry and exit, and no single buyer or seller able to influence prices. In this model, firms are price takers, and resources are allocated efficiently.

In reality, perfect competition is rare because these conditions are seldom fully met. Markets often exhibit some level of product differentiation, barriers to entry, and information asymmetries. However, some agricultural markets and financial markets come close to this model, where many producers offer standardized products, and information is relatively accessible.

Despite its rarity, the concept of perfect competition serves as a useful benchmark for economists. It provides a standard for evaluating the efficiency of real-world markets and understanding how deviations from this ideal impact economic outcomes, such as pricing, production efficiency, and consumer welfare.