Economics : 2015 : CBSE : [Delhi] : Set- III
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Q1
When income of the consumer falls the impact on price-demand curve of an inferior good is (choose the correct alternative)
Marks:1View AnswerAnswer:
Shifts to the right.
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Q2
If Marginal Rate of Substitution is constant throughout, the Indifference curve will be: (choose the correct alternative)
Marks:1View AnswerAnswer:
Parallel to the x-axis.
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Q3
Define budget set.
Marks:1View AnswerAnswer:
A budget set is combination of goods that an individual can afford, keeping income and prices constant.
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Q4
What will be the impact of recently launched ‘Clean India Mission’ (Swachh Bharat Mission) on the Production Possibilities curve of the economy and why?
Marks:3View AnswerAnswer:
The Production Possibilities curve shows the different combinations of goods that can be produced in an economy when all the resources are utilized efficiently, given a level of resources and technology.
The ‘Clean India Mission’ will not have any impact on the Production Possibilities curve as the amount of resources and level of technology will remain unchanged. However, it will lead to more efficient utilisation of existing resources.
As seen in the diagram above, it will lead to the economy to move from point A, where resources are not utilised efficiently to point B where all resources are efficiently utilised.
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Q5
What will be the likely impact of large scale outflow of foreign capital on Production Possibilities curve of the economy and why?
Marks:3View AnswerAnswer:
Production Possibilities curve shows the different combinations of goods that can be produced in an economy when all the resources are efficiently utilised, given a level of resources and technology.
A large scale outflow in capital implies a reduction in the level of resources in the economy. Thus, as a result of the decrease in resources in the economy, the production possibilities curve will shift inwards. This is shown in the diagram below.
Outflow of capital causes an inward shift in the PPC from PPC1 to PPC2.
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Q6
Explain the feature ‘interdependence of firms’ in an oligopoly market.
Marks:3View AnswerAnswer:
Oligopoly market is a market in which only a few firms dominate the industry. Such a market has the distinctive characteristic of ‘Interdependence of firms’. This implies that the decisions of one firm regarding pricing affects the pricing and output decisions of the other firms in the industry. Thus, when a firm makes price and output decisions it considers the price and output decisions of its rival as well as their expected reactions. Hence, there is a mutual dependence between the firms in the market.
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Q7
Explain the effects of ‘maximum price ceiling’ on the market of a good? Use diagram.
Marks:3View AnswerAnswer:
Price ceiling is a situation in which the government sets a price lower than the market equilibrium price. In the diagram below, it can be seen that the price ceiling P1 is below the market-clearing price of P.
The effect of fixing price at a level lower than market price is that it will force the producers to sell the goods at a lower price. As profits lower, the producers will reduce the quantity of good supplied. On the other hand, at the reduced price, the quantity demanded of the good will rise. As a result, there will be an excess demand for the good in the market.
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Q8
The measure of price elasticity of demand of a normal good carries minus sign while price elasticity of supply carries plus sign. Explain why?
Marks:3View AnswerAnswer:
Price elasticity of demand is the change in quantity demanded of a good as a result of a change in price. The law of demand states that, citrus paribus, an increase in price of a good leads to a decline in the quantity demanded of that good. As a result, there exists a negative relationship between price and quantity demanded as reflected by the minus sign in the elasticity of demand.
Elasticity of supply is the change in the quantity of output supplied as a result of a change in the price of the good. As the price of the good rises, the profit margins of the producers also increase. Hence, they have an incentive to produce more. This result in a positive relation between price and quantity supplied, reflected by the plus sign in the elasticity of supply.
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Q9
Giving reasons comment on the shape of the Production Possibilities curve based on the following schedule:
Good X (units)
Good Y (units)
0
20
1
18
2
14
3
8
4
0
Marks:3View AnswerAnswer:
In the table below, the Marginal Rate of Transformation of the Production Possibilities has been calculated.
Good X (units)
Good Y (units)
∆X
∆Y
MRT (∆Y/∆X)
0
20
1
18
1
2
2
2
14
1
4
4
3
8
1
6
6
4
0
1
8
8
As can be seen from the table above, as production of good X increases, the Marginal Rate of Transformation also increases. Hence, to produce an additional unit of good X an increasing amount of good Y has to be given up. The increase in the Marginal Rate of Transformation implies that the Production Possibilities curve will be concave.
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Q10
A consumer spends Rs. 100 on a good priced at Rs. 4 per unit. When price falls by 50 per cent, the consumer continues to spend Rs. 100 on the good. Calculate the price elasticity of demand by percentage method.
Marks:4View AnswerAnswer:
Given,
Initial Price = Rs. 4
Expenditure = Rs. 100
Thus, Quantity Demanded = Expenditure/Initial Price
= 100/4
= 25
After 50 per cent reduction,
New Price = Rs. 2
Given,
Expenditure = Rs. 100
Thus, New Quantity Demanded = 100/2
= 50
Percentage Change in Price = -50%
Percentage Change in Quantity = (50-25)/25 x 100
= 100%
Elasticity of Demand =
Percentage Change in Quantity Demanded
Percentage Change in Price
= 100/-50
= -2
Thus, price elasticity of demand is equal to -2.
