Economics : 2016 : CBSE : [Delhi] : Set- I

When marginal cost is rising and average variable cost is falling marginal cost lies below average variable cost.

 

b. equal to average revenue

Explanation: When total revenue is rising at a constant rate as more and more units of a commodity are sold, marginal revenue would be equal to average revenue.

Increase in demand takes place due to change in factors other than price of the good (like, increase in income of consumers, increase in price of substitute goods, etc.). Increase in demand causes demand curve to shift rightward.

c. Both (a) and (b)

Explanation: Homogeneous products imply that goods produced by different producers are identical.

(c) Both under monopoly and monopolistic competition

Explanation: The monopolist and monopolistic firms face downward sloping demand curve which shows the negative relation between price and demand for the product.

A consumer attained equilibrium when

MU_X/P_X = MU_y/P_y

Where,

MU_X = Marginal utility derived from good X

P_X = Price of good X

MU_y = Marginal utility derived from good Y

P_y = Price of good Y

By putting the values in the given formula, we get

       MU_x/P_x = 5/4 and

       MU_Y/P_Y = 4/5

Thus, as MUx/Px > MU_Y/P_Y, the consumer is not at equilibrium.

A rational consumer who wants to maximise his utility should increase the consumption of good X and decrease the consumption of good Y. This is because the utility that the consumer derives from the last rupee spent on good Y is less than the utility that he derives from the last rupee spent on good X. Thus, the consumer should increase consumption of good X and decrease the consumption of good Y till MUx/Px = MU_Y/P_Y.

Price elasticity of demand of good Y is more elastic than good X. For the measurement of price elasticity of demand we ignore the negative sign because this sign appears due to the negative relation between price and quantity demanded of good not because of the mathematical calculation.

A price ceiling is a government-imposed limit on how high a price can be charged for a product. Price ceilings are often intended to protect consumers from certain conditions that could make necessities unattainable. Example: prices of wheat at ration shop.

Price ceiling accompanied by rationing of the goods may have following implications:

• Black marketing: Price ceiling leads to excess demand in market which in turn creates black marketing if market price is below the equilibrium price. In the black market, goods and services are sold at a price more than the price fixed by the government. It implies the failure of government policy.
• Consumer has to wait in long queues: When there is excess demand in the market, people are demanding more than supply. People have to wait in long queues for buying goods.
• Consumers not satisfied with the quantity: Since all consumers will not be able buy desired quantity from the fair price shop, some of them will be compelled to buy from regular market at higher price.

If price of a good is less than the equilibrium price, there will be a situation of excess demand. There will be competition among the buyer to purchase more and more quantity at a lower price. It will push the prices upward and reduce the excess demand. These changes continue till the price settles at the equilibrium point. At this price, demand is equal to supply.

The effect of change in prices of the related goods on demand for the given good can be understood in two cases:

Substitute goods: Goods which are used in place of other, say tea and coffee. In case of substitute goods, an increase in the price of one good causes the demand for other good to rise and vice-a-versa. There can be two situations:

• An increase in price of coffee causes demand curve of tea to shift rightward at the existing price.
• A decrease in price of coffee causes demand curve of tea to shift leftward at the existing price.

Complementary goods: Goods which are used together, say car and petrol. In case of complementary goods, increase in the price of one good causes the demand for other to fall and vice-a-versa. There can be two situations:

• An increase in price of petrol causes demand curve of car to leftward shift at the existing price.
• A decrease in price of petrol causes demand curve of car to shift rightward at the existing price.