Economics : 2017 : CBSE : [Delhi] : Set I

Correct Answer is option (c) Decrease in expenditure on it.

The change in expenditure ∆E = ∆p[q(1+ed)]

When price elasticity of demand is inelastic ed > -1. This implies that (1+ed) is positive. Thus the change in expenditure would have the same sign as the change in price. Since price fall,  ∆p will be negative and hence ∆E will also be negative  i.e. the expenditure on the good will fall.

Correct Answer is option (b) Goes on Falling.

When the price of a good is high, a fall in its price results in a large percentage increase in quantity demanded, because people shift to buying its substitutes to buying this good. But as the price of the good keeps on falling along the linear demand curve, the percentage increase in quantity demanded becomes smaller and smaller because it becomes less and less possible to substitute this good for other goods.

Market demand is defined as the total quantity of a commodity which all the consumers in the market are ready to purchase at a given price within a given period of time.

Correct Answer is option (d) All market forms.

Average revenue is the proportion of total revenue to the total units of good sold. Thus, it is the revenue which is generated on every unit of good sold i.e. the price of the good.

AR = TR/Q = (Price X Quantity) /Quantity = Price

Prices in an oligopoly are rigid which means that the market price does not move freely in responses to change in demand. This is because there are only few firm in the industry which compete with each other in producing homogenous goods.

Macro Economics can be distinguished from Micro economics on following grounds:

Production possibility frontier or curve (PPC) is defined as the curve which represents all possible combinations of two commodities that can be produced with the given quantity of available resources.

PPC has the following characteristics : -

(1) It slopes downwards: PPC curve slopes downwards from left to right. This is because production of one commodity can be increased only by taking away resources from another commodity i.e. by reducing the production of another commodity.

(2) It is concave to the origin: PPC is concave to the origin because it is based on the concept of increasing marginal opportunity cost.

(3) It represents the production frontier of the economy: PPC is based on thorough and efficient utilisation of resources due to which it represents maximum production level that can be achieved.

As additional units of a commodity are consumed the intensity of want decreases and the consumer gets less and less marginal (additional) utility. Also, the consumer would consume additional unit of a good only if the price of that additional unit is equal to the marginal (additional) utility obtained from that good.

Thus additional units of a good are demanded by a consumer only when the price of the commodity falls. This is the reason behind the law of inverse relation between the demand of a commodity and its price.

An indifference curve is negatively sloped because of the assumption that the preferences are monotonic.

Monotonic preferences imply that between two bundles the consumer always prefers that bundle which has more of at least one good and no less quantity of other goods. Since the level of utility (satisfaction) obtained from bundles on an indifference curve should be always equal, in order to have two bundles A and B on the same indifference curve, if  bundle A has more of good X than bundle B then bundle A should certainly have less of good Y compared to bundle B. This would make the slope of the indifference curve negative.

If this is not the case and among any two pair of bundle, at least one good is more in say bundle A and the second good is equal in the both bundle A and B then according to the law of monotonic preferences bundle A will definitely give more utility and will be preferred to bundle B. This would contradict the fact that they lie on the same indifference curve.

A consumer attains his equilibrium when he maximizes his total utility, given his income and prices of the commodities.

Two main conditions of consumer’s equilibrium under indifference curve approach are:

1. Budget line/Price line should be tangent to the indifference curve.

In figure, IC1, IC2 and IC3 are indifference curves. MN is the Budget line/Price line.

Consumer can buy any combination, A, B and C, shown on the budget line MN. Consumer cannot get any combination on IC3 (i.e., highest IC curve) as it is away from price-line MN.

Out of A, B and C combinations, the consumer will be in equilibrium at combination C. At point C, price-line is tangent to the highest indifference curve IC2.  Consumer can buy A and B combinations as well but this will not give him maximum satisfaction. this is because

Point A and B are situated on lower indifference curve IC1.

2. Indifference curve should be convex to the point of origin.

This is because of the diminishing marginal utility.