Economics : 2017 : CBSE : [Delhi] : Set-III

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 (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.

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.

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

How to produce may be defined as the problem of choice of technique of production. Since resources are scarce, the choice of technique of production should be such that it undertakes production with minimum wastage and cost. Such a production technique is said to be efficient.

The two main techniques of production are labour intensive technique or capital intensive technique of production. The former involves more use of labour than capital in the production process, while the capital intensive technique of production involves more use of capital than labour. It is efficient to use that resource intensively for production which is available abundantly in a country.

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.

Marginal Rate of Substitution (MRS) is the rate at which the consumer can substitute one good for another without changing the level of satisfaction. It indicates the slope of an indifference curve. Diminishing Marginal Rate of Substitution implies that the consumer will be willing to give up less and less quantities of Good Y for every additional quantity of Good X. This is because of the law of diminishing marginal utility.

For example, in the table given below bundle A, B, C and D lie on the same indifference curve. Good X lies on the X axis and good Y lies on the Y-axis. As the consumer increases the amount of ice-cream consumed, the additional utility from ice-cream goes on decreasing. Due to this the consumer is willing to give up less and less quantity of chocolate for each additional unit of ice-cream. Thus the marginal rate of substitution of X for Y is diminishing.