Economics: 2018 : CBSE : [Delhi] : Set 2

(d) 1.5

Explanation: Elastic supply of a commodity implies that elasticity is more than 1.

Opportunity cost refers to value of a factor in its next best alternative use.

At zero level of production total cost is equal to total fixed cost. It is because at 0 level of production variable cost is zero.

(b) Price of the good

Explanation: Changes in price of goods cause movement along the supply curve.

The consumer will be willing to purchase 300 units at price 15 rupees per unit.

The central problem what to produce and in what quantities that an economy faces is related to decision what goods and services to be produced in the economy. For instance, if an economy produces only two goods say capital goods (building, tractor, airplane, etc.) and consumer goods (wheat, butter, laptops, etc.). Then, the economy has to take decision in what quantities these goods have to be produced. The economy has to decide which of the capital goods to be produced and in what quantities to be produced. Similarly, the economy has to decide which of the consumer goods to be produced and in what quantities to be produced. It depends on amount of available resources. Thus, the economy has to choose whether it wants more of capital goods and more of consumer goods.

Production possibility frontier depicts all possible combinations of two goods which can be produced with the given resources and technology with full and optimum utilisation of resources.

The following changes lead to production possibility frontier shift away from the origin:

• Growth of Resources
• Improvement in Technology for production of both commodities

Both the changes lead to increase in productive capacity and thereby causes rightward shift in the PPC.

In a perfect competitive market, there is free entry and free exit of firms. This is only possible in the long run, not in short run (as some factors of production are fixed which cannot be changed frequently).

The implication of freedom from entry and exit of firms under perfect competition is firms earn only normal profit in long run.

Whenever firm earns supernormal profit, other firms enter the industry and start producing goods. It leads to increase in cost of production. Since firms cannot change the price, thereby profit declines and they start earning normal profit.

Whenever firms are making loss, other firms exit the industry. It leads to decrease in cost of production. It leads to increase in profit and firms start earning normal profit.

Budget line depicts all possible combinations of two goods that can be purchased at given prices with consumer’s given income.

Equation of Budget line is:

M = P₁ X₁+ P₂ X₂

Here:M: Money Income

P_1: Price of good X₁

X_1: Units of good X₁

P_2: Price of good X₂

X_2: Units of good X₂

Given:

Consumer's income is Rs 100 =M

Price of Good X = Rs 10 =P_x

Price of Good Y =Rs 5 = P_y

Putting the given values in the formula, we get the equation of Budget line as:

10x + 5y =100

Marginal rate of substitution is the rate at which the consumer can substitute one good for another without changing the level of satisfaction. It indicates the slope of indifference curve.

Its behaviouralong an indifference curve can be understood by figure.

Initially, the consumer is not buying any unit of goods. Suppose the consumer is at point A, buying 8 units of rice and 1 unit of wheat. ∆Y/∆X is MRS which is also the slope of IC. At point A, MRS = 8/1.

Now, if consumer wants to shift to point B, he/she has to give up 2 units of rice to gain 1 unit of wheat. At point B, MRS = 2/1.

We can see that as consumer moves downward along the indifference curve, its slope i.e. MRS declines.