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

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.

(d) 1.5

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

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.

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

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.

A producer is in equilibrium when it produces that level of output which earns him the maximum profits. This point is equilibrium point because a producer does not have incentive to move from this point.

Under perfect competition, there are two ways of studying producer equilibrium:

• TR-TC Approach
• MR-MC Approach

Under TR-TC Approach, the condition is the difference between TR and TC should be maximum.

Under MR-MC Approach, there are two conditions for producer equilibrium:

• MR=MC
• MC cuts MR curve from below

In the figure, MC cuts MR at points A and B. But MC cuts MR from below at point B. So, point B is the point of producer equilibrium.