2013_XI I _Delhi_Economics_Set-2

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General Instructions:
(i) All questions in both the sections are compulsory.
(ii) Marks for questions are indicated against each.
(iii) Question Nos. 1-5 and 17-21 are very short-answer questions carrying 1 marks each. They
are required to be answered in one sentenceeach.
(iv) Question Nos. 6-10 and 22-26 are short- answer questions carrying 3 marks each.
Answers to them should normally not exceed 60 words each.
(v) Question Nos. 11-13 and 27-29 are also short-answer questions carrying 4 marks each.
Answers to them should normally not exceed 70 words each.
(vi) Question Nos. 14 -16 and 30-32 are long-answer questions carrying 6 marks each.
Answers to them should normally not exceed 100 words each.
(vii) Question Nos. 11 and 19 are value based questions.
(viii) Answer should be brief and to the point and the above word limits should be adhered to
as far as possible.

Section A

1. Give two examples of variable costs. 1

Ans. Two examples of variable cost are cost of labour and cost of raw material

2. Given the meaning of market demand. 1

Ans. Market demand refers to the aggregate (total) demand for all the consumers in the market at
different prices.

3. Under which market form a firms marginal revenue is always equal to price? 1

Ans. Under Perfect Competition, marginal revenue is always equal to price.

4. When is the demand for a good said to be inelastic? 1

Ans. The demand for a good is said to be inelastic if the percentage change in the demand for a
good is less than the percentage change in its price.

5. Define marginal cost. 1

Ans. Marginal Cost is defined as the additional cost to the Total Cost, which is incurred for
producing one more unit of output.

6. Explain the law of diminishing marginal utility with the help of a total utility schedule.

OR

Explain the condition of consumers equilibrium with the help of utility analysis. 3

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Ans. Law of Diminishing Marginal Utility states that as a consumer consume more and more units
of a commodity at succession, then Marginal Utility derived from the consumption of each
additional unit of the commodity falls. For example, consider the follow utility schedule.

Number of
Units
Consumed of
Commodity X
Total Utility
(TU)

(utils)
Marginal Utility
(MU)
MU
n
=TU
n
TU
n 1

(utils)
1 50 50 0 = 50
2 100 100 50 = 50
3 130 130 100 = 30
4 150 150 130 = 20
5 160 160 150 = 10
6 160 160 160 = 0
7 150 150 160 = 10

As per the schedule, marginal utility of the second unit is 50 utils. For the consumption of the
third unit, the marginal utility falls to 30. Next, for the consumption of the fourth unit, the
marginal utility falls to 20 and so on. For the consumption of the sixth unit the marginal utility
becomes zero and for the seventh unit it becomes negative. Thus, with consumption of
additional units of the commodity, the marginal utility falls.

OR
According, to the utility analysis, in case of a single commodity, a consumer attains
equilibrium when the utility derived from each additional unit of the rupee spent on the
commodity becomes equal to the Marginal Utility of Money. In other words the consumer
attains equilibrium when,
Marginal Utility of a Rupee spent on the commodity = Marginal Utility of Money
Marginal Utility of a Rupee spent on the commodity
As a consumer derives satisfaction by consuming commodities, in the similar sense, he
derives utility by spending money. Therefore, the utility that is derived from the additional
unit of rupee spent on the commodity is called Marginal Utility of a Rupee spent on that
commodity. In other words, it refers to the utility derived from each additional unit of the
rupee spent on the purchase of the commodity. Algebraically,

where,
MU
x
represents Marginal Utility of commodity x
P
x
represents price of commodity x


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Marginal Utility of Money
Marginal utility of money refers to the valuation of an unit of rupee for a consumer. It is a
subjective concept and the consumer himself defines the marginal utility of money. The
marginal utility of money is assumed to be constant in the Utility Analysis.
Consumer Equilibrium
As we know a consumer attains equilibrium where the marginal utility of a rupee spent on the
commodity becomes equal to the marginal utility of money. Thus, according to the utility
analysis, in case of a single commodity, a consumer attains consumer equilibrium, when:

(Note: Besides the one-good case, the student who have presented the two-good case are also
correct)

7. Explain the difference between an inferior good and a normal good. 3

Ans. Normal Goods: Normal goods refer to those goods that share a positive relationship with
income. That is as the income increases, demand for normal goods increases. On the other
hand, as the income falls, the demand for normal goods falls. For example, clothing is a
normal good. As income increases, the demand for clothing increases.

I nferior Goods: Inferior goods refer to those goods that share an inverse relationship with
income. That is as against normal goods, as the income increases, the demand for inferior
goods falls and vice-versa. For example, coarse cereals are inferior goods. As the income
increases, the consumer reduces its demand for coarse cereals and instead shifts its demand
towards superior quality cereals.

8. A firms revenue rises from Rs 400 to Rs 500 when the price of its product rises from
Rs 20 per unit to Rs 25 per unit. Calculate the price elasticity of supply. 3

Ans.
1
2
1
2
1
1
Given:
Initial Total Revenue ( ) = Rs 400
Final Total Revenue ( ) = Rs 500
Initial Price ( ) Rs 20
Initial Price ( ) Rs 25
Change in Price ( ) = Rs (25 20) Rs 5
Initial Quantity Supplied ( ) =
TR
TR
P
P
P
TR
Q
=
=
A =
1
400
= 20
20 P
=

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2
2
2
500
Final Quantity Supplied ( )= = 20
25
Change in Price ( ) = Rs (20 20) Rs 0
( )
0
100
100
20
0
( ) 5
100 100
20
Hence, elasticity of supply is zero.
s
TR
Q
P
Q
Q
Q
E
P
P
=
A =
A


= = =
A



9. Complete the following table: 3
Output
(Units)
Average Cost
(Rs)
Marginal Cost
(Rs)
1 12 .
2 10 ..
3 . 10
4 10.5 ..
5 11 ..
6 .. 17

Ans.

Output
(Units)
Average Cost
(TCQ)
(Rs)
Marginal Cost
(TC
n
TC
n-1
)
(Rs)
Total Cost
(TC)
(Rs)
1 12 - 12
2 10 8 20
3 10 10 30
4 10.5 8 42
5 11 13 55
6 12 17 72

10. Explain any two features of monopoly market. 3

Ans. The following are the two features of a monopoly market.
1. Restricted entry of new firms- The entry into the monopolist market is restricted. In other
words, no new firm can enter the monopoly market. There may be various legal barriers such
as, patent rights, cartel laws, exclusive rights, etc. to restrict the entry of the new firms.
2. A monopolist is a price maker- Since, a monopolist firm is the single firm in the market,
therefore, it enjoys full control over the price and output decisions. The monopolist has the
total freedom to fix the price level, which maximises his profit. Therefore, it can be said that a
monopoly firm is a price-maker.
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11. Production in an economy is below its potential due to unemployment. Government starts
employment generation schemes. Explain its effect using production possibilities curve. 4
Ans. As initially, the production in the economy is below its potential due to unemployment, this
suggests that the economy is operating at a point below the Production Possibility curve
(PPC). As the government starts employment generation schemes, the unemployed resources
get utilized. In a situation of full employment the economy would move to a point on the PPC.
Consider the example of the economy producing two goods- consumer goods and capital
goods. Suppose AB is the Production Possibility Curve (PPC) depicting full-employment of
resources.

Initially, suppose the economy is at point I (which is below the PPC) where, the economy is
below the potential level. As employment in the economy rises, the economy starts moving at
a point towards the PPC. At full employment, it will reach a point on the PPC such as point D.
12. The demand for good rises by 20 percent as a result of all in its price. Its price
elasticity of demand is () 0.8. Calculate the percentage fall in price.

OR

How is price elasticity of demand affected by:
(i) Number of substitutes of available for the good.
(ii) Nature of the good. 4

Ans.
Percentage Change in Quantity Demanded
Percentage Change in Price
20
or, 0.8 =
Percentage Change in Price
20
or, Percentage Change in Price 25%
0.8
Thus, the percentage fall in the price 25.
d
E =
= =

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OR
(i) Number of Substitutes Available of the Good:
The demand for a good that has more number of substitutes available will be
relatively more elastic and |e
d
| < 1. This is because a slight increase in the price
will push the consumers to shift their demand away from the good to its
substitutes. On the other hand, with a slight fall in price the consumers would
shift their demand from the substitutes towards the good. Thus, the goods
having a large number of close substitutes will have elastic demand. On the
contrary, if a good has no close substitutes, then it will have an inelastic
demand.

(ii) Nature of the Good:
The price elasticity of demand depends on the nature of a good. The goods and
services can be broadly divided into three categories- Necessities, Luxuries, Jointly-
demanded goods. The three types of goods have different values of elasticity as
discussed below.
a. Necessity Goods- These goods are those goods which a consumer demands for
sustaining his life. A consumer cannot reduce the consumption of these goods. The
demand for such goods does not change much in response to the changes in their
prices. Even when the price rises the consumer cannot reduce their demand.
Hence, such goods have an inelastic demand (|e
d
| < 1).
b. Luxury Goods- Luxuries are the goods which are not essential, rather, are
consumed for leisure or comfort purposes. For example, air conditioner, branded
garments, etc. The demand for such goods is highly responsive to changes in their
prices. A rise in the price, reduces the demand for them and vice-versa. Thus, such
goods have high price elasticity.
c. Jointly-demanded Goods- Jointly-demanded goods are those goods that are
demanded together. The joint consumption of such goods collectively satisfies
wants. For example, sugar and tea. A rise in the price of one good does not reduce
its demand if the demand for its complement good has not reduced. For example, a
rise in the price of sugar will not reduce its demand if the demand for tea has not
decreased. Hence, such goods have an inelastic demand (|e
d
| < 1).
13. Explain the conditions of producers equilibrium with the help of a numerical example. 4

Ans. The conditions of producer's equilibrium can be explained through the MR-MC approach. In
this approach, the producer attains equilibrium where the following two necessary and
sufficient conditions are fulfilled.

(i) MR = MC
or,
( ) ( ) d TR d TC
dx dx
=

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(ii) MC curve is rising and cuts MR curve from below
That is, Slope of MC > 0
or,
( )
0
d MC
dx
>

Units of
Output
MR MC
1 10 22
2 10 15
3 10 10
4 10 12
5 10 15

According to the schedule, at 3 units of output, both the conditions of producers
equilibrium are satisfied. That is, at this level, both MR and MC are equal to 10 and
MC is rising. Thus, the producers equilibrium is 3 units of output.
(Note: Besides the MR- MC approach the students who have presented the TR-TC
approach are also correct.)

14. Explain consumers equilibrium with the help of Indifference Curve Analysis.

OR

Explain the relationship between
(i) Prices of other goods and demand for the given good.
(ii) Income of the buyers and demand for a good. 6

Ans. According to the Indifference Curve Approach, a consumer attains equilibrium at the point
where the budget line is tangent to the indifference curve and also at the point of
tangency, the IC should be convex to the origin. This optimum point is characterised by the
following equality:

1
2
P dy
MRS
dx P

= =
That is,
Absolute value of the slope of the IC = Absolute value of the slope of the budget line
Graphically, the equilibrium can be depicted as follows.
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In the above figure, point E depicts consumers equilibrium. At this point, the budget line is
tangent to the indifference curve IC2. The optimum bundle is denoted by (x1*, x2*). This
point is the optimum or the best possible consumption bundle, where the consumer is
maximising his satisfaction.

All other points lying on the budget line (such as point B and point C) are inferior to (x1*x2*)
as they lie on a lower IC (i.e. IC1). Thus, the consumer will rearrange his consumption and
will attempt to reach the equilibrium point, where the marginal rate of substitution is equal to
the price ratio.
Let suppose that instead of point E, the consumer is at point B. At this point, MRS is greater
than the price ratio
1
2

i.e.
P
MRS
P
| |
>
|
\ .
. In this case, the consumer would tend to move towards
point E by giving-up some amount of good 2 in order to consume more units of good 1. The
consumer will continue to give-up consumption of good 2, until, he reaches the point E,
where, MRS becomes equal to the price ratio.
On the other hand, for all points such as point C, MRS is lesser than the price
ratio
1
2

i.e.
P
MRS
P
| |
<
|
\ .
. In this case, the consumer would tend to move towards point E by
giving up some amount of good 1 to consume more units of good 2.
Thus, we can conclude that if the consumer is consuming any bundle other than the optimum
one, then he would rearrange his consumption bundle in such a manner that the equality
between the MRS and the price ratio is established and he attains the state of equilibrium.

OR

(i) Price of Other Goods and Demand for the given Good
Quantity demanded of a good depends on the price of other goods (i.e. related goods).
Any two goods are considered to be related to each other, when the demand for one
good changes in response to the change in the price of the other good. The related
goods can be classified into following two categories.

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1. Substitute Goods
Substitute goods refer to those goods that can be consumed in place of each other. In
other words, they can be substituted for each other. For example, tea and coffee,
Colgate and Pepsodent, Cello pens and Reynolds pen, etc. In case of substitute goods,
if the price of one good increase, the consumer shifts his demand to the other
(substitute) good i.e. rise in the price of one good result in a rise in the demand of the
other good and vice-versa.
For example, if price of tea increases, then the demand for tea will decrease. As a
result, consumers will shift their consumption towards coffee and the demand for
coffee will increase. (Price of Tea Demand for Coffee ). It should be noted that
the demand for a good moves in the same direction as that of the price of its
substitute.
If PT increases DT decreases DC increases Tea and coffee are substitute goods
2. Complementary goods
Complementary goods refer to those goods that are consumed together. The joint
consumption of these goods satisfies wants of the consumer. For example: Tea and
sugar, ink pen and ink, printer and paper, etc.
In case of complementary goods, if the price of one good increases then a consumer
reduces his demand for the complementary good as well, i.e. a rise in the price of one
good results in a fall in demand of the other good and vice-versa.
For example, sugar and tea are complementary goods. Since, sugar and tea consumed
together, so a rise in price of tea reduces the demand for sugar and vice-versa. It
should be noted that demand for a good moves in the opposite direction of the price of
its complementary goods. (Price of tea demand for sugar )
If P
Tea
increases D
Tea
decreases D
Sugar
increases Tea and Sugar are
complementary goods
(ii) I ncome of the Buyer and the Demand for a Good.
Change in the income of the buyer also affects the demand for goods. The effect of
change in income on the demand depends on the type of the good.
Demand for normal goods share a positiverelationship with buyer's income. As
income increases, the demand for normal goods also increases and vice-versa.
Demand for inferior goods (such as coarse cereals) shares a negativerelationship with
consumer's income. As the income increases, the demand for inferior goods falls and
vice-versa.
Giffen goods are those goods which are highly inferior. Similar to the inferior goods,
demand for Giffen goods also shares a negativerelationship with the income.




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15. Giving reasons, state whether the following statements are true or false.
(i) A monopolist can sell any quantity he likes at a price.
(ii) When equilibrium price of a good is less than its market price, there will be
competition among the sellers. 6
Ans. (i) False, a monopolist cannot sell any quantity he likes at a price. This is because he has
no control over the quantity that he can sell in the market. Rather, it depends on the
buyers that what quantity of output they want to purchase at the price fixed by the
monopolist. If the monopolist fixes a higher price, then lesser quantity of the output
will be demanded and lesser quantity will be sold in the market. On the other hand, if
he fixes a lower price, then higher quantity of the good will be sold.
(ii) True, when equilibrium price of a good is less than its market price then there will be
competition among the sellers. This is because in such a situation there exists excess
supply in the market.
This is explained with the help of the following diagram.

In the above diagram, point E is the equilibrium point, where the market demand curve
DD and the market supply curve SS intersects each other. At this point the equilibrium
price is Op
e
and the equilibrium quantity is Oq
e
.
Now, suppose the market price is OP
o
. So, the equilibrium price is less than the market
price. At this price the market demand is Oq
d
and the market supply is Oq
s
. Clearly,
market supply is more than the market demand. So, there exists a situation of excess
supply. Due to excess supply, there will exist competition among the sellers.

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16. Explain the Law of Variables Proportions with the help of total product and marginal product
curves. 6
Ans. The Law of Variable Proportions states that if more and more of variable factor (labour) is
combined with the same quantity of fixed factor (capital), then initially the total product will
increase but gradually after a point, the total product will become smaller and smaller.
Assumptions of Law of Variable Proportions
1. Technology level remains constant
2. The units of variable factor are homogeneous. This implies that all the labour units are
equally productive.
3. One of the inputs must be fixed and it is because of the limited availability of this factor
that diminishing returns exists.
4. No change in the input prices i.e. wages (price of labour) and interests (price of capital)
remains the same.
5. It is assumed that proportions in which the factors are combined can be varied to
produce the desired output level.
For example, consider the following total product and marginal product schedule.
Units of
Capital
Units of
Labour
TP
AP

MP

Phase
1 0 0 0 Phase I
1 1 7 7 7
1 2 18 9 11
1 3 33 11
15
1 4 44 11 11 Phase II
1 5 48 9.6 4
1 6 51 8.5
3
1 7 51 7.4 0
1 8 49 6.1
2
Phase III
The whole production phase can be distinguished into three different production stages.
I
st
Stage: Increasing Returns to a Factor
This stages starts from the origin point O and continues till the point of inflexion (K) on the
TP curve. During this phase, TP increases at an increasing rate and is also accompanied by
rising MP curve (in figure ii). The MP curve attains its maximum point (U) corresponding to
the point of inflexion. Throughout this stage, AP continues to rise. As per the schedule, this
stage continues till the employment of third unit of labour. Here, the marginal product is
maximum at 15 units.
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II
nd
Stage: Diminishing Returns to a Factor
This stage starts from point K and continues till point B on the TP curve. During this stage,
the TP increases but at a decreasing rate and attains its maximum point at B, where it remains
constant. On the other hand (in the figure ii), the MP curve continues to fall and cuts AP from
its maximum point Z, where MP equals AP. When TP attains its maximum point,
corresponding to it, MP becomes zero. AP, in this stage initially rises, attains its maximum
point at Z and thereafter starts falling. As per the schedule, this stage is from the employment
of fourth unit of labour to the seventh unit of labour. With the employment of the seventh unit,
the marginal product becomes zero.
III
rd
Stage: Negative Returns to a Factor
This stage begins from the point B on the TP curve. Throughout this point, TP curve is falling
and MP curve is negative. Simultaneously, the AP curve continues to fall and approaches the
x-axis (but does not touch it). Like the first stage, this stage is also known as non-economic
zone as any rational producer would not operate in this zone. This is because the addition to
the total output by the additional labour unit (i.e. marginal product) is negative. This implies
that employing more labour would not contribute anything to the total product but will add to
cost of the production in form of additional wage. Hence, the cost of the additional labour
input is greater than the benefit of employing it. As per the schedule, beyond, the employment
of the seventh unit of labour, the marginal product becomes nagtive.