School of Business and Economics

Department of Economics

Short Questions

Q1 Briefly define and explain their use and assumptions (of any 5) of the following
concepts: (Please tick the five questions answered) (Total 15
Marks)

1) Elasticity (3 Marks)√
2) Measure of elasticity (3 Marks)
3) Indifference Curve (3 Marks) √
4) Budget Constraint/Line (3 Marks) √
5) Short run (3 Marks)
6) Law of diminishing returns (3 Marks) √
7) Constant Returns to Scale (3 Marks)
8) Equi-Marginal Principle? (3 marks) √
9) What is production function? (3 Marks)

Q2. What are the assumptions of oligopoly market structure? A brief mention of the
meaning of these assumptions will score full mark. (5 Marks)

Q3. What is Concentration ratio? Suppose there are two industries. In industry A, largest
four firms sale is 50% of the industry sale. On the other hand, in industry B, largest
four firms sale is 25% of the industry sale. Which industry is less concentrated? (5
Marks)

Q4. What are the assumptions of Monopolistic Competition market structure? A brief
mention of the meaning of these assumptions will score full mark. (5 Marks)

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 School of Business and Economics
Department of Economics

Broad Questions

Q5. Suppose Jasmin has an ice-cream shop and she is initially selling 200 cones per day
at a price of $4.00 per cone. If she reduces her price to $2.50 per cone, then she can
sell 400 cones per day. In another scenario, if she reduces her price to $2.50 per
cone, then she can sell 250 cones per day. (Total 15
Marks)

a) Calculate the price elasticity of demand (PED) of ice-cream and the change in her
total Revenue (TR) due to change in price from $4.00 to $2.50. (5 Marks)
b) What would be the value of PDE and change in TR if she can sell only 250 cones per
day at that reduced price of $2.50 per cone. (5 Marks)
c) What is the relationship between the change in PED and the change in TR of a firm?
(5 Marks)

Q6. Suppose Karim and Rahim both buy petrol for their cars. Karim’s price elasticity of
demand (PED) for petrol is one (PED=1, unit elasticity) and Rahim’s PDE is zero
(PED=0, perfectly inelastic). (Total 15
Marks)
a) Generate hypothetical data on price and quantity (5 Marks)
b) Draw demand curves separately for both Karim and Rahim (5 Marks).
c) Explain the differences in petrol buying behaviour of Karim and Rahim based on the
value of their PED. (5 Marks)

Q7. Use the figure below to answer the following questions: (Total 20 Marks.)
Price

90 C

B
50 MC = ATC
E

D
MR
0 50 100 Quantity

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 School of Business and Economics
Department of Economics
a. If the market is perfectly competitive, what would be value of profit? Show
calculation of the value below (Hint: Profit = TR – TC) (6 Marks)

b. If the market is a monopoly market, what would be the value of profit? Show
calculation of the value below. (Hint: Profit = TR – TC) (6 Marks)

c. In perfectly competitive market, what is the area of consumers’ surplus?(3 Marks)

d. Under the Monopoly market, what is the area of consumers’ surplus? (3 Marks)
e. Also under a Monopoly market, what is the area of deadweight loss? (2 Marks)

(Note that you are asked to show the area – not to calculate the value. For
example: you can write (A,C,90) as the area of top triangle of the graph.

Q8. Using the data in the table and answer the questions below (Total 20 Marks)

Q = Quantity TR = TC = P= MR = MC =
of Output Total Total Price Marginal Marginal
Revenue Cost (Tk) (Tk) Revenue Cost (Tk)
(Tk) (Tk)
0 0 0
1 10 6
2 20 10
3 28 17
4 36 25
5 40 34
6 40 46

a. Complete (fill up) the blank columns in the table by calculating Price, Marginal
Revenue (MR) and Marginal Cost (MC) (8 Marks)

b. What is the profit maximizing quantity of output the firm produce should and sell at
what price? (3 Marks)

c. Is the firm in a perfectly competitive or monopoly firm? (3 Marks)

d. Explain your answer to question (c) above based on your calculations of P, MR

and MC in the blank columns. ( For example, if your answer is monopoly or
perfectly competitive then explain or justify why?) (6 Marks)

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 School of Business and Economics
Department of Economics
ANSWER PAGE-1

ANS TO THE Q1

1. Elasticity: Elasticity mainly alludes to the responsiveness of one variable to changes in

another variable. Elasticity is primarily an economic variable. It is mostly one kind of
reflection of flexibility. It has various applications in economics. If we define elasticity with
an example, then it would be: the responsiveness of one variable such as quantity
demanded to changes in another variable, which is the price.

Elasticity is four types, and each of them estimates the connection between two
noteworthy economic variables.
i. Price elasticity of demand (PED)
ii. Price elasticity of supply (PES)
iii. Cross elasticity of demand (XED)
iv. Income elasticity of demand (YED)

3. Indifference Curve: The Indifference Curve indicates the various blends of two products
that give equivalent satisfaction and utility to the purchasers. In different words, the
indifference curve is the graphical portrayal of various mixes of goods, for which the
consumers are apathetic, as far as the general fulfillment and the utility.

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Department of Economics
ANSWER PAGE-2

The consumers are indifferent between Product 1 and Product 2. A,B,C,D,E show
different combinations. That means combination A (10P2+1P1) gives an equivalent
satisfaction and utility the same as (9P2+2P1) and so on.

3. Budget Constraint/Line: The Budget Line or Budget Constraint states all the mixes of
two wares that a buyer can manage the cost of given market costs and inside the specific
salary level.

Budget Line – 40$

Burger Burger – 1$
Pizza – 2$
20
10
10 15
20
Pizza

If a Burger costs 1$ and a Pizza 2$, then the above spending line shows all the mixes of
the product which can be purchased at 40$. For example, 20 Burgers at 1$ and ten
pizzas at 2$; ten burgers at 1$ and 15 pizzas at 2$.

6. Law of diminishing returns: This law operates in the short run when we can’t change all
the elements of creation. Moreover, Further, it examines the change in output or yield by
changing the quantity of 1 input. In fact, the law expresses that as we increment, the
amount of one input is joined with other fixed inputs.

Worker Total Product Average Product Marginal Product

1 10 10 10
2 24 12 24
3 36 12 12
4 44 11 8
5 48 9.6 4
6 48 8 0
7 47 6.7 -1
ANSWER PAGE-3
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Department of Economics
Observations:

i. As the marginal product increases, the total product grows as well by the same
amount. (W=1, TP=10, MP=10 & W=2, TP=24, MP=24)

ii. The total product has the maximum value (TP = 48) when, at the point, the
marginal product = 0.

iii. The total product decreases when the MP is negative (MP=-1)

8. Equi-Marginal Principal: Equimarginal principle is fundamentally utilized in

administrative, customer, and economics. Equimarginal law expresses where consumers
are obliged to pick the mix of goods, which will assist in expanding the all-out utility of
those products.

There are some critical variables to consider:

i. Consumers think about the unimportant utility of the products and the costs.
ii. As a result, the customer will assess the insignificant utility over the expense of the
items.
iii. The result is alluded to as the remote utility of use on every item.

ANS TO THE Q2

Oligopoly is a theory of market structure. So, it is a market structure with few firms; none of
those firms can shield others from having a noteworthy impact. Like every single other firm, it
creates the amount of output at which MR=MC. This market structure is in light of three
assumptions. They are below with brief meaning:

i. There are few sellers and many buyers. I have mentioned earlier, the oligopoly market
structure has few firms, and for that reason, they are depended on each other. Each of
them knows the outcome of some actions by one firm occurs; then, it will influence the
others. So, the strategic decisions by firms are interdependent. This interdependency
among a few firms under the oligopoly market structure is a significant quality of oligopoly.
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Department of Economics
ANSWER PAGE-4

ii. Firms produce and sell either homogeneous or differentiated products.

 Homogeneous products can’t be distinguished one product from another. So, in that
case, in the example, ONION is a homogeneous product that will be produced in the
oligopolistic market.
 Differentiated products can be shown off the differences between the product and the
competition by a firm. In the example, SHAMPOO is a differentiated product that will
be produced in the oligopolistic market.

iii. The barriers to entry are significant. It is hard to enter an oligopoly market and contend
as a new starting company. Oligopoly firms are huge and advantage from economies of
scale. It takes extensive skill and money to fight in this industry. Besides, innovation
challenges, government guidelines, licenses, patents, start-up capital, or education and
permitting prerequisites can also be considered as barriers to entry.

ANS TO THE Q3

Concentration Ratio measures the industry sales or market share of top firms in an
industry. The ratio of concentration in an industry is a wellspring of market power, the
capacity of firms in a market to set their costs over their marginal cost. For instance, in a
monopoly market, there is just a single producer, a firm can charge whatever value it regards
fit without stressing over any opposition. In the given question, two industries are having the
largest four firms each.

 In Industry A, the largest four firms sale is 50% of the industry sale. As we know,
the concentration ratio of 50% to 80% is viewed as an industry with medium
concentration. These industries are a lot of oligopolies. So, Industry A is medium
concentrated.

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Department of Economics

ANSWER PAGE-5

 In Industry B, the largest four firms sale is 25% of the industry sale. As we know,
the concentration ratio of 0% to 50% is viewed as an industry with less
concentration. Monopolistic rivalry falls into the base of this with oligopoly rising
close to the upper end. So, Industry B is less concentrated.

After comparing the industry sales percentage of Industry A and Industry B, I can state that
Industry B is less concentrated compared to Industry A.

ANS TO THE Q4

MONOPOLY is a theory of market structure. A monopoly refers to if a company dominates a

sector or industry for its unique type of product offerings. A monopoly frequently used to
portray a substance that has absolute or almost total control of a market. This market
structure is in light of three assumptions. They are below with brief meaning:

i. There is one seller. Here, 1 Firm represents the industry that means the firm is the
industry itself. There are only one producer and seller in the market, offering its unique
type of product. But the quantity of buyers is thought to be huge.
 For example, INTEL is a monopolistic firm that is providing its unique product Intel
Processor and dominating the market, having a smaller rival AMD.

ii. The single seller sells a product that has no close substitutes. As I have said earlier,
the firm is the industry by offering unique types of products. For this reason, there is no
substitute product which is sold by the monopolist. The cross elasticity of demand
between the unique products of the monopolist and others must be insignificant or zero.
 For example, water is a product that has no close substitute. In Bangladesh, water has
been supplied to its users by the government company Dhaka WASA (Water Supply
and Sewerage Authority).

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Department of Economics

ANSWER PAGE-6

iii. The barriers to entry are extremely high. There are either regular or artificial limitations
on the entry of firms into monopolistic business, even if the firm is making strange
benefits. Legal barriers, economies of scale, government regulations, etc. can be
included as the barriers to entry.
ANS TO THE Q5

a) Let’s calculate the PED of ice-cream:

Price
(dollars)

4 A

B
2.50

0 200 400 Quantity

Demanded

 At point A, the price is $4 and the quantity demanded is 200 units.

At point B, the price is $2.50, and the quantity demanded is 400 units. So, by the following
information, it is clear that,
 The price decreases from $4 to $2.50 and on the other hand the quantity increases from
200 units to 400 units.
(2.50−4)
× 100=−46.15 %
So, the Percentage change in price = (2.50+4 )
2
(400−200)
×100=66.66 %
and the Percentage change in quantity = (400+200)
2
% ∆ Qd 66.66
∴ Price elasticity of demand (PED) of ice-cream, Ed =
%∆P
= (
−46.15 )
%=1.44

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 School of Business and Economics
Department of Economics
Here, Ed = 1.44 > 1, so it’s terminology is Elastic.

ANSWER PAGE-7

Let’s calculate the change in her total Revenue (TR) due to a change in price from $4.00 to
$2.50.

∴ Change in Total Revenue (TR) = ¿

=¿

= 200 (ANS)

b) Let’s calculate the value of PDE and change in TR if she can sell only 250 cones per day
at that reduced price of $2.50 per cone.

Price
(dollars)

4 A

2.50 B

0 200 250 Quantity

Demanded

 At point A, the price is $4 and the quantity demanded is 200 units.

At point B, the price is $2.50, and the quantity demanded is 250 units. So, by the following
information, it is clear that,
 The price decreases from $4 to $2.50 and on the other hand the quantity increases from
200 units to 250 units.

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 School of Business and Economics
Department of Economics
(2.50−4)
× 100=−46.15 %
So, the Percentage change in price = (2.50+4 )
2

ANSWER PAGE-8

(250−200)
× 100=22.22 %
and the Percentage change in quantity = (250+200)
2

% ∆ Qd 22.22
∴ Price elasticity of demand (PED) of ice-cream, Ed =
%∆P
= (
−46.15 )
%=0.48

Here, Ed = 0.48 < 1, so it’s terminology is Inelastic.

∴ Change in Total Revenue (TR) = ¿

=¿

= -175 (ANS)

c) Total revenue depends on the Price elasticity of demand (PED). After a price change, the
rises, falls, or constant value in total revenue depends on whether the percentage change
in the quantity demanded is less than, greater than, or equal to the percentage change in
price. Total revenue is influenced by the Price elasticity of demand (PED). Let’s explain
the relationship between the change in the Price elasticity of demand (PED) and the
change in the Total revenue of a firm.

Price
(dollars)
L
P1
M
P2

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 School of Business and Economics
Department of Economics

Quantity
0 Q1 Q2 Demanded

Here, the demand is elastic. After falling the price to P1 to P2 which

eventually increases the size of the total revenue rectangle from 0 P1 L Q1 to 0 P2 M Q2. So,

ANSWER PAGE-9

On the other hand, if the price increases from P2 to P1, then the total size of the total revenue
will decrease from 0 P2 M Q2 to0 P1 L Q1. So, P ↑→ TR ↓. We can see the inverse relationship
between price and TR when the demand is elastic, where the value of PED > 1.

Price
(dollars)
E
P1
P2 F

Quantity
0 Q1 Q2 Demanded

Here, the demand is inelastic. After falling the price to P1 to P2 which eventually
decreases the size of the total revenue rectangle from 0 P1 E Q1 to 0 P2 F Q2. So, P ↓→ TR ↓.
On the other hand, if the price increases from P2 to P1, then the total size of the total revenue
will increase from 0 P2 F Q2 to0 P1 E Q1. So, P ↑→ TR ↑. As we can see, if the demand is
inelastic, then the price and TR are related directly, where the value of PED<1.

ANS TO THE Q6

a) Let’s generate hypothetical data on price and quantity.

Price
(dollars)
80
Unit Elastic = 1
60
40
20
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 School of Business and Economics
Department of Economics

Quantity Deamanded
0 1 2 3 4 (liter)

ANSWER PAGE-10

This is the graphical representation of Karim’s petrol buying behavior, including the
hypothetical data on price and quantity. Here, Karim’s price elasticity of demand (PED) for
petrol is one which is PED=1, unit elasticity. Here, the demand for buying petrol depends on
the price. If the price increases, the demand will fall, and on the other hand, if the price falls,
the demand for petrol will rise. From the graph, if the price is $80, then Karim will buy 1 liter
of petrol. When the price falls from $80 to $60, then he will buy 2 liters of petrol.

Price
(dollars)

60
50 Perfectly Inelastic = 0

40
20
Quantity Deamanded
0 4 (liter)

This is the graphical representation of Rahim’s petrol

buying behavior, including the hypothetical data on price and quantity. Here, Rahim’s price
elasticity of demand (PED) for petrol is one which is PED=0, perfectly inelastic. Here,
whatever the price is, the demand for Rahim for petrol won’t change. From the graph, if the
price is $60, then Rahim will buy 4 liters of petrol even if the price is $20 after then Rahim will
also buy the same quantity, which is 4 liters.

b) Let’s draw demand curves separately for both Karim and Rahim.

Price
(dollars)
80
Unit Elastic = 1
60
40
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20
 School of Business and Economics
Department of Economics

Quantity Deamanded
0 1 2 3 4
(liter)
Demand Curve
of Karim

ANSWER PAGE-11
This is the graphical representation of Karim’s petrol buying behavior, including the
hypothetical data on price and quantity. Here, Karim’s price elasticity of demand (PED) for
petrol is one which is PED=1, unit elasticity. Here, the quantity demanded changes
proportionately to price changes. For example, if the price is increased by 15%, then the
quantity demanded will also be decreased by 15%.

Price
(dollars)

60
50 Perfectly Inelastic = 0

40
20
Quantity Deamanded
0 4 (liter)

This is the graphical representation of Rahim’s petrol

buying behavior, including the hypothetical data on price and quantity. Here, Rahim’s price
elasticity of demand (PED) for petrol is one which is PED=0, perfectly inelastic. Therefore, in
perfectly inelastic demand, a change in price cause no change in quantity demanded. For
example, if the price increases by 20%, Rahim will buy 4 liters of petrol and even if the price
increases by 30%, Rahim will also buy the same quantity of petrol which is 4 liters.

c) Let’s explain the differences in the petrol buying behavior of Karim and Rahim based on
the value of their PED.
Karim’s price elasticity of demand (PED) for petrol is one which is PED=1, unit
elasticity. Here, the demand for buying petrol depends on the price. If the price increases, the
demand will fall, and on the other hand, if the price falls, the demand for petrol will rise. For
example, if the price is $40, then Karim will buy 3 liters of petrol. If the price decreases from
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Department of Economics
$40 to $20, then he will buy 4 liters of petrol. If the price increases by a high amount such as
$200 for only 1-liter petrol, then Karim will wait for the prices to return to a previous level.
Here, the quantity demanded changes proportionately to price changes. For example, if the
price is increased by 20%, then the quantity demanded of Karim for petrol will also be
decreased by 20%. Following that, if the price is decreased by 25%, then the quantity
demanded of Karim for petrol will also be increased by 25%.

ANSWER PAGE-12

On the other hand, Rahim’s price elasticity of demand (PED) for petrol is one which is
PED=0, perfectly inelastic. Here, whatever the price is, the demand for Rahim for petrol won’t
change. For example, if the price is $50, then Rahim will buy 4 liters of petrol even if the
price is $10 after then Rahim will also buy the same quantity, which is 4 liters. Following that,
if the price is increased excessively such as $200 for 4 liters of petrol. Still, Rahim will buy the
same quantity, which is 4 liters.

ANS TO THE Q7
a) Let’s calculate the value of profit if the market is perfectly competitive.

From the graph,

MC = ATC = $50, P = $50 & Q = 100

∴ Total Revenue (TR) = ( P × Q) = (50 × 100) = $5000

∴ Total Cost (TR) = (ATC × Q) = (50 × 100) = $5000

∴ Profit = (TR – TC) = (5000-5000) = $0

In a perfectly competitive market, MC = ATC is known as the break-even point. In this

circumstance, a firm won’t earn any profit, but it won’t lose any money either. As we can
see from the value of profit is $0 because of the break-even point. This is like no gain, no
loss. So, if the market is perfectly competitive, then the value of profit would be $0.

b) Let’s calculate the value of profit if the market is a monopoly.

From the graph, MC = ATC = $50, P = $90 & Q = 50

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 School of Business and Economics
Department of Economics
∴ Total Revenue (TR) = ( P × Q) = (90 × 50) = $4500

∴ Total Cost (TR) = (ATC × Q) = (50 × 50) = $2500

∴ Profit = (TR – TC) = (4500-2500) = $2000

ANSWER PAGE-13

So, if the market is a monopoly, then the value of profit would be $2000.

c) Let’s find out the area of consumers’ surplus if the market is perfectly competitive.

So, the area above the price line of the perfectly competitive market, and below the
demand curve is called the area of consumers’ surplus.

From the graph, the area (A, B, 50) indicates the area of consumers’ surplus.

Consumer surplus is mainly the contrast between what a customer is eager or able to pay
and the market cost of the products.

 When the demand is perfectly elastic, the consumers’ surplus is zero.

 Consumers’ surplus is infinite if the demand is perfectly inelastic.

 When demand is inelastic, there is a more prominent consumer surplus.

d) Let’s find out the area of consumers’ surplus if the market is a monopoly.

So, the area above the price line of the monopoly market, and below the demand curve is
called the area of consumers’ surplus.

From the graph, the area (A, C, 90) indicates the area of consumers’ surplus.

As I mentioned earlier, Consumer surplus is mainly the contrast between what a customer
is eager or able to pay and the market cost of the products. But in the monopoly market,
because of the higher price, the area of consumers’ surplus of monopoly market is
smaller than the area of consumers’ surplus of a perfectly competitive market.

e) Let’s find out the area of deadweight loss if the market is a monopoly.

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 School of Business and Economics
Department of Economics
From the graph, the area (C, B, E) indicates the area of deadweight loss.

Deadweight Loss mainly measures economic efficiency, which has been lost because of
not producing enough quantity of output.

ANSWER PAGE-14
ANS TO THE Q8

a) Let’s complete the blank columns in the table by calculating Price, Marginal Revenue
(MR) and Marginal Cost (MC)
Q = Quantity TR = TC = P= MR = MC =
of Output Total Total Price Marginal Marginal
Revenue Cost (Tk) (Tk) Revenue Cost (Tk)
(Tk) (Tk)
0 0 0 0 0 0
1 10 6 10 10 6
2 20 10 10 10 4
3 28 17 9.3 8 7
4 36 25 9 8 8
5 40 34 8 4 9
6 40 46 6.67 0 12

b) If a firm wants to enhance its profit at the maximum level, then they have to follow the
rules of profit maximization.

The profit maximization formula is MC = MR.

So, to maximize the profit, the firm should produce at the level where Marginal Cost (MC)
is equal to Marginal Revenue (MR).

From the filled up table, I can say that MR = MC = 8 when they are producing four
outputs. So, the firm should produce four quantities of production, and they should sell
them at 9 Tk.

c) Let’s identify either the firm is perfectly competitive or in a monopoly firm.

The firm is in a monopoly market.

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 School of Business and Economics
Department of Economics
As we know, in a monopoly market, at profit maximization point, P > MR=MC. In the
above table, at profit maximization point, P > MC = MR.

Following that, in a perfectly competitive market, at profit maximization point, P = MC =

MR. But in the above table, P> MC= MR.

By comparing two possibilities, it can be said that the firm is in a monopoly market.

ANSWER PAGE-15

d) I am explaining my answer to question (c).

As I have confirmed in the question (c), the firm is in a monopoly market. Because As we
know, in a monopoly market, at profit maximization point, P > MR = MC. In the above
table, at profit maximization point, P > MC = MR (P = 9, MC = 8, MR = 8)

Following that in a monopoly market, at profit maximization point (MC = MR), Total
Revenue (TR) > Total Cost (TC). In the above table, at the profit maximization point (MC
= MR = 8), TR > TC where TR = 36 and TC = 25.

Moreove, in a perfectly competitive market, according to shutdown rule, at profit

maximization point, P = MC = MR. But in the above table, P> MC= MR. (P = 9, MC = 8,
MR = 8)

Following that in a perfectly competitive market, MR remains constant. But in the above
table, Marginal Revenue (MR) is not constant.

Moreover, in a perfectly competitive market, at profit maximization point, P = MC or P =

MR, whereas in the above table, P > MC and P > MR (P = 9, MC = 8, MR = 8).

Lastly, based on the above explanation and calculations, the firm must be in a monopoly
market.

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Department of Economics

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