SOLUTION BOOKLET

for
MICROECONOMICS-XI 2020 Edition by Subhash Dey

18. A PPC shifts rightwards due to growth of resources because with

UNIT 1: Introduction increased resources (more labour, more capital goods, etc.), the economy
Do it yourself 1 can produce more output, i.e., its production potential increases.
Good X (units) Good Y (units) MRT
19. Production capacity can be increased through upgradation in
production technology.
0 16 —
20. Yes, even in rich countries, resources are scarce having alternative
1 12 4Y:1X
uses and wants are unlimited.
2 8 4Y:1X True/False? Give Reason.
3 4 4Y:1X 1. True: Economic problem is the problem of making choice among
4 0 4Y:1X alternative uses of the scarce resources so that optimum or most
PPC will be a straight line since marginal rate of transformation (MRT) is efficient use of resources is possible.
constant. 2. True: Study of an automobile industry is microeconomics since it
Do it yourself 2 is an individual economic unit, i.e., an individual part of the entire
manufacturing sector.
Possibilities Machines Wheat Marginal Rate of
Transformation 3. True: Allocation of scarce resources and the distribution of the final
(in (in million goods and services, i.e., ‘what’, ‘how’ and ‘for whom’ to produce are
(MRT)
thousands) tons) the central problems of an economy.
A 0 75 — 4. False: The PP curve is a graphical medium of highlighting the central
problem of ‘what to produce’, i.e., which goods and services are to be
B 1 70 5:1 produced in the economy and in what quantities.
C 2 62 8:1 5. False: PPC is the locus of points that represent all the obtainable
D 3 50 12 : 1 combinations of the two goods with full and efficient use of the given
scarce resources and available technology.
E 4 30 20 : 1
6. False: A point above the PPC represents a combination of the two
F 5 0 30 : 1 goods which is not obtainable because of scarcity of resources.
7. False: The concave downward sloping PP curve has an increasing slope.
Very Short Answer Type Questions (1 mark each) The slope of the PP curve is the same as Marginal Rate of Transformation
1. Scarcity of resources gives rise to the problem of choice (or economic (MRT). So, concavity of PP curve implies increasing MRT.
problem). 8. False: PPC is concave, i.e., its slope increases, because MRT increases
2. (i) Resources are limited (ii) Resources have alternative uses. as we move downwards from left to right. MRT increases because no
3. Microeconomics is the study of individual economic units/agents. resource is equally efficient in production of all goods. As we transfer
4. Macroeconomics is the study of an economy as a whole. resources from one good to another, the rate of sacrifice, i.e., MRT
5. Microeconomics deals with the individual economic units while increases because we have to transfer less and less efficient resources.
Macroeconomics deals with the economy as a whole. 9. False: Production in the economy may also take place at any point
6. (i) Demand by a consumer (ii) Price determination of a commodity. below the PPC if the given resources are either under-utilised or
7. (i) Total output in an economy ( ii) Total investment in an economy. inefficiently utilised or both.
8. It is a macroeconomic study. 10. False: Due to massive unemployment, production will take place
9. Salary of a computer engineer will depend upon the overall wage rate at any point inside the PPC, but it will not shift to the left. This is
in the economy. because unemployment implies underutilisation of resources, not
10. National income is the sum total of factor incomes of all the residents decrease in resources.
of a country. 11. False: The problem of ‘how to produce’ deals with choice to technique
11. Economy refers to the whole collection of production units in an area to be used for production of goods and services — labour intensive
by which people get their living. technique or capital intensive technique.
12. Opportunity cost is the value of the next best alternative foregone 12. False: There will be no effect on production possibilities frontier (PPF)
when availing a particular alternative. because there is no change in production potential of the economy. The
13. Marginal Rate of Transformation (MRT) is the ratio of units of one economy will now operate on the PPF because it has realised its potential.
good which the economy will have to sacrifice to produce one more 13. True: Since all points outside production possibilities frontier represent
unit of the other good. those combinations of the two goods which are not obtainable due to
14. The Production Possibilities Curve (PPC) is the locus of points limited resources.
representing different combinations of the two goods which an 14. True: Growth of resources increase the production potential of the
economy can produce with full and efficient use of its given resources economy, i.e., it can now produce more output. Therefore, the PPF
and technology. shifts towards right.
15. A point above the PPC represents a combination of the two goods 15. False: Production Possibility Curve (PPC) does not show the point
which is not obtainable because of limited resources. at which the economy actually operates. It only shows the points
16. The slope of the PPC is a measure of the marginal rate of that represent those combinations of the two goods which can be
transformation (MRT). potentially produced. However, an economy may operate below the
17. Increase in resources or /and improvement in technology. PPC if there is underutlisation or inefficient utilisation of resources.
SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey 1
Objective Type Questions, MCQs utilised, then economy operates at any point inside PPF.
1. (c) 2. (c) 3. (b) 4. (c) 5. (b) 6. (c) 7. (b) 8. (a) SELF ASSESSMENT TEST 2
1. (b) Increase in resources.
9. (b) 10. (d) 11. (d) 12. (d) 13. (a) 14. (b) 15. (c) 16. (b)
2. Diminishing
17. (a) 18. (c) 19. (d) 20. (b) 21. (b) 22. (b) 23. (c) 24. (d) 3. (i) Resources are scarce and limited.
25. (c) 26. (c) 27. (b) 28. (a) 29. (b) 30. (d) 31. (d) 32. (c) (ii) Resources have alternative uses.
33. (c) 34. (a) 35. (b) 36. (b) 37. (a) 38. (c) 39. (d) 40. (a) 5. Microeconomics studies the behaviour of individual economic units e.g.
41. (c) 42. (b) 43. (d) 44. (d) 45. (d) 46. (c) 47. (c) 48. (b) demand and supply whereas Macroeconomics studies the behaviour of the
economy as a whole e.g. Aggregate Demand and Aggregate Supply.
49. (d) 50. (b) 51. (b) 52. (d)
6. How to produce: Due to the relative scarcity of resources, every
53. choice 54. scarcity 55. concave 56. MRT economy has to face this problem, which deals with the choice of technique
57. opportunity cost 58. MRT of production, i.e. labour intensive or capital intensive techniques. This
59. (d) 60. (b) 61. (a) 62. (d) 63. (a) 64. (b) 65. (a) 66. (a) problem is concerned with the efficient use of resource (labour or capital)
67. (b) 68. (d) 69. (d) 70. (d) 71. (a) 72. (c) 73. (c) 74. (b) so as to maximise the output at minimum possible cost.
75. (d) 76. (b) 77. (b) 78. (b) 79. (c) 80. (c) 81. (b) 82. (c) 9. (a) Normative statement- it deals with a situation as it ‘ought to be’.
83. (c) 84. (c) 85. (d) (b) Positive statement – it deals with a real life situation, justifiable by facts.
10. If the river Kosi causes widespread floods in Bihar, it will lead to
Revision Questions
destruction of resources in Bihar. This will shift the PPC leftward because
24. destruction of resources will reduce the production capacity and hence,
Combinations MRT (DY/DX) there will be less production of output.
Initial PPC is AB.
A – With floods, the PPC will shift to EF.
B 5:1
C 10 : 1
D 15 : 1
E 20 : 1
F 25 : 1
Since MRT is increasing, PPF will be downward sloping concave to the origin.
29. Real level of production will be increased by improvement in employment.
But potential level of production will not increase (No shifting of PPC will
take place). Reason being PPC is based on the assumption that available
resources are fully utilised. SELF ASSESSMENT TEST 3
1. (c) Production of more units of Good X and less units of Good Y.
30.
2. straight line
Good X (units) Good Y (Units) MRT 3. (a) What to produce and in what quantity?
(b) How to produce?
0 10 –
(c) For Whom to produce? (Any Two)
1 9 1Y : 1X 5.
2 7 2Y : 1X Positive Economics Normative Economics
3 4 3Y : 1X Positive economics is that branch Normative economics is that
4 0 4Y : 1X of economics which deals with branch of economics which
economic issues as “what is”. It is deals with economic issues
Since MRT is increasing, the PP curve is downward sloping and concave based on facts and actual data. as “what ought to be“. It is
to the origin. suggestive in nature.
31. Floods have damaged and reduced resources. Since potential production
declines, the production possibility frontier shifts to the left. e.g. Western Railways has earned e.g. the government should
SELF ASSESSMENT TEST 1 517.41 crores by selling scrap promote social safety nets to
1. b) A1 to A2 material in 2018-19. take care of the poor population
2. Opportunity cost 6. The central problem of ‘for whom to produce’ relates to the distribution
3. Scarcity of resources gives rise to the problem of choice (or economic of income among the different factor inputs. Goods and services are
problem). produced for those who have the capacity to pay. Capacity of the people to
4. Microeconomics is the study of economic behaviour of individual pay for goods depends upon their level of income which, in turn, depends
economic agents in the markets for different goods and services. on the market conditions of demand and supply of the factor inputs.
5. Normative Economics is that branch of economics which is suggestive 9. (a) Normative statement- it deals with a situation as it ‘ought to be’.
in nature. It deals with economic issues as they ‘ought to be’. Normative (b) Positive statement – it deals with a real life situation, justifiable by facts.
statements can only be assessed relative to beliefs and value judgements. 10. Production below the potential means that total production in the
e.g. The unemployment rate should be reduced. economy is somewhere below the production possibility curve PP’, for
6. The problem of ‘what to produce’ relates to the choice of goods for example at point U in the diagram. When the government starts employment
production. For example choice between capital goods and consumer generation schemes, the economy moves forward in its attempt to remove
goods, between war time goods and peace time goods and the like. The unemployment. The movement forward is towards the PP’ curve. It will
actual quantity of two possible goods would ultimately depend upon the help the economy in realising its production potential.
market conditions of demand and supply for each of the goods.
9. (i) Positive statement – it deals with a real life situation, justifiable by
facts.
(ii) Normative statement- it deals with a situation as it ‘ought to be’.
10. (a) No, the given statement is false. Under-utilisation of resources
does not decrease the capacity of economy to produce. So, there will be
no shift of Production Possibilities Frontier (PPF). However, economy will
operate at some point inside the PPF.
(b) No, the second statement is also false. An economy operates on
production possibilities frontier (PPF) only when resources are fully and
efficiently utilised. However, if resources are not fully and efficiently
2 SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey
 It will have the same slope since prices remain unchanged. The new
UNIT 2: Consumer’s Equilibrium and Demand budget line will shift rightwards parallel to the initial budget line since the
consumer can buy more of both the goods.
Do it yourself 1: Utility Schedule (v) Px = 4, P’y = 4, M =20
Units consumed Total utility Marginal utility Equation of new budget line: 4Qx + 4Qy = 20.
Its slope will be –4/4 = –1. Since absolute value of the slope of budget line
1 7 7 decreases, therefore, the new budget line will be flatter. Since Py falls the
2 17 10 consumer will be able to buy more of good Y in the same money income
pushing the Y-intercept of the Budget Line away from origin, keeping the
3 25 8 X-intercept constant, it rotates outwards.
4 31 6 (vi) If prices as well as the income double, i.e., P’x = 8, P’y = 10, M’ =40
Equation of new budget line: 8Qx + 8Qy = 40 or , 2 (4Qx + 4Qy) = 2
5 34 3 (20), or 4Qx + 4Qy = 20
6 34 0 Therefore, there will be no change in the budget set and the budget line.
Do it yourself 7: (a) PxQx + PyQy = M ⇒ 50Qx + 10Qy = 500
7 30 (–)4 (b) Slope of budget line = (–) Px/Py = (–) 50/10 = (–) 5
(c) If Qy = Zero, then 50Qx + 10Qy = 500 ⇒ 50Qx + 10(0) = 500
Do it yourself 2: The consumer will buy 3 units to attain equilibrium, i.e., Qx = 500/50 = 10 units
to maximise his satisfaction since at this consumption level, MU = Price = `8. (d) Old Py = `10
At consumption level of less than 3 units, MU is greater than price.
New Py = `5 (50% of `10 = `5)
Therefore, there is scope of increasing gain by purchasing more. If he buys If Py falls the consumer will be able to buy more of good Y in the same
more than 3 units, MU < Price. Therefore, the consumer will maximise his money income pushing the Y-intercept of the Budget Line away from ori-
satisfaction by buying 3 units only. gin, keeping the X-intercept constant, it rotates outwards and the equation
Do it yourself 3: will be 50Qx + 5Qy = 500.
Good X Good Y Do it yourself 8: Market demand function:
(20 − p) + (30 − 2p) = 50 − 3p ; when p ≤ 15
Qx TUx MUx MUx/Px Qy TUy MUy MUy/Py d(p) = 
 0; when p > 15
1 25 25 12.50 1 10 10 5.00
10(10 − 2p) ; when p ≤ 5
2 40 15 7.50 2 16 6 3.00 Do it yourself 9: Market demand function: 
 0; when p > 5
3 50 10 5.00 3 21 5 2.50 Do it yourself 10: (-) 0.2, (-)1.1, (-) 3.1 F
4 56 6 3.00 4 24 3 1.50 Do it yourself 11:
5 59 3 1.50 5 26 2 1.00 Price (`) Demand (units) Expenditure (`)
6 60 1 0.50 6 27 1 0.50 8 200 ÷ 8 = 25 200
Given the consumer’s income `12 and prices of the two goods (Px = `2, 7 210 ÷ 7 = 30 210
Py = `2), he will be in equilibrium when the following two conditions are
satisfied: Dq p 5 8 40
Price elasticity of demand, eD = × = × = =−1.6
Dp q −1 25 −25
1. Per rupee MU from consumption of each good is the same, i.e., MUx = MUy .
2. MU falls as more units of a good are consumed. Px Py Since eD = 1.6 > 1, therefore, demand for the good is elastic.
Do it yourself 12: Suppose demand for the good remains unchanged at ‘q’ units.
The condition MUx = MUy is satisfied at the following combinations of
the two goods: Px Py Price (`) Demand (units)
(i) 3X + 1Y (ii) 4X + 2Y
7 q
(iii) 5X + 4Y (iv) 6X + 6Y
Total money expenditure on these combinations are: 9 q
(i) 3 × 2 + 1 × 2 = `8 Dq p
(ii) 4 × 2 + 2 × 2 = `12* Price elasticity of demand, e= D ×
Dp q
(iii) 5 × 2 + 4 × 2 = `18
(iv) 6 × 2 + 6 × 2 = `24 0 7 0
eD = × = =0
The consumer is in equilibrium when he buys 4 units of X and 2 units 2 q 2q
of Y because his money income is `12. He will not buy the combination Therefore, demand for the good is perfectly inelastic and hence, the
3X + 1Y because he can gain by purchasing more. Also, he cannot obtain demand curve will be a vertical demand curve (parallel to Y-axis).
the combinations 5X + 4Y and 6X + 6Y because of his money constraint. Do it yourself 13: Price elasticity of demand, eD = –0.8
Do it yourself 4: No, bundle (10, 8) should be preferred as it contains percentage change in quantity demanded
eD =
more of both the goods. percentage change in price
Do it yourself 5: Px = 6, Py = 8, Qx = 6, Qy = 8. 20
Equation of budget line is QxPx + QyPy = M −0.8 =
M = 6 × 6 + 8 × 8 = 36 + 64 = 100 percentage change in price
Therefore, the consumer’s income = ` 100 −20
\ Percentage change in price = = –25% , i.e., price of the good falls by 25%.
Do it yourself 6: (i) When the consumer is in equilibrium, MRSxy = Px/Py 0.8
Do it yourself 14:
Substituting Px = 4, Py = 5, we have MRSxy = 4/5 = 4 : 5
(ii) Equation of the budget line is QxPx+ QyPy= M Price (`) Demand (units)
Substituting Px = 4, Py = 5, we get the equation of budget line 4Qx + 5Qy = 20
Slope of budget line = –Px/Py = – 4/5 = –0.8 4 1000
(iii) Equation of the budget line is 4Qx + 5Qy = 20 ? 750 (= 1000 – 25%)
When Qy = 0, 4Qx + 0 = 20
Price elasticity of demand, eD = –1
Qx = 5, i.e., if the consumer spends his entire income on good X he can Dq p
have maximum 5 units of it. Price elasticity of demand, e=
D ×
When Qx = 0, 0 + 5Qy = 20 Dp q
Qy = 4, i.e., if the consumer spends his entire income on good Y he can −250 4
−1
= ×
have maximum 4 units of it. Dp 1000
(iv) Px =4, Py = 5, M’ = 40 Dq = 1, therefore, new price = 4 + 1 = `5 per unit.
Equation of new budget line: 4Qx + 5Qy = 40.

SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey 3

 Do it yourself 15: Do it yourself 20: Price elasticity of demand,
Demand (units) percentage change in demand
Price (`) eD =
percentage change in price
5 20
−30
× 100
120 ÷ 24 = 5 24 −20
eD = 150 = = −0.8
Dq p 25 25
Price elasticity of demand, e=D ×
Dp q
percentage change in quantity
Do it yourself 21:
demanded of Good X
4 5 20 eDx =
eD =× = = ∞ percentage change in price of the Good X
0 20 0
−10%
Therefore, demand for the good is perfectly elastic and hence, the demand = = −2
curve will be a horizontal demand curve (parallel to X-axis). −5%
Do it yourself 16: Percentage change in price = – 10% eD = 2 (eD > 1, Elastic demand)
30 percentage change in quantity
Percentage change in demand = × 100 = 20%
150 demanded of Good Y
eDy =
Therefore, price elasticity of demand, percentage change in price of the Good Y
percentage change in quantity demanded 20% −10%
=eD = = –2 = = −0.5
percentage change in price –10% 20%
(minus sign is ignored as it only represents the inverse relation between eD = 0.5 (eD < 1, Inelastic demand)
price and quantity demanded.) Thus, Good X is more elastic since eDx > eDy.
eD = 2 (eD > 1, relatively more elastic demand). Do it yourself 22: Demand curve D(p) = q = 10 – 5p
Now, if demand rises from 150 to 210 units, percentage change in demand
Dq p
60 Price elasticity of demand, e= ×
= × 100 =40% D
Dp q
150
percentage change in quantity demanded Dq
eD = Slope of the demand curve, = − 5 (Since for a demand curve q =
percentage change in price Dp
40 a – bp, slope is –b, which measures the rate of change in demand due to
–2 = Dq
percentage change in price change in price, i.e., .
Dp
Percentage change in price = –20%
Thus, price of commodity X must fall by 20% so that its demand rises 3 3
At p = , q = 10 − 5 × = 10 − 3 = 7
from 150 to 210 units. 5 5
p Substituting these values, we get eD = – 5 × (3/5)/7 = – 3/7
Do it yourself 17: Let original price be ` ‘p’ per unit. Therefore, new price =
2 eD < 1 (inelastic demand)
p −p
−p Very Short Answer Type Questions (1 mark each)
2 × 100 = 2 × 100 = −50 1. Consumer’s equilibrium means allocation of income by a consumer on
Percentage change in price =
p p goods and services in a manner that gives him maximum satisfaction.

150 − 120 30 2. The term ‘utility’ refers to the want satisfying power of a commodity.
Percentage change in demand = × 100 = × 100 = 25 3. Total utility is the sum of the utilities from all the units consumed.
120 120
4. Marginal utility can be defined as the addition to the total utility when
percentage change in demand 25 one more unit of the commodity is consumed.
Price elasticity of demand, eD = = = −0.5
percentage change in price −50 5. As we consume more units of a commodity, each successive unit consumed
Since eD = 0.5 < 1, therefore, demand for the good is inelastic. gives lesser and lesser satisfaction, that is marginal utility diminishes.
Do it yourself 18: 6. (i) Marginal utility (MU) = Price  (ii) MU of the good diminishes as
Price (`) Demand (kg) more of it is consumed.
7. When utility is expressed in ranks, it is called ordinal utility.
7 8 8. Budget set refers to all the possible combinations of the two goods
8 ? which a consumer can afford from his given income and prices in the
Dq p market, irrespective of whether the whole of income is spent or not.
Price elasticity of demand, e=
D ×
Dp q
9. A change in income of the consumer or change in price of one good
or both the goods can lead to a change in budget set.
Dq 7 −8 10. Budget line is the locus of points representing all the possible combinations
−1= × ⇒ Dq=
1 8 7 of the two goods which the consumer can buy, given his money income
8 48 and prices in the market, when his entire income is spent.
Therefore, new quantity demanded = 8 − = = 6.85 kg (approximately)
7 7 11. Any point below the budget line represents a bundle which costs less
Do it yourself 19: Suppose original price be ` ‘p’ per unit. than the consumer’s income, i.e., some income is left over.
Demand (units) 12. Indifference curve (IC) is the locus of points that represent different

Price (`)
combinations of the two goods which give the consumer same utility level.
p 30 13. ‘Monotonic preferences’ implies that a consumer will prefer a

combination which contains more of at least one good and no less of
33 (= 30 + 3)
the other good.
Dp = –1,   Dq = 3,   q = 30 14. The set of indifference curves of a consumer is called indifference map in
Dq p which a higher indifference curve represents a higher level of satisfaction.
Price elasticity of demand, e=
D ×
Dp q 15. Marginal Rate of Substitution (MRS) is the rate at which the consumer
is willing to sacrifice the quantity of one good to obtain one more unit
3 p
−1.5 = × of the other good.
−1 30 16. Demand for a good is the quantity of that good which a buyer is willing
45
3p = 45 ⇒ p = = 15 D and able to buy at a particular price, during a given period of time.
3
Therefore, original price was ` 15 per unit. 17. Demand schedule is a tabular presentation showing the different

quantities of a good that buyers of that good are willing and able to
buy at different prices during a given period of time.
4 SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey
 18. Market demand refers to the total quantity demanded of a commodity
by all the consumers at a given price, during a given period of time.
19. Market demand curve is derived by the horizontal summation of
individual demand curves in the market
20. Normal good is any good whose demand increases as the consumer’s
income increases, and decreases as the consumer’s income decreases.
21. Inferior good is any good whose demand falls as the consumer’s
income increases, and as the consumer’s income decreases, the
demand for it rises.
22. Rise in price of the good, other things remaining the same.
23. A rightward shift of demand curve indicates increase in demand due
to change in any factor other than the own price of the good, e.g.,
rise in income (in case of a normal good), rise in price of a substitute
good, etc.
24. X and Y are substitute goods.
25. Substitute goods are those goods which can be used in place of one
another to satisfy a given want, e.g., Pepsi and Coca-Cola.
26. Complementary goods are those goods which are consumed (or
used) jointly/together to satisfy a given want, e.g., Tea and Sugar.
27. Law of demand states that–“Other things remaining unchanged,
a consumer buys more quantity of a good when its price falls and
vice-versa.” The inverse relationship between price and quantity
demanded is referred to as the ‘Law of demand’.
28. Prices of related goods, consumer’s income, tastes and preferences of
the consumer, etc. remain unchanged.
29. If the number of buyers of a good in the market increases, it leads to
increase in market demand for the good at the same price.
30. Increase in quantity demanded refers to rise in demand due to fall in
own price of the good, other things remaining unchanged.
31. Decrease in demand refers to less quantity demanded of a good at
the same price, due to any factor other than the own price of the
good.
32. Price elasticity of demand refers to the degree of responsiveness of
the demand for a good to a change in its price.
33. When the percentage change in demand for a good is less than the
percentage change in the price, then |eD| < 1 and the demand for
the good is said to be inelastic.
34. When a price change never leads to a change in the demand for a
good, it is called perfectly inelastic demand,
eD = 0. Whatever be the price, the quantity demanded remains at a
constant level.
35. When the percentage change in demand for a good is greater than
the percentage change in the price, then |eD| > 1 and the demand
for the good is said to be price-elastic.
36. Because water is a necessity of life and it has no substitutes.
37. Salt, newspapers, toothpaste, match-box
38. Price elasticity of demand, eD is a negative number since the demand
for a good is negatively (or inversely) related to the price of a good,
i.e., due to the inverse relationship between price and quantity
demanded of a good.
39. Rectangular hyperbola demand curve is always unitary elastic. |eD| =
1 at every point on this demand curve.
40. Demand curve is a horizontal straight line (i.e., parallel to X-axis).
41. (i) Nature of the good (ii) Availability of close substitutes of the good.
42. If demand curve of a good is a negatively sloped straight line, the
price elasticity of demand may be: eD = –1 or |eD| >1 or |eD| < 1.
43. Price elasticity of a constant elasticity demand curve may be : eD = 0
or eD = –1.
44. If two demand curves intersect, at their point of intersection, the
elasticity associated with the flatter demand curve is higher.
45. The area under the demand curve shows price multiplied by quantity,
i.e. total expenditure on the good.
46. Total utility.
True/False?
1. False: Marginal utility of a good falls as more of it is consumed and
becomes negative when total utility falls.
2. False: A budget set is the collection of all bundles of goods that a
consumer can afford to buy with his given income and the prices of
the goods in the market.
3. False: Lower indifference curve represents lower level of satisfaction
because a point on a lower indifference curve represents a
consumption bundle which contains less good(s).
SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey 5
4. True: The indifference curve is convex to the origin because when a
consumer moves downwards along the indifference curve, Marginal
Rate of Substitution (MRS) between the two goods continuously falls
due to the operation of the law of diminishing marginal utility.
5. False: Marginal rate of substitution (MRS) is the term used to denote
the rate at which the consumer is willing to sacrifice units of one
good to obtain one more unit of the other good.
6. True: At the point of consumer’s equilibrium, MRS continuously falls
and the indifference curve is convex to the origin because the law of
diminishing marginal utility is in operation.
7. False: With increase in the price of a substitute good, the demand for
a good increases. But with increase in the price of a complementary
good, the demand for the given good decreases.
8. False: With the increase in income, demand for a normal good
increases but demand for an inferior good decreases.
9. True: If goods X and Y are substitutes, a rise in price of X makes Y
relatively cheaper. Therefore, it leads to increase in demand for good Y
at the same price. As a result, demand curve of Y shifts to the right.
10. False: Demand for food is inelastic since food is a necessity. However,
demand for a specific food item like Pizza, Burger, etc. is elastic since
many substitutes are available.
11. False: Marginal rate of substitution (MRS) is a measure of the slope
of indifference curve. The absolute value of price ratio of two goods is
the slope of budget line.
12. False: Marginal rate of substitution (MRS) diminishes as we move
down along the indifference curve due to the operation of law of
diminishing marginal utility.
13. True: It is because two regular convex to origin indifference curves
cannot intersect each other.
14. False: When marginal utility (MU) falls, total utility (TU) increases so
long as MU is positive. TU decreases only when MU becomes negative.
15. False: Budget set is a collection such bundles of goods which cost less
than or equal to the consumer’s money income at the given prices.
16. False: In case of substitute goods, fall in price of one good reduces
the demand for another good. X and Y are complementary goods and
not substitute goods.
17. False: There will be no shift in demand curve. Rather, there will be an
upward movement along the same demand curve.
18. False: Sometimes, the demand curves can be such that the elasticity
of demand remains constant throughout. At all points on a rectangular
hyperbola demand curve, eD = –1 and at all points on a vertical
demand curve, eD = 0 because demand is perfectly price-inlastic.
19. False: When a price change does not result in any change in
expenditure on the good, its demand is unitary elastic, eD = –1 and
the demand curve has the shape of a rectangular hyperbola.
20. True: Indifference curves are drawn on the assumption that a
consumer can rank his preferences on the basis of the level of
satisfaction derived from each consumption bundle of the two goods.
Objective Type Questions, MCQs
1. (b) 2. (a) 3. (d) 4. (d) 5. (b) 6. (c) 7. (a) 8. (a)
9. (a) 10. (c) 11. (c) 12. (c) 13. (a) 14. (d) 15. (b) 16. (b)
17. (b) 18. (b) 19. (b) 20. (c) 21. (c) 22. (d) 23. (a) 24. (d)
25. (d) 26. (b) 27. (c) 28. (b) 29. (c) 30. (d) 31. (b) 32. (d)
33. (d) 34. (a) 35. (b) 36. (d) 37. (d) 38. (c) 39. (a) 40. (c)
41. (d) 42. (a) 43. (c) 44. (c) 45. (b) 46. (d) 47. (a) 48. (b)
49. (c) 50. (c) 51. (a) 52. (c) 53. (d) 54. (b) 55. (c) 56. (c)
57. (c) 58. (a) 59. (a) 60. (b) 61. (c) 62. zero 63. utility
64. decrease 65. marginal utility 66. negative
67. consumer 68. (?) 69. (?) 70. (?) 71. (?) 72. (?) 73. (?)
74. (?) 75. (?) 76. (?) 77. (?) 78. (?) 79. (?) 80. (?) 81. (?)
82. (?) 83. (?) 84. (?) 85. (?) 86. (?) 87. (?) 88. (?) 89. (?)
90. (?) 91. (?) 92. (d) 93. (b) 94. (c) 95. (b) 96. (b) 97. (b)
98. (c) 99. (b) 100. (b) 101. (b) 102. (c) 103. (d) 104. (a) 105. (c)
106. (c) 107. (a) 108. (b) 109. (b) 110. (b) 111. (a) 112. (b) 113. (c)
114. (a) 115. (c) 116. (a) 117. (d) 118. (c) 119. (a) 120. (c) 121. (b)
122. (b) 123. (c) 124. (c) 125. (a) 126. (a) 127. (a) 128. (a) 129. (b)
130. (a) 131. (c) 132. (c) 133. (a) 134. (a) 135. (c) 136. (b) 137. (d)
138. (b) 139. (d) 140. (c) 141. (a)
Revision Questions
49. Given Px = 3, Py = 3 and MRS = 3, A consumer is said to be in
equilibrium when MRS = Px/Py
 ubstituting values we find that 3 > 3/3 i.e. MRS > Px/Py
S 13. (i)PX.Qx+PY.Qy = M
Therefore consumer is not in equilibrium. MRS > Px/Py means that 20.Qx + 10.Qy = 200
consumer is willing to pay more for one more unit of x as compared to ii)Slope of Budget line = (ignoring minus sign) =2
what market demands. The consumer will buy more and more of X. As iii) If the entire income is spent on Good Y Qx is zero;
a result MRS will fall due to the law of Diminishing Marginal Utility. This PX.Qx+PY.Qy =M
will continue till MRS = Px/Py and the consumer is in equilibrium again. 20 x 0 + 10 x Qy = 200
50. Given Px = 4, Py = 5 and MUx = 5, MUy = 4, and consumer will be Qy = 20 units.
in equilibrium when MUx/Px = MUy/Py 15. Law of Demand: Law of Demand states that other things being
equal; there exists an inverse relation between price of a commodity and
Substituting values, we find that 5/4 > 4/5 i.e. MUx/Px > MUy/ Py
its quantity demanded. In other words, when the price of a commodity
Since per rupee MUx is higher than per rupee MUy, consumer is not in ncreases, its quantity demanded falls and vice-versa, other factors
equilibrium. remaining the same.
The consumer will buy more of X and less of Y. As a result MUx will Demand Schedule:-
fall and MUy will rise. The reaction will continue till MUx/Px and MUy/ Price of the Commodity X (in ) Quantity Demanded of the
Py are equal and the consumer is in equilibrium again. Commodity X (in units)
SELF ASSESSMENT TEST 1
1. (c) Marginal utility is zero 10 1
2. (b) Marginal Rate of Substitution 8 2
3. Rectangular hyperbola
7. ed = % change in quantity demanded/%change in price (ignoring minus sign) 6 3
% change in quantity demanded =ΔQ/Q × 100 4 4
= 30/150 × 100 = 20% fall in the quantity demanded
ed = 20%/40% = 0.5 (ignoring minus sign) 2 5
9. (a) (P1 )(X1) + (P2 )(X2) = M In the above schedule, as the price of the commodity X falls from `10 to `8
(b) (i) (PX )(Qx) +( PY)(Py)= M to `6, the quantity demanded for the commodity X rises from 1 unit to 2
4(Qx)+ 5(Qy) = 40 units and 3 units, assuming other factors to be constant.
(ii) Slope = –Px/Py Diagram:
= –4/5
SELF ASSESSMENT TEST 2
1. (b) maximum
2. ( d) Downward sloping straight line.
3. (c) Both (a) and (b)
7. (a) Ed = (-) 0.2 (given)
Percentage rise in price = 5% (given)
Let percentage change in quantity demanded = x
Ed = Percentage change in quantity demanded/ Percentage change in
price (ignoring minus sign)
0.2 = x/5%
x=1%
Percentage fall in quantity demanded is 1% The demand curve is a left to right downwards sloping curve due to the
9. (a) PxQx + PyQy = M inverse relationship between price of the commodity and its quantity
50.Qx + 25.Qy = 500 demanded, assuming other factors to be constant.
b) Slope = –Px/Py = –50/25 = –2
c) Qx = M/Px = 500/10 = 10 units of Good X. UNIT 3: Producer Behaviour and Supply
d) Qy = M/Py = 500/50 = 10 units of Good Y. (since price of commodity
Do it yourself 1: Given Q = 2L2K2 , L = 5, K = 2
Y has doubled)
Therefore, Q = 2 (5)2 (2)2 = 2 × 25 × 4 = 200
SELF ASSESSMENT TEST 3
Thus, the maximum possible output that the firm can produce with 5 units
1. (b) Downward sloping concave
of L and 2 units of K is 200 units.
2. (c) Utils
Do it yourself 2:
3. ( a) Increasing
4. (d) A1to A2 Labour (L) MP TP = Sum of MPs AP=TP ÷ L
9. Positive economics is that branch of economics which deals with
1 3 3 3
economic issues as “what is”. It is based on facts and actual data. e.g.
Western Railway e.g. has earned 517.41 crore by selling scrap material in 2 5 8 4
2018-19. 3 7 15 5
Normative economics is that branch of economics which deals with economic
issues as “what ought to be“. It is suggestive in nature. e.g. the government 4 5 20 5
should promote social safety nets to take care of the poor population. 5 3 23 4.6
10. Ed = Percentage change in quantity demanded/Percentage change in
price (ignoring minus sign) 6 1 24 4
Percentage change in quantity demanded (%ΔQ)= 10/40 ×100 = 25% (fall)
Ed = 25%/10% Do it yourself 3:
Ed = 2.5 Units of Total Average Marginal Physical
Demand is more elastic as Ed>1 variable Physical Physical Products (units)
12. (a) PP curve is concave to the origin, i.e., its slope is increasing, because input Product Product (units)
Marginal Rate of Transformation (MRT) increases as we move downwards (units)
along the curve from left to right. MRT increases because no resource is
equally efficient in production of all goods. As we transfer resources from 1 10 10 10
one good to another, the rate of sacrifice, i.e., MRT increases because we 2 22 11 12
have to transfer less and less efficient resources.
3 30 10 8
(b) Any point below the PPC highlights the problem of unemployment and
inefficiency in the economy. It represents a combination of the two goods that 4 35 8.75 5
will be produced when the resources are under-utilised or inefficiently utilised
5 30 6 –5
or both. In other words, production is below the potential in the economy.

6 SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey

Do it yourself 4: Law of variable proportions Do it yourself 11:
L AP TP MP Phase Output sold Total cost Average cost Marginal cost
1 9 9 9 I phase Increasing (in units) (in `) (in `) (in`)
returns to a factor 1 30 30 30
2 10 20 11
3 11 33 13 2 40 20 10

4 11.25 45 12 3 36 12 –4

5 11 55 10 4 48 12 12
Increasing returns to a factor means TP of the variable factor (labour) Do it yourself 12:
increases at increasing rate and MP rises. Up to 3 units of the variable Output sold Total Revenue Average Rev- Marginal Revenue
factor (labour), there are increasing returns. (in units) (in `) enue (in `)
Do it yourself 5: TFC= AFC × Output = 20×3 = `60. At q = 1, MC=TVC (in `)

Output TFC AFC TVC AVC TC (sum MC ATC 1 18 18 18

(q) (AVC × q) of MCs) (TC/q) 2 32 16 14
1 60 60 30 30 90 30 90 3 42 14 10
2 60 30 56 28 116 26 58 4 48 12 6
3 60 20 96 32 156 40 52 Do it yourself 13:
Do it yourself 6:
Output Marginal Revenue (`) Total Revenue Price (`)
Output TVC AVC MC (units) (`)
1 12 12 12 1 10 10 10
2 20 10 8 2 6 16 8
3 30 10 10 3 2 18 6
4 40 10 10 4 0 18 4.50
Do it yourself 7 Do it yourself 14:

Output TFC AFC TVC MC AVC TC AC Price Output TR TC MR MC Profit (TR – TC)
1 60 60 20 20 20 80 80 8 1 8 6 8 6 2
2 60 30 38 18 19 98 49 8 2 16 14 8 8 2
3 60 20 54 16 18 114 38 8 3 24 20 8 6 4
4 60 15 72 18 18 132 33 8 4 32 28 8 8 4
5 60 12 95 23 19 155 31 8 5 40 38 8 10 2
Do it yourself 8: The two conditions of producer’s equilibrium under MC = MR approach are:
(i) MC = MR
Output MC TVC AVC TC TFC AFC
(ii) MC > MR after the ‘MC = MR’ output level.
1 60 60 60 120 60 60 MC=MR condition is satisfied both at output level 2 units and the output
2 54 114 57 174 60 30 level 4 units. But the second condition MC > MR after the ‘MC = MR’
output level is satisfied only at 4 units of output.
3 48 162 54 222 60 20 Therefore, equilibrium output level is 4 units.
4 54 216 54 276 60 15 Maximum profit = TR – TC = 32 – 28 = `4
5 69 285 57 345 60 12 Do it yourself 15:

Do it yourself 9 Price Output TR TC MR MC Profit (TR – TC)

8 1 8 5 8 5 3
Output AFC TFC MC TVC TC AVC
7 2 14 8 6 3 6
1 60 60 32 32 92 32
6 3 18 12 4 4 6
2 30 60 30 62 122 31
5 4 20 15 2 3 5
3 20 60 28 90 150 30
4 5 20 19 0 4 1
4 15 60 30 120 180 30
Do it yourself 16:
5 12 60 35 155 215 31 Producer’s Equilibrium
6 10 60 43 198 258 33 Output MR MC TR TC Profit (TR–TC)
Do it yourself 10 1 8 10 8 10 –2
Total quantity (in TC (in `) TVC (in `) AVC (in 2 8 8 16 18 –2
units) `) 3 8 7 24 25 –1
0 200 0 - 4 8 8 32 33 –1
1 300 100 100 5 8 9 40 42 –2
2 380 180 90 Producer of the good is in equilibrium at 4 units of output because at this
3 440 240 80 level of output both the conditions of equilibrium are satisfied:
(i) MC = MR
4 490 290 72.5

SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey 7

(ii) MC > MR after ‘MC = MR’ level of output < MR. So, the second condition of producer’s equilibrium is not satisfied.
The producer incurs losses at all the given levels of output. At equilibrium It means the producer has not yet reached the equilibrium position. It is in
output of 4 units, he minimises his losses. The minimum loss is `1. the interest of the producer to produce more output to maximise profits.
Do it yourself 21:
Do it yourself 17:
0 ; p < 50
Quantity Price = AR TR TC MR MC 
Market supply function is: Sm (p) = p − 5 ;50 ≤ p < 75
(in units) (in `) (in `) (in `) (in `) (in `) (p − 5) + (p − 10) = 2p − 15 ;p ≥ 75

0 20 0 10 - - Do it yourself 22:
1 20 20 50 20 < 40 Market supply schedule

2 20 40 80 20 < 30 Price SS1 SS2 SS3 Market Supply (SS = SS1

(`) (units) (units) (units) + SS2 + SS3)
3 20 60 100 20 = 20
0 0 0 0 0
4 20 80 105 20 > 5
1 0 0 0 0
5 20 10 125 20 = 20
2 2 2 2 6
6 20 120 150 20 > 25
The firm will be in equilibrium at 5 units of output as at this level of 3 4 4 4 12
output both the conditions of firm’s equilibrium are satisfied, i.e. 4 6 6 6 18
i) MR is equal to MC (20)
5 8 8 8 24
ii) MC is increasing at the point of equilibrium
Do it yourself 18: 6 10 10 10 30
7 12 12 12 36
Quantity (in units) Price = AR TR TC MR MC
8 14 14 14 42
0 10 0 5 - -
Do it Yourself 23
1 10 10 25 10 < 20
2 10 20 35 10 = 10 Price (`) Supply (Units)
3 10 30 40 10 > 5 4 100
4 10 40 50 10 = 10 5 120
5 10 50 70 10 < 20 Dq p 20 4
Price elasticity of supply, eS = × ⇒ × ⇒ 0.8
Dp q 1 100
6 10 60 100 10 < 30
No, supply is not elastic but inelastic since eS < 1.
The firm will be in equilibrium at 4 units of output as at this level of
Do it Yourself 24:
output both the conditions of firm’s equilibrium are satisfied, i.e.
i) MR is equal to MC (10) Price (`) Supply (Units)
ii) MC is increasing at the point of equilibrium
Do it yourself 19: 10 200
10 + 10% = 11 ?
Output TR TC MC MR
Dq p Dq 10
1 18 21 21 18 Price elasticity of supply, e=
S × ⇒= 2 × ⇒ D=
q 40
Dp q 1 200
2 36 39 18 18 Therefore, new quantity supplied = 200 + 40 = 240 units
3 54 54 15 18 Do it Yourself 25:
Suppose ‘q’ units was the original quantity supplied.
4 72 72 18 18
Price elasticity of supply, Percentage change in quantity supplied
5 90 93 21 18 eS =
Percentage change in price
Producer of the good is in equilibrium at 4 units of output because at this 735 − q
level of output both the conditions of equilibrium are satisfied: × 100
q
(i) MC = MR 1.5 =
(ii) MC > MR after ‘MC = MR’ level of output 15
Since MR is constant at all levels of output, therefore it is a perfectly 735 − q 15 × 1.5
= ⇒
= q 600
competitive firm. Price per unit = MR = ` 18 q 100
Do it yourself 20: Thus, original quantity supplied = 600 units
Do it Yourself 26:
Output Price TR TC MR MC
Price (`) Supply (Units)
0 52 0 10 – –
1 44 44 60 44 50 5 200

2 37 74 90 30 30 ? 200 – 100 = 100

3 31 93 100 19 10 Dq p −100 5
Price elasticity of supply, eS = × ⇒ 2.5 = ×
Dp q DP 200
4 26 104 102 11 2
−100 × 5
5 22 110 105 6 3 Dp = =−1
200 × 2.5
6 19 114 109 4 4 Therefore, new price = 5 – 1 = ` 4 per unit.
7 18 126 115 12 6 Do it Yourself 27:

The two conditions of producer’s equilibrium are: (i) MC = MR (ii) MC > Price (`) Total Revenue (`) Supply (units)
MR after ‘MC = MR’ level of output
10 50 50 ÷ 10 = 5
The first condition is satisfied at 6 units of output. But after 6 units of
output (i.e. when 7th unit is produced), MC is ` 6 and MR is ` 12 i.e. MC 15 50 + 200% = 150 150 ÷ 15 = 10

8 SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey


Dq p
Price elasticity of supply, e=
S ×
Dp q
5 10
= × =2
5 5
ince eS > 1, therefore, supply of the good is price-elastic.
S 27. TVC at a level of output is the sum of marginal costs (MC) up to that level.
Do it Yourself 28:
Commodity A:
% change in quantity supplied of commodity A
es A =
% change in price of commodity A
− 40%
= = 2
− 20%
Commodity B:
esB = 2 × 1.5 = 3 (since the ratio of elasticity of supply of commodities A
and B is 1 : 1.5)
% change in quantity supplied of commodity B
e sB =
% change in price of commodity B
% change in quantity supplied of commodity B
3=
10 %
Therefore, percentage change (increase) in quantity supplied of
commodity B = 30%)
Very Short Answer Type Questions (1 mark each)
1. Production function of a firm is a technological relationship between
physical inputs used and physical output produced by the firm.
2. Marginal product can be defined as the increase in total product
when employment of the variable input is increased by one unit,
keeping all other inputs constant.
3. Average product (AP) is defined as the output per unit of variable
input. AP = TP/Units of variable input
4. The law of variable proportions shows the pattern of change in total output
when only one input is increased, other inputs remaining unchanged.
5. As more and more units of variable factor are employed with fixed factor,
initially total product (TP) increases at an increasing rate and marginal
product (MP) increases. This is called increasing returns to a factor.
6. Total physical product (TPP) increases at a decreasing rate and it
falls when MPP becomes negative.
7. When MP falls and becomes negative, TP declines (phase III of
production). So, TP curve is downward sloping.
8. The MP curve looks like an inverse U-shaped curve. AP curve is also
inverse U-shaped.
9. Average product (AP) decreases.
10. In economics, cost of producing a good is the sum of actual money
expenditure on inputs and the estimated (or imputed) expenditure
on the inputs supplied by the owner, including normal profit.
11. The actual money expenditure on inputs is called explicit cost, e.g.,
expenditure on purchase of raw materials.
12. The estimated (or imputed) value of inputs supplied by the owner of
the firm is called implicit cost, e.g., imputed salaries of the owners,
imputed rent of the building of the owners, etc..
13. (i) Wages
(ii) Cost of raw materials.
14. Marginal cost can be defined as the increase in total cost due to
increase in production of one extra unit of output.
15. Average variable cost (AVC) is defined as per unit variable cost of output.
16. Since ATC = AVC + AFC and AFC is positive, therefore, ATC is
greater than AVC.
17. TFC remains constant at all levels of output.
18. TFC curve is a horizontal straight line (parallel to the X-axis) since
TFC remains constant at all levels of output.
19. As output is increased, AFC continuously falls.
20. As output increases, TVC first increases at a decreasing rate and
after a point increases at an increasing rate.
21. As output increases, TC first increases at a decreasing rate and after
a point increases at an increasing rate.
22. Since TC = TFC + TVC and TFC remains constant at all levels of
output, therefore an increase in TC is equal to increase in TVC.
23. TC – TVC = TFC, so the vertical distance between TC and TVC
curves remains the same since TFC is constant at all levels of
SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey 9
output. Hence, TC and TVC curves remain parallel to each other.
24. Inverse S shaped–TC curve is concave in the beginning and convex
afterwards.
25. AFC curve is downward sloping (rectangular hyperbola).
26. As output increases initially MC falls, then MC rises. Therefore, MC
curve is U-shaped.
28. At 1 output level, TVC = MC.
29. Because marginal cost is not affected by fixed cost.
30. ATC – AVC = AFC and as output increases AFC falls. Therefore, the
difference between AC and AVC decreases with increase in output.
31. Revenue refers to the sale receipts or the market value of output
produced.
32. Marginal revenue (MR) of a firm is defined as the increase in total
revenue when one more unit of output is produced.
33. Since price falls and average revenue means price, therefore,
average revenue (AR) falls.
34. Marginal revenue (MR) remains constant and is equal to the market price.
35. Since average revenue (AR) means price, therefore, AR increases if
MR > AR.
36. Since price is constant, TR increases at a constant rate. Therefore,
TR curve of the firm is a straight line.
37. Producer’s equilibrium refers to the level of output of a commodity
which gives the maximum profit to the producer of that commodity.
38. The producer is not in equilibrium when MR is greater than MC
because benefit is greater than the cost. By producing more output,
the producer can add to his profits.
39. ‘MC = MR’ is a necessary condition but not sufficient enough to
ensure equilibrium. MC must be greater than MR after the MC = MR
output level, i.e., after equilibrium.
40. Supply means the quantity of a commodity which a firm is willing to
produce at a particular price, during a given period of time.
41. Supply schedule is a table which shows the quantities of a
commodity supplied at various prices during a given time period.
42. Market supply refers to the sum total of supply of all firms or
producers in the industry at a particular price, during a given time
period.
43. Increase in supply refers to more quantity supplied of a good at the
same price, due to any factor other than the own price of the good.
44. Technological progress.
45. Decrease in supply refers to less quantity supplied of a good at the
same price, due to any factor other than the own price of the good.
46. Rise in input prices.
47. If the number of firms in the market increases, it leads to increase
in market supply of the good at the same price. Therefore, market
supply curve shifts to the right.
48. Price elasticity of supply is a measure of the responsiveness of the
supply of a good to change in its price.
49. If the percentage change in supply of a good is less than the
percentage change in the price, then eS < 1 and the supply of the
good is said to be inelastic.
50. When a price change never leads to a change in the supply of a
good, it is called perfectly inelastic supply, eS = 0.
51. Marginal Cost is less than Average Variable Cost.
52. Marginal Cost is equal to Average Cost.
53. Average Variable Cost is equal to Average Total Cost.
54. The difference between Average Total Cost and Average Variable
Cost is Average Fixed Cost, which decreases as output is increased.
55. Marginal Cost is more than Average Cost.
56. The difference between Total Cost and Total Variable Cost is Total
Fixed Cost, which remains constant.
57. Imputed salary of the producer.
58. Imputed interest of own saving.
59. MCq =TVCq – TVCq–1
MC16 =TVC16 – TVC15 = `3500 – `3000 = `500.
60. Total Revenue = Market Price × Quantity sold.
61. Price line is a horizontal straight line parallel to X-axis that represents
that a perfectly competitive firm can sell any quantity of output at
the given market price.
62. For a price-taking firm, market price is equal to average revenue.
 63. For a price-taking firm, market price is equal to marginal revenue.
True/False? Give Reason.
1. False: Diminishing returns to a factor means diminishing MP, and so
long as MP is positive, TP increases even though MP is falling.
2. False: When MP decreases TP will increase so long as MP is positive.
3. False: TP also increases when there are diminishing returns to a
factor so long as MP is positive.
4. False: MP falls (i.e., diminishing returns), TP can rise so long as MP is
positive.
5. False: Average product rises as long as marginal product is greater
than average product. Here, marginal product could be rising or falling.
6. True: Under diminishing returns to a factor, total product (TP)
continues to increase till marginal product reaches zero, though TP
increases at decreasing rates.
7. False: When there is diminishing returns to a factor, total product
(TP) can decrease when marginal product (MP) of the variable factor
becomes negative.
8. False: When MP falls due to diminishing returns to a factor, AP may
rise so long as MP > AP.
9. True: When there are diminishing returns to a factor, TP first
increases (though at decreasing rate when MP falls but is positive)
and then TP starts falling when MP becomes negative.
10. False: With increase in level of output, average fixed cost (AFC) goes
on falling but it can never be zero because AFC = TFC/output and
TFC is positive.
11. False: When marginal cost (MC) starts rising, AVC can continue to fall
as long as MC is less than the AVC.
12. False: After a certain level of output, MC starts rising but AC
continues to fall as long as MC is less than the AC.
13. ATC – AVC = AFC and AFC = TFC/output. Therefore, as output
increases AFC falls since TFC is constant at all levels of output.
14. True: After a certain level of output, MC starts rising but AVC
continues to fall as long as MC is less than the AVC.
15. False: TC – TVC = TFC, which remains constant at all levels of
output. TFC does not fall with increase in output.
16. False: TVC curve is inverse S shaped curve. This is because as
output increases TVC first increases at decreasing rate and then
TVC increases at increasing rate. (TVC curve is concave initially and
convex afterwards.)
17. False: MR = 0 is possible when TR is constant and as TR is constant,
AR will fall as output is increased.
18. False: MR can be less than price (AR) when a firm can sell more
units of a commodity only by lowering the price.
19. False: When marginal revenue (MR) is constant and not equal to
zero, then total revenue (TR) will increase at a constant rate, the
rate of increase being equal to the market price of the good.
20. False: When total revenue (TR) is maximum, marginal revenue (MR) is zero.
21. False: When MR is positive and constant, TR will increase at a
constant rate but AR will be constant and will be equal to MR.
22. False: When TR is constant, MR = 0 and AR falls.
23. False: When MR falls to zero, AR falls.
24. False: For a producer to be in equilibrium, MC = MR is a necessary
condition but not the sufficient condition because MC must be greater
than MR after ‘MC = MR’ level of output.
25. False: Total cost rises at a diminishing rate when marginal cost
falls and total cost rises at an increasing rate when marginal cost
increases.
26. True: Zero marginal product means that change in total product is
zero, i.e., total product has stopped increasing and is maximum.
27. False: Marginal product (MP) can be negative when total product
(TP) starts declining. But average product cannot be negative as TP
is always positive.
28. False: A rational producer aims to operate in the second phase of
production as total production is maximum and marginal product of
variable factor is positive.
29. False: When average product is maximum, marginal product will be
equal to average product.
30. True: As long as marginal product is more than average product,
average product can rise even when marginal product starts declining.
31. True: Under diminishing returns to a factor, MP falls. TP increases till MP
is positive and when MP becomes zero, TP is maximum and constant.
32. False: Although TP increases at a diminishing rate, but MP falls under
10 SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey
diminishing returns to a factor.
33. True: AP = TP/L. Since TP is constant and variable input (L)
increases, AP will fall. TP is constant and maximum when MP = 0.
Here, AP must be falling.
34. True: Because AP, like an average, falls if the MP, the marginal value,
lower than AP.
35. False: When marginal cost falls, AVC falls. AC = AFC + AVC. AFC
always falls as output increases. Hence, AC will fall when MC is falling.
36. True: Because total fixed cost exists even at zero level of output,
whereas, total variable cost is zero at zero output.
37. False: In the short run, summation of marginal cost is total variable
cost and not total cost because marginal cost does not include total
fixed cost. However, in the long run summation of marginal cost is
total cost since there is no fixed cost in the long run.
38. True: Since total fixed cost does not change with change in output,
therefore, marginal cost is independent of total fixed cost and is
affected only by change in total variable cost.
39. True: Total Cost can be constant only when Marginal Cost is zero,
which is not possible.
40. False: The difference between average total cost (ATC) and average
variable cost (AVC) is average fixed cost (AFC), which rises with
decrease in level of output.
41. False: Average cost rises only when Marginal cost is greater than average cost.
42. False: Rise in AC takes place when MC is greater than AC and not
necessarily when MC rises.
43. True: The difference between average cost and average variable
cost is average fixed cost. As output increases, average fixed cost
decreases. So, the difference between average cost and average
variable cost decreases.
44. False: Since the firm under Perfect Competition is a price taker, AR
curve will be a horizontal straight line parallel to X-axis.
45. False: When MR is falling but positive, TR must be rising.
46. True: Since price falls, AR falls (as price = AR). Therefore, AR curve
is downward sloping. Since AR falls, MR < AR. Therefore, MR curve is
also downward sloping.
4
7. False: When a firm can sell more output only by lowering the price,
it is possible that MR becomes negatives after a level of output when
TR starts declining.
48. True: Total revenue (TR) curve starts from the origin since TR is zero
at zero output.
49. False: MR curve lies below the AR curve (i.e., MR < AR) only when
a firm can sell more quantity of output by lowering the price. But
if price remains constant, MR = AR and both MR and AR curves
coincide and are horizontal straight lines parallel to the X-axis.
50. True: AR = TR/Output. When TR is constant (when MR = 0), AR (or
price) must fall with rise in output.
51. False: When a firm can sell more output only by lowering the price,
after a level of output sold, total revenue starts declining when MR
becomes negative.
5
2. False: Marginal Revenue can be zero when total revenue is maximum
and constant. This happens at a level of output in a market form
where a firm can sell more output only by lowering the price.
53. True: If marginal cost (MC) is falling, then it is possible to increase
profits by producing more. So, MC should be rising at the state of
producer’s equilibrium.
5
4. False: Only that output level is the producer’s equilibrium where
marginal cost is greater than marginal revenue after the ‘MC = MR’
level of output.
55. False: Contraction of supply occurs due to fall in price of the given
commodity, other factors remaining constant.
56. False: In case of perfectly inelastic supply, supply curve is a vertical
straight line parallel to the Y-axis.
57. True: A cost saving technology raises productivity and generally
lowers per unit cost of production. Consequently, the probability to
earn more profit also increases and hence, the producer is induced
to supply more. As a result, supply curve shifts towards right.
58. False: When prices of other goods rise, it becomes more profitable
to produce them in place of the given good. Therefore, supply of
the given good decreases at the same price and hence, supply curve
shifts to the left.
59. True: The supply is inelastic because coefficient of price elasticity of
supply is less than one. es = 0.8 means with change in price by 1%,
 quantity supplied of the good changes by 0.8% only. money’ is the explicit cost as it is actual money expenditure on input.
Objective Type Questions, MCQs (iii) ‘Imputed interest on savings’ is the implicit cost as producer would
1. (d) 2. (a) 3. (a) 4. (b) 5. (b) 6. (a) 7. (d) 8. (a) have earned interest if he had lent his savings. ‘Salary paid to the
9. (c) 10. (b) 11. (b) 12. (d) 13. (c) 14. (d) 15. (c) 16. (b) manager’ is the explicit cost as it is actual money expenditure on input.
17. (d) 18. (b) 19. (c) 20. (d) 21. (a) 22. (b) 23. (c) 24. (d) 4. Average fixed cost (AFC) is per unit fixed cost of output (AFC = TFC/
25. (a) 26. (b) 27. (b) 28. (b) 29. (c) 30. (a) 31. (b) 32. (c) Output). AFC increases as output is decreased. It is because even when
33. (a) 34. (a) 35. (c) 36. (d) 37. (b) 38. (c) 39. (a) 40. (c) output is decreased, TFC is unchanged.
41. (b) 42. (c) 43. (c) 44. (a) 45. (d) 46. (a) 47. (d) 48. (b)
5. (i) TC and TVC curves both are inverse S shaped.
49. (a) 50. (b) 51. (a) 52. (a) 53. (a) 54. (a) 55. (b) 56. (b)
57. (c) 58. (b) 59. (c) 60. (b) 61. (c) 62. (b) 63. (a) 64. (a) TVC, being the sum of MCs, increases at decreasing rate initially, then
65. (d) 66. (c) 67. (b) 68. (a) 69. (b) 70. (c) 71. (a) 72. (c) increases at increasing rate. Therefore, TVC curve is concave at the
73. (c) 74. (b) 75. (b) beginning and convex afterwards. That is why TVC curve is inverse
S-shaped.
76. Total Physical Product refers to total no. of units of a good produced
by a firm in a given perio of time by using a given unit of variable factor. Since TC = TFC + TVC and TFC remains constant at all levels of output,
77. Zero therefore, when we change the level of output, whatever change occurs
78. (a) to TC is entirely due to the change in TVC. So when initially, MC falls and
therefore TVC rises at decreasing rate, TC also increases at decreasing
79. The function showing relationship between physical and physical
rate. And when MC rises and therefore TVC rises at increasing rate, TC
output of a food is called production function.
also rises at increasing rate. Thus, TC curve is concave in the beginning
80. Marginal product will decrease but remain positive
and convex afterwards. That is why TC curve is also inverse S-shaped
81. Long Run 82. (a) Labour (b) Capital curved like a TVC curve.
83. (c) 84. above, maximum
(ii) TC – TVC = TFC, which remains constant at all levels of output.
85. (a) 86. (a)
Therefore, the vertical distance between TC and TVC curve remains the
87. (d) 88. (b) same, being equal to TFC. That is why TC and TVC curves remain parallel
89. Total fixed cost 90. Implicit cost, Normal Profit to each other.
91. (d) 92. decreases
6. (i) Fall in AC means MC < AC.
93. (c) 94. (b) 95. (b) 96. (a) 97. (c) 98. (a) 99. (c) 100. (c)
(ii) Rise in AC means MC > AC.
101. Equal to 102. (a)
103. AR curve will be a straight line pariallel to x axis (iii) Constant AC means MC = AC.
104. MR curvbe will be downward sloping. 7. ATC – AVC = AFC and AFC = TFC/Output. As output increases AFC
105. AR will remain constant decreases because TFC remains constant. So, the difference between AC
106. (a) 107.(c) 108. (c) 109. After equilibrium MR < MC 110. (a) and AVC decreases with increase in output.
111. (a) 112. (d) 113. (a) 114. (c) 115. (a) 116. (false) 8. (i) AC is the sum of AFC and AVC. The minimum point of AC curve fall
117. This schedule is supply function because increase in price leads to towards right of minimum point of AVC curve because after a certain level
increase in quantity of output AVC starts rising but AC still falls due to decrease in AFC. AC
118. (d) 119. (d) 120. (a) 121. (d) 122. (b) falls because fall in AFC is greater than the rise in AVC.
123. specific quantity, specific price (ii) TC – TVC = TFC. Therefore, the gap between TC and TVC curves is
124. (d) 125. (a) 126. (d) 127. increase 128. (a) 129. (c) TFC. Since TFC remains constant at all levels of output, therefore, the
130. Zero 131. (d) 132. (d) 133. (b) 134. (b) 135. (b) 136. (c) gap between TC and TVC curves remain constant with rise in output.
137. (a) 138. (c) 139. (a) 140. (a) 141. (a) 142. (c) 143. (a) (iii) AC = AFC + AVC. The AC curve lies above the AVC curve because AC
144. (a) 145. (c) 146. (a) 147. (c) 148. (d) 149. (a) 150. (a) includes both AFC and AVC at all levels of output and AFC is positive.
151. (b) 152. (b) 153. (c) 154. (a) 155. (d) 156. (c) 157. (c) 9. (i) Average fixed cost (AFC) curve slopes downwards and looks like a
158. (a) 159. (b) 160. (a) 161. (d) 162. (d) 163. (a) 164. (b) rectangular hyperbola.
165. (a) 166. (c) 167. (c) 168. (c) 169. (c) 170. (a) 171. (c) (ii) No, there are no fixed cost in the long-run since all the factors of the
172. (d) 173. (c) 174. (b) 175. (d) 176. (d) 177. (a) 178. (b) production are variable in the long run. Fixed cost exists only in the short-run.
179. (d) 180. (b) 181. (c) 182. (a) 183. (a) 184. (d) 185. (b) (iii) The short run marginal cost, average variable cost and average cost
186. (b) 187. (d) 188. (b) 189. (c) 190. (d) 191. (a) 192. (b) curves are U-shaped.
193. (b) 194. (d) 195. (d) 196. (b) 197. (b) 198. (b) 199. (b) 10. (i) The rising MC curve cuts the AVC curve from below at the
200. (d) 201. (c) 202. (d) 203. (c) 204. (c) 205. (d) 206. (c) minimum point of AVC curve. This is so because as long as AVC is falling,
207. (a) 208. (b) 209. (b) 210. (b) 211. (a) 212. (b) 213. (c) MC must be less than the AVC and as AVC rises, MC must be greater than
214. (a) 215. (b) 216. (d) 217. (c) 218. (c) 219. (a) 220. (a) the AVC. Therefore, it is only when AVC is constant and at its minimum
221. (d) 222. (a) 223. (b) 224. (a) 225. (a) 226. (b) 227. (b) point, that MC becomes equal to AVC and hence the MC curve cuts the
228. (c) 229. (d) 230. (b) 231. (d) 232. (c) 233. (b) 234. (a) AVC curve at its minimum point.
235. (b) 236. (c) 237. (c) 238. (a) 239. (a) 240. (c) (ii) The rising MC curve cuts the AC curve from below at the minimum point
of AC curve. This is so because as long as AC is falling, MC must be less than
Higher Order Thinking Skills (HOTS) AC and as AC rises, MC must be greater than the AC. Therefore, it is only
1. Short run production function or Law of variable proportions when AC is constant and at its minimum point, that MC becomes equal to AC
If only one input is increased and other inputs are kept constant, initially and hence the MC curve cuts the AC curve at its minimum point.
total product (TP) increases at increasing rate, then TP increases at (iii) According to the law of variable proportions, initially MP of a variable
decreasing rate and finally TP falls. factor increases as its employment increases, and then after a certain
2. (i) The MP curve cuts AP curve from above at its maximum point. This point, it decreases. This means initially to produce every next unit of
is because as long as the AP increases, MP > AP. Otherwise, AP cannot output, the requirement of the factor becomes less and less, and then
rise. Similarly, when AP falls, MP < AP. It, therefore, follows that MP curve after a certain point, it becomes greater and greater. As a result, with
cuts AP curves from above at its maximum point where MP = AP and AP is the factor price given, initially MC falls, and then after a certain point, MC
constant and maximum. rises. Therefore, MC curve is U-shaped.
(ii) Yes, AP can rise when MP starts declining. It can happen as long as
11. Relationship between Total cost (TC) and Marginal cost (MC):
falling MP is more than AP. However, when MP becomes equal to AP, then
(i) When MC falls, TC rises at a decreasing rate.
further decline in MP will also reduce the AP.
(ii) When MC rises, TC rises at an increasing rate.
3. (i) ‘Estimated salary of the owner’ is the implicit cost as owner would (iii) When MC is constant, TC rises at a constant rate.
have earned this salary if he had worked with a firm not owned by him. 12. (i) According to the law of variable proportions, initially MP of a variable
‘Rent paid’ is the explicit cost as it is actual money expenditure on input. factor increases. Therefore, MP curve is upward sloping. (phase I)
(ii) ‘Imputed rent of the shop’ is the implicit cost as owner would have Then, after a certain level of employment of the variable factor, MP
earned rent if he had given his shop on rent. ‘Interest paid on the borrowed decreases but remains positive. Therefore, MP curve is downward sloping
SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey 11
but above the X-axis. (phase II).
Finally, MP becomes negative. Therefore, MP curve is downward sloping
and below the X-axis. (phase III)
Thus, the MP curve looks like an inverse U-shaped curve in the input-
output plane.
(ii) As output increases, initially MC falls. AVC, being the average of
marginal costs, also falls, but falls less than MC. MC falls and reaches its
minimum. Then after a certain level of output, MC starts rising. However,
AVC continues to fall as long as MC < AVC. Once MC has risen sufficiently
and MC becomes greater than the AVC, AVC starts rising. Therefore, AVC
curve is U-shaped curve.
13. In the short run, AC is the sum of AFC and AVC.
Initially both AVC and AFC decrease as output increases. So, AC initially falls.
After a certain level of output production, AVC starts rising, but AFC
continues to fall. Now AVC and AFC are moving in opposite direction, i.e.,
AVC rises and AFC falls. Here, initially the fall in AFC is greater than the
rise in AVC. So, AC is still falling.
But, after a point, rise in AVC overrides the fall in AFC. From this point
onwards, AC is rising. Thus, AC curve is U-shaped.
14. Average revenue (AR) is defined as per unit revenue of output sold.
Since TR = p × q, we have
Hence, average revenue (AR) is always equal to Price.
15. (i) As price means average revenue (AR), so AR is also constant.
When AR is constant, marginal revenue (MR) is equal to AR. Thus, when
a firm is able to sell more quantity of output at the same price MR = AR.
(ii) Since price falls, it means that AR falls as more is sold. When AR falls,
MR is less than AR. Thus, when a firm is able to sell more quantity by
lowering the price, MR < AR.
16. It is under the market condition when a firm can sell more quantity
of output at the given price (i.e. perfect competition) that AR = MR
throughout as production is increased by the firm. It is because the
firm is a price-taker. It means that price, which is same as AR, remains
unchanged throughout. By the average-marginal relationship, AR remains
unchanged only when AR = MR throughout.
17. When TR increases at an increasing rate, it means price rises as more
output is sold. Since price means average revenue (AR), it means AR
rises. From the AR-MR relationship, when AR rises, MR is greater than
AR. Therefore, when TR increases at an increasing rate MR > AR.
18. (i) MR will increase.
(ii) MR will decrease, but will remain positive.
(iii) MR is constant.
19. (i) MR is positive and constant when price is constant as more output
is sold. Therefore, TR will increase at constant rate.
(ii) MR is positive and falling when price falls as more output is sold.
Therefore, TR will increase at decreasing rate.
20. (i) Demand curve or AR curve will be a horizontal straight line parallel
to the X-axis because positively sloped straight line TR curve passing
through the origin indicates that price (or AR) remains constant at all
levels of output.
(ii) Demand curve or AR curve will be downward sloping because
horizontal TR curve indicates that TR is constant. It is possible when price
(or AR) falls as more output is sold.
21. (i) MR curve will be a horizontal straight line parallel to the X-axis
because positively sloped straight line TR curve indicates that price
remains constant as more output is sold. Since price = AR, it means AR is
constant. From the AR – MR relationship, when AR is constant, MR = AR.
It means MR is also constant. Therefore, MR curve is a horizontal straight
line parallel to X-axis.
(ii) Horizontal straight line TR curve indicates that TR is constant and
maximum. It is possible when MR is zero. Here, MR curve is downward
sloping (intersecting the X-axis).
22. When one more unit of output is produced, Marginal Revenue (MR) is
the benefit and Marginal Cost (MC) is the cost to the producer.
(i) When MR is greater than MC, it is profitable to produce more because
benefit is greater than the cost. Therefore, the maximum profit level
(i.e., the equilibrium level) is not reached because it is possible to add to
profits by producing more.
(ii) When MR = MC, benefit is equal to cost. Therefore, the producer
is in equilibrium provided MC > MR after this level of output because it
is possible that MC = MR condition is fulfilled at more than one output
levels. But only that output level beyond which MC > MR is the equilibrium
12 SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey
output. It is because if MC > MR, producing more will reduce profits.
23. A firm’s profit maximising level of output is achieved when the
following two conditions are satisfied:
(i) MC = MR
(ii) MC > MR after ‘MC = MR’ level of output.
For a perfectly competitive firm, marginal revenue (MR) is equal to the
market price. Therefore, the first necessary condition for profit maximisation
for a competitive firm is MC = Market price. Thus, if market price is not
equal to marginal cost, there cannot be a positive level of output.
Suppose the competitive firm produces at an output level where MC <
Market price.
— This means that the firm’s cost incurred on the last unit is less than the
revenue earned on it. In other words, the cost is less than benefit.
— Therefore, the firm earns a profit on the last unit.
— This is an incentive for the firm to produce more output because the
maximum profit level (i.e., the equilibrium level) is not reached. The
equilibrium is not achieved because it is possible to add to profits by
producing more.
Similarly, suppose the competitive firm produces at an output level where
MC > Market price.
— This means that the firm’s cost incurred on the last unit is more that
the revenue earned on it. In other words, the cost is greater than benefit.
— Therefore, the firm makes a loss on the last unit.
— This induces the firm to produce less output because by producing less
the producer can add to his profits.
Thus, a competitive firm earns maximum profit by producing that level of
output where MC = Market price.
24. No, a profit-maximising firm in a perfectly competitive market will not
produce a positive level of output in the range where the marginal cost
is falling because a perfectly competitive firm’s profit maximising level of
output is achieved when the following two conditions are satisfied:
(i) Marginal Cost (MC) = Price. (Since for a perfectly competitive firm,
marginal revenue (MR) is equal to the market price.)
(ii) Marginal Cost must be rising.
‘MC = Price’ is a necessary condition but not sufficient enough to ensure
equilibrium. Fulfillment of the first condition alone does not ensure
maximum profits. It is possible that MC = Price condition may be fulfilled
at more than one output levels, but only that output level beyond which
MC must be rising (or MC > Price) is the profit maximising level of output.
If MC is falling, it means MC < Price, i.e., the firm’s cost incurred on the
last unit is less than the price. Therefore, the firm earns a profit on the
last unit. This is an incentive for the firm to produce more output because
the maximum profit level (i.e., the equilibrium level) is not reached. The
equilibrium is not achieved because it is possible to add to profits by
producing more.
25. No, a profit-maximising firm in a perfectly competitive market will not
produce a positive level of output in the short run if the market price (p)
is less than the minimum of AVC.
If p < AVC
Multiplying by output ‘q’ both sides, we have
p × q < AVC × q
TR < TVC
Since the firm’s total revenue will be less than total variable cost, it will
incur loss and will not be able to recover even its fixed costs. When the
firm produces zero output, TR and TVC are zero. Therefore, profit = TR –
TC = TR – (TFC + TVC) = 0 – (TFC + 0) = – TFC. That means when the
firm produces zero output, loss is equal to the total fixed cost. But when
p < AVC, the firm’s loss will be even greater than the total fixed cost. In
other words, the firm’s loss is greater than what its loss is when it does
not produce at all.
26. Yes, a profit-maximising firm in a perfectly competitive market will
produce a positive level of output in the short run if the market price is
less than the minimum of AC, provided the market price is greater than
the minimum of AVC. We know that AC = AFC + AVC. Price < AC means
loss to the competitive firm but if the price > AVC, there is recovery of
some fixed costs. So, the firm will produce a positive level of output.
This is because producing zero output means that losses = AFC whereas
producing output means that losses < AFC.
27. Yes, we do agree with the given statement that in the short run the
supply curve is the rising portion of marginal cost curve over and above
the minimum of Average Variable cost curve, since no rational producer/ increases at increasing rate.
seller would like to supply his output to the market if he is unable to Reason: According to the law of variable proportions, initially MP of a
recover his per unit variable cost (minimum AVC) as it would lead to variable factor increases as its employment increases, and then it
losses between the range of minimum of marginal cost and minimum decreases. So, with the factor price given, initially MC falls, then MC rises.
average variable cost. TVC, being the sum of MCs, increases at decreasing rates initially, then
28. If the supply curve is a positively sloped straight line, the price increases at increasing rates.
elasticity of supply can be eS = 1 or eS > 1 or eS < 1. 34. Producer’s equilibrium refers to the level of output of a commodity
29. The production of liquor will be less profitable to the producer due which gives the maximum profit to the producer of that commodity.
to increased tax rate because increase in taxes will increase the cost of The two conditions of MC = MR approach are:
production. Price remaining the same, producer’s profit will decrease and
(i) MC = MR
hence, the supply of liquor will decrease.
(ii) MC is greater than MR after the MC = MR output level.
30. When only one input is increased while all other inputs are kept
unchanged, the behaviour of Total Product (TP) and Marginal Product Since price falls as more output is produced, the MR curve is downward
(MP) is summed up as follows: sloping. A typical MC curve is U-shaped.
Phase I: TP increases at increasing rate and MP increases. MC = MR condition is satisfied at both Oq1 and Oq2 levels of output. But
Reason: When the units of the variable factor increases, efficient the second condition is satisfied only at Oq2. So, the equilibrium level of
utilisation of the fixed factors takes place due to specialisation. This output is Oq2.
increases efficiency of the variable factor. Therefore, MP increases and
hence TP increases at increasing rate.
Phase II: TP increases at diminishing rate and MP decreases but remains
positive.
Reason: Beyond a point, increasing variable factor puts pressure on fixed
factors. This lowers the efficiency of the variable factor. So, MP of the
variable factor starts falling, hence TP increases at decreasing rates.
Phase III: TP declines and MP becomes negative.
Reason: Increasing variable factor puts so much pressure on the fixed
factors that MP becomes negative and TP starts falling.
31. Returns to a factor refers to change in output when only one input 35. Since price falls, it means AR falls as more output is sold. Therefore,
is changed, other inputs remaining unchanged. Diminishing returns AR curve will be downward sloping.
to a factor: When only one input is increased, other inputs remaining From the AR-MR relationship when AR falls, MR < AR. Therefore, MR
unchanged, after a certain level of employment of the variable input, TPP curve is below the AR curve.
starts increasing at diminishing rates (phase II of production). Finally, TPP
falls (phase III of production).

36. (i) Other things remaining the same, an increase in price of the good
results in higher profits for the producer. The higher the price of the good,
the greater are the profits earned by the firms and the greater is the
incentive to produce more. Therefore, supply of the good rises. This is
called extension of supply. As a result, the supply curve moves upwards.
(ii) Suppose the government gives subsidy on production of the good.
This raises total revenue. Cost remaining unchanged, profits rise. This
provides incentive to the producers to supply more units of output.
Therefore, supply curve shifts rightwards.
37. (a) Total Variable Cost is zero at zero level of output. It initially
increases at decreasing rate and later it increases at increasing rate. TVC
is an inversely S-shaped curve due to the Law of Variable Proportion.
(b) Per unit fixed cost is known as Average Fixed Cost. As the value of
Total Fixed Cost doesn’t vary at any level of output in short run and if it
is divided by an incremental number the result would be diminishing with
the same proportion as that of the proportion of increase in the number
of units and the product will be same.

The schedule and the diagram show that after 3 units of the variable
factor and up to 8 units of the variable factor, there are diminishing
returns to a factor.
32. The given statement is correct.
Normal profit is defined as the minimum reward that is just sufficient
to keep the entrepreneur supplying his factor service. Since total cost
includes payment made to primary inputs: land, labour, capital and
enterprise, total cost includes rent, wages interest and (normal) profits.
33. The cost which changes with change in output is called variable cost.
As output increases, TVC increases at decreasing rate initially, then Since TFC remains same at different levels of output, AFC falls as the
SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey 13
level of output is increased. % Change in Quantity Supplied
The AFC keeps on falling as the level of output increases. AFC can never Therefore, 2 =
10%
become zero. Percentage change in Quantity Supplied = 20%
38. The total revenue (TR) curve of a price-taking firm is an upward Thus, 20% of Q = 100
rising straight line curve because TR increases at a constant rate as the Q = 100/0.2 = 500
output goes up since price remains constant. Therefore, New Quantity Supplied Q1 = 500 + 100 = 600 Units
When the output is zero, the total revenue (TR) of the firm is also zero. SELF ASSESSMENT TEST 1
Therefore, the TR curve passes through the origin. 1. (c) 7 70
Numerical Question 2. (d) All of these
77. 3. Total physical product (TPP) increases at decreasing rate and it falls
when MPP becomes negative.
Units of Variable input TP (Units) AP (Units) MP (Units) 4. (d) ` 40000
1 – – 20 5. TC – TVC = TFC, so the vertical distance between TC and TVC curves
remains the same since TFC is constant at all levels of output. Hence, TC
2 – – 26 and TVC curves remain parallel to each other.
3 66 – – 6. (a) False: Diminishing returns to a factor means diminishing MP, and so
4 – 19 – long as MP is positive, TP increases even though MP is falling.
(b) False: When MP decreases TP will increase so long as MP is positive.
5 – – 4 (c) True: Zero marginal product means that change in total product is
78. zero, i.e., total product has stopped increasing and is maximum.
8. Marginal cost curve is U-Shaped due to the operations of the returns to
Units of Variable TP MP (Units) Phase of a factor input. Initially, units of the variable factor are employed with the
input (Units) Production fixed factor yield increasing returns thereby reducing the marginal cost,
0 0 0 First Phase pushing the curve down. Further addition of variable factors may result
into diminishing returns to creep in, thereby increasing the marginal cost
1 4 4 after reaching to its minimum level.
2 14 10 As a result, we may say that, the MC curve falls to its minimum level and
then rises. Therefore, the short-run marginal cost curve is U-shaped.
3 22 8 Second Phase
9.
4 28 6
Quantity sold Price Total Cost MC MR
5 32 4 (in units)
(in `) ( in `) (in `) ( in `)
6 34 2
1 20 50 40 20
7 34 0
2 20 80 30 20
8 32 –2 Third Phase
3 20 100 20 20
79.
4 20 105 5 20
Output AVC TFC TVC MC TC
1 50 24 50 50 74 5 20 125 20 20

2 40 24 80 30 104 6 20 150 25 20

3 45 24 135 55 159 The conditions for producer to be in equilibrium are:

i. (MR) Marginal revenue is equal to marginal cost (MC)
80. ii. MC is greater than MR, after equilibrium.
OUTPUT PRICE (`) MR (`) TR (`) Thus, producer achieves equilibrium at 5th units of output. It is because
at this level of output both the conditions are satisfied simultaneously.
1 10 10 10
10. (b)
2 7 4 14
Price (`) Total Revenue (`) Supply (units)
3 5 1 15
4 3 (–3) 12 10 50 50 ÷ 10 = 5
15 50 + 200% = 150 150 ÷ 15 = 10
81.
Dq p
Price elasticity of supply, e= ×
OUTPUT AR (`) TR (`) TC (`) MC (`) MR (`) S
Dp q
1 7 7 8 8 7 5 10
= × =2
2 7 14 15 7 7 5 5
ince eS > 1, therefore, supply of the good is price-elastic.
S
3 7 21 21 6 7
SELF ASSESSMENT TEST 2
4 7 28 26 5 7
1. ( b) TP is maximum
5 7 35 33 7 7 2. The MP curve looks like an inverse U-shaped curve. AP curve is also
6 7 42 41 8 7 inverse U-shaped.
3. (c) ` 110
The producer will be in equilibrium at 5th units of output because here all 4. TC curve is inverse S shaped: TC curve is concave in the beginning and
conditions of producer’s requlibrium is satisfied i.e., (i) MR = MC and (ii) convex afterwards.
MC > MR after MR = MC level of output. 5. e qual, rising
82. 7. (a) False: When MP falls, AP may rise so long as MP > AP.
% Change in Quantity Supplied (b) False: When average product is maximum, marginal product will be
eS =
% Change in Price equal to average product.
Percentage change in price = 1/10×100 = 10% (c) True: As long as marginal product is more than average product,

14 SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey

average product can rise even when marginal product starts declining.
8. Average Variable Cost (AVC) curve is U-shaped due to the application of Therefore, new quantity supplied = 200 + 40 = 240 units
law of variable proportions.
Initially, Average Variable Cost (AVC) curve falls due to increasing returns to
a factor with better utilisation of fixed and variable factors. After reaching UNIT 4: Forms of Market and Price Determination
its minimum level (optimum level of output), AVC starts increasing with Do it yourself 1:
every increase in output due to diminishing returns to a factor. Equilibrium price and quantity for the commodity X in a perfectly competitive
9. market will be determined where:
Quantity sold Price Total Cost MC MR Qd = Qs
(in units) 1700 – 2P = 1300 + 3P
(in `) ( in `) (in `) ( in `)
1700 – 1300 = 3P + 2P
1 10 12 2 10 400 = 5P
2 10 24 12 10 P = 80
3 10 40 16 10 Therefore, Equilibrium price = 80
Equilibrium quantity can be ascertained by substituting equilibrium price =
4 10 50 10 10
80, either in Qd or Qs.
5 10 56 6 10 Qd = 1700 – 2P
6 10 57 1 10 Qd = 1700 – 2(80)
he conditioned for produces to be in equilibrium are-
T Qd = 1700 – 160 = 1,540 units
(i) Marginal revenue (MR) is equal to marginal cost (MC). Therefore, equilibrium quantity = 1,540 units.
(ii) MC > MR after the point of equilibrium. Do it yourself 2
Since the both the conditions are not satisfied simultaneously, therefore We know that the equilibrium price and quantity are achieved at:
the equilibrium will not be possible. Qd = Qs ⇒ 200 – p = 50 + 2p
10. (b) (–) 3p = (–) 150
Price (`) Supply (Units) Therefore, Equilibrium Price p = `50
Equilibrium Quantity q = 200 – 50 = 150 units
5 200 Do it yourself 3
? 200 – 100 = 100 (i) We know that the equilibrium price and quantity are achieved at:
Qd = Qs ⇒ 200 – p = 50 + 2p
Dq p −100 5 (–) 3p = (–) 150
Price elasticity of supply, eS = × ⇒ 2.5 = ×
Dp q DP 200 Therefore, Equilibrium Price p = `50
−100 × 5 Equilibrium Quantity q = 200 – 50 = 150 units
Dp = =−1 (ii) If the price of factor of production has changed, then under the new
200 × 2.5
conditions:
Therefore, new price = 5 – 1 = ` 4 per unit. Qd = Qs′ ⇒ 200 – p = 80 + 2p
SELF ASSESSMENT TEST 3 (–) 3p = (–) 120
1. (b) Additional output resulting from a unit increase in the variable input Therefore, Equilibrium Price p = `40
2. (b) Government should be concerned with how to reduce unemployment. Equilibrium Quantity q = 200 – 40 = 160 units
4. (d) A1 to A2 Thus, the equilibrium price is decreasing and the equilibrium quantity is
5. Average product (AP) decreases. increasing.
6. (a) ` 280 Do it yourself 4
7. AFC curve is a rectangular hyperbola. (a) The farmers will never produce below price p = `20, i.e., minimum
9. Short run production function or Law of variable proportions average cost because otherwise they will incur loss from production,
If only one input is increased and other inputs are kept constant, initially in which case they will exit the market.
total product (TP) increases at increasing rate, then TP increases at (b) With free entry and exit of the farmers, the market for wheat will be
decreasing rate and finally TP falls. equilibrium at a price which equals the minimum average cost of the
11. (a) True: The difference between average cost and average variable farmers. The equilibrium price is p = `20.
cost is average fixed cost. As output increases, average fixed cost (c) At this price p = `20, market will supply that quantity which is equal
decreases. So, the difference between average cost and average variable to the market demand. Therefore, from the demand curve, we get the
cost decreases. equilibrium quantity q = 200 – 20 =180
(b) False: Total cost can rise (at decreasing rate) even when marginal cost falls. At p = `20, each farmer supplies = 10 + 20 = 30
(c) False: When marginal cost falls, AC will fall. Therefore, the number of farmers = 180/30 = 6
(d) True: AFC curve is a rectangular hyperbola, which depicts that the area Do it yourself 5
under the AFC curve is constant, which is equal to TFC. If we multiply (i) For a perfectly competitive firm, price must be greater than or equal
any level of output with its corresponding AFC, we always get a constant,
to minimum average cost in the long run (p > min. AC). A firm will not
namely TFC.
produce at an output level wherein the market price is lower than the
12. TVC = Direct labour cost + Cost of raw materials + Other variable costs
minimum AC. Therefore, the firms here will never produce below price p
= 75 × 9000 + 25 × 9000 + 50 × 9000 = ` 1350000
= `15, i.e., minimum average cost because otherwise they will incur loss
TC = TFC + TVC = 1350000 + 1350000 = ` 2700000
(a) AFC = TFC/q = 1350000 ÷ 9000 = ` 150 from production.
(b) AVC = TVC/q = 1350000 ÷ 9000 = ` 150  (ii) We know that the equilibrium price and quantity are achieved at:
(c) ATC = TC/q = 2700000 ÷ 9000 = ` 300 Qd = Qs ⇒ 200 – p = 50 + 2p
(d) TR = p × q = 400 × 9000 = ` 3600000 (–) 3p = (–) 150
(e) Profit = TR – TC = 3600000 – 2700000 = ` 900000 Therefore, Equilibrium Price p = `50
14. (b) Equilibrium Quantity q = 200 – 50 = 150 units
Very Short Answer Type Questions (1 mark each)
Price (`) Supply (Units) 1. Anything which facilitates contact between buyers and sellers
10 200 constitutes a market. It may be a face to face meeting at some
place or simply verbal negotiations through telephone, internet, etc.
10 + 10% = 11 ? 2. (i) Perfect competition (ii) Monopoly (iii) Monopolistic competition
Dq p Dq 10 (iv) Oligopoly
Price elasticity of supply, e=
S × ⇒=
2 × ⇒ D=
q 40 3. (i) The number of sellers (ii) Similarity of products
Dp q 1 200
SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey 15
 4. A perfectly competitive market is one in which an individual firm
cannot influence the prevailing market price of the product on its
own.
5. In microeconomics, an equilibrium is defined as a situation where
the plans of all consumers and firms in the market match and the
market clears.
6. Equilibrium price is the price at which the sellers of a good are willing
to sell the same quantity which buyers of that good are willing to buy.
7. The quantity bought and sold at equilibrium price is called the
equilibrium quantity.
8. Price remains constant.
9. A firm is called a price-taker firm when it has no option but to sell
products at a price determined at the industry level because an
individual firm’s share in total market supply is negligible.
10. In microeconomics, excess demand means that market demand
exceeds market supply of the good at a given price.
11. If at a price, market supply is greater than market demand, we say
there is excess supply in the market at that price.
12. No single buyer is in a position to influence the market price on
its own because an individual buyer’s demand forms a negligible
proportion of the market demand of the good in the market.
13. A single seller’s share in total market supply of the product is so
insignificant that he cannot influence the market price on his own.
14. The ‘homogeneous products’ feature of perfect competition ensures
a uniform price for the products of all the firms in the industry.
15. There is uniform price and uniform cost in case of all firms, and
hence uniform profits.
16. The firms start exiting. The total market supply decreases, resulting in
a rise in market price, and reduction in losses. This trend continues till
losses are wiped out and the remaining firms earn just the normal profits.
17. Marginal revenue remains constant, and is equal to the price.
18. Average revenue (price) remains constant.
19. Equilibrium price will fall.
20. Demand curve is a horizontal straight line (parallel to X-axis) because
demand is perfectly elastic since price remains constant.
21. Equilibrium price increases.
22. Equilibrium price decreases.
23. Price ceiling’ is the maximum price that sellers can legally charge for
a product or a service.
24. It is fixed below the market-determined equilibrium price since at the
market-determined price some section of the population will not be
able to afford these goods.
25. Price ceiling is generally imposed on necessary items like wheat, rice,
LPG, sugar, etc.
26. ‘Price floor’ is the minimum price fixed by the government at which
sellers can legally sell their product.
27. (i) Agricultural price support programmes (ii) Minimum wage legislation
28. A price-maker firm is one which can influence the market price of
the product on its own.
29. Monopoly is a market situation in which there is a single seller of a
particular commodity.
30. Price decreases when a monopoly firm tries to sell more.
31. Since average revenue means price, therefore, average revenue falls
when a monopoly firm increases the quantity of output to be sold.
32. The monopoly firm may charge different price from different buyers
for the same product. This practice of the seller is called price
discrimination.
33. A monopolist is a price-maker because he has perfect knowledge
of the market demand curve. He can decide the price at which he
wishes to sell his commodity. He can influence the market price of
the product on his own.
34. Sufficient restrictions prevent new firms to enter the market and
selling the commodity. This is the main reason for the existence of
monopoly.
35. Sufficient restrictions prevent new firms to enter the market and
selling the commodity. Therefore, the monopoly firm earns abnormal
profits in the long run.
36. Monopolistic competition is a market structure where the number
of firms is large, there is free entry and exit of firms and the firms
16 SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey
produce differentiated products.
37. The goods produced by the firms under monopolistic competition
are not homogeneous like in the case of perfect competition. Firms
under monopolistic competition produce differentiated products.
38. A firm earns just normal profits (i.e., zero economic profits) in the long-run.
39. Number of buyers and sellers is large.
40. Monopoly, since there is only a single seller of a particular commodity.
41. Demand curve is downward sloping elastic, | eD | > 1.
42. Monopoly 43. Monopoly 44. Monopoly
True/False? Give Reasons
1. True: When market price is greater than the equilibrium price, market
supply is greater than market demand at this price. It is called a situation
of excess supply. Producers are not in a position to sell all they want to
sell at this price.
2. False: Under monopolistic competition, demand curve is very elastic |
eD | > 1, because there are many close substitutes available for the firm’s
product. However, it is not horizontal (perfectly elastic) as in the case
with perfect competition.
3. True: When equilibrium price of a good is less than its market price,
market supply will be greater than market demand at the market price.
It is a situation of excess supply. Excess supply will lead to competition
among the sellers because they are not in a position to sell all what they
want to sell at the given market price.
4. False: The monopolist’s decision to sell a larger quantity is possible
only at a lower price.
5. True: A monopolist is a price-maker because he can influence the
market price of the product on his own. For example, if he brings a
smaller quantity of the product into the market for sale he will be able to
sell at a higher price.
6. False: When the government imposes a floor higher than the
equilibrium price of the good, the market supply is greater than the
market demand at that price, thereby leading to an excess supply or
surplus in the market.
7. False: A monopoly firm earns abnormal profits only in the long run
because sufficient restrictions prevent new firms to enter the market. In
the short run, AR may be less than AC and hence, the monopolist may
incur losses.
8. True: There is freedom of entry end exit of firms under monopolistic
competition. If the firms are receiving positive amounts of profit in the
short run, this will attract new firms to start producing the commodity. As
output of the commodity expands, prices in the market will tend to fall till
profits become zero.
Objective Type Questions, MCQs
1. (c) 2. (b) 3. (d) 4. (a) 5. (a) 6. (a) 7. (c) 8. (c)
9. (d) 10. (a) 11. (d) 12. (a) 13. (c) 14. (c) 15. (c) 16. (a)
17. (c) 18. (b) 19. (a) 20. (a) 21. (c) 22. (a) 23. (a) 24. (c)
25. (a) 26. (b) 27. (a) 28. (c) 29. (c) 30. (d) 31. (a) 32. (d)
33. (a) 34. (a) 35. (c) 36. (a) 37. (d) 38. (a) 39. (c) 40. (a)
41. (c) 42. (c) 43. (d) 44. (d) 45. (c) 46. (c) 47. (c) 48. (d)
49. (a) 50. (a) 51. (d) 52. (b) 53. (c) 54. (c) 55. (c) 56. (c)
57. (a) 58. (c) 59. (c) 60. (d) 61. (d) 62. (c) 63. (c) 64. (c)
65. (c) 66. (d) 67. (d) 68. (d) 69. (a) 70. (c) 71. (a) 72. (d)
73. (d) 74. (b) 75. (b) 76. (c) 77. (c) 78. (b) 79. (a) 80. (c)
81. (d) 82. (d) 83. (a) 84. (b) 85. (a) 86. (b) 87. (a) 88. (b)
89. (c) 90. (d) 91. (d) 92. (c) 93. (a) 94. (c) 95. (a) 96. (b)
97. (a) 98. (a) 99. (c) 100. (c)
SELF ASSESSMENT TEST 1
1. (a)
2. (c)
3. (a)
4. Equilibrium price decreases.
5. Average revenue (price) remains constant.
10. (i) We know that the equilibrium price and quantity are achieved at:
Qd = Qs
200 – 10p = 50 + 15p
150 = 25p
Therefore, equilibrium price p = `6
Equilibrium quantity Q = 200 – (10) (6) = 140 units.
(ii) If the price of factor of production has changed, then under the new
conditions: Qd = Qs’
 00 – 10p = 100 + 15p ⇒ 25p = 100
2 8 4 8 = 8
Therefore, Equilibrium Price p = `4
Equilibrium Quantity Q = 200 – (10) (4) = 160 units. 8 5 8 < 10
Thus, the equilibrium price is decreasing and the equilibrium quantity is increasing. 8 6 8 < 12
SELF ASSESSMENT TEST 2 As shown in the above schedule, sufficient condition (MC=MR) is satisfied
1. ???????? both at 2nd unit and at 4th units of output. However, the necessary
2. (a) Less than one condition (MC > MR) is satisfied only at 4th level of output. Thus, the
3. (b) a perfectly competitive firm can sell any quantity at a given price producer would attain equilibrium at 4th unit of output.
4. Equilibrium price increases.
5. Marginal revenue remains constant, and is equal to the price. MULTIPLE CHOICE QUESTIONS TEST
9.   Equilibrium price and quantity for the commodity X in a perfectly 1. (d) 2. (a) 3. (b) 4. (a) 5. (c) 6. (d) 7. (a) 8. (a)
competitive market will be determined where: 9. (c) 10. (b) 11. (a) 12. (b) 13. (a) 14. (c) 15. (a) 16. (d)
Qd = Qs 17. (a) 18. (c) 19. (b) 20. (b) 21. (c) 22. (c) 23. (d) 24. (d)
1700– 2P = 1300 + 3P 25. (b) 26. (d) 27. (c) 28. (c) 29. (c) 30. (a) 31. (b) 32. (a)
1700-1300 = 3P+2P 33. (c) 34. (c) 35. (a) 36. (d) 37. (c) 38. (b) 39. (a) 40. (c)
400 = 5P
P = 80 SAMPLE QUESTION PAPER - 2
Therefore, Equilibrium price = 80 1. (d) A1 to A2
Equilibrium quantity can be ascertained by substituting equilibrium price =
2. Total utility
80, either in Qd or Qs.
3. (d) Downward sloping straight line
Qd = 1700– 2P
Qd = 1700-2(80) 4. (d) a leftward shift in demand curve of the other commodity
Qd = 1700-160 = 1,540 units OR
Therefore, equilibrium quantity =1,540 units. (a) 1
10. Distinction between Perfect Competition and Monopolistic Competition 5. (c) 770
1. Number of sellers – Perfect competition and monopolistic competition, 6. above (higher/greater than/more than)
both the markets consists of large number of sellers but there is lesser 7. equal, rising
number of sellers in monopolistic competition as compared to the number 8. (c) Perfectly Inelastic Supply
of sellers in perfect competition. 9. (a) Perfect competition
2. Nature of product – under perfect competition product is homogeneous. 10. (c) Presence of Close Substitutes
Whereas In monopolistic competition products are differentiated on the
12. Increasing returns to a variable factor, implies that as we keep on
basis of brand, size, colour etc.
increasing the units of variable factor along a given fixed factor, the total
3. Selling cost - under perfect competition, products are homogeneous production increases at an increasing rate i.e. Marginal Product increases.
in nature therefore there is no selling cost required whereas under This is due to the factors like division of labour, proper coordination
monopolistic competition, products are differentiated. Therefore, huge between fixed and variable factor etc.
selling costs are required to be incurred to attract consumers. Reasons for the decreasing returns to a variable factor
SELF ASSESSMENT TEST 3
(i) Over-utilisation of the fixed factor: As we keep on increasing the variable
1. (c) 2. (b) 3. (d) 4. (d) 5. (a) 6. (d) 7. ?? 8. (a) factor along with the fixed factor eventually a position comes when the
9. (b) a perfectly competitive firm can sell any quantity at a given price fixed factor has its limits and starts yielding diminishing returns.
11. The curve is called Production Possibilities Curve (PPC) or Production
(ii) I mproper coordination between Fixed and Variable factors: After a
Possibilities Frontier (PPF). certain level of employment of variable factors along with the fixed factors,
Properties of PPC: (Explain) the production process becomes too crowded. With the employment of
(i) Downward sloping from left to right (ii) Concave to the origin additional variable inputs, factor proportion become lesser and lesser
14. Es = DQ/DP × P/Q = 20/1 × 4/100 = 0.8 suitable for the production and start yielding diminishing returns.
Supply is inelastic, as Es is less than one. 13. The law of diminishing marginal utility states as follows:
16. II Part:
‘As a consumer consumes more and more units of a specific commodity,
(a) The given statement is false:- A commodity with a number of alternative without a time lag, the additional utility(satisfaction),he expects to derive
uses carries positive relation with the coefficient of price elasticity of from each successive unit will go on diminishing.
demand. With the fall in the price of such a commodity the quantity
demanded increases as people can put it for different uses. Units Consumed Total Utility Marginal Utility
(b) The given statement is false:-If the price of luxury goods increases, (` in units) (` in utils) (` in utils)
people may postpone its consumption. Hence the demand is elastic in nature. 1 20 20
(c) The given statement is false. The quantity of a good that a consumer
demands can increase or decrease with rise in income. This depends upon 2 35 15
the nature of the good i.e. normal good or an inferior good. With increase 3 45 10
in income of an individual, the demand for normal good rises whereas
4 50 5
demand for inferior good falls.
(d) The given statement is false. The demand curve in this situation will be 5 50 0
downward sloping from left to right due to inverse relationship between price 6 47 (–)3
and its quantity demanded. Since percentage change in quantity demanded
OR
is equal to percentage change in price, therefore Ed = 1 (ignoring minus
L aw of Demand: Law of Demand states that other things being equal; there
sign). Hence the demand curve will be a rectangular hyperbola.
exists an inverse relation between price of a commodity and its quantity
17. A producer is said to be in equilibrium, if both of the following conditions demanded. In other words, when the price of a commodity increases, its
are simultaneously satisfied: quantity demanded falls and vice-versa, other factors remaining the same.
(1) MR is equal to MC (MR= MC).
Demand Schedule:
(2) MC is greater than MR, after equilibrium.
Output MR MC Price of the Commodity X Quantity Demanded of the
Price (` per unit) (in ) Commodity X (in units)
8 1 8 < 10
10 1
8 2 8 = 8
8 2
8 3 8 > 6

SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey 17

 6 3 5 10 = 10
4 4 6 10 < 12
2 5 s per the schedule, producer is in equilibrium at 5th unit of output where
A
14. both the conditions are fulfilled.
SAMPLE QUESTION PAPER - 3
1. (a) TUn – TUn – 1
2. a bundle which costs less than the consumer’s income, i.e., some
income is left over.
3. (c) Mobile phone
4. (b) 0%
5. (b) A1 to A2 OR straight line
6. (b) an inverse ‘U’ shaped curve
7. (d) Es > 1
8. `240
he market for a good is in equilibrium at point e, increase in the input
T 9. (d)
price will decrease the supply in the market and supply curve will shift 10. (a)
towards left from SS to S’S’. New supply curve intersects the original 11. The problem of ‘what to produce’ relates to the choice of goods for
demand curve DD at higher point e’. production. For example choice between capital goods and consumer
15. (a) Non Price Competition: In oligopoly market firms generally collude goods, between war time goods and peace time goods and the like.
and make cartels/group to avoid price war, rather they indulge themselves The actual quantity of two possible goods would ultimately depend
in product war (exhibiting their product to be superior). Normally, the upon the market conditions of demand and supply for each of the
oligopoly firms do not respond to a rise in price by the rivals. However, goods.
they have to respond if a rival firm reduces the price of the product. 12. (a) (PX)(Qx) +( PY)(Py) = M
(b) Few Seller: Oligopoly is a market structure where the number of sellers is 4(Qx) + 5(Qy) = 40
limited. Each producer has some effective control over the market. The degree (b) Slope = –Px/Py
of control rises as the number of firms in the industry falls and vice versa.
  = –4/5
OPe to OPe’ and equilibrium quantity will fall from OQe to OQe’.
OR
16. I Part:(a) Ed = (–) 0.2 (given)
When MUx/Px < MUy/Py, the consumer is obtaining greater marginal utility
Percentage rise in price = 5% (given) per rupee in case of good Y as compared to good X. Therefore, he would
Let percentage change in quantity demanded = x prefer to buy more units of good Y and lesser units of good X. This will lead
Ed = Percentage change in quantity demanded/ Percentage change in
to a decline in MUy and rise in MUX. The consumer will continue to buy
price (ignoring minus sign) more of Y till he attains equilibrium at a point where MUx/Px = MUy/Py.
0.2 = x/5% ⇒ x = 1 % 13.
Percentage fall in quantity demanded is 1% Quantity Price =AR TR TC MR MC
(b) (–) 0.2, (–)1.1, (–)3.1 (in units) (in `) (in `) (in `) (in `) (in `)
(c) If there is a favourable change in taste and preferences of the consumer
0 20 0 10 - -
for a good at the same price, the quantity demanded would increase.
Demand curve will shift to the right. This rightward hift shows increase in 1 20 20 50 20 < 40
demand for the good at the same price, keeping other factors constant.
2 20 40 80 20 < 30
II Part: (a) (i) Movement along the same indifference curve shows various
bundles of two goods that provide equal satisfaction to the consumer. In 3 20 60 100 20 = 20
order to increase the consumption of one commodity, the consumer has 4 20 80 105 20 > 5
to sacrifice the consumption of the other and he moves up or down on the
same indifference curve. 5 20 10 125 20 = 20
(ii) A consumer will shift from a lower indifference curve to a higher 6 20 120 150 20 > 25
indifference curve when he wants to have a new bundle of two goods, he firm will be in equilibrium at 5 units of output as at this level of output
T
which has more quantity of at least one good and no less of the other good both the conditions of firm’s equilibrium are satisfied, i.e.
(monotonic preference). Alternatively, the new bundle may offer more
(i) MR is equal to MC (20)
quantity of both the goods, thereby providing the consumer greater level
of satisfaction. (ii) MC is increasing at the point of equilibrium
(b) The Law of Equi-marginal utility is an extension of the Law of 14. (a) Price floor: Price fixed by the government at a higher level than the
Diminishing Marginal Utility. The consumer may expect to get maximum equilibrium price to support the interest of the producers.
utility by allocating the income among various goods in such a way that Example: Minimum support price on agricultural commodities is an example
last rupee spent on each good yields the same Marginal Utility. In other of price floor.
words, the law states that the consumer will get maximum satisfaction if (b) The government may impose upper limit on the price to be charged for
the marginal utility of the last rupee of expenditure on each good is the a good or service. This maximum price is called ‘price ceiling’. It is normally
same i.e. MUx/Px = MUy/Py = MU of last rupee on each good. fixed below the equilibrium price, for the benefits of the consumers.
17. A firm’s equilibrium under perfect competition is obtained when both Example: Price ceiling is generally imposed on necessity goods like wheat,
the following two conditions are satisfied: rice, sugar etc.
(i) Marginal Revenue = Marginal Cost 15. If the market for a good is in equilibrium and there is an increase in
the supply of a commodity. This will lead to occurrence of “excess supply”
(ii) After point of equalisation Marginal Cost should be rising Schedule:
of the commodity in the market. This would lead to:
Output (in units) Marginal Revenue (in `) Marginal Cost (in `) • There will be competition among the sellers to sell their commodities.
• Sellers reduce the price as demand is less.
1 10 < 12
• Equilibrium price falls.
2 10 = 10 • Equilibrium quantity increases.
3 10 > 8 OR
Features of Monopolistic Competition:
4 10 > 9
(i) Number of sellers – there exist large number of sellers in monopolistic
18 SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey
 competition. 2. Parallel to X-axis.
(ii) Nature of product – under monopolistic competition products are 3. Examples of implicit cost: Imputed rent on owner’s land, Interest on
differentiated on the basis of brand, size, colour etc. owner’s capital. (any other two relevant examples)
(iii) Freedom of entry & exit of firms- There are no barriers for the firm to 4. (c) Elastic supply
enter and to leave the industry. 5. (b) Downward sloping concave
(iv) Selling cost - under monopolistic competition, products are differentiated. 6. substitutes
Therefore, huge selling costs are required to be incurred to attract consumers. 7. (b) 25 units
16. I Part: (a) Ed = Percentage change in quantity demanded/Percentage 8. (c)
change in price (ignoring minus sign) 9. (a)
Percentage change in quantity demanded (% DQ)= 10/40 × 100 = 25% (fall) 10. (a)
Ed = 25%/10% 11. (a) Normative statement- it deals with a situation as it ‘ought to be’.
Ed = 2.5 (b) Positive statement – it deals with a real life situation, justifiable by facts.
Demand is more elastic as Ed > 1 12. Price discrimination: it refers to selling the same good at different
(b) prices to different consumers. For example: a doctor may charge lesser
fees from the poor and more fees from others.
Product differentiation: In monopolistic competition products are
differentiated on the basis of brand, size, colour etc. The firms in the
market sell commodities which are close substitutes to each other. For
example: Colgate, Pepsodent, Babul etc. in toothpaste.
OR
In perfect competition form of market a firm is a price taker as the

equilibrium price is determined by the free market forces of demand and
With increase in level of air pollution market demand for air purifiers will supply. Industry is the key role player in price determination and the firms
increase. D1D1 is the market demand curve of air purifier at a given level have to accept the market price as they have insignificant share in the
of air pollution. It will shift rightwards to D2D2 due to change in preference market and cannot influence the price determined by the industry.
for air purifiers, as the pollution level rises. 13. I Part: Perfect competition
II Part: (a) An Indifference curve is convex to the origin due to Diminishing The feature stated here is homogenous product which means that all the
Marginal Rate of Substitution(Dy/Dx). producers in the industry must be producing and selling identical goods
which are perfect substitutes of each other. Which keeps the price constant
or uniform.
II Part: Price floor: Price fixed by the government at a higher level than the
equilibrium price to support the interest of the producers.
Consequence of price floor:
• Excess supply
• Unsold stock with the producers. (Explain)
14.
In the above diagram the consumer is willing to sacrifice lesser and lesser Quantity (in units) MU (Utils) TU (Utils)
units of good Y to gain one additional units of good X.
1 8 8
(b) An Indifference curve is downward sloping – means that the indifference
curve is negatively sloped. 2 5 13
This property signifies that to remain on the same level of satisfaction the 3 3 16
consumer must forego units of one good if he wishes to consume more
units of the other good. 4 1 17
5 0 17
6 –1 16
Relationship between total utility and Marginal Utility
• Marginal utility falls but remains positive as long as total utility
increases from 1st unit to 4th unit of consumption.
• When marginal utility is Zero, total utility is maximum i.e. at 5th unit
of consumption.

• When marginal utility becomes negative, total utility starts falling but
17. (a) With the employment of more and more units of the variable factor
remains positive i.e. at 6th unit of consumption and beyond.
along with the given fixed factor, MP increases and hence TP increases at
an increasing rate. This is called Increasing returns to a factor. 15.
Reasons for the Increasing returns to a variable factor are:- Quantity Marginal Revenue Marginal Cost
(i) Fuller utilisation of the fixed factor: Certain factors of production (in units) (in `) (in `)
are indivisible. They can put to their best use only when they are fully
1 20 = 20
employed.
(ii) Division of labour and specialisation: When a large number of labour 2 20 > 10
units are employed, it is possible to divide a job in different stages. It 3 20 > 6
results in specialisation implies higher efficiency and more production.
4 20 > 4
(b) Yes, Average Revenue (AR) is the revenue earned per unit of output.
It is same as the price of the commodity. 5 20 = 20
AR = Total revenue/Quantity = Price × Quantity/Quantity = Price 6 20 < 30
Demand curve shows the relationship between price (= AR) and quantity
demanded of a commodity in the market. Thus, the demand curve is the Although MR = MC is equal at two different units purchase but the firm
Average Revenue (AR) curve of a firm. will be in equilibrium at 5 units of output as at this level of output both the
conditions of firm’s equilibrium are satisfied, i.e.
SAMPLE QUESTION PAPER - 4 (i) MR is equal to MC (`20)
1. (b) Increase in resources. OR MRT is declining (ii) MC is increasing after the point of equilibrium

SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey 19

 6. (a) Short run Marginal Cost (MC) curve is U shaped because of the
1 allocation arises because resources are scare & can be put to alternate
application of the law of returns to a variable factor.
(b) (i) When MC < AC, AC decreases (this happens up to Q2 level of output)
(ii) When MC = AC, AC is constant and at its minimum (at Q2 level of output)
(iii) when MC > AC, AC increases (beyond Q2 level of output)
7. I Part: (a) Given
1 Units Consumed (` in units)
Ed = –1.25
Change in Price (ΔP)= 4.
Percentage change in Price (%ΔP)= 4/10 × 100 = 40%
Ed = Percentage change in quantity demanded/ Percentage change in
price (ignoring minus sign)
OR
1.25 = Percentage change in quantity demanded/ 40%
Percentage change in quantity demanded = 1.25 (40%)
= 50% (fall in quantity demanded will be 50%)
(b) (i) The given statement is false:- A commodity with a number of
alternative uses carries positive relation with the coefficient of price
elasticity of demand. With the fall in the price of such a commodity the
quantity demanded increases as people can put it for different uses.
(ii) The given statement is false:-If the price of luxury goods increases,
people may postpone its consumption. Hence the demand is elastic in
nature.
II Part: (a) (i) PxQx + PyQy = M
50.Qx + 25.Qy = 500
Slope = –Px/Py = –50/25 = –2
(ii) Qx = M/Px = 500/10 = 10 units of Good X.
(iii) Qy = M/Py = 500/50 = 10 units of Good Y. (since price of commodity
Y has doubled)
(b) The given partially statement is true. As the consumer will get stable
equilibrium only when the following two conditions are satisfied:
(i) Slope of Indifference Curve is equal to the price ratio or MRSxy = Px/Py
(ii) MRSxy must be diminishing.
There may be following two situations that may arise:
• I f MRSxy > Px/Py consumer is willing to pay more for commodity X than
the price preventing in the market It will induce him to purchase more of
X less of Good Y, which leads to decline of MRS. This will continue until
MRSxy = Px/Py.
• It must be supported by the second condition i.e. MRS must diminish.
SAMPLE QUESTION PAPER - 5
1. (d) P1 to P2 OR Diminishing
2. (c) interest on owner’s capital
3. (c) Maximum would be willing to sell at a given price.
4. (d) Downward sloping straight line.
5. Wages of casual labour, cost of raw material (any other relevant example)
6. ( a) zero
7. (c)
8. (d)
9. ( a) Equal to Marginal Revenue.
10. duopoly
11. (a) Restriction to entry – under monopoly form of market there are
barriers to entry in the market for any new firm. Such restriction may be
due to legislative reasons, licence, patent rights etc. Due to this feature
firms earn abnormal profits. For example traditionally production of many
defence goods is monopoly of the government.
(b) A monopolist is in a position to exercise price discrimination; it refers
to offering of the same commodity at two different prices to different
consumers. For example: a doctor may charge lesser fees from the poor
and more fees from others.
12. Yes the given statement is correct. The economic problem of resource
20 SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey
uses. If a resource can be put only to a specific use then the problem of
resource allocation would not arise.
OR
Positive economics is that branch of economics which deals with economic
issues as “what is”. It is based on facts and actual data. e.g. Western
Railway e.g. has earned 517.41 crore by selling scrap material in 2018-19.
Normative economics is that branch of economics which deals with economic
issues as “what ought to be“. It is suggestive in nature. e.g. the government
should promote social safety nets to take care of the poor population.
13. The law of diminishing marginal utility states as follows: ‘As a consumer
consumes more and more units of a specific commodity, without a time
lag, the additional utility (satisfaction), he expects to derive from each
successive unit will go on diminishing.
Marginal Utility (` in utils)
1 20
2 15
3 10
4 5
5 0
6 (–)3
In the given schedule, as the consumer consumes more and more units of
a commodity one after the other, the Marginal Utility falls to zero(at 5 unit)
and even becomes negative (at 6 unit). (Any other relevant example with
explanation)
Or
As shown in the above diagram as the consumer consumes more and more
units of a commodity one after the other, the Marginal Utility curve slope
downwards. It becomes equal to zero at point e. and negative these after
this explains the law of diminishing marginal utility.
14. (a) Marginal cost curve is U-Shaped due to the operations of the
returns to a factor input. Initially, units of the variable factor are employed
with the fixed factor yield increasing returns thereby reducing the marginal
cost, pushing the curve down. Further addition of variable factors may
result into diminishing returns to creep in, thereby increasing the marginal
cost after reaching to its minimum level.
As a result, we may say that, the MC curve falls to its minimum level and
then rises. Therefore, the short-run marginal cost curve is U-shaped.
(b) Supply refers to the different quantities of a commodity that the
producer would be willing to sell at different prices.
Quantity supplied refers to the quantity of the commodity that a seller
15. At equilibrium under perfect competition is established where demand
= supply
Therefore, QD = QS
2200-3P =1800 + 2p
5P = 400
Equilibrium Price = 80
Equilibrium quantity can be determined by substituting Equilibrium Price =
80 in QD or QS
Qd = 2200- 3P
QD = 2200-3(80)
Equilibrium Quantity = 1,960 units
OR

The market for a good is in equilibrium at point e. Any decrease in the
supply only will shift the supply curve towards left of the original supply
curve i.e. from SS to S’S’. This will create excess demand which will lead to
competition among buyers, putting the upward pressure on price.)
New supply curve (S’S’) intersects the original demand curve DD at higher
point e’, so equilibrium price will increase from OPe to OPe’ and equilibrium
quantity will fall from OQe to OQe’.
16. (a) Change in quantity demanded = 2(20%) = 40% New Quantity =
original quality + ∆Q = 40 units + 40% of 40 New Quantity = 56 units.
(b) Slope of the indifference curve = Marginal rate of substitution( )
(c) (i) PX.Qx + PY.Qy = M
20.Qx + 10.Qy = 200
(ii) S lope of Budget line =(ignoring minus sign) = 2
(iii) If the entire income is spent on Good Y Qx is zero;
PX.Qx + PY.Qy = M
20 x 0 + 10 x Qy = 200
Qy = 20 units.
SAMPLE QUESTION PAPER - 6
1. Opportunity cost
2. (d) an inverse ‘U’ shaped curve.
3. (b) 20 units
4. (b) AFC curve
5. (a) TVC
6. (P1)(X1) + (P2)(X2) = M
OR
Marginal utility (MU): MU can be defined as the addition to the total utility
(TU) by consuming one extra unit of the commodity.
7. (c) Utils
8. Leftward Shift in demand curve:
(i) Fall in the price of substitute goods
(ii) Rise in the price of Complementary goods
(iii) Decrease in the size of population
(iv) Unfavourable Change in taste
(v) Fall in income of the consumer (in case of normal goods) (any one
valid reason)
9. (a) a normal good
10. (b) Monopoly
11. Marginal Rate of transformation (MRT) increases as we move along
the Production Possibility Curve (PPC) from left to right. MRT increases
because it is based on the assumption that resources are not equally
efficient in production of both the goods. Thus, when resources are
transferred from one use (Good Y) to another (Good X), more and more
units of Good Y are to be sacrificed to produce an additional unit of Good
X.
12. As output increases, Average fixed Cost (AFC) curve decreases
continuously but never touches to any axis. It is because, when total fixed
cost is divided by incremental units of output, the resultant AFC curve falls
and takes the shape of a rectangular hyperbola. (to be marked as a whole)
OR
Average Variable Cost (AVC) curve is U-shaped due to the application of
law of variable proportions.
Initially, Average Variable Cost (AVC) curve falls due to increasing returns to
a factor with better utilisation of fixed and variable factors. After reaching
its minimum level (optimum level of output), AVC starts increasing with
every increase in output due to diminishing returns to a factor.
13. (a) The given statement is false. The quantity of a good that a
consumer demands can increase or decrease with rise in income. This
depends upon the nature of the good i.e. normal good or an inferior good.
With increase in income of an individual, the demand for normal good rises
whereas demand for inferior good falls.
SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey 21
(b) The given statement is false. The demand curve in this situation will
be downward sloping from left to right due to inverse relationship between
price and its quantity demanded. (no marks to be allotted if the reason is
not given or wrongly given)
OR
Ed = Percentage in change quantity demand/Percentage change in price
(ignoring minus sign) = 100%/20% = 5
Shape of demand curve is downward sloping from left to right.
14. The given statement is true.
Under Perfect Competition the equilibrium price is determined by the
industry through the market forces of demand and supply. This price is to
be accepted by the all individual firms which have negligible share in the
total market output and cannot influence the market price. Thus, the firms
under perfect competition are a price taker and industry is the price maker.
15. The market for a good is in equilibrium when demand for the
commodity is equal to the supply of the commodity. Due to improvement
in technology, the marginal cost (MC) falls which will lead to an increase in
the total market supply of the commodity. This will create excess supply of
the commodity in the market leading to competition among sellers to clear
their unsold inventories.
In such a situation, the supply will contract due to law of supply. The
market (both demand and supply) will adjust itself to a lower equilibrium
price. Thus, as a result the equilibrium price will fall and equilibrium
quantity will rise.
16. In case of two goods A and B, a consumer will at equilibrium when:
• MU of good A/Price of good A = MU of good B/Price of good B
• MU falls as consumption increases
If the price of Good B rises the per rupee Marginal Utility derived from the
consumption of Good A will be more than the consumption of Good B. This
will create a situation where:
MU of good A/Price of good A > MU of good B/Price of good B
This will induce the consumer to reallocate his expenditure from Good B
(less satisfying) to Good A (more satisfying). Therefore, consumer will buy
more of Good A and less of Good B.
As a result, MU derived from consumption of Good A decreases gradually
while the MU derived from consumption of Good B increases. Eventually,
this process will continue till MU of good A/Price of good A = MU of good
B/Price of good B
OR
Two Properties of indifference Curve (IC):
(i) Indifference curve (IC) is Convex to the point of origin: it is because
of diminishing marginal rate of Substitution. In order to gain an additional
unit of Good X, the consumer is willing to give up lesser and lesser units of
good Y. This is due to application of law of diminishing marginal utility.
(ii) Indifference curve Slopes downwards from left to right: As a consumer
consumes more units of one commodity he must give up the consumption
of some units of the other commodity, so that his level of satisfaction
remains unchanged.
17. A producer is said to be in equilibrium, if both of the following conditions
are simultaneously satisfied:
(i) MR is equal to MC (MR= MC).
(ii) MC is greater than MR, after equilibrium.
Price (` per unit) Output MR MC
8 1 8 < 10
8 2 8 = 8
8 3 8 > 6
8 4 8 = 8
8 5 8 < 10
8 6 8 < 12
s shown in the above schedule, sufficient condition (MC = MR) is satisfied
A
both at 2nd unit and at 4th units of output. However, the necessary
condition (MC > MR) is satisfied only at 4th level of output. Thus, the
producer would attain equilibrium at 4th unit of output.
SAMPLE QUESTION PAPER - 7
1. Total fixed cost, which remains unchanged at all given levels of output,
is the reason behind vertical parallel distance between TVC curve and TC
curve. 
 OR
Price Output TR TC MR MC
L aw of Variable Proportions
2. ( c) TU falls and MU falls and becomes negative 10 1 10 10 10 10
3. (c) Downward sloping elastic 10 2 20 19 10 9
4. (a) Less than one 10 3 30 26 10 7
5. (b) a perfectly competitive firm can sell any quantity at a given price
10 4 40 36 10 10
6. `3,000
7. a bundle which costs less than the consumer’s income, i.e., some income 10 5 50 48 10 12
is left over. quilibrium level of output is 4 units.
E
8. ( a) a straight line Because at this output
9. Demand will be inelastic because cooking gas is a necessity. (i) MC = MR
10. (b) 70 (ii) MC > MR after equilibrium (at 5th unit)
12. Price elasticity of demand (Ed) = Percentage Change in quantity OR
demanded/Percentage change in price
Percentage change in price = (12 – 10)/10 × 100 = 20% Variable input TP MP
Percentage change in quantity demanded = 40% 1 5 5
Price elasticity of demand (Ed) = 40%/20% = 2
2 11 6
(minus sign is ignored as it only represents the inverse relation between
price and quantity demanded.) 3 15 4
Ed = 2 (Ed > 1, Elastic demand)   Or 4 17 2
When price of a good falls the purchasing power (real income) of the
consumer increases as he will able to purchase more units of the given 5 15 (–2)
good with the same money income. This phenomenon is called as income hase I is upto 2 units of variable input because MP rises or TP rises at an
P
effect and is one of the main reasons for negative slope of demand curve. increasing rate.
13. Phase II is from 3 upto 4 units of variable input because MP falls but is
Units of Average Physical Marginal Physical Physical positive or TP rises at a decreasing rate.
Total Product (units) Product (units) Products (units) Phase III is from 5th unit of variable input onwards because MP becomes
negative or TP falls.
1 10 10 10
17. (a) (i) Interest paid on borrowed money is explicit cost because it is
2 22 11 12 recorded in accounts.
3 30 10 8 (ii) Imputed rent of the owner’s building is implicit cost because it is not
actually paid by the owner.
4 35 8.75 5
(iii) Imputed salary of the owner is implicit cost because the owner does
5 30 6 –5 not actually receive any salary.
15. (b) Marginal rate of substitution (MRS) is the rate at which consumer is SAMPLE QUESTION PAPER - 10
willing to trade-off one good for the other. It depends on the quantity of the
two goods s/he is consuming. A rational consumer will sacrifice lesser units 1. (b) Government should be concerned with how to reduce unemployment.
of Good Y so as to acquire additional units of Good X, due to the application 3. (a) TUn – TUn – 1
of law of diminishing marginal utility. MRS should be diminishing as 4. (i) `140
additional consumption of Commodity X, symbolises fall in marginal utility 5. (b) Downward sloping concave
due to which the consumer will not further increase its consumption. If it 6. (b) Complements
does not fall, s/he will keep on increasing the consumption of Commodity-X
7. (b) an inverse ‘U’ shaped curve
and will not reach a stable equilibrium.
8. (d) wages
SAMPLE QUESTION PAPER - 8 9. Zero
1. Growth of resources or improvement in technology. 10. –0.53, –0.80, –0.87, –3.1 (minus sign only represents the inverse
3. (c) 4. (d) 5. (d) 6. (a) 7. (d) 8. (b) 9. (a) relation between price and quantity demanded)
12. Good X is more elastic 11. (i) Demand of the good X will increase, hence demand curve of good X
shifts towards right.
16. II Part:
(ii) Demand of Good X may decrease as people may be inclined to consume
(i) Slope of the Budget Line = (–)Px/Py = (–)20/10 = –2
less due to media reports of harmful effect of the good X, as a result,
(ii) Units of Good X, if entire income of consumer (`500) is to be spent on demand curve may shift towards left.
Good X only (X-intercept) = M/Px = 500/20 = 25 units
(iii) When income of consumer increases the disposable income increases
(iii) New Price of Good Y=Original Price – 50% of Original Price = 10 – 5 = `5 and consumer is in a better position of spending more on the good X. Hence,
New Budget line equation: 20X+5Y = 500 the consumer may consume more of the commodity due to which the
Slope of the new Budget line = (–)Px/Py = (–)20/5 = – 4 demand for the goods increases and demand curve shifts away from origin.
16. II Part
SAMPLE QUESTION PAPER - 9 (a) PxQx + PyQy = M
1. ( c) Both (a) and (b) 50Qx + 10Qy = 500
3. (d) wages Slope of budget line = (–)Px/Py = (–) 50/10 = –5
4. Put a tax on it so that its price rises. (b) If Qy = Zero, then
5. Reduce price by giving subsidy. 50Qx + 10Qy = 500
6. (b) Marginal Rate of Substitution 50Qx + 10(0) = 500
7. ( d) All the above Qx = 500/50 = 10 units
8. ( d) Average fixed cost curve (c) Old Py = `10
9. (d) Both (a) and (c) New Py = `5 (50% of `10 = `5)
12. Ed = Percentage change in quantity demanded/ Percentage change in If Py falls, the consumer will be able to buy more of good Y in the same
price = – 40/20 = – 2 money income pushing the Y-intercept of the Budget Line away from origin,
13. keeping the X-intercept constant. It rotates outwards and the equation will

22 SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey

be 50Qx + 5Qy = 500. 7. (d) Equilibrium quantity may increase, decrease or remain unchanged
17. (i) We know that the equilibrium price and quantity are achieved at: 8. (c) Monopolistic Competition
Qd = Qs 9. (b) Downward sloping concave
200 – 10p = 50 + 15p 11. (a) Perfect Competition and Monopolistic Competition both
150 = 25p. Therefore, equilibrium price p = `6 12. There will be no effect on the PPC because it shows only what a country
Equilibrium quantity q = 200 – (10) (6) = 140 units. can potentially produce, and not what it actually produces. Unemployment
(ii) If the price of factor of production has changed, then under the new in the economy implies under-utilisation of resources because some
conditions: Qd = Qs’ resources are not employed. So, production takes place at any point below
200 – 10p = 100 + 15p Þ 25p = 100 the PPC. That is, production in the economy is below its potential.
Therefore, Equilibrium Price p = `4 OR
Equilibrium Quantity q = 200 – (10) (4) = 160 units. Reducing unemployment has no effect on the production potential of the
country. It is because production potential is determined assuming full
Thus, the equilibrium price is decreasing and the equilibrium quantity is
employment. Unemployment indicates that the country is operating below
increasing.
potential. Reducing unemployment simply helps in reaching potential.
SAMPLE QUESTION PAPER - 11 13. Ed = Dq/Dp × p/q = 4/2 × 5/20 (Absolute values taken)
= 0.5 (Ed < 1, relatively less elastic demand.)
2. (iv) `250
14.
3. (a) TUn – TUn – 1
4. a bundle which costs less than the consumer’s income, i.e., some income Units Produced TPP APP MPP
is left over. 0 0 – –
5. substitutes
1 100 100 100
6. (a) Perfect competition
7. (c) Presence of Close Substitutes 2 240 120 140
8. (b) Monopoly 3 420 140 180
9. The given statement is correct. Normal profit is defined as the minimum
4 480 120 6
reward that is just sufficient to keep the entrepreneur supplying his factor
service. Since total cost includes payment made to primary inputs: land, 15. (i) We know that the equilibrium price and quantity are achieved at: Qd = Qs
labour, capital and enterprise, total cost includes rent, wages interest and 200 – p = 50 + 2p
(normal) profits. (–) 3p = (–) 150
13. (a) Ascending order: –0.3, –0.7, –0.8, –1.1 Therefore, Equilibrium Price p = `50
(minus sign only represents the inverse relation between price and quantity Equilibrium Quantity q = 200 – 50 = 150 units
demanded). (ii) If the price of factor of production has changed, then under the new
(b) Ed = Dq/Dp × p/q = 50/5 × 18/50 (Absolute values taken) conditions: Qd = Qs’
= 3.6 (Ed > 1, relatively more elastic demand.) 200 – p = 80 + 2p Þ (–) 3p = (–) 120
15. I Part: (a) 
False: Under monopolistic competition, demand curve is Therefore, Equilibrium Price p = `40
elastic because there are many close substitutes available Equilibrium Quantity q = 200 – 40 = 160 units
for the firm’s product. However, it is not horizontal (perfectly Thus, the equilibrium price is decreasing and the equilibrium quantity is
elastic) as in the case with perfect competition. increasing.
(b) False: The monopolist’s decision to sell a larger quantity is 17. I Part
possible only at a lower price.
(a) False: Diminishing returns to a factor means diminishing MP, and so
16. The given statement is true. In a perfect competitive market, there long as MP is positive, TP increases even though MP is falling.
are a very large number of firms. Each firm has insignificant share in the
(b) False: When MP decreases TP will increase so long as MP is positive.
market. The price at which a firm has to sell its product is decided by the
industry as a whole. Every firm has to sell at this price. Thus, the firm is (c) False: MR = 0 is possible when TR is constant and as TR is constant,
called a price taker. AR will fall as output is increased.
In a monopoly market, there is a single firm that controls the market. In SAMPLE QUESTION PAPER - 13
absence of any rival firm, the existing firm decides the price of its product.
Hence, firm is called the price maker. 1. (c) ` 5
17. (a) False: Since the firm under Perfect Competition is a price taker. 2. (c) TU falls and MU falls and becomes negative
That is, a firm can sell more quantity of output at the same price. Since 3. (b) Marginal Rate of Substitution
AR is always equal to price, AR remains constant at all levels of output. 4. the demand for a good is negatively (or inversely) related to the price of
Therefore, AR curve will be a horizontal straight line parallel to X-axis. a good.
(b) True: AFC = TFC/output. As the level of output is increased, AFC 5. (a) Equilibrium price falls
falls because TFC remains constant at all levels of output. AFC keeps on 6. (d) All of these
falling as the level of output increases but can never become zero since
7. (c) Both under Monopoly and Monopolistic Competition
TFC is positive. AFC curve is downward sloping and takes the shape of
a rectangular hyperbola. AFC as rectangular hyperbola depicts that area 8. If the river Kosi causes widespread floods in Bihar, it will lead to
beneath the curve given by TFC remains constant at all points. AFC × Q = destruction of resources in Bihar. This will shift the PPC leftward.
TFC is constant at all levels of output. 9. False: Average product rises as long as marginal product is greater than
(c) False: When MR is falling but positive, TR will be rising. When a firm average product. Here marginal product could be rising or falling.
can sell more output by lowering the price, MR falls. However, so long as 11. Large scale outflow of foreign capital from the economy will reduce resources
MR is positive, TR rises. and thus production potential of the country will fall. Fall in production potential
in turn will shift the PP Curve to the left towards the origin.
SAMPLE QUESTION PAPER - 12 OR
. MCn = TVCn –TVCn – 1
1 The curve is called Production Possibilities Frontier (PPF) or Production
Possibilities Curve (PPC).
MC16 = TVC16 –TVC15 = 3500 – 3000 = `500
Properties of PPC: (i) Downward sloping from left to right (ii) Concave to
3. (ii) Resources are not equally efficient for the production of the two
the origin
goods.
13. (a) Market demand function:
4. (b) 25 units
(b) Suppose demand for the good remains unchanged at ‘q’ units. Price
5. water is a necessity of life and it has no substitutes.
elasticity of demand, eD = Dq/Dp × p/q = 0/2 × 7/q = 0
6. (c) C and D

SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey 23

15. (b) Substituting L = 100 and K = 25, we have the maximum possible • Because at this output
output that the firm can produce with 100 units of L and 25 units of K will (i) MC = MR (ii) MC > MR after equilibrium (at 5th unit)
be Q = 5 (100)1/2 (25)1/2 17. I Part (b)
= 5 × 10 × 5 = 250 units. (i) MRS = Px/Py = 4/5 = 0.8 : 1
17. I Part: The consumer will buy 3 units to attain equilibrium, i.e., to (ii) PxQx + PyQy = M
maximise his satisfaction since at this consumption level, MU = Price =
4Qx + 5Qy = 20
`8. At consumption level of less than 3 units, MU is greater than price.
Therefore, there is scope of increasing gain by purchasing more. If he Slope of budget line = (–)Px/Py = (–) 4/5 = –0.8
buys more than 3 units, MU < Price. Thus, the consumer will maximise his (iii) If Qy = Zero, then
satisfaction by buying 3 units only. 4Qx + 10(0) = 20
Qx = 20/4 = 5 units

SAMPLE QUESTION PAPER - 14 SAMPLE QUESTION PAPER - 16

3. (c) Buy more units of X and less of Y 4. ( d) Shifting of demand curve
4. Total utility 5. (b) 2%
5. (c) Maximum 6. (a) Perfect Competition
6. (a) Perfect Competition 7. Monopoly
7. (c) Firm is a price-taker 8. The word ‘few’ implies that the number of firms is manageable enough
8. (a) Monopolistic Competition to make a guess of the likely reactions of rivals by a firm.
9. Marginal revenue = Market price 9. (c) Mobile phone
10. Increases 10. (a) Equal to Marginal Revenue.
13. Ed = Dq/Dp × p/q 14.
–1 = Dq/1 × 9/18 (Since demand curve is a rectangular hyperbola, Ed = –1) AR Output TR TC MR MC
Dq = –2
20 1 20 22 20 22
\  New quantity demanded = 18 – 2 = 16 units
16. (a) 20 2 40 42 20 20

Output MR MC 20 3 60 60 20 18
20 4 80 76 20 16
1 7 8
20 5 100 96 20 20
2 7 7
20 6 120 120 20 24
3 7 6
4 7 7 • Equilibrium level of output is 5 units.
• Because at this output
5 7 8 (i) MC = MR (ii) MC > MR after equilibrium (at 6th unit)
• Equilibrium level of output is 4 units. 16. II Part:
• Because at this output Variable Input TPP MPP Phases
(i) MC = MR 1 10 10 I phase
(ii) MC > MR after equilibrium (at 5th unit)
2 22 12
(b) Es = Dq/Dp × p/q
3 30 8 II phase
0.5 = 15/15 × 5/q
q = 5/0.5 = 10 4 35 5
\ Initial output = 10 units 5 30 –5 III phase
Final output = 10 + 15 = 25 units Phase I: TP increases at increasing rate. MP increases. (Up to 2 units of
the variable input)
SAMPLE QUESTION PAPER - 15 Phase II: TP increases at decreasing rate. MP falls but remains positive.
1. (d) Reduction in unemployment helps the economy in realising its (from 3 to 4 units of the variable input)
production potential. Phase III: TP falls. MP falls and becomes negative. (at 5th unit of the
2. (a) the firm can sell any quantity at the same price variable input)
4. a horizontal straight line (i.e., parallel to X-axis). 17.I Part: (b) Price must fall by 20%
5. flatter
6. (c) Freedom of entry and exit to firms
SAMPLE QUESTION PAPER - 17
7. (a) Perfect Competition 1. (a) 1
8. Monopoly 2. (a) Equal to AP
9. (d) a leftward shift in demand curve of the other commodity 3. (a) AFC cannot be zero.
10. price 4. above (higher/ greater than/ more than)
11. Ed = Dq/Dp × p/q = 4/2 × 10/20 (Absolute values taken) 5. Zero.
= 1 (Ed = 1, unitary elastic demand.) 6. Monopoly
15. 10. Slope of the demand curve = –3
AR Output TR TC MR MC SAMPLE QUESTION PAPER - 18
6 1 6 7 6 7 1. (b) Average product
6 2 12 13 6 6 2. (a) increases
6 3 18 17 6 4 3. (d) All of these
4. (c) Both (a) and (b)
6 4 24 23 6 6
5. Price decreases when a monopoly firm tries to sell more.
6 5 30 31 6 8 6. Firms under oligopoly use non-price competition methods like adver­
• Equilibrium level of output is 4 units. tising, better services to customers, etc. to avoid price competition for
the fear of price war.
24 SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey
 % Change in Quantity Supply
8. (a) Shifts to the right. Working Notes: Es
% Change in Price
SAMPLE QUESTION PAPER - 19 20
× 100
80 25 5
1. Demand curve is downward sloping elastic, (eD > 1). = = = 1.25
1 20 4
2. (b) Average product × 100
5
3. (b) TVC rises at decreasing rate 10. No, AR curve can never lie in the negative axis, as price cannot be negative.
4. (a) MR = MC OR
5. (c) Elastic supply (c) both (a) and (b)
6. (b) Monopoly 11. • Production potential of the economy is indicated by PPC which is
8. (c) rise in the price of substitute good based on the assumption that given resources are fully & efficiently utilised.
9. (c) Downward sloping straight line • If unemployment exists in the economy, it simply implies that economy is
17. II Part: operating somewhere within the PPC i.e. actual output < potential output.
• If unemployment is reduced, actual output get closer to the potential
Output TFC AFC TVC AVC TC AC MC
output but potential output is not affected as it is highest level of output
1 60 60 40 40 100 100 40 that an economy can produce.
2 60 30 76 38 136 68 36 12. (i) ATC will always be greater than AVC because at all level of output it
include both AVC & AFC.
3 60 20 108 36 168 56 32
(ii) AVC reaches its minimum point earlier, than the minimum point of ATC
4 60 15 144 36 204 51 36 because ATC continue to fall beyond the minimum point of AVC due to fall
5 60 12 185 37 245 49 41 in AFC (ATC = AVC + AFC)
(iii) As output increases gap between ATC and AVC reduces but never
intersect each other because AFC can never be zero.
SAMPLE QUESTION PAPER - 20
1. The main reason why the number of firms is small is that there are
barriers which prevent entry of firms into industry like patents, large
capital, control over the crucial raw materials, etc.
2. (d) Returns to a factor
3. (d) All of these
4. (a) Shifts to the right.
5. Give subsidies to reduce price/Undertake health campaigns to promote
the positive effects of milk consumption.
6. Demand for desert coolers will increase.
8. (b) `300
17. II Part
OR
• Rent of the premises -Explicit cost because rent is paid to the land lord.
• Imputed interest on personal savings
- Implicit cost, because savings are self supplied by the owner of the
production unit.
• Imputed salary of manager
- Implicit cost, because business is managed by the owner himself.
13.
he market for a good is in equilibrium at point e. Any decrease in the
T
supply only will shift the supply curve towards left of the original supply Units of TTP (Units) MPP Phase
curve i.e. from SS to S’S’. This will create excess demand which will lead to variable input (Units)
competition among buyers, putting the upward pressure on price.)
1 10 10 Phase I
New supply curve (S’S’) intersects the original demand curve DD at higher
Increasing returns
point e’, so equilibrium price will increase from OPe to OPe’ and equilibrium 2 22 12
quantity will fall from OQe to OQe’.
3 30 8 Phase II
SAMPLE QUESTION PAPER - 21 4 35 5
Diminishing returns

1. Problem of choice arises for 5 30 –5 Phase III

(a) For producers - Resources are scarce & hc1ve alternative uses Negative returns
(b) For Consumers - Human want’s are unlimited and resources are limited
(i) Ist Phase – TP increase at an increasing rate, MP also increase because
and have alternative uses.
of better utilisation of fixed factor or increased efficiency of variable factors.
2. Point of satiety - where MU = 0
(ii) IInd Phase – TP increases at diminishing rate and MP falls because
Point of consumer equilibrium - where MUx = Px factors of pruduction are imprefect substitute.
3. Yes, demand for inferior good decreases when income of its (iii) IIIrd Phase – TP starts decreasing and MP becomes negative because
buyers rises. of overcrowding.
4. Slope of demand curve measures change in quantity demanded per unit
OR
change in price.
Producer equilibrium will be at a point, where following two conditions are fulfilled.
5. (a) `400
(i) MC – MR
Working Notes: TVC at 8th unit = AVC x q
(ii) At equilibrium MC must be rising. This can be illustrated with the hilp
300 × 8 = 2400
of diagram.
TVC at 10th unit= 320 × 10 = 3200
MC = DTVC/Dq = 800/2 = 400
6. (d) All of these
7. When TR increases at increasing rate MR rises.
8. (a) `10
9. (c) Elastic supply

SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey 25

 put’s downward pressure on price.
• Fall in price will cause contraction in supply from E to E1 and expansion
in demand from A to E1.
• This process continue till market demand and market supply again
settles on a new equilibrium point E1 and equilibrium price and equilibrium
quantity falls from OP to OP1 and OQ to OQ2 respectively.
OR
• Price ceiling refers to fixing the maximum price of a commodity at a level
lower than the equilibrium price.
• Government fixes the maximum price of essential commodities, when
– Producer’s equilibrium will be determined at OQ level of output the equilibrium price determined by demand and supply is too high for the
corresponding to point E. poor people to afford. (can support with the help of diagram)
– at this point both the conditions are fulfilled i.e. MC = MR and MC is Implication
rising. • Price ceiling causes shortage of commodity which may lead to rationing
– at E1 only first condition is satisfied, MC is falling so it is profitable for the – when due to shortage a good is not available at controlled price,
producer to producer more beyond OQ1 level of output. government start system of rationing throught fair price shops.
Black marketing – Another effect can be the emergence of a black market
in which controlled price goods are sold illegally at a price higher than the
14. Good X
% Change in Quantity Demand price fixed by the government.
Ed for goodx = Ed =
Dq % Change in Price
× 100 SAMPLE QUESTION PAPER - 22
q
Ed = 1. (b)
% change in Price
2. (b) 25 units
50
× 100 3. (b) Marginal Rate of Substitution
200 25%
= = = Edx = –2.5 4. (d) Shifting of demand curve
−10% −10%
As price elasticity of good X and Y are equal 5. (a) Shifts to the right.
Good Y 6. Equilibrium price will fall.
% Change in Quantity Demand 7. A firm earns just normal profits in the long-run.
Ed for goodY = Ed =
% Change in Price
% Change in Quantity Demand
SAMPLE QUESTION PAPER - 23
– 2.5 =
–8
1. (a)
% Change in Quantity Demand = – 2.5 × –8
% Rise in Demand of Y = 20% SAMPLE QUESTION PAPER - 24
15. Price discrimination – refers to a situation where a firm charges different
prices from different buyers of the same product. It is relevant ot monoply. 1.
For example: charging lower fare by Indian Railway from senior citizens
compared to the common men.
Product differentiation – When different producers differentiatie their SAMPLE QUESTION PAPER - 25
produce’s in terms of its shape packaging, size, brand name etc. is called
product differentiation. It is the key feature of monopolistic competition. 1.
for example: Surf excel, Airtel, Tide etc.
16. (a) Indifference curve always slopes downward from left to right:– It SAMPLE QUESTION PAPER - 26
follows that if consumer wants to have more quantity of one commodity he
will have to give up some quantity of other commodity in order to derive 1.
the same level of satisfaction. So that the total satisfaction at any point on
the indifference curve remains the same. SAMPLE QUESTION PAPER - 27
(b) An indifference curve is convex to the origin– because of diminishing
MRS, MRS declines because of the operation of law of diminishing marginal 1.
utility. As consumer constumes more & more of X his MU from X keeps on
declining and he is willing to give up less and less. SAMPLE QUESTION PAPER - 28
(c) Higher indifference curve represents those combinations which yeild 15. II Part: When the price of apples and grapes rises, consumers will
higher level of satisfaction than the combinations on lower indifference substitute with these fruits with the relatively cheaper oranges. Thus,
curve. So consumer always prefers, more goods to less goods. It represents demand for oranges will increase and the demand curve shifts rightwards
monotomic prefrence of the consumer. from DD to D1D1.
17. • When there is increase in the price of complimentary goods, Demand
curve shifts leftward from DD to D1D1.

• When demand curve shifts leftward there is excess supply by EA. t the prevailing market price (OP), there was an excess demand. In this
A
• Then there is competition among the sellers to sell unsold stock. This situation, buyers would react by competing with each other and raise
26 SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey
the market price. This process will continue till a new equilibrium price is
reached at OP1, where market demand is equal to market supply. OP1 is
higher than the old price of oranges.
Therefore, the equilibrium price of oranges increases and the equilibrium
quantity also increases when the price of apples and grapes rises in
Southern India.
16. II Part: (a) The given statement is false. Average Cost curve is the
vertical summation of Average Variable Cost and Average Fixed Cost(AC =
AFC + AVC). Since, Average Fixed Cost cannot be zero (AFC ≠ 0) the two
curves would never touch each other.
(b) The given statement is false. As per Laws of Returns to a Factor,
Average Product Curve and Marginal Product Curve both rise and then
tend to fall. Thus, the two curves are inverted ‘U’ shaped curves and not
‘U’ shaped curves.
(c) The given statement is false. This condition is obtained in perfect
competition market a price remains constant only under the perfect
competition a market.
(d) The given statement is true. The difference of the two is represented
by Total Fixed Cost (TFC). TFC remains constant at all levels of output.
It represents the vertical distance between the two curves making them
parallel to each other.
SAMPLE QUESTION PAPER - 29
1.
SAMPLE QUESTION PAPER - 30
1. M OCxy = Sacrifice of y/Gain of x and MOCyx = Sacrifice of x/Gain of y
2. ( b) Consumer is rational and ranks his preference.
3. Income increase/decrease or prices of both the goods increase/decrease
in same proportion.
4. (c) Horizontal summation of demand of all the consumers in the market.
5. (c) Initially falling, then rising
6. (b) AR=MR
7. Supply curve will be upward sloping from left to right.
8. (a) Both ‘i’ and ‘iii’ (both explicit and fixed cost)
9. Not agreed. As slope of TP = MP, and TP increases even if MP decreases
but positive.
10. He should increase the output.
11. (a) Marginal utility=Price (single commodity equilibrium condition):
Consumer purchases that much quantity of a good at which MU=Price; If
price of the good falls, it makes MU>Price, it encourages the consumer to
buy more. The consumer will continue to buy more until MU falls enough
to be equal to Price again. It shows that when price fall quantity demanded
rises; If price of the good rises, it makes MU<Price. Now consumer will
reduce the quantity demanded until MU rises till MU=Price. It means when
price rise quantity falls.
(b) Budget set consists for all the possible combinations of two goods
which at given prices cost less than or equal to the given income of
the consumer. The budget is thus the collection of all bundles that the
consumer can buy with his income at the prevailing market prices. For ex;
Budget set of pen and pencil
Pen 0 1 2 3 4 5
Pencil 10 8 6 4 2 0
(Diagram is needed)
Budget line is a graphical representation of all possible combinations of two
goods which exactly equals to consumer’s income.
12. (a) It is because AR=TR/Price and TR= Price X Quantity. So, AR=PXQ/Q
= P; AR shows the relationship between price and quantity which is same
as demand curve.
(b) The given statement is correct. Normal profit is defined as the minimum
reward that is just sufficient to keep the producer supplying his factor
service. Since TC includes payments made to primary inputs in the form of
rent, wages, interest and normal profits.
13. (a) PPC curve will shift rightwards as more skilled brain in India
will increase production potential of India. (Diagram and explanation is
needed)
(b) Due to LVP, initially MP increases and as MP increases so MC decreases.
MC represents increase in TVC. So decrease in MC makes TVC increase at
diminishing rate. (Give suitable examples or diagram etc)
SOLUTION BOOKLET for Microeconomics-XI 2020 Edition – by Subhash Dey 27
14. (a) ∆P/P=-0.5; Or P/∆P = -2. (as price is falling)
Elasticity = P/Q X ∆Q/∆P = P/∆P X ∆Q/Q (Substituting the values) -0.5 = -2
X ∆Q/100; therefore, ∆Q=25 and new quantity = 100 + 25 = 125.
(b) This statement is true. Oligopoly and monopolistic competitions spend
lot of money on sales promotion and advertising. It not only leads to
wastage of resources but also increases the price of the commodity. For ex,
lux, liril dove, etc, incur heavy expenditure on sales promotion but the truth
is that no manufacturer pays for the advertising cost out of his own pocket.
All the advertisement costs are covered up the producers by charging high
prices. Also, some consumers discard away their existing products by the
attraction of advertisements which lead to wastage of resource.
15 (a) Upward Movement /Extension of supply
i. It means increase in quantity supplied due to increase in price of own
commodity
ii. O ther factors other than price of the commodity remain constant.
iii. Supply curve remains same only there is movement upwards from
one point to other point on the same supply curve indicating increase in
quantity supply.
Leftward shift /Decrease in supply
It means decrease in supply due to unfavourable change in factors other
than the price of own commodity.
Here the price remains constant and any other factors affecting supply changes.
Here supply curve shifts towards left from ss to s1s1.
(Diagrams are must)
(b) Time periods can be classified in to three categories:
i. In very short time period the firm cannot increase its supply. This is
because in very short time period, the firm can neither increase its variable
factors like labour, nor can the firm increase its fixed factors like machine,
equipment, land etc.
ii. In short time, the supply can be increased by increasing variable factors
like labour etc. but not the fixed factors like building, land etc. Hence
quantity supplied can be increased to some extent
iii. In the long run, the firm can increase both fixed and variable factors. So
supply can be increased to maximum extent possible.
16. (a) Minimum price ceiling or price floor: It is government imposed
limit which tells the minimum price which should be charged for a product
is very less. To prevent huge losses by the farmers, the government has
price support programmes. Here the government fixes a price above the
equilibrium price. (Drawing is must)
(b) As tomato crop damaged, it causes decrease in supply. Now, as supply
decreases but demand remains the same,it leads to excess demandwhich
leads to competition among buyers. As a result price starts rising. Because
of increase in price, quantity demanded will decrease (contraction) and
quantity supplied will increase (extension). This process will continue
till quantity demanded becomes equal to quantity supplied and a new
equilibrium is reached. (Diagram is essential)
17. (a) MRT = Sacrifice of good Y/Gain of good X. In PPC, MRT increases
as all resources are not equally efficient in production of all goods. As more
of one good is produced, less and less of efficient resources have to be
transferred to the production of the other good which raises marginal cost
i.e MRT. (Diagram, schedule and examples are essential)
(b) False. i. MR=MC ; ii. MC is rising after MR=MC (Diagram and schedule
is essential)
Losses are measure as the excess of cost over revenue related to a product.
In a situation when subsidy is not reduced and therefore, revenue cannot
be raised through higher price of the product, the government can do
price discrimination by charging high price fro rich and giving subsidies to
poor. Govt. can also reduce losses by lowering the cost of production. The
government must use more cost efficient technique to produce electricity.
Also, loss of revenue due to transmission and distribution should be checked.
(c) It is perfect market where Mohan will be price taker and he has no
option but to sell at a price determined by the industry. (Diagram and
explanation is essential)
Mohan cannot change price as:
(i) very large number of sellers, hence individual firm cannot influence the
price as its share in the market is very minimum or negligible.
(ii) Homogeneous product- so price charged is uniform. If Mohan charges
more price, then no one will buy his product and the same product is
available at less prices by the other sellers.
(iii) Lowering the price is not possible due to the fear of losses.