Very Short Answer Type Questions
Question. What is meant by utility?
Answer : Utility is the power of goods to satisfy human wants.
Question. What is Law of Diminishing Marginal Utility?
Answer : Law of diminishing marginal utility states that as more and more units of a commodity are consumed marginal utility derived from every additional unit must decline.
Question. State condition of consumer’s equilibrium in respect of one good.
Answer : MUX = Px
Question. What is meant by Marginal Rate of Substitution (MRS).
Answer : MRS is the rate of sacrifice of one good to get an additional unit of other good.
Question. Define Indifference curve Map.
Answer : A family of indifference curve indicating different levels of satisfaction called indifference map.
Question. Why does higher indifference curve give more satisfaction?
Answer : Higher difference curve shows a higher level of satisfactions. It shows the various combinations of excess quantity of both goods than lower indifference curve.
Question. Define monotonic preference.
Answer : Consumer’s preferences are called monotonic when between any two bundles, one bundle has more of one good and no less of other good.
Question. Define normal good.
Answer : Normal goods are those goods, the demand for which increases as income of the buyer rise. There in positive relation between income and demand of these goods.
Question. Demand of good ‘X’ falls due to increase in the income of the consumer what type of good ‘X’ is?
Answer : Good ‘X’ is an inferior good.
Question. A rise in price of a good results in a decrease in expenditure of it. Is its demand elastic or inelastic?
Answer : Elastic.
Question. Define demand schedule.
Answer : Demand schedule is a tabular representation which represent different quantities of the commodity demanded at different prices.
Question. If the number of consumers increase, in which direction will the demand curve shift?
Answer : Rightward.
Question. If the slope of a demand curve is parallel to X-axis, what will be the elasticity of demand?
Answer : Perfectly elastic.
Question. Define price elasticity of demand.
Answer : The price elasticity of demand is the degree of responsiveness of quantity demanded of a commodity to the change in its price.
Question. Define market.
Answer : Market is a system with the help of it the buyers and seller of a commodity or service come to contact with each other.
Question. How is price determined under perfect competition?
Answer : Price is determined by an industry by the forces of demand and supply.
Question. If the firms are earning abnormal profits, how will the number of firms in the industry change?
Answer : The number of firms in the industry will increase.
Question. Under which market there is no difference between firm and industry?
Answer : Monopoly.
Question. Under which form of market the firm is price taker.
Answer : Perfect competition.
Question. What is the relationship between AR curve and demand curve in a monopoly market?
Answer : Both AR curve and demand curve are the same in a monopoly market.
Question. Define oligopoly.
Answer : Oligopoly is a market structure where there are few firms competing for their homogenous or differentiated products.
Question. When does the situation of excess supply arise?
Answer : When market price is more than equilibrium price and market supply is more than
Question. Under what situation does the equilibrium price remains unaffected when there is simultaneous increase in demand and supply.
Answer : When increase demand is equal to increase in supply the equilibrium price will remain same.
Short Answer Type Questions
Question. Distinguish between ‘increase in demand’ and ‘increase in quantity demanded’ of a commodity.
Answer : When demand increases at given price then it is called ‘increase in demand’. On the other hand, when demand increases by decrease in the price of a commodity then it is called increase in quantity demand.
Question. A consumer consumers only two goods X and Y. State & explain the conditions of consumer’s equilibrium with the help of utility analysis.
Answer : There are two conditions of consumer equilibrium :
utility by buying less of X and more of Y.
(ii) MU falls as consumption increases : If MU does not fall as consumption increases the consumer will end up buying only good which is unrealistic or consumer will never reach the equilibrium position.
Question. Distinguish between normal goods and inferior goods. Give example also.
Answer : Normal Goods : These are the goods the demand for which increases as income of the buyer rises. There is a positive relationship between income and demand or income effect is positive.
Example ; Rice, Wheat
Inferior Goods : These are the goods the demand for which decreases as income of buyer rises. Thus, there is negative relationship between income and demand or income effect is negative.
Example : coarse grain, coarse cloth.
Question. Explain relationship between total utility and marginal utility with the help of a schedule.
1. As long as MU is positive, TU increases.
2. When marginal utility is equal to zero then total utility is maximum.
3. When marginal utility is negative; Total utility starts diminishing.
Higher Order Thinking Skills
Question. Why does total utility increases at diminishing rate due to continuous increase in consumption?
Answer : As more and more units of commodity are consumed, marginal utility derived from each successive unit tends to diminish so total utility increases at diminishing rate up.
Question. What will be the behaviour of total utility when marginal utility curve lies below Xaxis?
Answer : Total utility start to decline.
Question. Give two examples of normal goods & inferior goods.
Answer : Normal goods – Rice, Wheat
Inferior goods – coarse grain, coarse cloth.
Question. If a good can be used for many purposes, the demand for it will be elastic. Why?
Answer : If a good can be used for many purposes , the demand for it will be more elastic because with a decrease in its price it is put to several uses and with a rise in its price it is withdrawn from its many existing uses. So that, there is a considerable change in demand in response to some change in price.
Question. Suppose there are 30 consumers for a good, having identical demand function: d(p) =10-3P for any price less than or equal to 10/3 and d(p)=0 for any price greater than 10/3. Write the market demand function.
Answer : Market demand function is simply a horizontal summation of individual demand functions. Since demand function for all the 30 consumers is identical, we can write market demand simply as ‘individual demand function multiplying by a factor of 30’.
Thus: Individual demand function :
Market demand function:
Md(p)=10 x 30 – 3 (30)P
= 300-90 P.
Question. A dentist was charging Rs. 300 For a standard cleaning job and per month it used to generate TR is equal to Rs. 30,000. She has since last month increased the price of dental cleaning to Rs.350. As a result fewer customers are now coming for dental cleaning, but the TR is now Rs. 33,250 .From this , what can we conclude about the elasticity of demand for such a dental service?
When price increases, total expenditure also increases. So elasticity is less than one.
Question. If prices of salt and ciggrates, both rises by 10% , will the qt. demanded of both goods affected in an equal manner?
Answer : No, because the nature of the two goods is different. Salt , a necessary good, will have constant consumption and marginal consumers will reduce the consumption of cigarettes, which is non-essential.