Microeconomics

Introductory
Microeconomics
Workbook
Class
XII
4323/3, Ansari Road, Darya Ganj, New Delhi-110002

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Contents
Worksheet 1
Introduction
Worksheet 2
Consumer Equilibrium and Demand
Worksheet 3A
Producer Behaviour and Supply
17
Worksheet 3B
Cost and Revenue
25
Worksheet 4
Forms of Market and Price Determination under

Perfect Competition with Simple Applications
31
Solutions
Numericals
Solution to Unsolved Numericals in the Textbook
CBSE Question Papers2013
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Introduction
QUESTION SETI
Define the following concepts:
1. Microeconomics.
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2. Economy.
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3. Scarcity.
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4. Central problems of an economy.
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5. Mixed economy.
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6. Market economy.
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7. Centrally planned economy.
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8. Production possibility curve.
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9. Opportunity cost.
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Introductory Microeconomics
EconomicsXII
10. Marginal opportunity cost.

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11. Marginal rate of transformation.
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12. Macroeconomics.
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13. Macro variables.
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QUESTION SETII
Defend or refute the following statements. Write yes or no with reason:
1. Microeconomics does not deal with aggregates.
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2. Opportunity cost refers to explicit cost of production.
_________________________________________________________________________________________
_________________________________________________________________________________________
3. Production possibility curve may sometimes be convex to the origin.
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_________________________________________________________________________________________
4. Central problems of an economy are found only in those economies which are not governed or
regulated by the government.
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5. Scarcity exists even when certain goods are available at zero price.
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6. Marginal opportunity cost falls as resources are shifted from Use-1 to Use-2.
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7. PPC is drawn on the assumption of constant technology.
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8. Economising the use of resources means saving the resources for future use.
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9. If resources are not efficiently utilised, we are outside PPC.
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10. An economy produces goods and services in a manner such that it always operates on the PPC.
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QUESTION SETIII
Write your comment on each of the following statements in a sentence or two:
1. Choice between consumer goods and capital goods refers to the problem of how to produce.
_________________________________________________________________________________________
_________________________________________________________________________________________
2. Choice between labour intensive technology and capital intensive technology refers to the problem of
what to produce.
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3. Choice between production for the poor and production for the rich refers to the problem of what to
produce.
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_________________________________________________________________________________________
4. In a market economy, the central problems are solved by the central authority of the government.
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5. In a centrally planned economy, the central problems are solved by the forces of supply and demand.
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6. In a mixed economy, only public sector is engaged in the process of production.
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7. Problem of resource allocation is automatically solved in a mixed economy.
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8. Production possibility curve shows possibilities of production when different technologies are used.
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9. Economic activity would not exist if resources were not scarce.
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10. A point below PPC points to under utilisation of resources.
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QUESTION SETIV
Complete the following sentences:
1. Mixed economy is the one in which __________________________________________________________ .
2. In a capitalist economy, the problem of resource allocation is solved by ____________________________ .
3. In a centrally planned economy, the decision regarding resource allocation is taken by the ___________
_________________________________________________________________________________________ .
4. Marginal opportunity cost refers to the loss of output of Good-1 when ____________________________ .
5. Growth of resources causes a shift in PPC to the _______________________________________________ .
6. When an economy is operating inside the PPC, it is a situation of _________________________________ .
7. In a state of economic slowdown (or recession) when there is massive unemployment and the economy
fails to operate on the PPC, it tends to operate _________________________________________________ .
8. Destruction of resources causes a shift in PPC to the____________________________________________ .
9. Discovery of resources (or new technology) causes a shift in PPC to the____________________________ .
EconomicsXII
NUMERICALS
1. Find opportunity cost, given the following possibilities of employment of Mr. X.
Possibility 1:
employment in firm-A at the wage of 1,500 P.M.
Possibility 2:
employment in firm-B at the wage of 2,500 P.M.
Possibility 3:
employment in firm-C at the wage of 4,000 P.M.
Ans. ________________________________________________________________________________________
2. Find marginal rate of transformation, given the following information:
Output of Good-Y
Output of Good-X
200
200
160
220
Ans. ________________________________________________________________________________________
3. Find marginal opportunity cost, given the following situation when some resources are shifted from
Use-2 to Use-1.
Loss of output in Use-2 : 600 units
Gain of output in Use-1 : 300 units
Ans. ________________________________________________________________________________________
4. Find marginal opportunity cost of watches when production of watches increases from 10 units to
15 units while the production of shoes decreases from 500 units to 100 units.
Ans. ________________________________________________________________________________________
5. The table shows production possibilities of two goods. Find marginal opportunity cost at different
levels of the production of Good-1.
Good-1
Good-2
100
90
75
55
30
Ans. ________________________________________________________________________________________
HOTS (Higher Order Thinking Skills)

Write true or false with a reason:
1. With an efficient utilisation of resources, an economy can shift to point beyond the PPC.
_________________________________________________________________________________
_________________________________________________________________________________
EconomicsXII
2. When output of Good-1 increases from 100 units to 110 units and output of Good-2
decreases from 400 units to 350 units, marginal opportunity cost = 50 units.
_________________________________________________________________________________
_________________________________________________________________________________
3. When an economy moves from a situation of underemployment to full employment, PPC
curve shifts to the right.
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4. Marginal rate of transformation refers to the slope of PPC.
_________________________________________________________________________________
_________________________________________________________________________________
5. Convexity of PPC to the origin points to increasing slope of PPC and increasing marginal
opportunity cost.
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6. Problem of resource allocation would not arise if resources had not alternative uses.
_________________________________________________________________________________
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7. If a country is operating inside the PPC, it is saving its resources for future growth.
_________________________________________________________________________________
_________________________________________________________________________________
8. If an economy is operating inside the PPC, it is possible to increase the production of
Good-1 without any decrease in the production of Good-2.
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_________________________________________________________________________________
9. Opportunity cost is an avoidable cost.
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_________________________________________________________________________________
10. Even when resources and technology are constant, an economy may not operate on the PPC.
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Consumer Equilibrium and Demand
QUESTION SETI
1. Demand and quantity demanded.
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2. Marginal utility and total utility.
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3. Indifference curve.
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4. Budget line/price line.
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5. Consumers equilibrium.
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6. Law of diminishing marginal utility.
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7. Law of demand.
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8. Price elasticity of demand.
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9. Individual demand schedule and market demand schedule.
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10. Demand curve.

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11. Demand function.
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12. Substitute goods and complementary goods.
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13. Normal goods, inferior goods, and giffen goods.
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14. Extension and contraction of demand.
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15. Increase and decrease in demand.
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16. Movement along the demand curve and shift in demand curve.
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QUESTION SETII
1. Demand for a commodity can exist independent of its price.
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2. Quantity demanded is a specific amount of a commodity that the consumer is ready to buy against a
specific price, while demand is not.
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3. Demand for a commodity refers to the entire demand schedule.
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4. It is quantity demanded (and not demand for a commodity) that changes with respect to its own price.
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5. Marginal utility of each unit of a commodity adds up to total utility.
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6. Total utility will increase even when marginal utility decreases.
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7. Total utility is maximum when marginal utility starts declining.
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8. Increase in demand refers to extension of demand.
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9. Decrease in demand refers to contraction of demand.
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10. In case of inferior goods, law of demand fails.
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11. Giffen goods must be inferior goods, while inferior goods, may or may not be giffen goods.
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12. In case of substitute goods, a fall in price of Good-X causes a fall in demand for Good-Y.
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13. In case of complementary goods, a rise in price of Good-X causes a rise in demand for Good-Y.
_________________________________________________________________________________________
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14. Indifference curve is not convex to the origin.
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EconomicsXII
15. MRS (marginal rate of substitution) along an indifference curve tends to diminish.
_________________________________________________________________________________________
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16. All attainable combinations of Good-X and Good-Y are below the budget line of a consumer.
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MUX
= MUM.
PX
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17. A consumer strikes his equilibrium when:
_________________________________________________________________________________________
MUX
MUY
=
= MUM.
PX
PY
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18. A consumer strikes his equilibrium when:
_________________________________________________________________________________________
PX
.
PY
_________________________________________________________________________________________
19. A consumer strikes his equilibrium when: MRS =
_________________________________________________________________________________________
PX
P
is better than when MRS = X .
PY
PY
_________________________________________________________________________________________
20. A situation when MRS >
_________________________________________________________________________________________
PX MUX
P
MUX
is better than when X =
>
.
PY MUY
PY MUY
_________________________________________________________________________________________
21. A situation when
_________________________________________________________________________________________
QUESTION SETIII
1. MU must diminish as more and more standard units of a commodity are continuously consumed.
_________________________________________________________________________________________
_________________________________________________________________________________________
2. Cross price effect occurs in case of substitute goods, and not in case of complementary goods.
_________________________________________________________________________________________
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3. In an indifference curve map, higher IC always points to higher level of satisfaction.
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EconomicsXII
4. Changes in income causes a shift in demand curve, while change in price does not.
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5. Even when PX remains constant, QX may increase or decrease.
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6. Elasticity of demand refers to change in quantity consequent upon change in price of the commodity.
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7. When total expenditure on the commodity remains constant, price elasticity of demand also remains
constant, no matter what the change in price is.
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8. Elasticity of demand (with respect to price of the commodity) is constant along a straight line demand
curve.
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9. If price elasticity of demand is zero, it means expenditure on the commodity does not change with
change in price of the commodity.
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10. A commodity showing high elasticity of demand often has a large number of close substitutes in the
market.
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11. Elasticity of demand tends to be high over a short period of time than the long period.
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12. Complementary goods often exhibit low elasticity of demand.
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13. Luxuries of life often exhibit low elasticity of demand.
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14. Higher the price level, higher should be the elasticity of demand.
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15. A horizontal straight line demand curve shows zero elasticity of demand.
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16. A vertical straight line demand curve shows that demand rises to infinity even when price remains
constant.
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17. Price elasticity of demand is identical with slope of demand curve.
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18. From a point of intersection, a flatter demand curve shows greater elasticity of demand than a steeper
demand curve.
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19. In case of normal goods, income effect is positive, while in case of inferior goods, it is negative.
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20. In case of giffen goods, income effect is always greater than the substitution effect.
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QUESTION SETIV
1. When price of the commodity increases, demand for the commodity _____________________________ .
2. When demand for the commodity increases, demand curve_____________________________________ .
3. When demand curve shifts, price of the commodity____________________________________________ .
4. In case of normal goods, there is a positive relationship between_________________________________ .
5. Moving along an indifference curve, we find that MRS tends to__________________________________ .
14
EconomicsXII
6. Moving along a price line, we find that price ratio (PX /PY ) remains________________________________ .
7. In case of IC analysis, a consumer strikes his equilibrium when___________________________________.
8. In case of utility analysis (and one-commodity case) a consumer strikes his equilibrium when
_________________________________________________________________________________________.
9. In case of utility analysis (and 2-commodity case) a consumer strikes his equilibrium when _______
________________________________________________________________________________________ .
10. Demand curve slopes downward because of the law of__________________________________________ .
11. Downward sloping demand curve shows the law of_____________________________________________ .
12. Convexity of IC to the origin shows__________________________________________________________ .
13. Elasticity of demand (with respect to price of the commodity) shows______________________________ .
14. Law of demand fails in situations of (i) ______________, (ii) ______________ , and (iii) _______________ .
15. Demand curve shifts to the right because of (i) ________________________, (ii) _____________________,
and (iii) ______________________ .
16. When price of tea increases, demand for sugar will tend to ______________________________________ .
17. Even when price of the concerned commodity remains constant, people tend to buy less of it, because
(i) ________________________, (ii) _________________________, and (iii) _________________________ .
18. If demand curve is a rectangular hyperbola, elasticity of demand = _______________________________ .
19. At the mid-point of straight line downward sloping demand curve, elasticity of demand = ___________ .
20. In case of a perfectly elastic demand, demand curve for the concerned commodity is________________ .
21. In case of a perfectly inelastic demand, demand curve for the concerned commodity is ______________ .

1. If 5% increase in PX causes 5% increase in expenditure on Good-X, elasticity of demand = 1.
_________________________________________________________________________________
_________________________________________________________________________________
2. If 5% increase in PX is accompanied with constant expenditure on the commodity, elasticity
of demand = 1.
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3. If slope of two demand curves is the same, they show the same elasticity of demand.
_________________________________________________________________________________
_________________________________________________________________________________
4. When slope of demand curve = 0, price elasticity of demand =
_________________________________________________________________________________
_________________________________________________________________________________
5. When slope of demand curve = , price elasticity of demand = 0.
__________________________________________________________________________________
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EconomicsXII
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3A
Producer Behaviour and Supply
QUESTION SETI
1. Production function.
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_________________________________________________________________________________________
2. Producers equilibrium
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3. Supply and quantity supplied.
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4. Individual supply schedule and market supply schedule.
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5. Law of supply.
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6. Contraction of supply and decrease in supply.
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7. Extension of supply and increase in supply.
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8. TP, AP and MP.
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9. Returns to a factor.
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10. Law of variable proportions.

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11. Increasing returns to a factor.
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12. Diminishing returns to a factor.
_________________________________________________________________________________________
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13. Movement along the supply curve and shift in supply curve.
_________________________________________________________________________________________
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14. Joint supply and composite supply.
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15. Price elasticity of supply.
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16. Perfectly elastic and perfectly inelastic supply.
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17. Elastic and inelastic supply.
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18. Market period, short period and long period.
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_________________________________________________________________________________________
19. Fixed factors and variable factors.
_________________________________________________________________________________________
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20. Supply and stock.
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EconomicsXII
QUESTION SETII
1. Production function is only a technical relationship between physical inputs and physical output.
_________________________________________________________________________________________
_________________________________________________________________________________________
2. A producer strikes his equilibrium when the difference between TR and TC is maximised.
_________________________________________________________________________________________
_________________________________________________________________________________________
3. Supply may remain constant even when quantity supplied changes.
_________________________________________________________________________________________
_________________________________________________________________________________________
4. Contraction of supply causes a shift in supply curve.
_________________________________________________________________________________________
_________________________________________________________________________________________
5. Extension and contraction of supply are related to factors other than price of the concerned commodity.
_________________________________________________________________________________________
_________________________________________________________________________________________
6. Supply increases in response to increase in price of the concerned commodity.
_________________________________________________________________________________________
_________________________________________________________________________________________
7. TP is maximum only when MP = 0.
_________________________________________________________________________________________
_________________________________________________________________________________________
8. MP can be negative, but not the AP.
_________________________________________________________________________________________
_________________________________________________________________________________________
9. Law of variable proportions must operate, even when all factors of production are variable.
_________________________________________________________________________________________
_________________________________________________________________________________________
10. Diminishing returns to a factor occur simply because supply of the factor cannot be increased.
_________________________________________________________________________________________
_________________________________________________________________________________________
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EconomicsXII
11. AP and MP tend to be U-shaped.

_________________________________________________________________________________________
_________________________________________________________________________________________
12. Stage of increasing returns (when MP is increasing) is economically redundant, because the producer
will not strike his equilibrium in this stage.
_________________________________________________________________________________________
_________________________________________________________________________________________
13. The producer strikes his equilibrium only when MP is diminishing.
_________________________________________________________________________________________
_________________________________________________________________________________________
14. In the short period, production is done only by using the variable factors.
_________________________________________________________________________________________
_________________________________________________________________________________________
15. Law of variable proportions operates only if factor ratio happens to change.
_________________________________________________________________________________________
_________________________________________________________________________________________
16. If a straight line upward sloping supply curve shoots from the origin, elasticity of supply is always equal
to one.
_________________________________________________________________________________________
_________________________________________________________________________________________
17. If a straight line upward sloping supply curve shoots from the Y-axis, elasticity of supply < 1.
_________________________________________________________________________________________
_________________________________________________________________________________________
18. If a straight line upward sloping supply curve shoots from the X-axis, elasticity of supply > 1.
_________________________________________________________________________________________
_________________________________________________________________________________________
19. Stages of production are the consequences of the law of variable proportions.
_________________________________________________________________________________________
_________________________________________________________________________________________
20. Price elasticity of supply measures the change in quantity supplied in response to a change in price of the
commodity.
_________________________________________________________________________________________
_________________________________________________________________________________________
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QUESTION SETIII
1. MP must cut AP from its top.
_________________________________________________________________________________________
_________________________________________________________________________________________
2. If AP is falling, AP > MP.
_________________________________________________________________________________________
_________________________________________________________________________________________
3. If AP is rising, AP < MP.
_________________________________________________________________________________________
_________________________________________________________________________________________
4. If AP is falling, MP must also fall.
_________________________________________________________________________________________
_________________________________________________________________________________________
5. If AP is rising, MP must also rise.
_________________________________________________________________________________________
_________________________________________________________________________________________
6. TP must rise as more and more units of a variable factor are combined with the fixed factor.
_________________________________________________________________________________________
_________________________________________________________________________________________
7. MP is the rate of TP.
_________________________________________________________________________________________
_________________________________________________________________________________________
8. When MP is decreasing, TP increases at a constant rate.
_________________________________________________________________________________________
_________________________________________________________________________________________
9. When MP is increasing, TP increases at a decreasing rate.
_________________________________________________________________________________________
_________________________________________________________________________________________
10. When MP is constant, TP is also constant.
_________________________________________________________________________________________
_________________________________________________________________________________________
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11. Increasing returns to a factor occur because the variable factor is abundantly used in production.
_________________________________________________________________________________________
_________________________________________________________________________________________
12. Diminishing returns to a factor occurs because fixed factor cannot be used as much as the variable factor.
_________________________________________________________________________________________
_________________________________________________________________________________________
13. Diminishing returns to a variable factor occur because the producer fails to buy the variable factor in the
required quantity.
_________________________________________________________________________________________
_________________________________________________________________________________________
14. Supply never changes unless price changes.
_________________________________________________________________________________________
_________________________________________________________________________________________
15. It is more profitable for the producer to be in a stage of increasing returns than the stage of diminishing
returns.
_________________________________________________________________________________________
_________________________________________________________________________________________
16. In a state of equilibrium, firms MC should be rising.
_________________________________________________________________________________________
_________________________________________________________________________________________
17. A producer supplies more of a commodity only at a higher price.
_________________________________________________________________________________________
_________________________________________________________________________________________
18. At a point of intersection of two supply curves, flatter curve shows higher elasticity of supply.
_________________________________________________________________________________________
_________________________________________________________________________________________
19. In the long period, elasticity of supply tends to be lower than in the short period.
_________________________________________________________________________________________
_________________________________________________________________________________________
20. If elasticity of supply = 0, supply curve becomes a horizontal straight line.
_________________________________________________________________________________________
_________________________________________________________________________________________
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QUESTION SETIV
1. Variable factors are those factors ____________________________________________________________ .
2. Fixed factors are those factors _______________________________________________________________ .
3. In a state of equilibrium, the producer maximises ______________________________________________ .
4. Break-even point occurs when ______________________________________________________________ .
5. Shut-down point occurs when ______________________________________________________________ .
6. MP is the rate of __________________________________________________________________________ .
7. MP = 0, when ____________________________________________________________________________ .
8. TP starts declining when ___________________________________________________________________ .
9. TP increases at increasing rate when _________________________________________________________ .
10. TP increases at diminishing rate when _______________________________________________________ .
11. Increase in supply is caused by (i) ________________, (ii) ________________, and (iii) ________________ .
12. Decrease in supply is caused by (i) ________________, (ii) ________________, and (iii) ________________ .
13. Extension of supply is caused by _____________________________________________________________ .
14. Contraction of supply is caused by ___________________________________________________________ .
15. Upward movement along a supply curve occurs because of ______________________________________ .
16. Downward movement along a supply curve occurs because of ___________________________________ .
17. Two examples of technological progress causing a shift in supply curve are (i) _____________________,
and (ii) ______________________ .
18. Owing to improvement in technology, firms supply curve will shift to the _________________________ .
19. If price of inputs rises, firms supply curve will shift to the________________________________________.
20. Increase in excise tax will shift the firms supply curve to the _____________________________________.
21. When a cost saving technology is introduced, firms supply curve shifts to the ______________________.
22. During short period, production can be increased _____________________________________________ .
23. During long period, production can be increased ______________________________________________ .
24. Production does not respond to any change in price when elasticity of supply = ____________________.
25. When farm productivity reduces owing to natural calamity, farmers supply curve shifts to the
_________________________________________________________________________________________ .
26. Three important factors affecting supply of a commodity are (i) ________________________________,
(ii) ________________________________, and (iii) ________________________________.
27. Law of variable proportions operates because (i) _____________________, (ii) _____________________,
and (iii) _____________________ .
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EconomicsXII

1. Draw a diagram showing that MR = MC when the difference between TR and TC is maximum.
2. Find TP when 10 units of the variable factor are combined with 05 units of the fixed factor and MP
remains constant at 10 units.
_________________________________________________________________________________________
_________________________________________________________________________________________
3. At the existing level of output, MP = AP = 10 units. Would AP be equal to MP when production is
increased and law of variable proportions is in operation?
_________________________________________________________________________________________
_________________________________________________________________________________________
4. Introduction of new technology increases MP. How would it affect supply curve of a firm?
_________________________________________________________________________________________
_________________________________________________________________________________________
5. How would you explain a situation when supply of a commodity increases without any increase in
price of the commodity?
_________________________________________________________________________________________
_________________________________________________________________________________________
6. Write an equation for a short period production function. Give an example.
_________________________________________________________________________________________
_________________________________________________________________________________________
7. Why should TP be maximum when MP = 0.
_________________________________________________________________________________________
_________________________________________________________________________________________
8. If there is change in any other determinant of supply (other than price of the concerned commodity),
the supply curve must shift to the right or left. Do you agree? Give reason.
_________________________________________________________________________________________
_________________________________________________________________________________________
9. Why a situation of increasing returns to a factor not sustainable? Give two reasons.
_________________________________________________________________________________________
_________________________________________________________________________________________
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EconomicsXII
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3B
Cost and Revenue
QUESTION SETI
1. Fixed cost and variable cost.
_________________________________________________________________________________________
_________________________________________________________________________________________
2. Total cost, average cost and marginal cost.
_________________________________________________________________________________________
_________________________________________________________________________________________
3. Explicit cost and implicit cost.
_________________________________________________________________________________________
_________________________________________________________________________________________
4. Money cost and real cost.
_________________________________________________________________________________________
_________________________________________________________________________________________
5. Private cost and social cost.
_________________________________________________________________________________________
_________________________________________________________________________________________
6. Prime cost and supplementary cost.
_________________________________________________________________________________________
_________________________________________________________________________________________
7. Total revenue and marginal revenue.
_________________________________________________________________________________________
_________________________________________________________________________________________
QUESTION SETII
1. Fixed cost is constant even when output is zero.
_________________________________________________________________________________________
_________________________________________________________________________________________
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2. Variable cost is incurred before production is started.

_________________________________________________________________________________________
_________________________________________________________________________________________
3. Fixed cost must be greater than variable cost when output is zero.
_________________________________________________________________________________________
_________________________________________________________________________________________
4. Variable cost reduces as output increases.
_________________________________________________________________________________________
_________________________________________________________________________________________
5. Average fixed cost curve is a rectangular hyperbola.
_________________________________________________________________________________________
_________________________________________________________________________________________
6. Average variable cost tends to fall, stabilise and rise as output increases.
_________________________________________________________________________________________
_________________________________________________________________________________________
7. Total fixed cost is indicated by a vertical straight line.
_________________________________________________________________________________________
_________________________________________________________________________________________
8. Marginal cost includes both fixed cost and variable cost.
_________________________________________________________________________________________
_________________________________________________________________________________________
9. Average cost includes both fixed cost and variable cost.
_________________________________________________________________________________________
_________________________________________________________________________________________
10. Total cost is the sum total of marginal costs.
_________________________________________________________________________________________
_________________________________________________________________________________________
11. Total revenue is the sum total of marginal revenues.
_________________________________________________________________________________________
_________________________________________________________________________________________
12. Average revenue is the same as market price of the commodity.
_________________________________________________________________________________________
_________________________________________________________________________________________
26
EconomicsXII
13. Marginal revenue can never be negative.

_________________________________________________________________________________________
_________________________________________________________________________________________
14. When price is constant, AR > MR.
_________________________________________________________________________________________
_________________________________________________________________________________________
15. When price reduces as output increases, AR = MR.
_________________________________________________________________________________________
_________________________________________________________________________________________
16. Under perfect competition, AR and MR curves tends to slope downward.
_________________________________________________________________________________________
_________________________________________________________________________________________
17. Under monopoly, AR and MR curves are indicated by horizontal straight lines.
_________________________________________________________________________________________
_________________________________________________________________________________________
18. TR curve always shoots from the origin.
_________________________________________________________________________________________
_________________________________________________________________________________________
19. AR curve never shoots from the origin.
_________________________________________________________________________________________
_________________________________________________________________________________________
20. When MR = 0, TR is maximum.
_________________________________________________________________________________________
_________________________________________________________________________________________
QUESTION SETIII
1. AC curve tends to be U-shaped.
_________________________________________________________________________________________
_________________________________________________________________________________________
2. MC is greater than AC when production is in a state of diminishing returns.
_________________________________________________________________________________________
_________________________________________________________________________________________
27
EconomicsXII
3. AC is greater than MC, so long as AC is falling.

_________________________________________________________________________________________
_________________________________________________________________________________________
4. MC and AC are equal when AC tends to stabilise.
_________________________________________________________________________________________
_________________________________________________________________________________________
5. TC and TVC curves are parallel to each other.
_________________________________________________________________________________________
_________________________________________________________________________________________
6. The distance between AVC and AFC curves tends to reduce as output increases.
_________________________________________________________________________________________
_________________________________________________________________________________________
7. The distance between AC and AVC curves tends to increase at higher levels of output.
_________________________________________________________________________________________
_________________________________________________________________________________________
8. Short period TC curve starts from Y-axis.
_________________________________________________________________________________________
_________________________________________________________________________________________
9. Long period TC curve starts from the origin.
_________________________________________________________________________________________
_________________________________________________________________________________________
10. AFC continuously reduces as output increases.
_________________________________________________________________________________________
_________________________________________________________________________________________
11. Greater production always means greater revenue.
_________________________________________________________________________________________
_________________________________________________________________________________________
12. AR is always greater than MR under monopoly.
_________________________________________________________________________________________
_________________________________________________________________________________________
13. ATC and AVC tend to intersect at some level of output.
_________________________________________________________________________________________
_________________________________________________________________________________________
28
EconomicsXII
14. When MC > ATC, ATC must rise.

_________________________________________________________________________________________
_________________________________________________________________________________________
15. Area under MC curve = TVC.
_________________________________________________________________________________________
_________________________________________________________________________________________
16. TR curve under perfect competition is a straight line, sloping upward from the origin.
_________________________________________________________________________________________
_________________________________________________________________________________________
17. Under monopoly, TR curve increases only at a diminishing rate.
_________________________________________________________________________________________
_________________________________________________________________________________________
18. Under perfect competition, rate of TR never declines, but under monopoly and monopolistic
competition, it can.
_________________________________________________________________________________________
_________________________________________________________________________________________
19. AR = 0, when TR is maximum.
_________________________________________________________________________________________
_________________________________________________________________________________________
20. MR tends to fall even when AR is constant.
_________________________________________________________________________________________
_________________________________________________________________________________________
QUESTION SETIV
1. TFC = __________________________________________________________________________________ .
2. TVC = __________________________________________________________________________________ .
3. TC = ___________________________________________________________________________________ .
4. ATC is U-shaped, because of _______________________________________________________________ .
5. AFC is a rectangular hyperbola, because _____________________________________________________ .
6. ATC and AVC never intersect each other, because _____________________________________________ .
7. Area under MC curve = TVC, because _______________________________________________________ .
8. ATC is always above AVC, because ___________________________________________________________ .
29
EconomicsXII
9. Three examples of fixed costs are (i) _______________________, (ii) ________________________, and
(iii) ________________________ .
10. Three examples of variable costs are (i) _______________________, (ii) ________________________, and
(iii) ________________________ .
11. TFC curve is parallel to X-axis, because ______________________________________________________ .
12. Average and marginal cost tend to fall as output rises, because ___________________________________ .
13. The concept of fixed cost is not relevant in the long period, because ______________________________ .
14. Under perfect competition, both AR and MR are indicated by the same horizontal straight line, because
_________________________________________________________________________________________ .
15. AR curve is above MR curve under monopoly because __________________________________________ .
16. MR is the rate of __________________________________________________________________________ .
17. When TR is increasing at a decreasing rate, MR should be ______________________________________ .
18. When TR is increasing at a constant rate, MR should be ________________________________________ .
19. When price is constant, TR increases at a _____________________________________________________ .
20. When MR is negative, TR __________________________________________________________________ .

1. Draw TC and TR curves in one diagram. Show that MR = MC only when TR and TC are parallel to
each other.
_________________________________________________________________________________________
_________________________________________________________________________________________
2. MC is always variable cost. Why?
_________________________________________________________________________________________
_________________________________________________________________________________________
30
EconomicsXII
WO
ET
S
RK HE
Forms of Market and Price Determination under

QUESTION SETI
1. Pure competition and perfect competition.
_________________________________________________________________________________________
_________________________________________________________________________________________
2. Monopoly and monopolistic competition.
_________________________________________________________________________________________
_________________________________________________________________________________________
3. Oligopoly and duopoly.
_________________________________________________________________________________________
_________________________________________________________________________________________
4. Equilibrium price and equilibrium quantity.
_________________________________________________________________________________________
_________________________________________________________________________________________
5. Market and market equilibrium.
_________________________________________________________________________________________
_________________________________________________________________________________________
6. Homogeneous product and product differentiation.
_________________________________________________________________________________________
_________________________________________________________________________________________
7. Normal profits, extra-normal profits and extra-normal losses.
_________________________________________________________________________________________
_________________________________________________________________________________________
8. Break-even price, market price and normal price.
_________________________________________________________________________________________
_________________________________________________________________________________________
9. Patent rights and cartels.
_________________________________________________________________________________________
_________________________________________________________________________________________
31
EconomicsXII
10. Excess demand and excess supply.

_________________________________________________________________________________________
_________________________________________________________________________________________
11. Economic viability and non-viability of an industry.
_________________________________________________________________________________________
_________________________________________________________________________________________
12. Control price and support price.
_________________________________________________________________________________________
_________________________________________________________________________________________
QUESTION SETII
1. There is a large number of buyers both under monopoly and monopolistic competition.
_________________________________________________________________________________________
_________________________________________________________________________________________
2. A monopoly firm is a price maker.
_________________________________________________________________________________________
_________________________________________________________________________________________
3. A firm under perfect competition has no control over price of the product.
_________________________________________________________________________________________
_________________________________________________________________________________________
4. Price of the product never changes under perfect competition.
_________________________________________________________________________________________
_________________________________________________________________________________________
5. Firms demand curve is indeterminate under oligopoly.
_________________________________________________________________________________________
_________________________________________________________________________________________
6. Product differentiation allows partial control over price.
_________________________________________________________________________________________
_________________________________________________________________________________________
7. A monopolist can exercise price discrimination.
_________________________________________________________________________________________
_________________________________________________________________________________________
32
EconomicsXII
8. A monopolist fixes price of his product on the basis of elasticity of demand for his product.
_________________________________________________________________________________________
_________________________________________________________________________________________
9. For a perfectly competitive firm, there are only normal profits in the long run.
_________________________________________________________________________________________
_________________________________________________________________________________________
10. A firm under monopolistic competition makes only normal profits in the long run.
_________________________________________________________________________________________
_________________________________________________________________________________________
11. There are no selling costs in perfect competition and monopoly forms of the market.
_________________________________________________________________________________________
_________________________________________________________________________________________
12. Firms demand curve under perfect competition is a horizontal straight line.
_________________________________________________________________________________________
_________________________________________________________________________________________
13. Firms demand curve under monopolistic competition is more elastic than under monopoly.
_________________________________________________________________________________________
_________________________________________________________________________________________
14. A firm under monopolistic competition cannot influence market price.
_________________________________________________________________________________________
_________________________________________________________________________________________
15. Under perfect competition, equilibrium price is determined by the forces of market demand and
market supply.
_________________________________________________________________________________________
_________________________________________________________________________________________
QUESTION SETIII
1. A firm under perfect competition gets only a break-even price in the long run.
_________________________________________________________________________________________
_________________________________________________________________________________________
2. Freedom of entry and exit ensures only normal profits in the long run.
_________________________________________________________________________________________
_________________________________________________________________________________________
33
EconomicsXII
3. A perfectly competitive firm operates at the lowest point of AC curve in the long run.
_________________________________________________________________________________________
_________________________________________________________________________________________
4. There is a high degree of interdependence among firms in oligopoly form of the market.
_________________________________________________________________________________________
_________________________________________________________________________________________
5. In case of excess demand, equilibrium price must rise.
_________________________________________________________________________________________
_________________________________________________________________________________________
6. For a non-viable industry, supply curve is placed above the demand curve.
_________________________________________________________________________________________
_________________________________________________________________________________________
7. Equilibrium price may not change even when market demand happens to change.
_________________________________________________________________________________________
_________________________________________________________________________________________
8. Equilibrium price never changes in a situation of perfectly elastic supply, no matter what the demand is.
_________________________________________________________________________________________
_________________________________________________________________________________________
9. In a situation when productivity increases owing to improvement in technology, equilibrium price tends
to fall.
_________________________________________________________________________________________
_________________________________________________________________________________________
10. In a situation of war when people are fearing shortage of rice, equilibrium price of rice tends to rise.
_________________________________________________________________________________________
_________________________________________________________________________________________
11. Market price is always equal to or greater than the support price of a commodity.
_________________________________________________________________________________________
_________________________________________________________________________________________
12. In a situation when import of inputs becomes expensive, equilibrium price of the commodity tends to
rise.
_________________________________________________________________________________________
_________________________________________________________________________________________
34
EconomicsXII
13. In case of inferior goods, a rise in income of the buyers causes a fall in equilibrium price of the
commodity.
_________________________________________________________________________________________
_________________________________________________________________________________________
14. Equilibrium price may fall even when market demand tends to rise.
_________________________________________________________________________________________
_________________________________________________________________________________________
15. In a state of recession, when there is a substantial cut in production, and supply curve shifts to the left,
equilibrium price may fall.
_________________________________________________________________________________________
_________________________________________________________________________________________
QUESTION SETIV
1. Three important features of perfect competition are (i) ___________________ , (ii) __________________ ,
and (iii) ___________________ .
2. Two basic characteristics of monopoly are (i) ______________________ , and (ii) _____________________ .
3. Three notable features of monopolistic competition are (i) ______________________________________ ,
(ii) ______________________________________ , and (iii) ________________________________________ .
4. Two distinct features of oligopoly are (i) ________________________ , and (ii) _______________________ .
5. Price line under perfect competition _________________________________________________________ .
6. Price line under monopolistic competition is more elastic than under _____________________________ .
7. A perfectly competitive firm cannot make extra-normal profits __________________________________ .
8. In a state of perfectly elastic demand, increase or decrease in supply does not affect _________________ .
9. Owing to a forward shift in demand curve, equilibrium price tends to ____________________________ .
10. Rise in production cost owing to rise in input price, shifts the supply curve ________________________ .
11. Common features of monopoly and monopolistic competition are (i) ___________________________ ,
(ii) _______________________ , and (iii) ________________________ .
12. Common features of perfect competition and monopolistic competition are (i) _____________________,
and (ii) ______________________ .
13. Price is equal to MC in a situation of __________________________________________________________ .
14. Price is greater than MC in a situation of ______________________________________________________ .
15. In case of increase in excise tax, equilibrium price tends to ______________________________________ .
35
EconomicsXII

1. Firms demand curve as a horizontal straight line under perfect competition shows that an
individual producer has no control over price of his product.
_________________________________________________________________________________
_________________________________________________________________________________
2. A monopoly producer cannot control both price as well as quantity of his product.
_________________________________________________________________________________
_________________________________________________________________________________
3. It is because of high degree of interdependence that firms demand curve remains
indeterminate under oligopoly.
_________________________________________________________________________________
_________________________________________________________________________________
4. A situation of excess demand or excess supply is automatically corrected under perfect
competition.
_________________________________________________________________________________
_________________________________________________________________________________
5. In a situation of constant demand, equilibrium quantity does not change even when supply
increases or decreases.
_________________________________________________________________________________
_________________________________________________________________________________
6. A monopoly firm can make abnormal profits in the long run, but not a firm under
monopolistic competition.
_________________________________________________________________________________
_________________________________________________________________________________
7. Price exceeds MC under monopoly, but not under perfect competition.
_________________________________________________________________________________
_________________________________________________________________________________
36
EconomicsXII
SOLUTIONS
Worksheet1
Unit-1: Introduction
QUESTION SETI
1. Microeconomics is that branch of economics which studies economic problems (or economic issues)
relating to individual economic units like a consumer or a producer.
2. Economy is the sum total of economic activities directed towards the satisfaction of unlimited wants
using the scarce means.
3. Scarcity is a situation when demand for a good exceeds its supply even at a zero price.
4. Central problems are those problems which arise in every economy. At the micro level, these problems
are:
(i) What to produce? (ii) How to produce? and (iii) For whom to produce?
At the macro level, these are (i) problem of fuller utilisation of resources, and (ii) problem of
growth of resources.
5. Mixed economy is the one in which both private and public sectors play a significant role in production
activity. Free play of the market forces is allowed but not without checks and balances by the
government.
6. Market economy is the one in which decisions regarding what, how and for whom to produce are left to
the market forces of supply and demand.
7. Centrally planned economy is the one in which decisions regarding what, how and for whom to
produce are taken by some central authority.
8. Production possibility curve (or transformation curve) is a curve showing different possibilities of
producing a set of two goods with (i) the given resources, and (ii) given technology.
9. Opportunity cost refers to value of a factor in its next best (or second best) alternative use.
10. Marginal opportunity cost refers to loss of output of Good-Y for producing an additional unit of
Good-X, some resources are shifted from Good-Y to Good-X.
11. Marginal rate of transformation (MRT) is the same as marginal opportunity cost. It is estimated as
under:
when some resources
DY Loss of output of Y
MRT=
=
are shifted from Y to X
DX Gain of output of X
12. Macroeconomics is the study of economic relationships, economic problems or economic issues at the
level of economy as a whole, like the problem of inflation or of unemployment.
13. Those economic variables which are studied at the level of economy as a whole are known as macro
variables. Examples: GDP, Disposable Income, Household consumption, etc.
QUESTION SETII
1. No. Microeconomics does deal with the aggregates. Example: market demand is the aggregation of
individual demand.
2. No. Opportunity cost is the value of a factor in its second best alternative use. It is implicit cost, not an
explicit cost. Explicit cost is paid-out cost.
3. No. PPC is always concave to the origin, as marginal opportunity cost (indicating slope of the curve)
must rise as more and more resources are shifted from Good-2 (on Y-axis) to Good-1 (on X-axis).
4. No. Every economy faces the central problems, though these are solved differently in different
economies. Because, scarcity of resources is common to all economies.
5. Yes. Scarcity is a situation when demand for a good exceeds its supply even at a zero price.
39
EconomicsXII
6. No. Marginal opportunity cost increases as resources are shifted from Use-1 to Use-2. This is in
accordance with the law of variable proportions.
7. Yes. PPC is drawn on the assumption of constant technology. Which is why PPC shifts in response to a
shift in technology.
8. No. Economising the use of resources means that resources are to be used in a manner such that
maximum output is realised per unit of input. It also means optimum utilisation of resources.
9. No. If resources are not fully utilised, total output in the economy will be less than the potential output
and we are inside the PPC.
10. No. If resources are not fully utilised (or are under-utilised) an economy may as well be inside the PPC.
QUESTION SETIII
1. No. Choice between consumer goods and capital goods refers to the problem of what to produce.
2. No. Choice between labour intensive technology and capital intensive technology refers to the problem
of how to produce.
3. No. Choice between production for the poor and production for the rich refers to the problem of for
whom to produce. It is a problem relating to choice of users of goods and services.
4. No. In a market economy central problems are solved through the free play of the market forces.
5. No. In a centrally planned economy decisions relating to what, how and for whom to produce are
taken by some central authority of the government.
6. No. In a mixed economy both private and public sectors are engaged in the process of production.
7. In a mixed economy, problem of resource allocation, finds its solution through the market forces of
supply and demand, but not without checks and balances by the government.
8. No. Production possibility curve shows different combinations of two goods which can be produced
with the given resources on the assumptions that (i) resources are fully and efficiently utilised, and
(ii) technique of production remains constant.
9. Yes. Because economic activity is related to the use of scarce means for the satisfaction of human wants.
10. Yes. A point below PPC points to under utilisation of resources. In such a situation actual output is less
than potential output.
QUESTION SETIV
1. both private as well as public sectors play a significant role in production activity.
2. free play of the market forces.
3. central authority or the government.
4. a unit more of Good-2 is produced by shifting the resources from Good-1 to Good-2.
5. right.
6. under utilisation or inefficient utilisation of resources.
7. inside the PPC.
8. left.
9. right.
40
EconomicsXII
NUMERICALS
1. Opportunity cost = 2,500 P.M.
2. Marginal rate of transformation = 2.
3. Marginal opportunity cost = 2 units.
4. Marginal opportunity cost = 80 units.
5. 10, 15, 20, 25, 30.

1. False. With an efficient or fuller utilisation of resources, the economy operates on the PPC and cannot
shift to point beyond the PPC because PPC shows attainable combinations of two goods with given
resources and technology.
2. False. Marginal opportunity cost = 5 units. Because,
Loss of output of Good - 2
Marginal opportunity cost =
Gain of output of Good - 1
when some resources are shifted from Good-2 to Good-1.
3. False. When an economy moves from a situation of underemployment to full employment, the
economy is on PPC.
4. True. MRT is the same as marginal opportunity cost which is the slope of PPC.
5. False. Convexity of PPC to the origin points to decreasing slope of PPC and decreasing marginal
opportunity cost. However, PPC is always concave to the origin. Because marginal opportunity cost
must rise as more and more resources are shifted from Use-1 to Use-2.
6. True. Problem of resource allocation arises because resources have alternative uses.
7. False. If a country is operating inside the PPC, it corresponds to under utilisation or inefficient
utilisation of resources.
8. True. It is possible to increase the production of Good-1 without any decrease in the production of
Good-2. Because, being inside the PPC points to a situation when resources are not fully utilized (or are
not efficiently utilised).
9. False. Opportunity cost is the cost of a factor in its best alternative use. Accordingly, it is the minimum
cost of a factor, and therefore unavoidable.
10. Yes. Because resources may not be efficiently utilised.
41
EconomicsXII
Worksheet2
Unit-2: Consumer Equilibrium and Demand
QUESTION SETI
1. Demand refers to various quantities of a commodity that the consumer is ready to buy at different
possible prices of that commodity.
Quantity demanded refers to a specific quantity to be purchased against a specific price of the
commodity.
2. Marginal utility is the utility derived from an additional unit of a commodity.
Total utility is the sum total of marginal utilities from the consumption of different units of a commodity.
3. Indifference curve is a curve showing different combinations of a set of 2-Goods, each combination
offering the same level of satisfaction to the consumer.
4. Budget line is a line showing different combinations of a set of 2-Goods that the consumer can buy,
given his income and prices of the goods. It is also called price line, as it shows price ratio between
Good-X and Good-Y.
5. A consumer is in a state of equilibrium when he maximises his satisfaction by spending his given income
on different goods and services, with a given set of prices.
6. The law of diminishing marginal utility states that marginal utility derived from the consumption of a
commodity declines as more units of that commodity are consumed at a point of time.
7. Law of demand states that, other things remaining constant, more of a commodity is purchased in
response to decrease in its price.
8. The price elasticity of demand is the degree of responsiveness of quantity demanded of a commodity to
the change in its price.
9. Individual demand schedule is a table showing various quantities of a commodity which a consumer is
ready to buy at different possible prices of the commodity at a point of time.
Market demand schedule is a schedule showing various quantities of a commodity which all the buyers
in the market are ready to buy at different possible prices of the commodity at a point of time.
10. Demand curve is a graphic presentation of demand schedule, showing inverse relationship between
price and quantity demanded of a commodity.
11. Demand function shows the relationship between demand for a commodity and its various determinants.
12. Substitute goods are those goods which can be substituted for each other.
Complementary goods are those goods which complete the demand for each other.
13. A normal good is that good in case of which there is a positive relationship between consumers income
and quantity demanded. Implying that income effect is positive.
An inferior good is that good in case of which there is a negative relationship between consumers
income and quantity demanded.
A giffen good is that good in case of which income effect is negative as well as greater than substitution
effect. Implying that the law of demand fails.
14. When quantity demanded of a commodity changes due to change in own price of the commodity, other
factors remain constant, it is a situation of extension and contraction of demand.
15. When quantity demanded of a commodity changes owing to a change in other factors, other than price
of the concerned commodity, it is a situation of increase and decrease in demand.
16. Movement along the demand curve occurs when quantity demanded is related to changes in price of
the commodity.
Shift in demand curve occurs when demand for a commodity is related to factors other than price of the
commodity.
42
EconomicsXII
QUESTION SETII
1. No. Demand for a commodity is always expressed with reference to price.
2. Yes. Because demand refers to various quantities of a commodity that the consumer is ready to buy
against different possible prices.
3. Yes. Demand for a commodity refers to the entire demand schedule showing various quantities of the
commodity that the buyers in the market are ready to buy at different possible prices at a point of time.
4. Yes. It is quantity demanded of a commodity that changes in response to change in its own price.
Change in demand occurs even when price of the commodity remains constant.
5. Yes. Total utility is the sum total of marginal utilities. TU = SMU.
6. Yes. We know TU = SMU. Accordingly TU will increase so long as MU is positive, even when it is
decreasing.
7. No. When marginal utility starts declining, total utility increases at a diminishing rate. Total utility is
maximum when marginal utility is zero.
8. No. Increase in demand refers to increase in quantity demanded of a commodity at its existing price. It
is a situation of forward shift in demand curve, not of extension of demand.
9. No. Decrease in demand refers to decrease in quantity demanded of a commodity at its existing price. It
is a situation of backward shift in demand curve, not of contraction of demand.
10. No. In case of inferior goods, law of demand fails only when negative income effect is greater than
substitution effect. When negative income effect is less than substitution effect law of demand does not fail.
11. Yes. Because giffen goods by definition are those inferior goods in case of which two conditions are
satisfied: (i) income effect is negative, and (ii) income effect is greater than substitution effect. In case of
inferior goods, on the other hand, only one condition needs to be satisfied: that income effect is negative.
12. Yes. Because, cheaper good replaces the one which is more expensive.
13. No. In case of complementary goods, a rise in price of Good-X causes a fall in demand for Good-Y.
Because consumption of both goods X and Y goes together.
14. No. Indifference curve is convex to the origin, in accordance with the general law that MRS tends to
diminish.
15. Yes. As we move along the indifference curve marginal rate of substitution (MRS) tends to diminish.
Because when we have less of a commodity, intensity of its desire increases. Accordingly, less and less of
it is sacrificed for every additional unit of the other commodity.
16. No. All attainable combinations of Good-X and Good-Y are below as well as along the budget line.
MU X
17. Yes. A consumer attains his equilibrium when
= MUM, in case of single commodity.
PX
18. Yes. A consumer attains his equilibrium when
MU X MU Y
= MUM in case of two commodities.
=
PX
PY
19. Yes. In terms of indifference curve approach, a consumer strikes his equilibrium when:
Slope of IC = Slope of Price Line
Or
P
MRS = X
PY
20. No. A consumer attains his equilibrium only when: MRS =
PX
. It is a point of maximum satisfaction.
PY
21. No. A consumer attains his equilibrium only when:
PX MU X
. It is a situation of maximum satisfaction.
=
PY MU Y
43
EconomicsXII
QUESTION SETIII
1. Yes. MU must diminishes as more and more standard units of a commodity are continuously
consumed. This is in accordance with the law of diminishing marginal utility.
2. No. Cross price effect can occurs in case of substitute goods as well as in case of complementary goods.
Because substitute goods as well as complementary goods are related to each other.
3. Yes. Higher indifference curve shows higher level of satisfaction. Because, higher IC corresponds to
higher level of income of the consumer or higher level of consumption of both goods X and Y.
4. Yes. Shift in demand curve occurs due to change in factors other than own price of the commodity such
as change in income of the consumer, tastes or preferences.
5. Yes. QX may increase or decrease due to change in other determinants of demand even when PX
remains constant.
6. No. Elasticity of demand is always measured as a percentage change in quantity demanded in response
to a percentage change in price.
7. Yes. When total expenditure on the commodity remains constant, price elasticity of demand also
remains constant (which is equal to one), no matter price of the commodity increases or decreases.
8. No. Price elasticity of demand along a straight line demand curve is different at different points on the
lower segment
demand curve. Because, at a particular point on the demand curve, Ed =
, which tends
upper segment
to change from point to point.
9. No. When Ed = 0, demand remains constant, no matter what the price is. Implying that total
expenditure may increase/decrease, but not the quantity demanded.
10. Yes. Elasticity of demand is high in case of goods with close substitutes. Because availability of close
substitutes makes it possible for the consumer to switch from one commodity to the other in response to
change in the relative price structure.
11. No. Elasticity of demand tends to be high over longer period of time. Because, during short periods
consumers tend to be more sticky with regard to their consumption pattern.
12. Yes. Complementary goods often exhibit low elasticity of demand. Because, increase or decrease in the
demand for Good-1 causes a simultaneous increase or decrease in the demand for Good-2 even when
price of Good-2 has not changed.
13. No. Luxuries of life have greater elasticity of demand. Change in their prices has a great effect on their
demand. Because, these goods are not essentials of life.
14. Yes. Elasticity of demand will be high at higher level of price of the commodity. Because corresponding
lower segment
tends to be high.
to higher level of PX, the ratio
upper segment
15. No. A horizontal straight line demand curve parallel to X-axis shows infinite elasticity of demand
(Ed = ).
16. No. A vertical straight line demand curve parallel to Y-axis shows no change in the demand irrespective
of change in price.
DQ
P
17. No. We know Ed =
DP Q
DP
Slope of the demand curve =
DQ
1
P
So that, Ed =
Slope of Demand Curve Q
44
EconomicsXII
18. Yes. From a point of intersection of the demand curve, flatter the curve, more elastic it is. Because, for a
given change in PX, (at the point of intersection) flatter demand curve shows greater change in QX.
19. Yes. Income effect is positive when increase in income causes increase in demand. It occurs in case of
normal goods. It is negative when increase in income causes decrease in demand. It occurs in case of
inferior goods.
20. Yes. In case of giffen goods, income effect is higher than the substitution effect. Implying law of
demand fails in case of giffen goods.
QUESTION SETIV
1. contracts.
2. shifts to the right.
3. remains constant.
4. income of the consumer and demand.
5. diminish.
6. constant.
7. IC and price line are tangent to each other.
MU X
8.
= MUM.
PX
MU X MU Y
9.
= MUM.
=
PX
PY
10. diminishing marginal utility.
11. demand.
12. diminishing marginal rate of substitution.
13. percentage change in quantity demanded due to percentage change in price of the commodity.
14.
(i) articles of distinction

(ii) ignorance of the buyer
(iii) giffen goods.
15.
(i) increase in income of the consumer

(ii) increase in price of substitute good
(iii) decrease in price of complementary good.
16. decrease.
17.
(i) fall in income

(ii) decrease in price of substitute good
(iii) increase in price of complementary good.
18. 1 (one).
19. 1 (one).
20. horizontal straight line parallel to X-axis.
21. vertical straight line parallel to Y-axis.
45
EconomicsXII

1. False. It is a situation of zero price elasticity of demand. Because, when expenditure on the commodity
is increasing proportionate to increase in price, total purchase of the commodity remains constant.
Constant purchase means zero elasticity of demand.
2. True. Because increase in price is not causing any change in expenditure on the commodity. This is in
accordance with expenditure method of measuring elasticity.
1
P
3. False. Because Ed =

When slope of two demand curves is the same, elasticity of demand depends on the initial price and
initial quantity of the commodity.
4. True. We know
Ed =
=
1
P

1 P
0 Q
=
5. True. We know
Ed =
=
1
P

1 P
=0
46
EconomicsXII
Worksheet3A
Unit-3A: Producer Behaviour and Supply
QUESTION SETI
1. Production function refers to the functional relationship between physical inputs and physical output.
2. Producers equilibrium refers to the situation in which he maximises his profits.
3. Supply refers to the schedule showing various quantities of a commodity offered for sale at its different
possible prices.
Quantity supplied refers to a specific amount offered for sale at a specific price of the commodity.
4. Individual supply schedule is a table showing different quantities of a commodity that an individual
firm is ready to sell at different prices.
Market supply schedule is a table showing different quantities of a commodity that all the firms in a
market are willing to sell at different prices of that commodity at a given time.
5. The law of supply states that, other things being equal, quantity supplied increases with increase in
price and decreases with decrease in price of a commodity.
6. When a fall in price of a commodity causes a decrease in its quantity supplied, it is called contraction of
supply.
If quantity supplied falls due to factors other than own price of the commodity, it is a situation of
decrease in supply.
7. When a rise in the price of a commodity causes an increase in its quantity supplied, it is called
expansion/extension of supply.
If the quantity supplied increases in the market due to factors other than own price of the commodity, it
is a situation of increase in supply.
8. Total product (TP) is the total quantity of a commodity produced in a given period.
Marginal product (MP) is additional quantity of the commodity produced by using an additional unit of
a variable factor.
Average product (AP) is the output per unit of the variable factor.
9. Returns to a factor refer to the behaviour of physical output owing to change in physical input of a
variable factor, fixed factors remaining constant.
10. Law of variable proportions states that as more and more of the variable factor is combined with the
fixed factor, marginal product (MP) of the variable factor may initially increase and subsequently
stabilise, but must finally decrease.
11. Increasing returns to a factor occur when, due to increasing application of the variable factor, marginal
product (MP) of the factor tends to rise.
12. Diminishing returns to a factor occur when, due to increasing application of the variable factor,
marginal product (MP) of the factor tends to diminish.
13. The movement along the supply curve represents expansion and contraction of supply due to change
in own price of the commodity.
Shift in the supply occurs due to factors other than change in own price of the commodity.
14. Joint supply refers to supply of goods produced and sold jointly like cotton and cotton seeds.
Composite supply refers to supply of a commodity through its different sources.
15. Price elasticity of supply is a percentage change in quantity supplied in response to a percentage change
in price of the commodity.
16. Perfectly elastic supply refers to a situation when a slight change in price causes infinite change in
quantity supplied of a commodity. The supply curve is parallel to X-axis.
47
EconomicsXII
Perfectly inelastic supply refers to a situation when the quantity supplied remains unchanged whatever
be the price of the commodity. The supply curve is parallel to Y-axis.
17. Supply is said to be elastic when Es > 1.
Supply is said to be inelastic when Es < 1.
18. Market period is a period when supply of a product can be increased only upto the extent of its existing
stock.
Short period is a period of time when output can be increased only through greater application of the
variable factors.
Long period is a period of time when production can be increased through greater application of all
factors of production.
19. Fixed factors are those factors of production, the application of which does not change with the change
in output.
Variable factors are those factors of production, the application of which changes with the change in
output.
20. Supply refers to various quantities of a commodity that the producers wish to sell at different possible
prices of the commodity at a point of time.
Stock of a commodity refers to the total quantity of that commodity available with the producers (at a
point of time) for present or future sale.
QUESTION SETII
1. Yes. Production function is only a technical relationship between physical inputs and physical output.
This tells us how best resources can be utilised for maximising output.
2. Yes. A producer strikes his equilibrium when he produces that amount of output at which the
difference between total revenue and total cost is maximum. Because, gross profit = TR TC.
3. Yes. Because, supply refers to the entire supply schedule (or supply curve) while quantity supplied
refers to a specific point on the supply curve which changes with change in own price of the commodity.
4. No. Contraction of supply causes a downward movement along a supply curve.
5. No. Extension and contraction of supply are related to own price of the commodity, other factors
remaining constant.
6. No. Supply expands in response to increase in price of the concerned commodity. It increases in
response to factors other than price of the concerned commodity.
7. Yes. When TP is maximum, change in TP= zero. Implying, MP (which measures the change in TP)
must be zero when TP is maximum.
8. Yes. MP can be zero or negative but AP is never. Because, AP is the ratio between TP and units of the
variable factor (which is always positive) while MP is change in TP. (owing to an additional unit of the
variable factor) which can be zero or negative.
9. No. Law of variable proportions operates basically because of the fixity of factors of production.
10. Yes. It is because some factors are fixed that output is increased by using more and more units of the
variable factor. It disturbs the ideal factor ratio and diminishing returns set in.
11. No. AP and MP tend to be inverse U-shaped.
12. Yes. Because in a stage of increasing returns, cost of producing even additional unit of output tends to
fall. Accordingly, it would be irrational for the producer to stop production in this stage.
13. Yes. A producer strikes his equilibrium only when MP is diminishing. Because, diminishing MP means
rising MC. The producer stops production when rising MC matches with MR. Beyond this point, rising
MC would exceed MR, causing loss of profit.
48
EconomicsXII
14. No. In the short period production is done by using the both fixed and variable factors of production.
In fact, short period is a period of time when some factors are fixed.
15. Yes. Factor ratio ought to change in case of law of variable proportions. It is precisely because the
proportion of factors varies that the law is named as the law of variable proportions.
16. Yes. When a straight line upward sloping supply curve passes through the origin (no matter what the
angle it forms), the elasticity of supply is equal to one.
17. No. When a straight line upward sloping supply curve shoots from the Y-axis, Es>1.
18. No. When a straight line upward sloping supply curve shoots from the X-axis, Es<1.
19. Yes. Stages of production are the consequences of the law of variable proportions.
Percentage Change in Quantity Supplied
20. Yes. Price elasticity of supply =
Percentage Change in Price
QUESTION SETIII
1. Yes. This is because, when AP rises, MP > AP; when AP falls, MP < AP. Accordingly, it is only when AP is
constant at its top, that AP = MP. Implying that MP curve cuts AP curve from its top.
2. Yes. When AP is falling, AP>MP. See AP and MP corresponding to output range MN in the diagram.
AP, MP
AP=MP
AP
O
UNITS OF LABOUR
MP
3. Yes. When AP is rising, AP<MP. See AP and MP corresponding to output range OQ in the diagram.
AP, MP
AP=MP
AP
UNITS OF LABOUR
Q
MP
4. Yes. If AP is falling, MP must also fall. Because, unless MP

(showing additions to TP) is falling, AP (showing average
output) will not fall.
AP, MP
AP
5. No. AP can rise even when MP is falling. See AP and MP

corresponding to LQ range of output in the diagram.
MP
O
UNITS OF LABOUR
49
EconomicsXII
6. As more and more units of the variable factor are combined with the fixed factor, TP will rise only so
long as MP is positive. Once MP becomes negative, TP will start falling.
7. Yes. Increasing MP implies TP is increasing at increasing rate. Diminishing MP implies that TP is
increasing at diminishing rate.
8. No. When MP is decreasing, TP increases at a diminishing rate.
9. No. When MP is increasing, TP increases at an increasing rate.
10. No. Constant MP implies that TP is increasing at a constant rate.
11. Increasing returns to a factor occur because fixed factor is abundantly used in production.
12. Yes. As more and more units of a variable factor are combined with the fixed factor, the latter gets over
utilised. Hence, the diminishing returns.
13. No. Diminishing returns to a variable factor occur because the producer fails to maintain the ideal ratio
between fixed and variable factors. Because the use of fixed factors, by definition, cannot be changed
during the short period.
14. No. Supply can change due to factors other than price of the concerned commodity such as technology
and input prices.
15. No. A producer would maximise his profits only in the stage of diminishing returns when MP is
declining but is still positive.
16. Yes. Falling MC means that the cost of producing an additional unit of output tends to reduce. In a
situation when price is constant (as under perfect competition) this would mean a situation when the
difference between the firms TR and TVC tends to increase. This means a situation when firms gross
profit (TR TVC) tends to rise. Why should a firm not increase output when its gross profits are rising?
Certainly it will. Therefore, it is only when MC is rising that the firm will find its equilibrium output.
17. Yes. More of a commodity is offered at a higher price because other things remaining constant, higher
price implies higher profit. Accordingly, the producer is induced to produce more and sell more.
18. Yes. Flatter curve shows high elasticity of supply at the point of intersection of two supply curves.
Because, corresponding to a given change in price at the point of intersection) flatter curve shows
greater change in quantity.
19. No. Longer the time period, greater will be the elasticity of supply. Because, over a long period of time,
more and more factors are easily available and their input can be changed to increase (or decrease)
output of the commodity.
20. No. If elasticity of supply = 0, supply curve becomes a vertical straight line parallel to Y-axis.
QUESTION SETIV
1. of production the application of which changes with change in output.
2. of production the application of which does not change with the change in output.
3. profits.
4. TR = TC or AR = AC.
5. TR = TVC or AR = AVC.
6. TP.
7. TP is maximum.
8. MP is negative.
9. MP is increasing.
10. MP diminishes.
50
EconomicsXII
11.
(i) technological improvement

(ii) decrease in input prices
(iii) increase in number of firms.
12.
(i) increase in input prices

(ii) decrease in number of firms.
(iii) shift in goal of the firm from sales maximisation to profit maximisation.
13. increase in price of the concerned commodity.

14. decrease in price of the concerned commodity.
15. rise in price of the commodity.
16. fall in price of the commodity.
17.
(i) use of computers

(ii) use of diesel engines in place of steam engines.
18. right.
19. left.
20. left.
21. right.
22. through greater application of variable factors.
23. through greater application of all the factors of production.
24. 0 (zero).
25. left.
26.
(i) price of the concerned commodity

(ii) technology
(iii) input prices.
27.
(i) factors of production are use-specific which compounds their scarcity

(ii) some factors are fixed
(iii) factors of production cannot always be substituted for each other.

Y
A
Q1
b
TR
TC
(a)
COST, REVENUE
AND PROFIT
1.
Note: The difference between TR and TC

is maximum only when MR = MC
d
B (Maximum
P
Profit)
Q2
(b)
REVENUE AND COST
X
TP
MC
MR = MC
MR
O
Q1
Q
OUTPUT
Q2
51
EconomicsXII
2. When MP remains constant at 10 units, and 10 units of the variable factor are used, TP = 10 + 10 + 10
+ 10 + 10 = 50.
(Q TP = SMP)
3. False. When production is increased beyond a point where MP = AP (implying AP is at its top) MP and
AP should start declining. Fall in MP should be faster than the fall in AP. So that AP > MP.
4. Introduction of new technology increase MP. It implies a fall in MC. Accordingly supply curve of a firm
shift to the right which shows that the producers are now willing to offer more quantity of a commodity
at its existing price.
5. When supply of a commodity increases without any increase in price of the commodity, it is known as
the situation of increase in supply. Increase in supply occurs when quantity supplied increases due to
determinants other than price of the concerned commodity.
6. QX = f (L, K)
Where, QX = Output of good-X
L = Labour, a variable factor
K = Capital, a fixed factor.
Example: 25X = f (4L, 2K)
From the above equation, it is clear that K is constant at 2 units. Output of commodity-X (25 units) can
be produced by combining 4 units of L with 2 units of K.
7. MP is the rate of TP. When MP = 0, there is no change (or addition) in TP. Implying that TP should be
maximum when MP = 0.
8. True. Shift in the supply curve occurs due to factors other than price of the concerned commodity.
When other factors change in a positive direction, the supply curve shifts to the right, showing increase
in supply; and when the changes occur in the negative direction, the supply curve shifts to the left
showing a decrease in supply.
9. A situation of increasing returns to a factor is not sustainable owing to the following reasons:
(i) some factors are fixed in supply. So that their use cannot be increased proportionate to the variable
factors.
(ii) factors of production are not perfect substitutes of each other.
52
EconomicsXII
Worksheet 3B
Unit-3B: Cost and Revenue
QUESTION SETI
1. Fixed cost refers to the expenditure incurred on the fixed factors of production like plant and
machinery.
Variable cost refers to the expenditure incurred on the variable factors of production like casual
workers.
2. Total cost refers to all expenses incurred by the producer to produce a given quantity of output.
Average cost is the cost per unit of output produced.
Marginal cost is the change in total cost by producing one more or less unit of output.
3. Explicit costs are those cash payments which a firm makes to others for the purchase of goods and
services. Examples: (i) wages paid to labourers, (ii) payment made for the purchase of raw material.
Implicit costs are opportunity costs of self-owned and self-employed resources. Examples: (i) interest
on entrepreneurs own capital, (ii) rent on entrepreneurs own land used in business.
4. Money cost refers to the sum of monetary expenses incurred by the producer for producing a
commodity.
Real cost refers to the pains, the discomfort and disutility involved in supplying the factors of
production by their owners.
5. Private cost refers to the expenditure incurred by an individual firm for producing a commodity.
Social cost is the total cost to society of a production activity. Like the cost the society has to bear on
account of water pollution and noise pollution.
6. Prime or variable costs are those costs which change as the level of output changes.
Fixed or supplementary costs are those costs which do not change with change in the level of output.
7. Total revenue is the sum total of money receipts by a firm from the sale of its total output.
TR = Price Quantity
Marginal revenue is the change in total revenue as a result of selling one more or less unit of output.
MR = TRn TRn1
Or
DTR
MR =
DQ
QUESTION SETII
1. Yes. Because fixed costs are incurred even before output actually starts.
2. No. Variable costs are the expenditure incurred by the producer on the use of variable factors of
production. These are incurred only after output actually starts.
3. Yes. Because fixed costs are incurred even when output is zero, while variable costs are incurred only
after output actually starts (so that variable costs are zero when output is zero).
4. No. As the output increases, variable cost also increases. Because variable costs are largely the costs of
raw material.
5. Yes. Average fixed cost (AFC) curve is a rectangular hyperbola. Because TFC does not change with
output.
53
EconomicsXII
6. Yes. Average variable cost tends to fall, stabilise and rise as output
increase due to the law of variable proportions. See diagram.
AVC
AVC
OUTPUT
7. No. Total fixed cost is indicated by a horizontal straight line

parallel to X-axis. See diagram.
TOTAL FIXED COST
TFC
20
10
OUTPUT
8. No. Marginal cost covers only the variable cost. Because, MC is an additional cost and it cannot be a
fixed cost.
9. Yes. AC = AFC + AVC.
10. No. Sum total of marginal costs (MC) corresponding to different units of output become total variable
cost (TVC). TVC = SMC. Because, marginal costs are variable costs only.
11. Yes. Sum total of marginal revenues for all the units of output is equal to total revenue.
TR = SMR
12. Yes. We know that:
AR =
We also know that TR = P.Q
TR
Q
(Where P = Price, and Q = Quantity or Output sold.)
Relating the two equations, we can write that:

TR
AR =
= P.
Q
Thus, it is proved that AR = Price.
13. No. MR can be negative, though only when price is declining as under monopoly and monopolistic
competition.
14. No. When price is constant, AR is constant. Constant AR implies MR is also constant. Thus, when price
is constant, AR = MR.
15. No. When price (= average revenue) reduces as output increases,
MR declines faster than AR. So that AR > MR.
16. No. Under perfect competition, AR and MR curves coincide and

are a horizontal straight line parallel to X-axis.
17. No. Under monopoly, AR and MR curves slope downward, as in the
diagram:
AR/MR
AR
MR
O
54
OUTPUT
EconomicsXII
18. Yes. TR curve can shoots from the origin as TR = 0 when output is zero.
19. Yes. AR (= price) curve never shoots from the origin, because price of a commodity is often not zero.
20. Yes. MR is addition to TR. When MR = 0, addition to TR is zero, implying that TR is maximum.
QUESTION SETIII
1. Yes. AC curve is U-shaped in accordance with the law of variable proportions: it tends to fall owing to
increasing returns to a factor, it tends to stabilise owing to constant returns to a factor, and it tends to rise
owing to diminishing returns to a factor.
2. Yes. When the production is in a state of diminishing returns, MC will be rising in accordance with
falling MP. AC is rising, with the rising MC but less than MC or MC > AC.
3. Yes. AC is greater than MC or MC is less than AC when AC falls. See AC
and MC till point E in the diagram. In the diagram, AC is falling till
point E and MC continues to be lower than AC.
AC, MC
MC
AC
OUTPUT
MC
AC, MC
4. Yes. MC and AC are equal when AC tends to stabilise or when AC is

constant, MC = AC. See AC and MC corresponding to point E in the
diagram where AC = MC.
AC
OUTPUT
5. Yes, it is true. TC and TVC curves are parallel to each other. Because the difference between TC and
TVC is equal to TFC which is constant at all levels of output.
Y
AVC
AVC, AFC
6. No, it is not true. Initially as output increases the distance between AVC
and AFC curves may tend to reduce but once the two curves cross each
other (as in the diagram), the difference between the two tends to
increase. Because, while AVC tends to rise after a certain level of
output, AFC continuously falls.
AFC
O
55
OUTPUT
EconomicsXII
8. Yes. TC = TFC + TVC and TFC remains constant even at zero level of
output.
At zero level of output, TVC = 0
AC
AVC
AC, AVC
7. No. The distance between AC and AVC curves tends to reduce as

output increases. This is because as output increases the component of
AVC in AC tends to increase while the component of AFC in AC tends
to decrease. See diagram.
OUTPUT
\
TC = TFC
Accordingly, TC curve starts from the Y-axis in the short period.
9. Yes. Long period total cost (TC) curve starts from the origin (or zero) because in the long period, all
costs are variable costs and variable costs always vary with output, so that when output is zero, variable
costs are also zero.
10. Yes. AFC continuously reduces as output increases. Because TFC remains constant at all levels of
output.
11. No. Greater production does not always mean greater revenue (TR). Price (AR) may fall so much that
higher output yields lower TR.
12. Yes. AR>MR under monopoly because AR tends to fall, and falling AR implies falling MR at a higher
rate.
Y
14. Yes. When MC > ATC, ATC rises. See AC and MC beyond point E in
the diagram. In the diagram, AC starts rising from point E and after
that point E, MC > AC.
MC
AC, MC
13. No. Because ATC is the sum of AFC and AVC. Since AFC can never be
zero, AVC can never be equal or greater than ATC. Thus, ATC always
remains above AVC.
AC
15. Yes. Total variable cost is the area covered under MC curve
corresponding to a given level of output. In the diagram area
OLKM is total variable cost when output is OL.
OUTPUT
MC
MC
L
OUTPUT
16. Yes. Under perfect competition, AR and MR are constant.

Constant MR implies TR increases at a constant rate. Therefore, TR is shown as a straight line sloping
upward from the origin and it shoots from the origin. When Output= 0, TR = 0.
17. Yes. TR curve increases only at a diminishing rate because a monopolist can sell more only if he lowers
the price of his product.
18. Yes. Because rate of TR is equal to MR which is constant under perfect competition, but tends to decline
under monopoly and monopolistic competition.
19. No. When TR is maximum, MR = 0 even when AR is declining as under monopoly and monopolistic
competition.
20. No. When AR is constant, MR is also constant and AR = MR.
56
EconomicsXII
QUESTION SETIV
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
TC TVC.
TC TFC.
TFC + TVC.
law of variable proportions.
TFC remains constant at all levels of output.
AVC is only a component of AC.
MC covers only variable costs.
ATC = AFC + AVC.
(i) rent of building
(ii) cost of plant and machinery
(i) purchase of raw material
(ii) wages of daily workers
it is constant at all levels of output.
of increasing returns to a factor.
all factors are variable factors in the long period.
AR is constant.
when AR is decreasing, MR must be decreasing faster than AR.
TR.
decreasing.
constant.
constant rate, because constant price (AR) implies that AR = MR.
starts declining.
(iii) wages of permanent staff.

(iii) payment of electricity bill.

1.
Y
COST, REVENUE
AND PROFIT
Q1
b
TR
TC
(a)
Q2
(b)
REVENUE AND COST
Note: The difference between TR and TC

is maximum only when MR = MC
d
B (Maximum
P
Profit)
X
TP
MC
MR = MC
MR
O
Q1
Q
OUTPUT
Q2
Profit is maximised when the difference between TR and TC is maximum and when MR = MC.
Distance between TR and TC curves is measured by drawing tangents on these curves. The distance is
maximum when the tangent lines are parallel to each other.
2. Marginal cost is an additional cost and additional cost cannot be fixed cost, it can be variable cost.
Accordingly, the sum total of marginal costs corresponding to different units of output become TVC.
SMC = TVC.
57
EconomicsXII
Worksheet 4
Unit-4: Forms of Market and Price Determination under

QUESTION SETI
1. A firm is said to be operating under conditions of pure competition when there are many firms,
producing a homogeneous commodity with freedom of entry and exit, independent decision-making.
Perfect competition is said to exist, when besides conditions of pure competition, two more conditions
are satisfied, viz (i) there is perfect knowledge of the market conditions among buyers and sellers, and
(ii) there is perfect mobility of factors of production.
2. Monopoly is a market form with a single seller and many buyers of a commodity.
Monopolistic competition is a form of the market with many buyers and sellers, where differentiated
product is sold with a partial control over price.
3. Oligopoly is a form of the market in which there is a large number of buyers, but only a few big sellers of
a commodity.
4.
5.
6.
7.
8.
9.
10.
Duopoly is a form of market in which there are two sellers of a commodity with many buyers.
Equilibrium price is the price which corresponds to the equality between market demand and market
supply of a commodity.
Equilibrium quantity is the quantity which corresponds to the equilibrium price in the market.
Market refers to the mechanism of sale and purchase of goods and services.
Market equilibrium is a situation of zero excess demand and zero excess supply. Or, it is a situation
where: market demand = market supply.
Homogeneous product refers to a product of which all units are identical in all respects.
Product differentiation is a situation when different producers in the market try to differentiate their
product (with respect to size, weight, packaging, etc.) with a view to attracting the buyers and exercising
partial control over price.
Profits are said to be normal when: TR = TC or AR = AC.
Profits are said to be extra-normal or abnormal when: TR > TC or AR > AC.
Extra-normal or abnormal losses occur when: TR < TC or AR < AC.
Price which is equal to average cost is known as break-even price.
Market price is the price that exists in the market at a particular point of time.
Normal price is the price that prevails in the long period.
Patent rights is the official recognition of the originators of a new product or technology. No one else
can use their technology without obtaining a license.
A cartel is a formal collusive agreement among rival firms in the market under oligopoly. Firms collude
to avoid competition.
When market demand exceeds market supply of a commodity at a given price it is known as excess demand.
Excess supply means market supply of a commodity is more than market demand for a commodity at
the given price.
11. Economic viability of an industry refers to the situation when demand and supply curves of the industry
meet at some positive level of output.
Non-viability of an industry refers to a situation when demand curve and supply curve do not intersect
each other at any positive quantity. In such a situation, supply curve lies above the demand curve.
12. Control price means price of the good is fixed below its equilibrium price with a view to ensuring some
minimum supply of the essential commodities to a targeted group of people.
Support price is fixed by the government above the equilibrium price with a view to ensuring some
minimum income to the farmers.
58
EconomicsXII
QUESTION SETII
1. Yes. In case of monopoly, there is single seller and large number of buyers. Under monopolistic
competition, there are large numbers of both buyers and sellers.
2. Yes. Monopolist is a price maker because he is the single seller of a commodity with no close substitutes.
3. Yes. Under perfect competition, there are large number of buyers and sellers of a homogeneous
product. No single seller by changing his supply can influence the price.
4. No. Under perfect competition, an individual firm cannot change the price. But market price can
change owing to changes in demand and supply.
5. Yes. Firms demand curve is indeterminate or cannot be drawn under oligopoly because of high degree
of interdependence between the firms.
6. Yes. Because of product differentiation, each firm can decide its price policy independently. So that
each firm has a partial control over price of its product.
7. Yes. A monopolist can charge different prices for the same commodity from different buyers because of
no close substitutes of his product.
8. Yes. Often, higher price is fixed when elasticity of demand is low. Low price is fixed when elasticity of
demand is high.
9. Yes. Under perfect competition, only normal profits prevail in the long run because of freedom of entry
and exit of the firms in the market.
10. Yes. A firm makes only normal profits in the long run under monopolistic competition because of
freedom of entry and exit of the firms in the market.
11. Yes. It is because homogeneous products are sold at a uniform price under perfect competition and
because monopoly product has no close substitutes in the market.
12. Yes. Because price of the product is given to a firm under perfect competition.
13. Yes. Firms demand curve under monopolistic competition is more elastic than under monopoly
because of availability of close substitutes under monopolistic competition.
14. No. A firm under monopolistic competition has partial control over the price owing to product
differentiation.
15. Yes. Under perfect competition, equilibrium price is determined at the point of intersection of market
demand and market supply. An individual firm cannot change it.
QUESTION SETIII
1. Yes. A firm under perfect competition gets only a break-even price in the long run. It is a price which
corresponds to normal profits in the long run.
2. Yes. It is due to the freedom of entry and exit feature of the market that normal profits prevail in the
long run under perfect competition and under monopolistic competition.
3. Yes. A perfectly competitive firm makes only normal profits(AR= AC) in the long run which happens
only at the lowest point on the AC curve.
Y
5. No. In case of excess demand, market price is less than equilibrium

price. Excess demand will push the market price back to its equilibrium
level. i.e., equilibrium price is restored in the economy.
6. Yes. In case of non-viable industry, supply curve is entirely above the
demand curve. These curves do not meet anywhere. See diagram.
PRICE
4. Yes. Because there is only a small number of big firms in the market.
Non-viable industry:
supply curve is above
the demand curve S
D
D
59
SUPPLY/DEMAND
EconomicsXII
7. Yes. Because market supply may change proportionate to market demand.

8. Yes. Equilibrium price will remain unchanged when supply is perfectly elastic whether demand
increases or decreases. See diagram. Here price remains constant at OP when demand increases to
D1D1 and also remains constant at OP when demand decreases to D2D2.
D1
PRICE
D2
S
D1
D
D2
QUANTITY
9. Yes. Owing to improvement in technology supply of the good in the market will increase causing a
rightward shift of the supply curve. Accordingly, equilibrium price will decrease.
10. Yes. Because, fearing shortage, demand curve for rice will shift forward, causing a rise in equilibrium
price.
11. Yes. In a situation of support price (which is the minimum price assured to the producers) market price
ought to be equal or greater than the support price.
12. Yes. When import of inputs become expensive, the supply of the commodity reduces and supply curve
shifts to the left. Accordingly, equilibrium price of the commodity tends to rise.
13. Yes. The income effect for an inferior good is negative. It implies that for an increase in income of its
buyers, the demand for the good falls. Diagrammatically, demand curve, DD, as shown in the diagram
shifts leftward, i.e., from DD to D1D1. The new equilibrium struck at point E1. The equilibrium price
decreases from OP to OP1.
Y
PRICE
D1
D
S
E
E1
P1
S
D
D1
Q1 Q
QUANTITY
14. Yes. Because supply may rise proportionately greater than the rise in demand. See diagram.
Y
D1
D2
S1
PRICE
S2
P1
P2
D1
O
Q
QUANTITY
60
D2
X
EconomicsXII
15. No. With a substantial cut in production, supply curve shifts to the left and equilibrium price will
increase. See diagram.
Y
PRICE
S1
S
P1
E
P
S1
S
O
Q1 Q
QUANTITY
QUESTION SETIV
1.
(i) large number of buyers and sellers

(ii) homogeneous product
(iii) freedom of entry and exit of firms.
2.
(i) single seller and large number of buyers

(ii) no close substitutes.
3.

(ii) product differentiation
(iii) freedom of entry and exit of firms.
4.
(i) a few firms

(ii) large number of buyers.
5. is a horizontal straight line parallel to X-axis.

6. monopoly.
7. in the long run.
8. equilibrium price.
9. increases.
10. to the left.
11.
(i) not a uniform price

(ii) imperfect knowledge of market condition
(iii) imperfect mobility of factors.
12.

(ii) freedom of entry and exit of firms.
13. perfect competition.

14. monopoly.
15. increase.
61
EconomicsXII
HOTS
1. True. Under perfect competition, demand curve of the firm is a horizontal straight line parallel to
X-axis. It implies the firm will sell the product at the prevailing price which is determined by the
industry. The individual firm cannot influence the price.
Y
PRICE
Firms Demand Curve

under Perfect Competition
AR=MR
Q2
Q1
OUTPUT
2. True. As a single seller he can fix whatever price he wishes to fix for his product. But he can sell more
only by lowering the price of his product.
3. True. Firms demand curve is indeterminate under oligopoly because there is a high degree of
interdependence between the firms. Price and output policy of one firm has a significant impact on the
price and output policy of the rival firms in the market. When one firm lowers its price, the rival firms
may also lower the price. And, when one firm raises the price, the rival firms may not do it. Accordingly,
it becomes very difficult to estimate change in firms sales caused by a change in price. Implying that a
precise relationship between price and sales cannot be established. Or, that the firms demand curve
cannot be drawn.
4. True. In a situation of excess supply, supply is more than demand. Excess supply forces the market
price to slide down to its equilibrium level. In a situation of excess demand, demand is more than
supply. Shortage of supply shall push the price to its equilibrium level.
5. True. In a situation of constant demand or perfectly inelastic demand, increase or decrease in supply
causes a full impact on price of the commodity but equilibrium quantity does not change.
6. True. A monopoly firm can make abnormal profits in the long run because of lack of freedom of entry
and exit of firms in the market. Due to freedom of entry and exit of firms under monopolistic
competition, a producer cannot earn abnormal profits in the long run.
7. True. Because under perfect competition AR = MR, while under monopoly AR > MR. While
equilibrium in both cases is struck when MR = MC.
62
EconomicsXII
Numericals
Price Elasticity of Demand
Sol.
The diagram shows AE is the demand curve of a commodity. On the basis of this
diagram, state whether the following statements are true or false. Give reasons
for your answer:
(i) Demand at point B is price inelastic.
(ii) Demand at point C is more price elastic than at point B.
(iii) Demand at point C is price elastic.
(iv) Price elasticity of demand at point C is greater than the price elasticity of
demand at point D.
[CBSE Sample Paper 2012]
(i) The statement is false.
Lower segment of a point on demand curve
We know, Ed =
Upper segment of a point on demand curve
Y
A
B
Price
1.
C
D
E
O
Figure 1
Demand
At point B, lower segment (BE) > Upper segment (AB). Implying that Ed > 1.
\ Demand at point B is price elastic.
CE BE
(ii) The statement is false. This is because
<
AC AB
\ Demand at point C is less price elastic than at point B.
(iii) The statement is false.
At point C, lower segment (CE) < upper segment (AC). Implying that Ed < 1.
\ Demand at point C is price inelastic.
CE DE
(iv) The statement is true. Because,
>
AC AD
Ans. Price elasticity of demand at point C is greater than the price elasticity of demand at point D.
2. Calculate the price elasticity of demand for a commodity when its price increases by 25 per cent and quantity demanded
falls from 150 units to 120 units.
Sol.
Percentage change in price = 25 per cent

Percentage change in quantity demanded =
120 150
DQ
-30
100 =
100 =
100
Q
150
150
= 20 per cent
Percentage change in quantity demanded
Price elasticity of demand (Ed) = ()
Percentage change in price
= ( -)
20%
= 0.8
25%
Ans. Price elasticity of demand = 0.8.

3. When the price of a commodity falls by ` 2 per unit, its quantity demanded increases by 10 units. Its price elasticity of
demand is ()1. Calculate its quantity demanded at the price before change which was ` 10 per unit. [CBSE Delhi 2010]
Sol.
Suppose the initial quantity demanded = X units.

P = ` 10; P1 = ` 10 ` 2 = ` 8; DP = P1 P = ` 8 ` 10 = () ` 2
Q = X units; Q1 = (X + 10) units; DQ = Q1 Q = X + 10 X = 10 units
Ed = () 1
P DQ
Q DP
10 10
() 1 =
X -2
100
() 1 =
-2X
Price elasticity of demand (Ed) =
63
EconomicsXII
2X = 100
X = 50
Ans. Quantity demanded before change in price = 50 units.
4. When price of a commodity falls by ` 1 per unit, its quantity demanded rises by 3 units. Its price elasticity of demand is
()2. Calculate its quantity demanded if the price before the change was ` 10 per unit.
[CBSE (AI) 2010]
Sol.
Let the initial quantity be X units.

Given,
P = ` 10; DP = () ` 1
Q = X units; DQ = 3 units
Ed = () 2
P DQ
Q DP
10 3
() 2 =
X 1
30
() 2 =
X
2X = 30
X = 15

5. The price elasticity of demand of a commodity is () 1.5. When its price falls by ` 1 per unit its quantity demanded rises
by 3 units. If the quantity demanded before the price change was 30 units, what was the price at this demand? Calculate.
[CBSE (AI) 2010]
Sol. Suppose the initial price be ` X.
P = ` X; DP = () ` 1
Q = 30 units; DQ = 3 units
Ed = () 1.5
P DQ
Q DP
X
3
() 1.5 =
30 1
3X
() 1.5 =
-30
3X = 45
45
X=
= 15
3
Ans. Price before change = ` 15.

6.
Sol.
Quantity demanded of a commodity rises by 6 units when its price falls by ` 1 per unit. Its price elasticity of demand is () 1.
If the price before the change was ` 20 per unit, calculate quantity demanded at this price.
[CBSE (AI) 2010]
Suppose the initial quantity demanded be X units.
P = ` 20; DP = () ` 1; Q = X units; DQ = 6 units
Ed = () 1
P DQ
Q DP
20 6
() 1 =
X 1
120
() 1 =
-X
X = 120
64
EconomicsXII
7.
Sol.
The quantity demanded of a commodity falls by 5 units when its price rises by ` 1 per unit. Its price elasticity of demand is
() 1.5. Calculate the price before change if at this price quantity demanded was 60 units.
[CBSE (F) 2010]
Let the price before change = ` X.
Given, P = ` X; DP = ` 1
Q = 60 units; DQ = () 5 units
Ed = () 1.5
P DQ
Q DP
X 5
() 1.5 =
60 1
-5X
() 1.5 =
60
5X = 90
90
X = = 18
5
Ans. Price before change = ` 18.
8.
Sol.
Price elasticity of demand of a commodity is 0.5. Its quantity demanded falls by 5 units when its price rises by ` 1 per unit.
Calculate the quantity demanded if the price before the change is ` 5 per unit.
[CBSE (F) 2010]
Let the initial quantity demanded be X units.
Given,
P = ` 5; DP = ` 1
Q = X units; DQ = () 5 units
Ed = 0.5
P DQ
Q DP
5 5
0.5 =
X 1
-25
0.5 =
X
X = 50
Ans. Quantity demanded before the change in price = 50 units.

9.
Sol.
Price elasticity of demand of a commodity is () 0.75. When its price falls by ` 1 per unit its quantity demanded rises
by 4 units. Calculate its quantity demanded if the price before the change was ` 12 per unit.
[CBSE (F) 2010]
Suppose the initial quantity demanded is X units.
Given,
P = ` 12; DP = () ` 1
Q = X units; DQ = 4 units
Ed = () 0.75
P DQ
Q DP
12 4
X 1
48
() 0.75 =
X
() 0.75 =
X = 64
Ans. Quantity demanded before the change in price = 64 units.
65
EconomicsXII
Concepts of Cost
1.
Complete the following table:

Output
(Units)
Average Variable
Cost (`)
Total Cost
(`)
Marginal Cost
(`)
60
20
18
18
20
120
22
[CBSE Delhi 2009]
Sol.
2.
Output
(Units)
AVC
(`)
TC
(`)
MC
(`)
TVC
(`)
TFC
(`)
20
60
20
20
40
18
76
16
36
40
18
94
18
54
40
20
120
26
80
40
22
150
30
110
40

Output
(Units)
Total Cost
(`)
Average Variable
Cost (`)
Marginal Cost
(`)
90
30
27
27
180
30
[CBSE (AI) 2009]
Sol.
3.
Output
(Units)
Total Cost
(`)
Average Variable
Cost (`)
Marginal Cost
(`)
Total Variable
Cost (`)
Total Fixed Cost

(`)
90
30
30
30
60
114
27
24
54
60
141
27
27
81
60
180
30
39
120
60
Given below is the cost schedule of a firm. Its average fixed cost is ` 20 when it produces 3 units.
Output
(Units)
Average Variable Cost

(`)
30
28
32
Calculate its marginal cost and average total cost at each given level of output.
[CBSE Delhi 2010]
Sol.
Output
(Units)
Average Variable Total Fixed Cost

Cost (`)
(`)
Average Fixed
Cost
(`)
Total Variable
Cost
(`)
Marginal
Cost
(`)
Average Total
Cost (`)
(AFC + AVC)
30
60
60
30
30
90
28
60
30
56
26
58
32
60
20
96
40
52
66
EconomicsXII
When Output = 3 units;
AFC = ` 20
TFC = AFC Output

= ` 20 3 = ` 60.
4.
A firms average fixed cost, when it produces 2 units, is ` 30. Its average total cost schedule is given below. Calculate its
marginal cost and average variable cost at each level of output.
Output (Units)
Average Total Cost (`)
80
48
40
[CBSE (AI) 2010]

Sol.
Output
(Units)
Average Total
Cost
(`)
Total Fixed Cost

(`)
Average Fixed
Cost
(`)
Average Variable
Cost
(`)
Total Variable
Cost
(`)
Marginal
Cost
(`)
80
60
60
20
20
20
48
60
30
18
36
16
40
60
20
20
60
24
AFC = ` 30; when output = 2

TFC = AFC Output
= ` 30 2 = ` 60
We know, TFC remains constant at all levels of output.
5.
Given below is the cost schedule of a firm. Its total fixed cost is ` 120. Calculate the marginal cost and average variable cost
at each level of output.
Output
(Units)
Average Total Cost

(`)
160
96
80
[CBSE (AI) 2010]

Sol.
6.
Output
(Units)
Average
Total Cost
(`)
Total
Fixed Cost
(`)
Total
Cost
(`)
Total
Variable Cost
(`)
Average
Variable Cost
(`)
Marginal
Cost
(`)
160
120
160
40
40
40
96
120
192
72
36
32
80
120
240
120
40
48
From the following cost schedule of a firm, calculate marginal cost and average variable cost at each level of output.
Output
(Units)
Total Cost
(`)
Average Fixed Cost

(`)
80
60
96
30
120
20
[CBSE (AI) 2010]

Sol.
Output
(Units)
Total
Cost
(`)
Average
Fixed Cost
(`)
Total
Fixed Cost
(`)
Total
Variable Cost
(`)
Average
Variable Cost
(`)
Marginal
Cost
(`)
80
60
60
20
20
20
96
30
60
36
18
16
120
20
60
60
20
24
67
EconomicsXII
7.
Total fixed cost of a firm is ` 60. Given below is its average variable cost schedule. Calculate its marginal cost and average
total cost at each level of output.
Output (Units)
Average Variable Cost (`)
20
16
18
[CBSE (F) 2010]

Sol.
8.
Output
(Units)
Average
Variable Cost
(`)
Total
Fixed Cost
(`)
Average
Fixed Cost
(`)
Total
Variable Cost
(`)
Marginal
Cost
(`)
Average
Total Cost
(`)
20
60
60
20
20
80
16
60
30
32
12
46
18
60
20
54
22
38
From the following cost schedule of a firm, calculate marginal cost and average total cost at each level of output. Fixed cost
is ` 120.
Output (Units)
Average Total Cost (`)
40
32
36
[CBSE (F) 2010]

Sol.
9.
Output
(Units)
Average
Variable Cost
(`)
Total
Fixed Cost
(`)
Average
Fixed Cost
(`)
Total
Variable Cost
(`)
Marginal
Cost
(`)
Average
Total Cost
(`)
40
120
120
40
40
160
32
120
60
64
24
92
36
120
40
108
44
76
Given below is the cost schedule of a firm. Its total fixed costs are ` 90. Calculate marginal cost and total cost at each level of
output.
Output (Units)
Average Variable Cost (`)
30
24
27
[CBSE (F) 2010]

Sol.
Output
(Units)
Average
Variable Cost
(`)
Total
Fixed Cost
(`)
Total
Variable Cost
(`)
Marginal
Cost
(`)
Total
Cost
(`)
30
90
30
30
120
24
90
48
18
138
27
90
81
33
171
68
EconomicsXII
Concept of Revenue
1.

Output
(Units)
Price
(`)
Total Revenue
(`)
Marginal Revenue
(`)
36
42
40
[CBSE Delhi 2009]
Sol.
2.
Output
(Units)
Price
(`)
Total Revenue
(`)
Marginal Revenue
(`)
36
40
42
42
40

Output
(Units)
Total Revenue
(`)
Marginal Revenue
(`)
Average Revenue
(`)
12
[CBSE (AI) 2009]
Sol.
3.
Output
(Units)
Total Revenue
(`)
Marginal Revenue
(`)
Average Revenue
(`)
12
12

Output
(Units)
Price
(`)
Marginal Revenue
(`)
Total Revenue
(`)
16
12
24
28
[CBSE (AI) 2009]
69
EconomicsXII
Sol.
Output
(Units)
Price
(`)
Marginal Revenue
(`)
Total Revenue
(`)
16
16
16
12
24
10
30
28
Producers Equilibrium
1.
On the basis of the information given below, determine the level of output at which the producer will be in equilibrium.
Use the marginal cost-marginal revenue approach. Give reasons for your answer.
Output
(Units)
Average Revenue
(`)
Total Cost
(`)
15
21
26
33
41

Sol.
Output
(Units)
Average
Revenue (AR)
(`)
Total Cost
(TC)
(`)
Total Revenue
(TR)
(`)
Marginal
Revenue (MR)
(`)
Marginal Cost
(MC)
(`)
Profit
(p = TR TC)
(`)
15
14
21
21
26
28
33
35
41
42
Producers equilibrium is struck when output level is 5 units.

Reason: Both when the output level is 2 and 5 units respectively, MR = MC. But MC is falling when 2 units are produced,
and is rising when 5 units are produced. Profit is maximised (= 2 ) only when (i) MR = MC, and (ii) MC is rising.
Ans. The producer is in equilibrium when 5 units of output are produced.
2.
From the following schedule find out the level of output at which the producer is in equilibrium. Give reasons for your
answer.
Output
(Units)
Price
(`)
Total Cost
(`)
24
26
24
50
24
72
24
92
24
115
24
139
24
165
[CBSE Delhi 2009]

70
EconomicsXII
Sol.
Output
(Q)
(Units)
Price
(P)
(`)
Total Cost
(TC)
(`)
Total Revenue
(TR)
(`)
Profit
(p = TR TC)
(`)
Marginal Revenue
(MR)
(`)
Marginal Cost
(MC)
(`)
24
26
24
24
26
24
50
48
24
24
24
72
72
24
22
24
92
96
24
20
24
115
120
24
23
24
139
144
24
24
24
165
168
24
26

Reason: At output levels 5th and 6th units, the difference between TR and TC, i.e., profit is maximum, which is equal to 5 in
both the cases. But the producer is in equilibrium at 6th unit only where MR = MC (= 24) and MC is rising.
Ans. The producer is in equilibrium when the level of output = 6 units.
3.
From the following table find out the level of output at which the producer is in equilibrium. Give reasons for your answer.
Output
(Units)
Average Revenue
()
Total Cost
()
12
14
12
26
12
35
12
52
12
64
12
70
[CBSE Delhi 2009]

Sol.
Output (Q)
(Units)
Average Revenue = Price

()
Total Cost (TC)

()
Total Revenue (TR)

()
Profit (p = TR TC)
()
12
14
12
12
26
24
12
35
36
12
52
48
12
64
60
12
70
72

Reason: The producer is in equilibrium when the difference between total revenue and total cost (i.e., profit) is maximum.
At the 6th unit of output producer gets maximum profit which is equal to 2 in this case.
4.
Given below is a cost and revenue schedule of a producer. At what level of output is the producer in equilibrium? Give
reasons for your answer.
Output
(Units)
Price
()
Total Cost
()
10
13
10
22
10
30
10
38
10
47
10
57
10
71
[CBSE (AI) 2009]

71
EconomicsXII
Sol.
Output
(Units)
Price
()
Total Cost
(TC)
()
Total Revenue
(TR)
()
Profit
(p = TR TC)
()
Marginal
Revenue
(MR)
Marginal
Cost
(MC)
10
13
10
10
13
10
22
20
10
10
30
30
10
10
38
40
10
10
47
50
10
10
57
60
10
10
10
71
70
10
14

Reason: At output levels 5th and 6th units, the difference between total revenue and total cost (i.e., profit) is maximum
which is equal to 3 in both the cases. But, producer is in equilibrium at 6th unit only where MR = MC (=10).
5.
The price of commodity-X is ` 20 per unit and it remains constant. Given below is the cost schedule of one of its producers.
Find out the level of output at which this producer is in equilibrium. Give reasons for your answer.
Output (Units)
Total Cost (`)
26
45
60
76
94
114
142
[CBSE (AI) 2009]

Sol.
Output
(Units)
Total Cost
(TC)
(`)
Price
(`)
Total
Revenue (TR)
(`)
Profit
(p = TR TC)
(`)
Marginal
Revenue (MR)
(`)
Marginal Cost
(MC)
(`)
26
20
20
20
26
45
20
40
20
19
60
20
60
20
15
76
20
80
20
16
94
20
100
20
18
114
20
120
20
20
142
20
140
20
28

Reason: At output levels 5th and 6th units, the difference between total revenue and total cost (i.e., profit) is maximum
which is equal to 6 in both the cases. But, producer is in equilibrium at 6th unit only where MR = MC (= 20).
6.
From the following schedule find out the level of output at which the producer is in equilibrium, using marginal cost and
marginal revenue approach. Give reasons for your answer.
Price per unit
(`)
Output
(Units)
Total Cost
(`)
11
15
18
23
[CBSE (AI) 2010]

72
EconomicsXII
Sol.
Price per unit
(`)
Output
(Units)
Total Cost
(`)
Total Revenue
(`)
Marginal Revenue
(`)
Marginal Cost
(`)
11
14
15
18
18
20
23
20
The producer is in equilibrium at 3rd unit of output according to MR and MC approach.

Reason: At output level 3, both MR and MC are equal which is 4 in this case.
Ans. The producer is in equilibrium when output level = 3 units.
7.
From the following schedule find out the level of output at which the producer is in equilibrium. Give reasons for your
answer. (Use total revenue and total cost approach.)
Output
(Units)
Marginal Revenue
()
Total Cost
()
11
15
18
23
[CBSE (F) 2010]

Sol.
Output
(Units)
Marginal Revenue
()
Total Cost
(TC)
()
Total Revenue
(TR)
()
Profit
( p = TR TC)
()
11
14
15
18
18
20
23
20
Producer is in equilibrium at 3rd unit of output.

Reason: Profit is maximum at output level of 3rd unit. At this level, the difference between TR and TC is maximum, i.e., 3 and
thereafter starts falling. Therefore, producers equilibrium is at 3rd unit of output.
Ans. The producer is in equilibrium when output level = 3 units.
Theory of Supply
1.
Sol.
The price elasticity of supply of Good-X is half the price elasticity of supply of Good-Y. A 10 per cent rise in the price of
Good-Y results in a rise in its supply from 400 units to 520 units. Calculate the percentage change in quantity supplied of
Good-X when its price falls from ` 10 to ` 8 per unit.
520 - 400
Percentage change in quantity supplied of Good-Y =
100 = 30 per cent
400
Percentage change in price of Good-Y = 10 per cent
8 - 10
Percentage change in price of Good-X =
100 = () 20 per cent
10
Percentage change in quantity supplied of Good-X = ?
73
EconomicsXII
Given,
1
Price elasticity of supply of Good-X = (Price elasticity of supply of Good-Y)
2
That is,
Percentage change in quantity supplied of Good - X 1 Percentage change in quantity supplied of Good - Y
=
Percentage change in price of Good - X
2
Percentage change in price of Good - Y
Percentage change in quantity supplied of Good - X 1 30
=
() 20
2 10
Percentage change in quantity supplied of Good-X =
30 () 20
= () 30 per cent
2 10
Ans. Percentage fall in supply of Good-X = 30 per cent.

2.
Sol.
Commodities X and Y have equal price elasticity of supply. The supply of X rises from 400 units to 500 units due to a 20 per
cent rise in its price. Calculate the percentage fall in supply of Y if its price falls by 8 per cent.
[CBSE Delhi 2009]
500 - 400
Percentage change in quantity supplied of commodity-X =
100 = 25 per cent
400
Percentage change in price of commodity-X = 20 per cent
Percentage change in price of commodity-Y = () 8 per cent
Percentage change in quantity supplied of commodity-Y = ?
Given,
Price elasticity of supply of commodity-Y = Price elasticity of supply of commodity-X
That is,
Percentage change in quantity supplied of commodity - Y
Percentage change in price of commodity - Y
Percentage change in quantity supplied of commodity - X
=
Percentage change in price of commodity - X
Percentage change in quantity supplied of commodity - Y 25
=
() 8
20
25 ( -)8
Percentage change in quantity supplied of commodity-Y =
= ( -) 10 per cent
20
Ans. Percentage fall in supply of commodity-Y = 10 per cent.

3.
Sol.
The price elasticity of supply of commodity X and Y are equal. The price of X falls from ` 10 to ` 8 per unit and its quantity
supplied falls by 16 per cent. The price of Y rises by 10 per cent. Calculate the percentage increase in its supply.
[CBSE Delhi 2009]
8 - 10
Percentage change in price of commodity-X =
100 = () 20 per cent
10
Percentage change in quantity supplied of commodity-X = ()16 per cent
Percentage change in price of commodity-Y = 10 per cent
Percentage change in quantity supplied of commodity-Y = ?
Given,
Price elasticity of supply of commodity-X = Price elasticity of supply of commodity-Y
That is,
Percentage change in quantity supplied of commodity - X
Percentage change in price of commodity - X
=
Percentage change in quantity supplied of commodity - Y

Percentage change in price of commodity - Y
( -)16 Percentage change in quantity supplied of commodity - Y

=
( -)20
10
74
EconomicsXII
Percentage change in quantity supplied of commodity-Y =
16 10
20
Percentage change in quantity supplied of commodity-Y = 8 per cent

Ans. Percentage increase in supply of commodity-Y = 8 per cent.
4.
Sol.
The price elasticity of supply of commodity-Y is half the price elasticity of supply of commodity-X. 16 per cent rise in the
price of X results in a 40 per cent rise in its supply. If the price of Y falls by 8 per cent, calculate the percentage fall in its
supply.
[CBSE (AI) 2009]
Given,
Rise in price of X = 16 per cent

Rise in supply of X = 40 per cent
Fall in price of Y = 8 per cent
Fall in supply of Y = ?
Given,
1
Price elasticity of supply of commodity-Y = (Price elasticity of supply of commodity-X)
2
Percentage fall in supply of Y 1 Percentage rise in supply of X
=
Percentage fall in price of Y
2 Percentage rise in price of X
Percentage fall in supply of Y 1 40
=
8
2 16
40 8
Percentage fall in supply of Y =
= 10 per cent
2 16
Ans. Percentage fall in supply of commodity-Y = 10 per cent.

5.
Sol.
The ratio of elasticity of supply of commodities A and B is 1 : 1.5. 20 per cent fall in price of A results in a 40 per cent fall in its
supply. Calculate the percentage increase in supply of B if its price rises from ` 10 per unit to ` 11 per unit. [CBSE (F) 2009]
Percentage change in price of commodity-A = 20 per cent
Percentage change in supply of commodity-A = 40 per cent
Percentage change in quantity supplied 40
Elasticity of supply of commodity-A =
=
=2
20
Given,
Elasticity of supply of commodity - A 1

=
Elasticity of supply of commodity - B 15
.
2
1
=
Elasticity of supply of commodity - B 15
.
Now,
Elasticity of supply of commodity-B = 2 1.5 = 3

Elasticity of supply of commodity-B =
Percentage change in quantity supplied

Elasticity of supply of commodity-B = 3

11 - 10
Percentage change in price =
100 = 10 per cent
10
=3
10
Percentage change in quantity supplied = 3 10 per cent = 30 per cent

Ans. Percentage increase in supply of commodity-B = 30 per cent.
6. At a price of ` 5 per unit of commodity-A, total revenue is ` 800. When its price rises by 20 per cent, total revenue increases by
` 400. Calculate its price elasticity of supply.
[CBSE Delhi 2010]
Sol.
Given,
initial price (P) = ` 5

Rise in price (DP) = 20 per cent of ` 5
75
EconomicsXII
20
`5
100
=`1
New Price (P1) = P + D P
=`5+`1=`6
Initial total revenue (P Q) = ` 800
New total revenue (P1 Q1) = ` 800 + ` 400
= ` 1,200
800
= 160
5
1200
,
When P1 = 6; Q1 =
= 200
6
When P = 5; Q =
P = ` 5; P1 = ` 6; DP = P1 P = ` 6 ` 5 = ` 1
Q = 160; Q1= 200; DQ = Q1 Q = 200 160 = 40
P DQ
Price elasticity of supply (Es) =
Q DP
5
40
=
= 1.25
160 1
Ans. Price elasticity of supply =1.25.
7.
Sol.
Price of commodity-A is 10 per unit and total revenue at this price is 1,600. When its price rises by 20 per cent, total
revenue increases by 800. Calculate its price elasticity of supply.
[CBSE Delhi 2010]
Given,
initial price (P) = ` 10

Rise in price (DP) = 20 per cent of ` 10
20
=
`10 = ` 2
100
New price (P1) = P + D P
= 10 + 2 = 12
Initial total revenue (P Q) = 1,600

New total revenue (P1 Q1) = 1,600 + 800 = 2,400
1600
,
When P = 10; Q =
= 160
10
2,400
When P1 = 12; Q1 =
= 200
12
P = 10; P1 = 12; DP = P1 P = 12 10 = 2
Q = 160; Q1 = 200; DQ = Q1 Q = 200 160 = 40
P DQ
Q DP
10 40
=
160 2
= 1.25
Ans. Price elasticity of supply =1.25.
8.
Sol.
Total revenue at a price of ` 4 per unit of a commodity is ` 480. Total revenue increases by ` 240 when its price rises by 25
per cent. Calculate its price elasticity of supply.
[CBSE Delhi 2010]
Given,
initial price (P) = 4

Rise in price (DP) = 25 per cent of 4
25
=
4=1
100
76
EconomicsXII
New price (P1) = P + DP

=4+1
=5
Initial total revenue (P Q) = 480
New total revenue (P1 Q1) = 480 + 240
= 720
480
When P = 4; Q =
= 120
4
720
When P1 = 5; Q1 =
= 144
5
P = 4; P1 = 5; DP = P1 P = 5 4 = 1
Q = 120; Q1 = 144; DQ = 144 120 = 24
P DQ
Q DP
4 24
=
120 1
= 0.8
Ans. Price elasticity of supply = 0.8.
9.
Sol.
Total revenue is ` 400 when the price of the commodity is ` 2 per unit. When price rises to ` 3 per unit, the quantity
supplied is 300 units. Calculate the price elasticity of supply.
[CBSE (AI) 2010]
When price (P) = ` 2, total revenue (P Q) = ` 400
400
Quantity supplied (Q) =
= 200 units
\
2
P = ` 2; P1 = ` 3; DP = P1 P = ` 3 ` 2 = ` 1
Q = 200 units; Q1 = 300 units; DQ = Q1 Q = (300 200) units = 100 units

P DQ
Q DP
2
100
=
=1
200
1
Ans. Price elasticity of supply = 1.
10.
When the price of a commodity rises from ` 4 per unit to ` 5 per unit, total revenue increases from ` 600 to ` 750. Calculate
its price elasticity of supply.
[CBSE (F) 2010]
Sol.
When P = ` 4; total revenue (P Q) = ` 600

600
\
4
= 150 units
When P1 = ` 5; total revenue (P1 Q1) = ` 750
750
\ New quantity supplied (Q1) =
5
= 150 units
P = ` 4; P1 = ` 5; DP = P1 P = ` 5 ` 4 = ` 1
Q = 150 units; Q1 = 150 units; DQ = Q1 Q = (150 150) units = 0 unit

P DQ
Q DP
4
0
=
=0
150 1
Ans. Price elasticity of supply = 0 (zero).
77
EconomicsXII
11.
From the following schedule, calculate the price elasticity of supply:

Price per unit
(`)
Total Revenue
(`)
800
1,200
[CBSE (F) 2010]

Sol.

800
\
= 200 units
4
When P1 = ` 5; total revenue (P1 Q1) = ` 1200
,
1200
,
New quantity supplied (Q1) =
= 240 units
\
5
P = ` 4; P1 = ` 5; DP = P1 P = ` 5 ` 4 = ` 1

P DQ
Q DP
4
40
=
= 0.8
200 1
12.
From the following schedule, calculate the price elasticity of supply:

Price per unit (`)
Total Revenue (`)
800
1,200
[CBSE (F) 2010]

Sol.

800
= 160 units
\
5
When P1 = ` 6; total revenue (P1 Q1) = ` 1,200
1200
,
New quantity supplied (Q1) =
= 200 units
\
6
P = ` 5; P1 = ` 6; DP = P1 P = ` 6 ` 5 = ` 1

P DQ
Q DP
5
40
= 1.25
=
160 1
zzz
78
EconomicsXII
Solution to Unsolved Numericals in the Textbook

Economics, Economy and Central Problems of an Economy
Sol.
Ans.
2.
Sol.
3.
Sol.
Ans.
4.
You have ` 1,000 as your pocket money. You can deposit this money in a bank and get ` 1,100 after an year. However, you
have two other choices:
(i) lend this money to your friend who is ready to pay you ` 1,050 after an year, or
(ii) keep the money with you as cash in hand.
What is opportunity cost of keeping the money as cash in hand?
The opportunity cost of keeping the money as cash in hand is ` 100 in terms the loss of interest that the bank would have
paid.
Opportunity cost = ` 100.
Y
If the slope of PPC remains constant (or does not change) with an increase in the
production of Good-X (on horizontal axis) at the cost of Good-Y (on vertical axis),
what is the shape of PPC? Draw the PPC.
PPC in this case will be a downward sloping straight line touches X-axis and Y-axis. It
happens when marginal opportunity cost (or marginal rate of transformation) is
constant. See Fig. 1.
Good-Y
1.
O
Good-X
An economy produces two goods: wheat and rice. These could be produced in only
Figure
1
two combinations.
Combination A: Wheat: 20,000 tonnes; Rice: 5,000 tonnes
Combination B: Wheat: 10,000 tonnes; Rice: 9,000 tonnes
What is the marginal opportunity cost of producing an extra tonne of rice at the cost of wheat. (Compare combination A
with combination B.)
Loss of wheat production 10,000
Marginal opportunity cost =
=
= 2.5.
Gain of rice production
4,000
Marginal opportunity cost = 2.5.

Calculate the marginal opportunity cost for the various combinations of Good-X and Good-Y in the following table:
Combination
Good-X
Good-Y
95
10
85
20
73
30
58
40
41
50
22
60
Sol.
Combination
Good-X
Good-Y
95
10
85
10
=1
10
20
73
12
= 1.2
10
30
58
15
= 1.5
10
40
41
17
= 1.7
10
50
22
19
= 1.9
10
60
22
= 2.2
10
79
Marginal Opportunity Cost
EconomicsXII
5.
Draw PPC for the following PPC schedule. Also, calculate the marginal opportunity cost for different combinations:
Combination
Rice (000 tonnes)
Maize (000 tonnes)
120
25
100
50
75
75
45
100
Sol.
Combination
Rice
(000 tonnes)
Maize
(000 tonnes)
Marginal
Opportunity Cost
120
25
100
20
= 0.8
25
50
75
25
=1
25
75
45
30
= 1.2
25
100
45
= 1.8
25
Production Possibility Curve (PPC)

Y
Maize (000 tonnes)
120 A
100
80
60
40
20
E
O
20
Figure 2
6.
Sol.
Ans.
40
60
80 100
Rice (000 tonnes)
Find opportunity cost when investment of ` 50,000 in the stock market, by way of withdrawal of demand deposit causes a
loss of interest income of ` 5,000 per annum. Give logical reasoning.
Opportunity cost of investment by way of withdrawal of demand deposit from the bank = ` 50,000 (the amount of funds
withdrawn) + ` 5,000 (loss of interest income) = ` 55,000. Here, ` 50,000 is the explicit cost of investment and ` 5,000 is the
implicit cost of investment. Opportunity cost is estimated as the total sacrifice involved in the act of investment.
Opportunity cost = ` 55,000
Consumers EquilibriumUtility Analysis

1.
The total utility schedule of individual A is given below. Derive the marginal utility schedule.
Units Consumed
Total Utility
15
27
38
48
55
Sol.
Units Consumed
Total Utility
Marginal Utility
15
15
27
12
38
11
48
10
55
80
EconomicsXII
2.
Calculate total utility for the various units of commodity-X, given the following information:
Units of Commodity-X
MUX (Utils)
20
16
12
Sol.
3.
Sol.
MUX
(Utils)
TUX
(Utils)
20
20
16
36
12
48
57
65
68
68
63
When the consumer is in equilibrium, MU of commodity-X is 45 and price of commodity-X is ` 9. Calculate the marginal
utility of money. (Assuming marginal utility of money for the consumer is constant in equilibrium.)
PX = ` 9 and MUX = 45
MUX
= MUM
PX
45
= MUM
9
MUM = 5
At equilibrium,
Or,
Or,
Ans.
4.
Sol.
Marginal utility of money (MUM) = 5.

Following is the total utility schedule of Mr. X:
TUX (Utils)
20
37
51
61
66
66
64
(i) Derive MU schedule.

(ii) Find out the level of consumption at which Mr. X reaches the saturation point.
(iii) How many units should the consumer purchase to maximise satisfaction when the price of the commodity is ` 5?
(Assume that utility is expressed in utils and 1 util = ` 2). Give reasons for your answer.
(i)
TUX
(Utils)
MUX
(Utils)
20
20
37
17
51
14
61
10
66
66
64
(ii) Saturation point is struck when TU stops increasing even when consumption of the commodity is increased. In the
present case, the saturation point is reached when 6 units of the commodity are consumed, as corresponding to the
6th unit, MU = 0.
(iii) PX = ` 5 per unit, and MUM = 2
We know, equilibrium is struck when:
MUX
= MUM
PX
81
EconomicsXII
It happens when,
MUX
=2
5
5.
Or, when MUX = 10

Implying that the consumer purchases four units of the commodity-X to maximise satisfaction.
Suppose, price of commodity-Y (PY) is ` 10 per unit. Also, assume that marginal utility of money (MUM) is 8 (and constant).
Using the following marginal utility schedule of the consumer, find out equilibrium level of consumption and total
expenditure on commodity-Y.
Units Consumed
Marginal Utility
Sol.
PY = ` 10 and MUM = 8
At equilibrium,
Or,
170
130
110
80
30
MUY
= MUM
PY
MUY
=8
10
Or,
MUY = 8 10 = 80
Implying that the consumer finds his equilibrium when he consumes four units of the commodity-Y.
Ans.
6.
Total expenditure on commodity-Y at equilibrium level = 4 10 = ` 40.

Equilibrium level of consumption = 4 units of commodity-Y.
Total expenditure on commodity-Y = ` 40.
Summit has ` 90 with him. He intends to purchase goods X and Y with his money. The market price of X and Y per unit is
`10. The marginal utility schedule of goods X and Y is given below. Find out how many units of X and Y should Summit
purchase so that he gets maximum satisfaction?
Units of Commodity
MU of X
MU of Y
80
40
72
32
64
24
56
20
48
16
40
12
32
24
16
10
Sol. Equilibrium condition with respect to consumption of X and Y is that:

MUX MUY
=
PX
PY
MUX PX
Or,
=
MUY PY
Here, PX = PY = `10, so that equilibrium would be struck when:
MUX = MUY
MUX 10
Or when,
=
=1
MUY 10
Ans.
It occurs when Summit purchases 7 units of X and 2 units of Y. Because at this combination,
MUX (spending 7 10 = ` 70) = MUY (spending 2 10 = ` 20) = 32.
Summit purchases 7 units of commodity-X and 2 units of commodity-Y.
82
EconomicsXII
Theory of Demand
1.
Sol.
2.
Suppose the price of a touch-screen mobile is ` 15,000. How would you expect its demand curve to be affected with a
favourable shift in tastes and preferences of the consumers, price remaining unchanged?
Demand curve of touch-screen mobile will shift to right due to the favourable shift in tastes and preferences of the
consumers, price remaining unchanged.
Following table represents the demand schedule of households, A, B and C. Derive market demand.
Price
(`)
Household A
Household B
Household C
12
22
13
23
14
24
15
25
10
16
26
Sol.
3.
Price
(`)
Household A
Household B
Household C
Market Demand
12
22
40
13
23
43
14
24
46
15
25
49
10
16
26
52
Following table represents the market demand schedule and demand schedule of Ram, Sohan and Mohan:
Price
(`)
Ram
Sohan
Mohan
Market Demand
(i)
20
(ii)
16
(iii)
(iv)
(Assumption: Market includes three buyers.) Calculate the missing entries.

Sol.
4.
Price
(`)
Ram
Sohan
Mohan
Market Demand
20
16
10
Calculate the demand schedule of Raju, using following table. (Assuming market includes four buyers.)
Price
(`)
Ramesh
Raju
Rahim
Rina
Market Demand
19
32
20
10
44
21
12
11
51
22
14
15
61
23
18
19
74
83
EconomicsXII
Sol.
5.
Price (`)
Ramesh
Raju
Rahim
Rina
Market Demand
19
20
32
10
44
3
2
21
12
11
51
22
10
14
15
61
23
14
18
19
74
Individual demand schedules of Rakesh and Mohit for ice cream is given below. Derive market demand schedule for ice
cream from the following:
Price of Ice Cream
(` per unit)
Demand of Rakesh
(Units)
Demand of Mohit
(Units)
10
Sol.
6.
Price of Ice Cream

(` per unit)
Demand of Rakesh
(Units)
Demand of Mohit
(Units)
Market Demand
(Units)
10
1+2=3
2+3=5
3+4=7
4+5=9
5 + 6 = 11
Given below are the individual demand schedules of Maggi and Pasta. Derive market demand schedule and market
demand curve (assuming market includes two buyers, Maggi and Pasta) from the following:
Price
(` per unit)
Maggi
(Units)
Pasta
(Units)
10
Sol.
Price
(` per unit)
Maggi
(Units)
Pasta
(Units)
Market Demand
(Units)
10
12
14
16
10
18
Market Demand Curve
Price (`)
5
4
3
2
1
12
16
20
Quantity (units)
Figure 3
84
EconomicsXII
Price Elasticity of Demand

1.
Find out elasticity of demand given the following information:
Sol.
Price per unit

(`)
Quantity Demanded
(kg)
10
20
25
Ed = ()
P DQ
Q DP
P = ` 10; P1 = ` 9; DP = P1 P = ` 9 ` 10 = () ` 1
Q = 20 kg; Q1 = 25 kg; DQ = Q1 Q = (25 20) kg = 5 kg
10 5
Ed = () = 2.5
20 1
Ans.
2.
Elasticity of demand (Ed) = 2.5.

A consumer purchased 10 units of a commodity when its price was ` 5 per unit. He purchased 12 units of the commodity when
its price falls to ` 4 per unit. What is the price elasticity of demand for the commodity at that price?
P DQ
Sol.
Ed = ()
Q DP
P = ` 5; P1 = ` 4; DP = P1 P = ` 4 - ` 5 = () ` 1
5 2
Ed = () = 1 (unity)
10 1
Ans.
3.
Elasticity of demand (Ed) is unity (= 1), or unitary elasticity of demand.

As a result of 10 per cent fall in price of a good, its demand rises from 100 units to 120 units. Find out the price elasticity of
demand.
Sol. Percentage change in price = ()10%
DQ
120 - 100
100 =
100
Q
100
20
=
100 = 20%
100
20%
= ()
=2
-10%
Ans. Price elasticity of demand = 2 (greater than unity).
4. A certain quantity of the commodity is purchased when its price is ` 10 per unit. Quantity demanded increases by 50 per
cent in response to a fall in price by ` 2 per unit. Find elasticity of demand.
Sol. Percentage change in quantity demanded = 50%
-2
DP
100 =
100 = () 20%
P
10
Elasticity of demand (Ed) = ()
= ()
Ans.
5.
Sol.
50%
= 2.5
20%
The elasticity of demand = 2.5.

A consumer buys 80 units of a good at a price of ` 4 per unit. When the price falls, he buys 100 units. If price elasticity of
demand is () 1, find out the new price.
Elasticity of demand has been specified as 1. Accordingly, we need not use sign as a prefix to the formula of measuring
elasticity of demand. Thus,
P DQ
Ed =
Q DP
85
EconomicsXII
P = ` 4; P1 = ` X; DP = ` (X - 4)
Ed = (-) 1
Substituting given values:
4
20
1
=
80 X - 4 X - 4
X4=1
X=1+4
=3
() 1 =
Ans.
6.
Sol.
Ans.
7.
Sol.
New price = ` 3 per unit.

When the price is ` 5 per unit a consumer buys 40 units of a commodity and his price elasticity of demand is () 1.5. How
much will he buy if the price is reduced to ` 4 per unit?
Q -Q P
Ed = 1
= () 1.5
P1 - P Q
Q 1 - 40 5
= 1.5
4 -5
40
Q 1 - 40 1
= 1.5
-1
8
Q 1 - 40
= 1.5
-8
Q1 40 = 12
Q1 = 12 + 40 = 52
The consumer will buy 52 units of the commodity when price reduces to ` 4 per unit.
Price elasticity of demand of a good is () 1. At a price the consumer buys 60 units of the good. How many units will the
consumer buy if the price falls by 10 per cent?
Elasticity of demand (Ed) = ()
() 1 =
()10%
Percentage change in quantity demanded = 10
DQ
100 = 10
Q
DQ
100 = 10
60
DQ = 6
New quantity = Q + DQ
= 60 + 6 = 66
Ans.
8.
Sol.
Ans.
New quantity = 66 units.

At a given market price of a good a consumer buys 120 units. When price falls by 50 per cent he buys 150 units. Calculate
price elasticity of demand.
Percentage change in price = () 50%
DQ
150 - 120
Percentage change in demand =
100 =
100 = 25%
Q
120
25%
Ed = ()
= 0.5
50%
Price elasticity of demand = 0.5.
86
EconomicsXII
9.
Sol.
Price elasticity of demand is found to be () 2. Price falls from ` 10 per unit to ` 8 per unit. Find the percentage change in
quantity demanded.
P = ` 10; P1 = ` 8; DP = ` 8 ` 10 = () ` 2
Ed = () 2
DP
100
P
2
=
100 = ()20%
10
() 2 =
20%
Percentage change in quantity demanded = ()2 ()20 = 40
Percentage change in quantity demanded = 40%.
A commodity shows Ed = () 2. Quantity demanded reduces from 300 units to 150 units in response to increase in price.
Find the increased price when initially it was ` 20 per unit.
Initial price (P) = ` 20
Ans.
10.
Sol.
Q = 300 units; Q1 = 150 units; DQ = Q1 Q = (150 300) units = () 150 units

Ed = ()2
P DQ
Q DP
20 150
() 2 =
300 DP
10
2=
DP
10
DP =
2
DP = 5
P1 = P + DP
= 20 + 5 = 25
Elasticity of demand (Ed) =
Ans.
11.
Sol.
Ans.
Increased price = ` 25.

DP
For a commodity,
= 02,
. and elasticity of demand is 0.5. Find quantity demanded after a fall in price when initially it
P
was 60 units.
Initially, quantity demanded = 60 units
DP
= 02,
. Ed = () 0.5
P
P DQ
Ed =
Q DP
P DQ
Or,
Ed =
DP Q
1
DQ
() 0.5 =
0.2 60
DQ
() 0.5 =
12
DQ = 6
Q1 = Q + DQ
= 60 + 6 = 66
87
EconomicsXII
12.
Sol.
Ans.
13.
Sol.
A consumer buys 80 units of a good at a price of ` 5 per unit. Suppose price elasticity of demand is () 2. At what price will
he buy 64 units?
Supposing the new price = ` X.
We know,
P DQ
Q DP
P = ` 5; P1 = ` X; DP = ` (X 5)
Q = 80 units; Q1 = 64 units; DQ = (64 80) units = 16 units
Ed = () 2
5 16
() 2 =
80 X - 5
-1
2=
1 = 2(X 5)
X- 5
1 = 2X 10
2X = 11
11
X = = 5.5
2
New price = ` 5.5.
When price of the commodity reduces from ` 5 per unit to ` 4 per unit, expenditure on the commodity reduces from ` 60
to ` 48. Find price elasticity of demand.
(Using Percentage Method):
Total expenditure = ` 60, PX = ` 5
Total expenditure
PX
60
= = 12 units
5
Total expenditure = ` 48, PX = ` 4
Total expenditure
QX =
PX
48
=
= 12 units
4
Thus, there is no change in quantity demanded even when price has reduced from ` 5 to ` 4 per unit. Hence, Ed = zero.
Ed = 0 (zero).
When price of a good rises from ` 5 per unit to ` 6 per unit, its demand falls from 20 units to 10 units. Compare expenditures
on the good to determine whether demand is elastic or inelastic.
QX =
Ans.
14.
Sol.
Price
(`)
Quantity Demanded
(Units)
Total Expenditure
(`)
20
100
10
60
Here, total expenditure decreases with rise in price, hence elasticity of demand is more than unity. It is a situation of
elastic demand.
Ans.
15.
Demand is elastic.
When price of a good falls from ` 10 per unit to ` 9 per unit, its demand rises from 9 units to 10 units. Compare expenditures
on the good to find price elasticity of demand.
Sol.
Price
(`)
Quantity Demanded
(Units)
Total Expenditure
(`)
10
90
10
90
Since, total expenditure remains constant, elasticity of demand is equal to unity.

Ans.
Price elasticity of demand = 1.
88
EconomicsXII
Production Function and Returns to a Factor

1.
Calculate the average and marginal product from the following:

Units of Labour
Total Product
18
38
50
60
72
Sol.
2.
Units of Labour
Total Product
Average Product
Marginal Product
18
18
18
38
19
20
50
16.67
12
60
15
10
72
14.4
12
Calculate the total and marginal product from the following:

Units of Labour
Average Product
Sol.
3.
Units of Labour
Average Product
Total Product
Marginal Product
10
15
16
15
Units of Labour
Total Product
Average Product
Marginal Product
40
60
50
180
36
18
Units of Labour
Total Product
Average Product
Marginal Product
40
40
40
100
50
60
150
50
50
180
45
30
180
36
162
27
18
Sol.
89
EconomicsXII
4.

Input (Units)
Total Product
Average Product
20
Marginal Product
18
16
14
12
10
Input (Units)
Total Product
Average Product
Marginal Product
20
20
20
38
19
18
54
18
16
68
17
14
80
16
12
90
15
10
Sol.
5. Following is known about a firm:

Units of Labour (Input)
Total Output
50
110
150
180
180
150
State and explain the law underlying the change in output as input is changed. Also identify the various stages (or phases)
in total product.
Sol.
6.
Units of Labour
TP
AP
MP
Phases/Stages
50
50
50
110
55
60
Phase/Stage-I
Increasing returns up to 2nd unit of labour
employment. Here, MP increases.
150
50
40
180
45
30
180
36
150
25
30
Phase/StageII
Diminishing returns between 2nd to 5th unit of
labour employment. Here, MP diminishes.
Phase/StageIII
Negative returns beyond 5th unit of labour
employment. Here, TP diminishes and MP is
negative.
Identify the different output levels which makes the different phases/stages of the operation of the law of variable
proportions from the following data:
Variable Input
Total Product
20
28
28
26
Sol.
Variable Input
Total Product
Marginal Product
Phases/Stages
Phase/Stage-I
Increasing returns to a factor;
MP increases.
20
12
28
28
26
90
Phase/Stage-II
Diminishing returns to a factor;
MP diminishes.
Phase/Stage-II
Negative returns to a factor;
MP turns negative. TP diminishes.
EconomicsXII
Concepts of Cost
1.
From the following data on the cost of production of a firm calculate TFC, AFC, TVC, AVC and MC:
Output (kg)
TC ( `)
60
80
100
111
116
130
150
Sol.
2.
Output
(kg)
TC
(`)
TFC
(`)
AFC
(`)
TVC
(`)
AVC
(`)
MC
(`)
60
60
80
60
60
20
20
20
100
60
30
40
20
20
111
60
20
51
17
11
116
60
15
56
14
130
60
12
70
14
14
150
60
10
90
15
20
From the following data regarding cost of a firm, calculate:

(i) average fixed cost, and (ii) average variable cost.
Output (Units)
Total Cost ( `)
60
78
90
102
112
120
126
Sol.
3.
Output
(Units)
Total Cost
(`)
Total Fixed Cost

(`)
Average Fixed Cost

(`)
Total Variable Cost

(`)
Average Variable
Cost (`)
60
60
78
60
60
18
18
90
60
30
30
15
102
60
20
42
14
112
60
15
52
13
120
60
12
60
12
126
60
10
66
11
Calculate TVC and AVC with the help of the following data:
Output (Units)
MC (`)
20
16
12
Sol.
4.
Output
(Units)
MC
(`)
TVC
(`)
AVC
(`)
20
20
20
16
36
18
12
48
16
Calculate total variable cost and total cost from the following cost schedule of a firm whose fixed costs are ` 10.
Output (Units)
Marginal Cost (`)
91
EconomicsXII
Sol.
5.
Output
(Units)
Marginal Cost
(`)
Total Fixed Cost

(`)
Total Variable Cost

(`)
Total Cost
(`)
10
16
10
11
21
3
4
10
15
25
10
21
31
From the following data on the cost of production of a firm calculate (i) average fixed cost, and (ii) average variable cost
of producing four units and the marginal cost of the fourth unit:
Output (kg)
Total Cost (`)
80
102
122
140
156
Sol.
Output
6.
(kg)
Total
Cost
(`)
Total Fixed
Cost
(`)
Average Fixed
Cost
(`)
Total Variable
Cost
(`)
Average
Variable Cost
(`)
Marginal
Cost
(`)
80
80
102
80
80
22
122
80
40
42
140
80
26.6
60
156
80
20
76
22
22
20
21
18
20
16
19
From the following table, calculate average variable cost of each given level of output:
Output (Units)
Marginal Cost (`)
40
30
35
39
Sol.
7.
Output
(Units)
Marginal Cost
(`)
Total Variable Cost

(`)
Average Variable
TVC
Cost =
(`)
Q
40
40
40
= 40
1
30
70
70
= 35
2
35
105
105
= 35
3
39
144
144
= 36
4

Output
(Units)
Total Cost
(`)
Average Fixed Cost

(`)
20
26
39
Average Cost
(`)
Variable Cost
(`)
Sol.
Output
(Units)
Total Cost
(`)
Average Fixed Cost

(`)
Average Cost
(`)
Total Fixed Cost

(`)
Variable Cost
(`)
20
20
14
26
13
20
39
13
33
92
EconomicsXII
8.

Output
(Units)
Total Variable Cost

(`)

(`)
Marginal Cost
(`)
20
16
12
54
20
26
Sol.
Output
(Units)
Total Variable Cost

(`)

(`)
Marginal Cost
(`)
20
20
20
32
16
12
54
18
22
80
20
26
Concept of Revenue
1.
Find out total revenue, average revenue and marginal revenue:

Price (`)
Demand (Units)
10
Sol.
2.
Price
(`)
Demand
(Units)
Total Revenue
(`)
Average Revenue
(`)
Marginal Revenue
(`)
10
10
10
18
24
28
30
30
28
From the table given below, calculate total revenue and marginal revenue:
Units Sold
Average Revenue
(`)
Total Revenue
(`)
Marginal Revenue
(`)
Units Sold
Average Revenue = Price

(`)
Total Revenue
(`)
Marginal Revenue
(`)
24
28
30
Sol.
[Hint: Average Revenue = Price.]

93
EconomicsXII
3.
Find average revenue and marginal revenue from the following data:
Units Sold
Total Revenue
(`)
Average Revenue
(`)
Marginal Revenue
(`)
10
24
33
40
40
36
28
Units Sold
Total Revenue
(`)
Average Revenue
(`)
Marginal Revenue
(`)
10
10
10
24
12
14
33
11
40
10
40
36
28
Sol.
4.
Find marginal revenue on the basis of the following data:

Units
Sold
Total Revenue
(`)
Marginal Revenue
(`)
10
18
24
28
30
Units
Sold
Total Revenue
(`)
Marginal Revenue
(`)
10
10
18
24
28
30
Sol.
5.

Output
(Units)
Price
(`)
Total Revenue
(`)
Marginal Revenue
(`)
Output
(Units)
Price
(`)
Total Revenue
(`)
Marginal Revenue
(`)
12
12
Sol.
94
EconomicsXII
6.

Output
(Units)
Total Revenue
(`)
Marginal Revenue
(`)
Average Revenue
(`)
14
24
24
16
Output
(Units)
Total Revenue
(`)
Marginal Revenue
(`)
Average Revenue
(`)
14
14
14
24
10
12
24
16
Output
(Units)
Marginal Revenue
(`)
Total Revenue
(`)
Average Revenue
(`)
10
Output
(Units)
Marginal Revenue
(`)
Total Revenue
(`)
Average Revenue
(`)
10
10
10
18
18
16
Units Sold
Total Revenue
(`)
Average Revenue
(`)
Marginal Revenue
(`)
20
18
12
56
Units Sold
Total Revenue
(`)
Average Revenue
(`)
Marginal Revenue
(`)
20
20
20
36
18
16
48
16
12
56
14
60
12
60
10
Sol.
7.
Sol.
8.
Sol.
95
EconomicsXII
Producers Equilibrium
1.
Sol.
Find out profit of the producer, when total revenue is ` 400, total variable cost is ` 270, average fixed cost is ` 25 per unit
and 4 units of output are produced.
Total Revenue = ` 400
Total Variable Cost = ` 270
Average Fixed Cost = ` 25
Total Fixed Cost = AFC Output
= ` 25 4 = ` 100
Total Cost = Total Fixed Cost + Total Variable Cost
= ` 100 + ` 270 = ` 370
Profit = Total Revenue Total Cost
= ` 400 ` 370 = ` 30
Ans.
2.
Profit = ` 30.
Calculate the profit from the following:
Output
(Units)
Marginal Revenue
(`)
Total Cost
(`)
10
12
15
16
Sol.
3.
Output
(Units)
Marginal Revenue
(`)
Total Cost
(`)
Total Revenue
(`)
Profit
(p = TR TC) (`)
10
12
12
16
15
18
16
19

Output
(Units)
Total Revenue
(`)
Total Cost
(`)
Profit
(`)
10
12
11
14
Output
(Units)
Total Revenue
(`)
Total Cost
(`)
Profit
(`)
10
10
12
11
14
Sol.
96
EconomicsXII
4.
Find the profit maximising level of output.

Quantity Sold
(Units)
Total Revenue
(`)
Marginal Cost
(`)
14
15
30
12
44
48
52
Sol.
Quantity Sold
(Units)
Total Revenue
(`)
Marginal Cost
(`)
Total Variable Cost

(`)
Profit
(p = TR TVC) (`)
14
15
15
30
12
27
44
36
48
41
52
47
Profit is maximised when the output level = 3 units.
5.
[Note: Profit is maximised at that level of output where the difference between TR and TC is maximised, or where the
difference between TR and TVC is maximised, because fixed cost, by defination, remains constant.]
Find producers equilibrium from the following table given below:
Quantity Sold
(Units)
Total Revenue
(`)
Marginal Cost
(`)
15
18
27
36
10
45
11
Sol.
6.
Quantity Sold
(Units)
Total Revenue
(`)
Marginal Cost
(`)
Marginal Revenue
(`)
15
18
27
36
10
45
11
The producer will strike his equilibrium when 3 units of output are produced. Because, it is here that: (i) MR = MC, and
(ii) MC is rising.
Given below is a cost and revenue schedule of a producer. At what level of output is the producer in equilibrium? Give
reasons for your answer.
Quantity Sold
(Units)
Price
(` per unit)
Total Cost
(`)
15
14
16
24
17
30
18
51
19
75
97
EconomicsXII
Sol.
Quantity Sold
(Units)
Price
(` per unit)
TC
(`)
TR
(`)
15
14
15
16
24
32
17
30
51
18
51
72
19
75
95
MR
(`)
MC
(`)
Profit
(p = TR TC)
(`)
15
14
17
10
19
21
21
21
21
23
24
20
Producer is in equilibrium when the level of output = 4 units.

Reason: At output levels 3rd and 4th unit, the difference between total revenue and total cost (i.e., profit) is maximum
which is equal to 21 in both the cases. But, producer is in equilibrium at 4th unit only where MR = MC (= 21).
Theory of Supply
1.
Sol.
Price of a commodity increases from ` 10 to ` 12. As a result, its supply rises from 35 units to 42 units. Find out elasticity of
supply.
P = ` 10; P1 = ` 12; DP = P1 P = ` 12 - ` 10 = ` 2
Q = 35 units; Q1= 42 units; DQ = Q1 Q = (42 35) units = 7 units
P DQ
Elasticity of supply (Es) =
Q DP
10 7
Es =
= 1 (unity)
35 2
Ans.
2.
Elasticity of supply = 1.
As a result of 15 per cent rise in the price of a commodity, its supply increases from 25 to 30 units. Calculate elasticity of
supply.
Sol.
Percentage rise in price = 15%

DQ
5
Percentage rise in quantity supplied =
100 = 100 = 20%
Q
25
=
20%
= 1.33
15%
Ans.
3.
Elasticity of supply is 1.33.

The price of a commodity is ` 12 per unit and its quantity supplied is 500 units. When its price rises to ` 15 per unit, its
quantity supplied rises to 650 units. Calculate its price elasticity of supply. Is supply elastic?
Sol.
P = ` 12; P1 = ` 15; DP = P1 P = ` 15 - ` 12 = ` 3
Q = 500 units; Q1= 650 units; DQ = Q1 Q = (650 500) units = 150 units
P DQ
Q DP
12 150
= 1.2
=
500
3
Ans.
4.
Sol.
Price elasticity of supply = 1.2; elastic supply.

Price elasticity of supply for a product is unity. A firm supplies 25 units of this product at a price of ` 5 per unit. If the
price of product rises to ` 6 per unit, how much quantity of the product will be supplied by the firm?
Let the seller supply X units.
P = ` 5; P1 = ` 6; DP = P1 P = ` 6 - ` 5 = ` 1
Q = 25 units; Q1 = X units; DQ = Q1 Q = (X 25) units
Es = 1
98
EconomicsXII
P DQ
Q DP
5 X - 25
1=
25
1
X 25 = 5
X = 25 + 5
= 30
1=
X - 25
5
Ans.
5.
The seller will supply 30 units.

When the price of a commodity falls from `10 per unit to ` 9 per unit, its quantity supplied falls by 20 per cent. Calculate
its price elasticity of supply. Is its supply elastic?
Sol.
Percentage fall in quantity supplied = () 20%

P = ` 10; P1 = ` 9; DP = P1 P = ` 9 - ` 10 = () ` 1
DP
1
Percentage fall in price =
100 = 100
P
10
= ()10%
=
Ans.
6.
Sol.
20%
=2
10%
Price elasticity of supply = 2; supply is elastic.

The quantity supplied of a commodity at a price of ` 8 per unit is 400 units. Its price elasticity of supply is 2. Calculate the
price at which its quantity supplied will be 600 units.
Let the new price be ` P1
P = ` 8; P1 = ` P1; DP = ` (P1 8)
Q = 400 units; Q1= 600 units; DQ = Q1 Q = (600 - 400) units = 200 units
Es = 2
P DQ
Q DP
8
200
2=
400 P1 - 8
4
2=
P1 - 8
Ans.
7.
Sol.
2(P1 - 8) = 4
2P1 - 16 = 4
2P1 = 4 +16 = 20
P1 = 10
New price = ` 10.

When the price of a commodity rises from ` 10 to ` 11 per unit, its quantity supplied rises by 100 units. Its price elasticity of
supply is 2. Calculate its quantity supplied at the increased price.
P DQ
Es =
Q DP
P = 10; P1= 11; DP = P1 P = ` 11 - ` 10 = ` 1
Q = M units; Q1= (M + 100) units; DQ = 100 units
Es = 2
2=
10 100
M
1
2M = 1,000
99
EconomicsXII
Ans.
8.
Sol.
1000
,
= 500
2
Q1 = 500 + 100 = 600
M=
Quantity supplied at increased price is 600 units.

The price elasticity of supply of a commodity is 2. When its price falls from ` 10 to ` 8 per unit, its quantity supplied falls by
500 units. Calculate the quantity supplied at the reduced price.
P DQ
Es =
Q DP
P = 10; P1= 8; DP = P1 P = ` 8 - ` 10 = () ` 2
Q = X units; Q1= (X 500) units; DQ = () 500 units
Es = 2
10 500
X
2
2,500
2=
2X = 2,500
X
2,500
X=
= 1,250
2
Q1 = 1,250 500 = 750
2=
Ans.
9.
Sol.
Quantity supplied at reduced price is 750 units.

DP
For a commodity, if Es = 1.4 and
= 0.6, find the percentage change in quantity supplied.
P
DP
Es = 1.4 and
= 0.6
P
DP
100 = 0.6 100 = 60
P
1.4 =

60%
Percentage change in quantity supplied = 1.4 60 = 84

Ans.
10.
Sol.
Percentage change in quantity supplied = 84%.

The market price of a good changes from ` 5 to ` 20. As a result, the quantity supplied by the firm increases by 15 units. The
price elasticity of supply is 0.5. Find the initial and final output levels of the firm.
P DQ
Es =
Q DP
P = 5; P1= 20; DP = P1 P = ` 20 - ` 5 = ` 15
Q = X units; Q1= (X + 15) units; DQ = 15 units
Es = 0.5
5 15
0.5 =
X 15
5
0.5 =
0.5X = 5
X
5
X=
= 10
05
.
X1 = 10 + 15 = 25
Ans.
Initial output = 10 units.

Final output = 25 units.
zzz
100
EconomicsXII

(Delhi, All India & Foreign)
101
EconomicsXII

INTRODUCTORY MICROECONOMICS
1 MARK QUESTIONS
1. Give two examples of fixed costs.
Ans. (i) Rent of a building, and (ii) Salary to permanent employees.
2. Define marginal cost.
Ans. Marginal cost is the change in total cost when an extra unit of output is produced.
3. When is the demand for a good said to be inelastic?
Ans. Demand for a good is said to be inelastic when percentage change in quantity demanded is less than
percentage change in own price of the good.
4. Give the meaning of market demand.
Ans. Market demand is the total demand by all buyers of a commodity in the market.
5. Under which market form a firms marginal revenue is always equal to price?
Ans. Under perfect competition, a firms marginal revenue is always equal to price.
6. Give two examples of variable costs.
Ans. (i) Cost of raw material, and (ii) Payment of electricity bill.
7. Give an example each of fixed cost and variable cost.
Ans.
(i) Example of Fixed Cost: Rent of a building.
( ii) Example of Variable Cost: Cost of raw material.
8. Define marginal revenue.
Ans. Marginal revenue is the change in total revenue when an extra unit of output is sold.
9. What does a rightward shift of demand curve indicate?
Ans. Rightward shift of demand curve indicates that quantity demanded of the commodity increases even
when own price of the commodity does not change.
10. Under which market form is a firm a price taker?
Ans. Under perfect competition, a firm is a price taker.
11. When is the demand for a good said to be perfectly inelastic?
Ans. Demand for a good is said to be perfectly inelastic when change in price of the good causes no change
in the quantity demanded.
12. Give one reason for an increase in supply of a commodity.
Ans. Supply of a commodity increases when number of firms increases in the market.
13. Give one reason for decrease in supply of a commodity.
Ans. Increase in price of factor inputs causes decrease in supply of a commodity.
14. Give the meaning of market supply.
Or
Define market supply.
Ans. Market supply refers to supply by all the firms producing a commodity.
15. Define production function.
Ans. Production function refers to the functional relationship between (physical) inputs and (physical)
output.
103
EconomicsXII
16. When will marginal revenue be negative?

Ans. Marginal revenue will be negative when total revenue starts declining.
17. What is meant by price elasticity of demand?
Ans. Price elasticity of demand (Ed) is the degree of responsiveness of quantity demanded in response to
some percentage change in own price of the commodity.
Ed =
18. Define opportunity cost.
Ans. Opportunity cost is the value of a factor in its next best alternative use.
19. Give one reason for a rightward shift of demand curve.
Ans. Increase in consumers income causes rightward shift of demand curve.
20. How is marginal product calculated?
Ans. Marginal product is calculated as under:
MP = TPn - TPn -1
or
MP =
DTP
DL
Here, MP = Marginal product; TPn = Total product of n units; TPn1 = Total product of n 1 units;
DTP = Change in total product; DL = Change in labour.
21. What is a budget line?
Ans. Budget line is a line showing different combinations of a set of 2-Goods that a consumer can buy, given
his income and prices of the goods.
22. Give one reason for a leftward shift in demand curve.
Ans. Decrease in consumers income causes leftward shift in demand curve.
23. Give the meaning of total revenue.
Ans. Total revenue is the sum total of money receipts of a producer derived from the sale of all units of the
commodity.
24. When is supply of a good said to be inelastic?
Ans. When the percentage change in quantity supplied is less than the percentage change in price, supply of a
good is said to be inelastic.
25. What is meant by consumers equilibrium?
Ans. A consumer is in a state of equilibrium when he maximises his satisfaction by spending his given
income on different goods and services.
26. What is a normal good?
Ans. Normal good is a good whose demand increases with rise in income and decreases with fall in income
of the consumer.
3 MARKS QUESTIONS
1. Explain the difference between an inferior good and a normal good.
Ans. Inferior good is a good whose demand decreases with rise in income and increases with fall in income
of the consumer. So that, there is an inverse (or negative) relation between consumers income and
demand for the good. Example: Coarse grain. On the other hand, normal good is a good whose
104
EconomicsXII
demand increases with rise in income and decreases with fall in income of the consumer. So that, there
is a positive relation between consumers income and demand for the good. Example: Milk.
2. Explain the law of diminishing marginal utility with the help of a total utility schedule.
Or
Explain the conditions of consumers equilibrium with the help of utility analysis.
Ans. The law of diminishing marginal utility states that the marginal utility derived from the consumption
of a commodity must decline as more and more units of that commodity are consumed at a point of
time. Two basic assumptions of the law are: (i) only standard units of the commodity are consumed, like
a cup of tea (not a spoon of tea) or a glass of water (not a drop of water), and (ii) consumption of the
commodity is continuous. This law can be explained with the help of the following schedule:
Total Utility Schedule
TUX
MUX
25
25
45
20
60
15
70
10
75
75
70
The above schedule reveals that as the consumer consumes more of commodity-X, the marginal utility
diminishes. It may reduce to zero, and even become negative.
Or
Conditions of consumers equilibrium, using utility approach are as follows:
(i) In case of a single commodity:
MU X
= MUof Money
PX
In case of two commodities:
MU X MU Y
= MU of Money
=
PX
PY
Where, MUX is marginal utility of commodity-X; MUY is marginal utility of commodity-Y; PX is
price of commodity-X and PY is price of commodity-Y.
(ii) Marginal utility of money remains constant.
(iii) Law of diminishing marginal utility must hold good. Implying that marginal utility must decline
as more of a commodity is consumed.
3. When the price of a good rises from ` 20 per unit to ` 30 per unit, the revenue of the firm producing
this good rises from ` 100 to ` 300. Calculate the price elasticity of supply.
Ans. Given, P = ` 20; P1 = ` 30; DP = P1 - P = ` 30 ` 20 = ` 10
When price = ` 20, total revenue (P Q) = ` 100
100
= 5 units
\ Quantity supplied (Q) =
20
When, price = ` 30, total revenue (P1 Q1) = ` 300
300
= 10 units
\ New quantity supplied (Q 1 ) =
30
105
EconomicsXII
Q = 5 units; Q1= 10 units; DQ = Q 1 - Q = (10 5) units = 5 units

P DQ
Q DP
=
\
20 5
=2
5 10
Price elasticity of supply = 2.
4. Complete the following table:

Units of Labour
Average Product
(Units)
Marginal Product
(Units)
10
10
Ans.
Units of Labour
Average Product
(Units)
Marginal Product
(Units)
Total Product
(Units)
10
12
20
10
10
30
36
40
42
5. Explain large number of buyers and sellers feature of a perfectly competitive market.
Ans. The number of buyers and sellers of a commodity is very large under perfect competition. The
number of firms selling a particular commodity is so large that an individual seller contributes only a
small fragment to the market supply. Thus, any increase or decrease in supply by an individual firm
hardly impacts the total market supply and consequently, an individual firm cannot impact price of the
commodity.
Not only is the number of sellers very large, but the number of buyers is also very large under perfect
competition. It is so large that by varying his purchase, an individual buyer cannot affect total market
demand for a commodity. Accordingly, an individual buyer cannot affect market price. He can buy any
quantity at the existing price of the commodity. An individual buyer is a price taker.
6. A firms revenue rises from ` 400 to ` 500 when the price of its products rises from ` 20 per unit
to ` 25 per unit. Calculate the price elasticity of supply.
Ans. Given, P = ` 20; P1 = ` 25; DP = P1 - P = 25 20 = 5
400
= 20 units
20
When, price = ` 25, total revenue (P1 Q1) = ` 500
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EconomicsXII
500
= 20 units
25
Q = 20 units; Q1= 20 units; DQ = Q 1 - Q = (20 20) units = 0 unit
P DQ
Q DP
20 0
=0
20 5
Price elasticity of supply = 0 (zero).
=

Output
(Units)
Average Cost
(`)
Marginal Cost
(`)
12
10
10
10.5
11
17
Ans.
Output
(Units)
Average Cost
(`)
Marginal Cost
(`)
Total Cost
(`)
12
12
12
10
20
10
10
30
10.5
12
42
11
13
55
12
17
72
8. Explain any two features of monopoly market.

Ans. Two main features of monopoly market are as under:
(i) Single Seller and Large Number of Buyers: Under monopoly, there is a single producer of a
commodity. He may be alone, or there may be a group of partners or a joint stock company or a
state. However, there is a large number of buyers of the product.
(ii) Restrictions on the Entry of New Firms: Under monopoly, there are some restrictions on the
entry of new firms into monopoly industry. As for instance, there are patent rights or exclusive
control over a technique or raw material.
9. The price elasticity of supply of a good is 0.8. Its price rises by 50 per cent. Calculate the percentage
increase in its supply.
Ans. Given, Ed = 0.8
Percentage change in price = 50%
50%
Percentage change in quantity supplied = 50 0.8
Percentage change in quantity supplied = 40%
0.8 =
Percentage increase in supply = 40%.
107
EconomicsXII

Units of Labour
Average Product
(Units)
Marginal Product
(Units)
16
20
20
18
14
Ans.
Units of Labour
Average Product
(Units)
Marginal Product
(Units)
Total Product
(Units)
16
16
16
20
24
40
20
20
60
18
12
72
16
80
14
84
11. Explain freedom of entry and exit to firms in industry feature of monopolistic competition.
Ans. Firms are free to enter the industry or leave it. But under monopolistic competition new firms may
have to face several difficulties. Products of some firms may be legally patented. New firms cannot
produce those the patented brands of the product. Example: No rival firm can produce and sell a
patented item like Woodland shoes even when there is a freedom of entry in the shoe industry. It may
be noted that, owing to the freedom of entry and exit, only normal profits would prevail under
monopolistic competition in the long run. In case of extra normal profits, some new firms will join the
industry (though with a different brand name). Overall supply of the product will rise, leading to a fall
in market price and normal profits. In case of extra normal losses, on the other hand, some of the
existing firms will leave the industry. Overall supply of the product will fall, leading to a rise in market
price and normal profits.
12. How is the demand for a good affected by a rise in the prices of other goods? Explain.
Or
How is the demand for a good affected by the rise in prices of related goods? Explain.
Ans. Other (or related) goods may be: (i) substitute goods, or (ii) complementary goods.
Substitute goods are those goods which can be substituted for each other. If price of a commodity
increases, demand for its substitute will increase and vice versa. For example, if price of Pepsi rises,
consumers will shift from the consumption of Pepsi to Coca Cola, accordingly demand for Coca Cola
rises.
Complementary goods are those goods which are used simultaneously. If price of a commodity
increases, demand for its complementary will decrease and vice versa. For example, if price of car rises,
consumers will reduce the use of cars, leading to a fall in the demand for petrol.
13. A firm supplies 10 units of a good at a price of ` 5 per unit. Price elasticity of supply is 1.25. What
quantity will the firm supply at a price of ` 7 per unit?
Ans. Let the quantity supplied after change be M units.
Given, P = ` 5; P1 = 7; DP = P1 P = 7 5 = 2
Q = 10 units; Q1 = M units; DQ = Q1 Q = (M 10) units
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EconomicsXII
Es = 1.25
P DQ
Q DP
5 M 10
10
2
M 10
1.25 =
4
1.25 =
M 10 = 5
M = 5 + 10
= 15
14. Explain the meaning of diminishing marginal rate of substitution with the help of a numerical
example.
Ans. Marginal rate of substitution (MRS) is the rate at which a consumer is willing to substitute Good-1 for
DGood-2
Good-2. It is estimated as
at any point on IC.
DGood-1
It tends to diminish as move along an IC from left to the right. Implying that the consumer is willing to
give up less and less of Good-2 (measured on Y-axis) for every additional unit of of Good-1 (measured
on X-axis). It is because of the law of diminishing marginal utility.
Example:
Diminishing Marginal Rate of Substitution
Combination
Apples
Oranges
MRS
10
3:1
2:1
1:1
Above table indicates that the consumer is willing to give up 3 oranges for getting the second apple,
2 oranges for getting the third apple and 1 orange for getting the fourth apple. It is because of the
diminishing MRS that the IC becomes convex to the origin.
15. From the following table, find out the level of output at which the producer will be in equilibrium.
Give reasons for your answer.
Output
(Units)
Marginal Revenue
(`)
Marginal Cost
(`)
10
109
EconomicsXII
Ans.
Output
(Units)
Marginal Revenue
(`)
Marginal Cost
(`)
10
Producer is in equilibrium at 4th unit of output.

Reason: At output levels 2nd and 4th unit, MR and MC (= 8). But the producer is in equilibrium when
4 units of output are produced. Because, it is here only that: (i) MR = MC, and (ii) MC is rising.
16. Why can a firm not earn abnormal profits under perfect competition in the long run? Explain.
Or
Why is the demand curve of a firm under monopolistic competition more elastic than under
monopoly? Explain.
Ans. A perfectly competitive firm in the long run can earn only normal profits, i.e., there will be zero
abnormal profits. It is owing to the freedom of entry and exit. In case abnormal profits (TR > TC or
AR > AC) are earned, new firms will join the industry. This will shift market supply curve to the right.
Accordingly, market price will reduce and abnormal profits would be wiped out. In a situation of
abnormal losses (TR < TC or AR < AC) some of the existing firms will leave the industry. Accordingly,
market supply curve will shift to the left, forcing the price to move up, till the situation of zero
abnormal profits is reached.
Or
Demand curve for a monopolistic competitive firm is flatter, i.e., more elastic than the demand curve
for a monopoly firm. This is so because a product under monopolistic competition has a large number
of close substitutes while there are no close substitutes of monopoly product. We know, larger the
number of substitutes of a commodity greater is the elasticity.
17. The price elasticity of supply of a commodity is 2.0. A firm supplies 200 units of it at a price of ` 8
per unit. At what price will it supply 250 units?
Ans. Given, P = ` 8; P1 = X; DP = P1 P = (X 8)
Es = 2
New price = ` 9.
P DQ
Q DP
2=
8
50
200 X 8
2=
2
X 8
X8=1
X= 1 + 8 = 9
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EconomicsXII
18. What is a budget line? Why is it downward sloping?

Ans. Budget line is a line showing different possible combinations of a set of 2-Goods that a consumer can
buy, given his income and prices of the goods.
Budget line is a downward sloping line because (given prices of goods X and Y, and income of the
consumer) more of Good-X (on X-axis) can be purchased only when less of Good-Y (on Y-axis) is
purchased.
19. A 15 per cent rise in the price of a commodity raises its supply from 300 units to 345 units. Calculate
its price elasticity of supply.
Ans. Given, percentage change in price = 15%
45
Percentage change in quantity supplied =
100 = 15%
300
Percentage change in quantity supplied 15%
=
=1
15%
\ Price elasticity of supply = 1.
20. Explain the conditions of consumers equilibrium under utility analysis.
Ans. Conditions of consumers equilibrium, using utility approach are as follows:
(i) In case of a single commodity:
MU X
= MUof Money
PX
In case of two commodities:
MU X MU Y
= MU of Money
=
PX
PY
Where, MUX is marginal utility of commodity-X; MUY is marginal utility of commodity-Y; PX is
price of commodity-X and PY is price of commodity-Y.
(ii) Marginal utility of money remains constant.
(iii) Law of diminishing marginal utility must hold good. Implying that marginal utility must decline
as more of a commodity is consumed.
21. By spending his entire income only on two goods X and Y a consumer finds that
Marginal Utility of X Marginal Utility of Y
>
Price of X
Price of Y
Explain how will the consumer react.
Ans. Equilibrium of the consumer occurs when:
MU X MU Y
=
= MUM
PX
PY
Here, MUX = Marginal utility of X; MUY = Marginal utility of Y; PX = Price of X; PY = Price of Y.
Marginal utility of X
Marginal utility of Y
Given,
>
Price of X
Price of Y
The consumer will increase the consumption of Good-X in place of Good-Y. Accordingly, MUX would
start declining while MUY would start rising. The process of substituting X for Y would continue till
MU X
MU Y
(rupee worth of MUX) and
(rupee worth of MUY) are equal and the equilibrium is
PX
PY
achieved.
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EconomicsXII
22. Explain the problem of what to produce.

Or
Why does an economic problem arise? Explain.
Ans. Because resources are scarce, we cannot produce everything in whatever quantity we wish to. We are
bound to face the problem of what to produce and how much.
Illustration: Let us assume that resources are available worth ` 5 crore. Assuming technology to be
constant, we can utilise these resources entirely for the production of (say) guns and produce 500
guns, or utilise these resources entirely for the production of (say) bread and produce 500 tons of
bread. We need guns for the defence and bread for the masses. Accordingly, both the guns and the
bread are to be produced. How much of each is to be produced? It depends on the wisdom of the
planners in a planned economy, and depends upon the market forces of demand and supply in a free
economy.
Or
Economic problem is a problem related to the allocation of resources (or problem of choice). An
economic problem arises due to the following reasons:
(i) Scarcity: Resources are scarce in relation to their wants.
(ii) Alternative Uses: Resources have alternative uses like, for example, land may be used to produce
wheat or may be used for the construction of buildings.
23. Total revenue of a firm rises from ` 400 to ` 500 when the price of its product rises from ` 8 per unit
to ` 10 per unit. Calculate the price elasticity of supply.
Ans. Given, P = 8; P1 = 10; DP = P1 - P = 10 8 = 2
400
= 50 units
8
When, price = `10, total revenue (P1 Q1) = ` 500
500
= 50 units
10
Q = 50 units; Q1= 50 units; DQ = Q 1 - Q = (50 50) units = 0 unit
P DQ
Q DP
8 0
=0
50 2
Price elasticity of supply = 0 (zero).
24. Explain the relationship between marginal cost and average variable cost.
Y
Ans. Fig. 1 offers the following observations on the
relationship between marginal cost (MC) and average
variable cost (AVC):
(i) When AVC is falling, AVC > MC.
(ii) When AVC is rising, AVC < MC.
(iii) MC curve cuts AVC curve at its lowest point.
Here, AVC = MC.
(iv) Both AVC and MC curves are U-shaped.
=
AVC
AVC/MC
MC
(v) AVC can fall even when MC is rising.
X
Output
Figure 1
112
EconomicsXII
25. By spending his entire income only on two goods X and Y a consumer finds that
Marginal Utility of X
Marginal Utility of Y
<
Price of X
Price of Y
Explain how will the consumer react.
Ans. Equilibrium of the consumer occurs when:
MU X MU Y
=
= MUM
PX
PY
Here, MUX = Marginal utility of X; MUY = Marginal utility of Y; PX = Price of X; PY = Price of Y.
Marginal utility of X
Marginal utility of Y
Given,
<
Price of X
Price of Y
The consumer will increase the consumption of Good-Y in place of Good-X. Accordingly, MUY would
start declining while MUX would start rising. The process of substituting Y for X would continue till
MU Y
MU X
(rupee worth of MUY) and
(rupee worth of MUX) are equal and the equilibrium is achieved.
PY
PX
26. A fall in the price of a firms product results in a fall in its supply by 40 per cent. Its price elasticity of
supply is 1.6. Calculate the percentage fall in its price.
Ans. Given, Es = 1.6
Percentage change inquantity supplied = 40%
1.6 =
40%
40%
1.6

Percentage fall in price = 25%.
27. Explain the relationship between marginal cost and average cost.
Y
Ans. Fig. 2 offers the following observations highlighting

the relationship between MC and AC:
AC
MC
(ii) When AC is rising, AC < MC.

(iii) MC curve cuts AC curve at its lowest point. Here,
AC = MC.
AC/MC
(i) When AC is falling, AC > MC.
(iv) AC can fall even when MC is rising.

(v) Both AC and MC curves are U-shaped.
X
Output
Figure 2
28. Explain the meaning of diminishing marginal rate of substitution.
Ans. Marginal rate of substitution (MRS) is the rate at which a consumer is willing to substitute Good-1 for
Good-2.
DGood-2
It is estimated as
at any point on IC.
DGood-1
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EconomicsXII
Diminishing MRS implies that for every additional unit of Good-1, the consumer is willing to give up
DGood-2
less and less amount of Good-2. So that
tends to decline as we move along the IC curve from
DGood-1
left to the right. This happens owing to the law of diminishing marginal utility. It is because of the
diminishing MRS that the indifference curve is convex to the origin.
29. Price elasticity of supply of a good is 2. By what percentage should its price rise so that its supply
rises by 30 per cent?
Ans. Given, Es = 2
Percentage change in quantity supplied = 30%
2=
30%
30%
2

\ Percentage rise in price = 15%.
30. Show with the help of a numerical example that average cost is constant when marginal cost is equal
to it.
Ans. Following table considers a situation when MC = AC over a range of output. It is a situation of constant
returns to a factor.
Output
Total Cost
MC
AC
10
10
10
20
10
10
30
10
10
40
10
10
50
10
10
The table shows that when constant returns to a factor prevail over a range of output (1-5 units of
output) MC remains constant. Consequent, TC increases at a constant rate, and MC and AC are found
to be equal to each other. In the entire range of output when AC = MC, AC is also found to be constant
(like MC).
4 MARKS QUESTIONS
1. Production in an economy is below its potential due to unemployment. Government starts
employment generation schemes. Explain its effect using production possibilities curve.
114
Y
P
CommodityY
Ans. PPC (Production Possibility Curve) is drawn on the

assumption that the given resources are fully as well
as efficiently utilised. When production is below its
potential due to unemployment, it would mean that
the concerned economy is not operating on the PPC
but is somewhere inside the PPC. This is indicated by
point B in Fig. 3. Since, our resources and
technology remain the same, PPC would not shift.
With the commencement of employment generation
schemes, employment level will rise. Consequently,
the point B will start shifting closer to the PP line.
Figure 3
P
CommodityX
EconomicsXII
Once full employment is achieved (other things remaining constant), the point B will finally be located
somewhere on the PP line.
2. Explain the conditions of producers equilibrium with the help of a numerical example.
Ans. A producer strikes his equilibrium when following two conditions are satisfied:
(i) MR = MC, and
(ii) MC is rising or MC curve cuts MR curve from below.
Consider the following schedule and see how producers equilibrium is worked out by fulfilling above
two conditions:
Output
(Units)
MR
(`)
MC
(`)
24
30
24
28
24
25
24
24
24
20
24
24
24
26
The above table shows that MR and MC are equal when the level of output is = 4, and also when it is = 6.
But, when the output level is = 4, MC is NOT rising (instead, it is falling). It is only when output level
is 6 that MC = MR, and also MC is rising. Thus, a producer is in equilibrium when he produces 6 units
of the output.
3. The price elasticity of demand for a good is 0.4. If its price increases by 5 per cent, by what
percentage will its demand fall? Calculate.
Or
Explain any two factors that affect the price elasticity of demand. Give suitable examples.
0.4 = ()

5%
Percentage change in quantity demanded = 0.4 5 = 2

Percentage fall in quantity demanded = 2%.
Or
Price elasticity of demand is affected by the following two factors:
\
(i) Nature of Commodity: Goods may be: necessaries, luxuries and comforts. Demand for
necessaries (like salt) is highly inelastic; demand for luxuries (like ACs) is highly elastic; and
demand for comforts (like air coolers) is moderately elastic.
(ii) Availability of Substitutes: Commodities which have substitutes, have elastic demand, like tea
and coffee. Commodities having no substitutes like liquor and cigarettes, etc. have inelastic
demand.
115
EconomicsXII
4. The demand for good rises by 20 per cent as a result of fall in its price. Its price elasticity of demand
is ()0.8. Calculate the percentage fall in price.
Or
How is price elasticity of demand affected by:
(i) Number of substitutes available for the good.
(ii) Nature of the good.
Percentage change in quantity demanded = 20%
0.8 =
20%
20%
0.8

Or
(i) Larger the number of substitutes of a commodity, greater is the elasticity of demand (like tea and
coffee). On the other hand, if a commodity has no close substitute (like liquor and cigarettes)
elasticity of demand will be low.
(ii) Goods may be necessaries, luxuries or comforts. Demand for necessaries (like salt, vegetables) is
highly inelastic. Demand for luxuries (like ACs) is highly elastic. Demand for comforts (like TV,
coolers) is moderately elastic.
5. Give the meaning of producers equilibrium. A producer produces that quantity of his product at
which marginal cost and marginal revenue are equal. Is he earning maximum profits? Give reasons
for your answer.
Ans. Producer is said to be in equilibrium when he maximises his profits or minimises his losses. It occurs
when (i) MR = MC, and (ii) MC is rising or MC curve cuts MR curve from below.
We can consider two situations: (i) when MR > MC, and (ii) when MR < MC.
(i) When MR > MC, every additional unit of output contributes greater revenue than cost. Increase in
output in such a situation would increase the level of profits.
(ii) When MR < MC, every additional unit of output causes greater cost than revenue. A cut in the
level of output in such a situation would increase the level of profits.
Thus, when MR > MC, output needs to be increased, and when MR < MC output needs to be
decreased to reach the point when profits are maximised. Accordingly, profits are maximised only
when MR = MC.
6. Equilibrium price of an essential medicine is too high. Explain what possible steps can be taken to
bring down the equilibrium price but only through the market forces. Also explain the series of
changes that will occur in the market.
Ans. Possible steps to lower the market price of an essential medicine are as these:
(i) The government can lower/abolish excise duty on the production of the medicine.
(ii) The government can offer subsidy to the producer engaged in the production of the concerned
medicine
116
EconomicsXII
In either situation the market supply of the product is

expected to rise, leading to a shift in the supply curve
to the right, as shown in Fig. 4.
S2
A
P1
Price
A shift in supply curve from S1S1 to S2S2 generates

excess supply = AB. This leads to a fall in market
price, triggering extension of demand and contraction
of supply. Finally, new market equilibrium is struck,
indicating lower market price and higher equilibrium
quantity (OP2 price rather than OP1, and OQ2
quantity rather than OQ1).
S1
Initial equilibrium price
Excess
Supply
New equilibrium price
P2
S1
S2
Q1
Q2
Quantity
Figure 4
7. Explain the meaning of opportunity cost with the help of production possibility schedule.
Or
With the help of suitable example explain the problem of for whom to produce.
Ans. Opportunity cost is the value of a factor in its next best alternative use. Or, it is the sacrifice involved (in
terms of the loss of output of Good-2) for every additional unit of output of Good-1 when some of the
given resources are shifted from Good-2 to Good-1 (technology remaining constant).
Example:
Production Possibility Schedule

Production
Possibilities
Production of Good-X
(Units)
Production of Good-Y
(Units)
20
18
15
11
Initially, (at combination B) in order to produce one unit of Good-X, 2 units of Good-Y are sacrificed. At
combination C, for producing another unit of Good-X, 3 units of Good-Y are sacrificed. When one more
unit of Good-X is to be produced (at combination D), 4 units of Good-Y are to be sacrificed. Thus, at
combination B, opportunity cost is 2 units of Good-Y for one unit of Good-X; at combination C,
opportunity cost is 3 units of Good-Y for one unit of Good-X while at combination D, opportunity cost is
4 units of Good-Y for one unit of Good-X.
Or
For whom to produce is a problem relating to choice of users of the goods and services. For example, if
we produce goods for those who can pay high price, we shall end up producing goods and services for
a relatively richer section of the society (like luxury cars, ACs, etc.) or even for a richer section of the
world community. Their quality of life would improve, but that of the poor would stagnate or
deteriorate further. As such, the gulf between the rich and the poor would keep on widening. On the
other hand, if goods are produced for the poor only (like wheat, rice, etc.), they may not afford to buy,
reducing profits of the producers. Accordingly, level of output may remain low, and the process of
growth will suffer. Hence, the problem of choice related to the final users of goods and services.
8. A 5 per cent fall in the price of a good raises its demand from 300 units to 318 units. Calculate its
117
EconomicsXII
18
100 = 6%
300
6%
(-) 5%
= 1.2
\
9. When the price of a commodity falls by 20 per cent, its demand rises from 400 units to 500 units.
Calculate its price elasticity of demand.
100
100 = 25%
400
=
25%
(-) 20%
= 1.25
\
10. Price elasticity of demand of a good is 0.75. Calculate the percentage fall in its price that will result
in 15 per cent rise in its demand.
Percentage change in quantity demanded = 15%
0.75 =
15%
15%
0.75

\
11. Market for a necessary good is competitive in which the existing firms are earning super-normal
profits. How can the policy of liberalisation by the government help in making the market more
competitive in the interest of the consumers? Explain.
Ans. Policy of liberalisation will remove certain barriers like licencing, quotas from the market. Consequently,
new firms will join the industry. This will make the market more competitive, and the market supply will
increase. Implying a shift in the market supply curve to the right. Other things remaining constant, a
rightward shift in the market supply curve will lead to a fall in equilibrium price and a rise in equilibrium
quantity. Extra normal profits will ultimately be wiped out, and consumers are expected to enjoy larger
quantity at a lower price.
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EconomicsXII
12. From the following table find out the level of output at which the producer is in equilibrium. Give
reasons for your answer. (Use marginal costmarginal revenue method).
Output
(Units)
Marginal Cost
()
Total Revenue
()
12
10
10
20
30
10
40
12
50
Ans.
Output
(Units)
Marginal Cost
(MC)
()
Total Revenue
(TR)
()
Total Cost
(TC)
()
Marginal Revenue
(MR)
()
Profit
(p = TR TC)
()
12
10
12
10
10
20
22
10
30
30
10
10
40
40
10
12
50
52
10
Producer is in equilibrium at 4th unit of output.

Reason: At output levels 2nd and 4th unit both MR and MC are equal which is 10 in this case. But the
producer is in equilibrium at 4th unit only where MR = MC (= 10) and MC is rising.
13. A 20 per cent fall in the price of a good, raises its demand from 600 units to 750 units. Calculate its
150
100 = 25%
600
=
25%
(-) 20%
= 1.25
6 MARKS QUESTIONS
1. Giving reasons, state whether the following statements are true or false:
(i) A monopolist can sell any quantity he likes at a price.
(ii) When equilibrium price of a good is less than its market price, there will be competition among
the sellers.
119
EconomicsXII
Ans.
(i) No, the statement is false. A monopolist can sell

more only by lowering the price of his product.
S
A
P1
Price
(ii) Yes, the statement is true. Equilibrium price is

that price at which there is neither excess
demand nor excess supply in the market. When
equilibrium price is less than market price (price
that prevails in the market) it points to a situation
of excess supply in the market. Implying that
there are undesired stocks of the product with
the sellers. Obviously, this will lead to competition
among the sellers who will like to clear their
undesired stocks. Fig. 5 illustrates this situation.
B
Market Price
Equilibrium Price
D
X
Quantity
Figure 5
Excess Supply: AB
Consequence: Competition among sellers to clear the undesired stocks
2. Explain the Law of Variable Proportions with the help of total product and marginal product
curves.
Or
Explain the Law of Variable Proportions. Use diagram.
Ans. Law of variable proportions states that as more and more of the variable factor is used with the fixed
factors, a stage must come when marginal product (MP) of the variable factor starts diminishing.
Diminishing MP may become zero or negative.
Of course, initially, MP may rise owing to better coordination between the factors and better
utilisation of the fixed factor. Thus, broadly, we have situations of increasing MP, decreasing MP and
negative MP when the law of variable proportions is in operation. In a situation when MP is
increasing, TP should be increasing at an increasing rate. When MP is decreasing, TP should be
increasing at a decreasing rate. And, when MP is negative, TP should be declining. Of course TP
should be maximum when MP = 0.
Y
T
Diagrammatic Illustration:
Diagram shows that:
(ii) When MP is rising, TP tends to rise at an

increasing rate. This occurs till point K on
the TP curve. This corresponds to the
situation of increasing returns to a factor.
(iii) Beyond OL units of the variable factor,
MP tends to decline, and TP increases
only at diminishing rate. This occurs
between E and S on MP curve, and
between K and T on TP curve. This
corresponds to a situation of diminishing
returns to a factor.
Total Product
TP
O
Y
Marginal Product
(i) MP tends to rise till OL units of the

variable factor are used with the constant
application of the fixed factor. This
corresponds to point E on the MP curve.
This is a situation of increasing returns to
a factor.
Increasing
Returns
Diminishing
Returns
X
Negative
Returns
S ve
MP
Units of the Variable Factor
Figure 6
120
EconomicsXII
(iv) Beyond OS units of the variable factor, MP becomes negative. Now TP starts declining.
Economists sometimes refer to this situation as a situation of negative returns.
3. Explain consumers equilibrium with the help of indifference curve analysis.
Or
Explain the relationship between
(i) Prices of other goods and demand for the given good.
(ii) Income of the buyers and demand for a good.
Ans. Consumers equilibrium refers to a situation when a consumer maximises his satisfaction spending his
given income across different goods and services.
In terms of IC analysis, a consumer attains equilibrium when:
P
(i) MRS (Marginal rate of substitution) = X (Slope of the price line).
PY
(ii) IC is convex to the origin at the point where MRSXY =
PX
.
PY
Fig. 7 illustrates this situation.

Y
P
Good-Y
Q is the point of equilibrium. Here, IC and price line

(PP) are tangent to each other. Or, it is here that the
slope of IC = slope of price line. Or, it is here that:
P
MRS (indicated by the slope of IC) = X (indicated by
PY
the slope of price line)
Also, at point Q, indifference curve is convex to the

origin.
In a state of equilibrium, the consumer is buying OL
amount of Good-Y and OM amount of Good-X. It is
here that he is maximising his satisfaction. Any
departure from this point would only mean lesser
satisfaction.
IC
O
M
Good-X
Figure 7
Or
(i) Other goods may be: (a) substitute goods, or (b) complementary goods. The relation between the
demand for a given good and price of other goods is different in case of substitute goods and
complementary goods. This is explained with reference to Fig. 8.
(b) Complementary Goods: Complementary

goods are those goods which complete the
demand for each other. When price of
complementary goods increases, demand for
Good-X tends to fall. Demand curve for
D1
D
D2
Price of X
(a) Substitute Goods: Substitute goods are those

goods which can be substituted for each other.
When price of a substitute good increases,
demand for a given good (Good-X) tends to
rise. Demand curve for Good-X will shift to
the right, implying quantity demanded
increases from PK to PL even when price of
Good-X continues to be OP.
Initial demand curve
D1
D
D2
QX
Quantity of X
Figure 8
w Demand curve shifts to the right (from DD to D1D1) when
price of the substitute good increases.
w Demand curve shifts to the left (from DD to D2D2) when
price of the complementary good increases.
121
EconomicsXII
Good-X will shift to the left, implying quantity demanded decreases from PK to PS even when
price of Good-X continues to be OP.
Fig. 8 illustrates the effect of rise in price of the other goods.
(ii) The relation between the demand for a good and income of the buyers is different in case of
normal goods and inferior goods. This is explained with reference to Fig. 9.
(a)
Price of Coarse Grain
Price of Milk
D2
D1
P
T
D2
D1
(b)
Q2
Q1
Demand for Milk
Figure 9
D1
D2
P
D1
D2
O
Q2
Q1
Demand for Coarse Grain
(a) Normal Goods: A normal good is that good the consumption of which increases with increase
in income of the buyer, so that there is a positive relationship between buyers income and
demand for the good. When income rises, demand curve for the normal good (say milk) shifts
to the right from PK to PT as shown in Fig. 9(a).
(b) Inferior Goods: An inferior good is that good the consumption of which decreases with
increase in income of the buyer, so that there is a negative relationship between buyers income
and demand for the good. When income rises, demand curve for inferior good (say coarse
grain) shifts to the left from PT to PK as shown in Fig. 9(b).
4. Explain three properties of indifference curves.
Or
Explain the conditions of consumers equilibrium under indifference curve approach.
Ans. The principle three properties of indifference curves are as follows:
(i) Indifference Curves are Negatively Sloped or they Slope Downward: An indifference curve
slopes downwards from left to right. It shows that more of one commodity implies less of the other,
so that total satisfaction (at any point on IC) remains the same. This is because the consumer is
supposed to have monotonic preferences.
(ii) Indifference Curves are Convex to the point of Origin: An indifference curve will ordinarily be
convex to the point of origin. This is because of diminishing marginal rate of substitution which
indicates that consumer is willing to sacrifice less and less of one good for every additional unit of
the other.
(iii) Higher Indifference Curve represents Higher Level of Satisfaction: In indifference map, a
higher indifference curve represents those combinations which yield higher level of satisfaction
than the combinations on the lower indifference curve, based on the assumption of monotonic
preferences of the consumer.
Or
Consumers equilibrium refers to a situation when a consumer maximises his satisfaction spending his
122
EconomicsXII

(i) IC and price line are tangent to each other.
or
When: slope of IC and slope of price line are equal to each other.
and (ii) IC is convex to the origin, at the point of equilibrium.
Good-Y
Y
In Fig. 10 AB is the budget or price line. IC1, IC2 and
IC3 are indifference curves. A consumer can buy any
A
of the combinations, A, B, C, D and E of Good-X and
C
Consumers Equilibrium
Good-Y shown on the price line AB. He cannot get
any combination on IC3 as it is away from price line
E
AB. He can buy those combinations which are not
L
only on price line AB but also coincide with the
IC3
highest indifference curve which is IC2 in this case.
IC2
Out of A, B, C, D and E combinations, the consumer
D
IC1
X
will be in equilibrium at combination E, because at
O
M
B
this point price line (AB) is tangent to the highest
Good-X
indifference curve IC2. No doubt, the consumer can Figure 10
buy C or D combinations as well but these will not
give him maximum satisfaction being located on lower indifference curve IC1. It means consumers
equilibrium point is the point of tangency of price line and indifference curve. At equilibrium,
P
Slope of Indifference Curve = Slope of Budget or Price Line or MRSXY = X
PY
Also, at point E, the IC2 is convex to the origin. Accordingly, equilibrium is stable. If IC2 is not convex
at the point of equilibrium, we shall never have stable equilibrium.
In a state of equilibrium, the consumer is buying OL amount of Good-Y and OM amount of Good-X. It
is here that he is maximising his satisfaction. Any departure from this point would only mean lesser
satisfaction.
5. If equilibrium price of a good is greater than its market price, explain all the changes that will take
place in the market. Use diagram.
Y
D
Price
Ans. In Fig. 11, DD is the market demand curve and SS is

the market supply curve. Market demand and market
supply curves are equal at point E. Thus, point E
shows the equilibrium price. This point signifies that
equilibrium price is OP and equilibrium quantity is
OQ.
P
P1
Excess Demand
In the diagram, OP1 is the market price which is
D
S
lower than the equilibrium price. At the given market
price, there is excess demand = AB. This triggers a
X
O
Q1 Q
Q2
rise in market price. In response to the rise in price
Quantity
the quantity supplied tends to rise, leading to an Figure 11
upward movement along the supply curve, from
point A to point E. Also, a rise in price leads to backward movement along the demand curve, from
point B to point E, indicating a fall in quantity demanded. Movements along the supply and demand
curves would continue to occur till excess demand is eliminated, and equilibrium is restored. This
occurs at point E, where market demand = market supply, and equilibrium price = OP.
6. Giving reasons, state whether the following statements are true or false:
(i) Average product will increase only when marginal product increases.
(ii) With increase in level of output, average fixed cost goes on falling till it reaches zero.
123
EconomicsXII
(iii) Under diminishing returns to a factor, total product continues to increase till marginal product
reaches zero.
(i) The statement is false. Average product can
rise even when marginal product falls. See AP
and MP corresponding to output range MQ in
Fig. 12.
(ii) It is a wrong statement because as the level of
output increases, average fixed cost falls but can
never be zero, because average of any positive
value (fixed cost) can never be zero.
AP, MP
Ans.
AP
(iii) The statement is true. Under diminishing

Units of labour
returns to a factor, marginal product tends to Figure 12
fall. Falling marginal product implies that total
product increases at a diminishing rate. TP is maximum when MP = 0.
MP
7. Explain the effect of increase in demand for a good on its equilibrium price and equilibrium
quantity.
Or
Give the meaning of collusive oligopoly. Explain any two features of oligopoly.
Y
Increase in Demand
D1
S
D
Price
Ans. When the demand increases while supply remains

constant, the equilibrium price as well as equilibrium
quantity tend to rise. In the diagram, the initial
demand curve is DD and supply curve is SS. E is the
equilibrium point. OP is the equilibrium price and
OQ is the equilibrium quantity. When demand
increases while supply remains unchanged, demand
curve shifts upward (rightward) from DD to D1D1,
the equilibrium price will increase from OP to OP1
and equilibrium quantity increases from OQ to OQ1.
P1
E1
E
D1
D
S
Figure 13
Q1
Quantity
Or
Collusive oligopoly is a form of the market in which there are few firms in the market and all decide to
avoid competition through a formal agreement. They collude to form a cartel, and fix for themselves
output quota and market price. Sometimes a leading firm in the market is accepted by the cartel as a
price leader. Members of the cartel accept the price as fixed by the price leader.
Two main features of oligopoly are as under:
(i) Few Firms: A few firms, but large in size, dominate the market for a commodity. Each firm
commands a significant share of the market: it can impact market price of the product through its
independent price-output policy.
(ii) Barriers to the Entry of Firms: There are various barriers to the entry of new firms. These
barriers are almost similar to those under monopoly. Patent-rights is the most important form of
entry-barrier. Entry of the new firms is extremely difficult, if not impossible.
124
EconomicsXII
8. Explain the conditions of consumers equilibrium under indifference curve analysis.

Ans. Consumers equilibrium refers to a situation when a consumer maximises his satisfaction spending his
P
(i) MRS (Marginal rate of substitution) = X (Slope of the price line).
PY
(ii) IC is convex to the origin at the point where MRSXY =
PX
.
PY
Fig. 14 illustrates this situation.

Q is the point of equilibrium. Here, IC and price line
(PP) are tangent to each other. Or, it is here that the
slope of IC = slope of price line. Or, it is here that:
P
MRS (indicated by the slope of IC) = X (indicated by
PY
Good-X
the slope of price line)
Also, at point Q, indifference curve is convex to the

origin.
IC
O
In a state of equilibrium, the consumer is buying OL
amount of Good-Y and OM amount of Good-X. It is Figure 14
here that he is maximising his satisfaction. Any
departure from this point would only mean lesser satisfaction.
M
Good-Y
9. Explain the distinction between movement along the supply curve and shift of supply curve.
Use diagrams.
Ans. The movement along the supply curve represents expansion and contraction of supply of a
commodity caused by change in own price of the commodity. When price increases there is an
upward movement (a b) along the supply curve, called expansion of supply; and when price
decreases there is a downward movement (b a) along the supply curve, called contraction of
supply. See Fig. 15(a).
Shift in supply refers to increase or decrease in supply of a commodity caused by change in factors
other than own price of the commodity. When other factors change in a positive direction, the supply
curve shifts to the right, showing increase in supply; and when the changes occur in the negative
direction, the supply curve shifts to the left showing a decrease in supply. See Fig. 15(b).
(a)
Expansion:
ab
S2
S
S1
P1
Price
Price
(b)
P
S1S1 Increase in Supply
S2S2 Decrease in Supply
S2
S
Contraction:
ba
S1
O
Q
Q1
Quantity
Q2
Q
Q1
Quantity
Figure 15
125
EconomicsXII
10. Explain the distinction between decrease in supply and contraction in supply. Use diagrams.
Ans. When a fall in price of a commodity leads to decrease in quantity supplied of a commodity, it is called
contraction in supply. If quantity supplied falls due to factors other than own price of the commodity, it
is a situation of decrease in supply. Tables (a) and (b) show, respectively, the situations of contraction in
supply and decrease in supply respectively. Likewise, Fig. 16(a) shows contraction, while Fig. 16(b)
shows decrease.
(a)
(b)
Y
S
20
S1
10
Price
Quantity
20
10
200
100
Price
Price
S
O
Figure 16
E1
10
S1
100
200
Quantity
Fig. (a) Contraction in Supply
S
Price
Quantity
10
10
200
100
E
S
100
200
Quantity
Fig. (b) Decrease in Supply
Based on the assumption that price of

Good-X decreases, other determinants of
supply remaining constant.
Based on the assumption that price of

the good remaining constant, other
determinants of supply changes.
zzz
126
EconomicsXII

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Introductory

4323/3, Ansari Road, Darya Ganj, New Delhi-110002

Consumer Equilibrium and Demand

Producer Behaviour and Supply

Cost and Revenue

Forms of Market and Price Determination under

10. Marginal opportunity cost.

employment in firm-A at the wage of 1,500 P.M.

employment in firm-B at the wage of 2,500 P.M.

employment in firm-C at the wage of 4,000 P.M.

Gain of output in Use-1 : 300 units

HOTS (Higher Order Thinking Skills)

Consumer Equilibrium and Demand

10. Demand curve.

17. A consumer strikes his equilibrium when:

18. A consumer strikes his equilibrium when:

19. A consumer strikes his equilibrium when: MRS =

20. A situation when MRS >

21. A situation when

HOTS (Higher Order Thinking Skills)

Producer Behaviour and Supply

10. Law of variable proportions.

11. AP and MP tend to be U-shaped.

HOTS (Higher Order Thinking Skills)

Cost and Revenue

2. Variable cost is incurred before production is started.

13. Marginal revenue can never be negative.

3. AC is greater than MC, so long as AC is falling.

14. When MC > ATC, ATC must rise.

HOTS (Higher Order Thinking Skills)

Forms of Market and Price Determination under

10. Excess demand and excess supply.

HOTS (Higher Order Thinking Skills)

HOTS (Higher Order Thinking Skills)

Unit-2: Consumer Equilibrium and Demand

21. No. A consumer attains his equilibrium only when:

Slope of Demand Curve Q

(i) articles of distinction

(i) increase in income of the consumer

(i) fall in income

HOTS (Higher Order Thinking Skills)

Slope of Demand Curve Q

Slope of Demand Curve Q

Slope of Demand Curve Q

Unit-3A: Producer Behaviour and Supply

4. Yes. If AP is falling, MP must also fall. Because, unless MP

5. No. AP can rise even when MP is falling. See AP and MP

(i) technological improvement

(i) increase in input prices

13. increase in price of the concerned commodity.

(i) use of computers

(i) price of the concerned commodity

(i) factors of production are use-specific which compounds their scarcity

HOTS (Higher Order Thinking Skills)

Note: The difference between TR and TC

REVENUE AND COST

Unit-3B: Cost and Revenue

7. No. Total fixed cost is indicated by a horizontal straight line

TOTAL FIXED COST

Relating the two equations, we can write that:

16. No. Under perfect competition, AR and MR curves coincide and

4. Yes. MC and AC are equal when AC tends to stabilise or when AC is

7. No. The distance between AC and AVC curves tends to reduce as

16. Yes. Under perfect competition, AR and MR are constant.