Short Answer TypeDefine an indifference curve. Explain why an indifference curve is downward sloping from left to right.
When price of good is Rs 7 per unit a consumer buys 12 units. When price falls to Rs6 per unit he spends Rs 72 on the good. Calculate price elasticity of demand by using the percentage method. Comment on the likely shape of demand curve based on this measure of elasticity.
| Price (Rs) | Quantity (Uts) | (Total Expenditure) (TE) |
| 7 | 12 | 84 |
| 6 | 12 | 72 |
Elasticity of Demand by Percentage method:
E = % change in quantity demanded / % change in price.
% change in quantity demanded = (New quantity demanded - old quantity demanded)/ initial quantity*100
= (12-12)/12 = 0
% in price = (New price – old price)/ Initial price*100
= (6-7)/7 = -14.28
Ed = 0/-14.28 = 0
Hence demand is perfectly inelastic
As the demand is perfectly inelastic, so the demand curve is a vertical straight line parallel to the price-axis.
What does the Law of variable Proportions show? State the behaviour of total product according to this law.
Explain how changes in prices of other products influence the supply of a given product.
Long Answer TypeExplain the conditions of a producer’s equilibrium in terms of marginal cost and marginal revenue. Use diagram.
Market for a good is in equilibrium. There is simultaneous increase both in demand and supply of the good. Explain its effect on market price.
Market for a good is in equilibrium. There is simultaneous decrease both in demand and supply of the good. Explain its effect on market price.
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