Short Answer TypeExplain “large number of buyers and sellers” features of a perfectly competitive market.
Production in an economy is below its potential due to unemployment. Government starts employment generation schemes. Explain its effect using production possibilities curve.
Explain the conditions of producer’s equilibrium with the help of a numerical example.
The price elasticity of demand for a good is − 0.4. If its price increases by 5 percentage, by what percentage will its demand fall? Calculate.
Explain any two factors that affect the price elasticity of demand. Give suitable examples.
Giving reasons, state whether the following statements are true or false.
A monopolist can sell any quantity he likes at a price.
Long Answer TypeExplain the Law of Variables Proportions with the help of total product and marginal product curves.
Explain consumer’s equilibrium with the help of Indifference Curve Analysis.
Consumer equilibrium refers to a situation, in which a consumer derives maximum satisfaction, with no intention to change it and subject to given prices and his given income. The point of maximum satisfaction is achieved by studying indifference map and budget line together. On an indifference map, higher indifference curve represents a higher level of satisfaction than any lower indifference curve. So, a consumer always tries to remain at the highest possible indifference curve, subject to his budget constraint.
Conditions of Consumer’s Equilibrium:
The consumer’s equilibrium under the indifference curve theory must meet the following two conditions:
(i) MRSXY = Ratio of prices or PX/PY:
Let the two goods be X and Y. The first condition for consumer’s equilibrium is that
MRSXY = PX/PY
(a) If MRSXY > PX/PY, it means that the consumer is willing to pay more for X than the price prevailing in the market. As a result, the consumer buys more of X. As a result, MRS falls till it becomes equal to the ratio of prices and the equilibrium is established.
(b). If MRSXY < PX/PY, it means that the consumer is willing to pay less for X than the price prevailing in the market. It induces the consumer to buys less of X and more of Y. As a result, MRS rises till it becomes equal to the ratio of prices and the equilibrium is established.
(ii) MRS continuously falls:
The second condition for consumer’s equilibrium is that MRS must be diminishing at the point of equilibrium, i.e. the indifference curve must be convex to the origin at the point of equilibrium. Unless MRS continuously falls, the equilibrium cannot be established.
Thus, both the conditions need to be fulfilled for a consumer to be in equilibrium.
In Fig, IC1, IC2 and IC3 are the three indifference curves and AB is the budget line. With the constraint of budget line, the highest indifference curve, which a consumer can reach, is IC2. The budget line is tangent to indifference curve IC2 at point ‘E’. This is the point of consumer equilibrium, where the consumer purchases OM quantity of commodity ‘X’ and ON quantity of commodity ‘Y. All other points on the budget line to the left or right of point ‘E’ will lie on lower indifference curves and thus indicate a lower level of satisfaction.
Thus, we can conclude that if the consumer is consuming any bundle other than the optimum one, then he would rearrange his consumption bundle in such a manner that the equality between the MRS and the price ratio is established and he attains the state of equilibrium.
Short Answer TypeExplain the relationship between prices of other goods and demand for the given period.
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