INDEX

CHAPTER 1
INTRODUCTION 2-3

CHAPTER 2
CONSUMER BEHAVIOUR 4-6

CHAPTER 3
PRODUCT & COST 7–9

CHAPTER 4
THE THEORY OF FIRM UNDER PERFECT 10 – 12
COMPETITION

CHAPTER 5
MARKET EQUILIBRIUM 13 - 16

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 MICRO ECONOMICS
CHAPTER-1 INTRODUCTION

I. Choose the correct answer (each question carries 1 mark)

1. The scarce resources of an economy have

(a)Competing usages (b) Single usages
(c) Unlimited usages (d) none of the above
Ans: (a) Competing usages

2. Which of the following is an example of micro economic study?

(a) National income (b) Consumer Behaviour
(c) Unemployment (d) Foreign trade
Ans: (b) Consumer behaviour

4. Central problems of an economy includes

(a) What to produce (b) How to produce
(c) For whom to produce (d) All the above
Ans: (d) All of the above

5. Traditionally, the subject matter of economics has been studied under the following broad
branches.
(a)Micro and macro Economics (b) Positive and Normative
(c) Deductive and Inductive (d) None of the above
Ans: (a) Micro and Macro Economics.

II. Fill in the blanks (each questions carries 1 marks)

1. Scarcity of resources gives raise to.....................
Ans: Problem of choice
2. In a centrally planned economy all important decisions are made by ………………
Ans: Government
3. ...................... is a set of arrangement where economic agents can freely exchange their
endowments with each other.
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 Ans: Market
4. In reality all economies are …………………..
Ans: Mixed Economies.

III. Match the following (each question carries 1 mark)

1. Market economy a. Government

2. Service of a Teacher b. Private
3. Centrally planned economy c. Skill
4. Positive economics d. Evaluate the Mechanism
5. Normative economics e. Functioning of
Mechanism Ans: 1-b; 2-c; 3-a; 4-e; 5-d;
IV. Answer the following in 4 sentences. (each question carries 2 marks)

1. Mention the central problems of an economy.

Ans: The central problems of an economy are as follows:

a) What goods are to be produced and in what quantities?
b) How the goods are to be produced?
c) For whom the goods are to be produced?

2. Distinguish between Micro and Macro economics.

Micro Economics Macro Economics

• Micro Economics study in individualunits • Macro Economics study in aggregates
• Its scope is narrow • Its scope is wider
• Follows slicing method • Follows lumping method

3. Distinguish between positive and normative economics.

Positive Economics Normative Economics

• Here we study how the differentmechanisms • Here we try to understand whether the different
function mechanisms are desirable or not
• It deals with the scientific explanation ofthe • It explains about ‘what should be andshould
working of the economy. not be done’.

4. do you mean by production possibility set?

Ans: The collection of all possible combinations of the goods and services that can be produced
from a given amount of resources and a given stock of technological knowledge is called the
production possibility set of the economy.

5. What is opportunity cost?

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 Ans: An opportunity cost is the cost of having a little more of one good in terms of the amount of
the other good that has to be forgone. This is known as the opportunity cost of an additional unit
ofthe goods.

6. What is production possibility frontier?

Ans: The production possibility frontier gives the combinations of two commodities (cotton and
corn) thatcan be produced when the resources of the economy are fully utilized. It is also called as
Production possibility curve (PPC) also known as transformation curve.

CHAPTER-2
CONSUMER BEHAVIOUR

I Choose the correct answer

1. Utility is …………
a) Objective c) Both a and b
b) Subjective d) None of the above
Ans: (b) Subjective

2. The shape of an Indifference curve is normally

a) Convex to the origin c) Horizontal
b) Concave to the origin d) Vertical
Ans: (a) Convex to the origin

3. The consumption bundle that are available to the consumer depend on

a) Colour and shape c) Income and quality
b) Price and income d) None of the above
Ans: (b) Price and income

4. The equation of Budget line is

a) Px+p1x1=M c) P1x1+p2x2=M
b) M=P0X0+Px d) Y=Mx+C
Ans: c) P1x1+p2x2=M

5. The demand for these goods increases as income increases

a) Inferior goods c) Normal goods
b) Giffen goods d) None of the above
Ans: (c) Normal goods

6. A vertical demand curve is

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 a) Perfectly elastic c) Unitary elastic
b) Perfectly inelastic d) None of the above
Ans: (b) Perfectly inelastic

7. Ordinal utility analysis expresses utility in

a) Numbers c) Ranks
b) Returnsd) awards
Ans: (c) Ranks

II Fill in the blanks

1. Wants satisfying capacity of commodity is ……………….
Ans: Utility
2. Two indifference curves never ……… each other.
Ans: Intersect
3. As income increases, the demand curve for normal goods shifts towards………………….
Ans: Rightward
4. The demand for a good moves in the direction of its price
Ans: Opposite
5. Method of adding two individual demand curve is called as……………………
Ans: Horizontal summation

III Match the following

A B
1. Demand curve 1. D(p)=a-bp
2. Linear Demand curve 2. Downward sloping
3. Unitary elasticity of demand 3. Pen and ink
4. Complementary goods 4. A family of Indifference curve
5. Indifference map 5. |ed|=1

Ans: 1-b; 2-a; 3-e; 4-c; 5-d;

IV Answer the following in 4 sentences

1. What are the differences between budget line and budget set?

Budget Line Budget Set

• It represents different combinations oftwo• It is a collection of all bundles available to
goods which the consumer consumes and a consumer at the existing price at his
whose prices are exactly equal to his income. given level ofincome.
• It is also known as Price line. • It is also known as opportunity set

2. What do you mean by inferior goods? Give example.

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Ans: The inferior goods are those goods for which the demand falls with the increase in income of
consumer. Here demand for such goods move in the opposite direction of the income of the
consumer. That is, there will be a negative relationship between income of consumer and demand
for inferior goods. Example: Low quality goods.

3. What is monotonic preference?

Ans: A consumer’s preferences are said to monotonic if and only if between any two bundles, the
consumer prefers the bundle which has more of at least one of the goods and no less of the other
good as compared to the other bundle.
For instance, the consumer, between any bundles say (x1,x2) and (y1, y2), if (x1,x2) has more of at
least one of the goods and no less of the other good compared to (y1, y2) then the consumer prefers
(x1,x2) to (y1, y2). This is called monotonic preferences.
Here the consumer will not remain indifferent between two combinations of commodities when he
has an opportunity to have more quantity in one combination than the other.

4. State the law of demand?

Ans: Law of Demand states that other things being equal, there is a negative relation between
demand for a commodity and its price.
In other words, when price of the commodity increases, demand for it falls and when price of the
commodity decreases, demand for it rises, other factors remaining the constant.

5. Mention two different approaches which explain consumer behaviour.

Ans:
a) Cardinal Utility Analysis – Law of Diminishing Marginal Utility
b) Ordinal Utility Analysis – Indifference Curve analysis

6. What do you mean by price elasticity of demand?

Ans: Price elasticity of demand is a measure of the responsiveness of the demand for a good to
changes in its price.
It is measured by using the following formula.
PED = Percentage change in demand for the goodPercentage change in price of the good

V Assignment and project oriented question

1. A consumer wants to consume two goods. The Price of bananas is Rs.5 and price of
mangoes is Rs.10. The consumer income is Rs.40.

a) How much bananas can she consume if she spend her entire income on that good
b) How much mangoes can she consume if she spend her entire income on that good
c) Is the slope of budget line is downward or upward
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 d) Are the bundles on the budget line equal to the consumers’ income or not
e) If you want to have more of banana you have to give up mangoes. Is it true?

Ans: (a) 8 Bananas (40/5)

(b) 4 Mangoes (40/10)

(c) Slope of budget line is downward.

(d) Yes, the bundles on the budget line are equal to the consumer’s income.

(e) True. If we want to have more of banana we have to give up mangoes.

CHAPTER- 3
PRODUCTION AND COST

I. Choose the correct answer.

1. The formula of production function is
a) q=f(L,K) c) Y=f(x)
b) q=d(p) d) None of the above.
Ans: (a) q=f(L,K)
2. In the short run, a firm.
a) Can change all the inputs c) can keep inputs fixed
b) Cannot vary all the inputs d) None of the above
Ans: (b) Cannot vary all the inputs
3. The change in output per unit of the change in the input is called.
a) Marginal product c) Total product
b) Average Product d) Product
Ans: (a) Marginal product
4. Cobb-Douglas production function is
a) q=(x, x) c) q= (x α, x β)
b) q=(x1, x2) d) q=(0)
Ans: c) q= (x1 α, x2 β)
5. TC=
a) TVC c) TFC+TVC
b) TFC d) AC + MC
Ans: c) TFC+TVC

II. Fill the blanks

1. In the long run, all inputs are ……………
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 Ans: Variable
2. ...................... is defined as the output per unit of variable input.
Ans: Average Product
3. Marginal product and average product curves are ...................... in shape.
Ans: Inverse U

4. SMC curves cuts the AVC curve at the ........................ point of AVC curve from below.
Ans: Minimum
5. ........................... is the set of all possible combinations of the two inputs that yield the same
maximum
possible level of output.
Ans: Isoquant

III. Match The Following.

A B
1. CRS a) ΔTC/Δq
2. SAC b) Long run Average cost
3. LRAC c) Short run Average cost
4. TFC+TVC= d) Constant returns to scale
5. SMC e) TC

Ans: 1 - (d); 2 - (c); 3 - (b); 4 – (e); 5 – (a)

IV. Answer the following in four sentences.

1. What is Isoquant?

Ans: An isoquant is the set of all possible combinations of the two inputs that yield the same
maximum possible level of output. Each isoquant represents a particular level of output and
labelled with that amount of output. It is just an alternative way of representing the production
function.

2. Give the meaning of the concepts of short run and long run.

Ans: The concepts of short run and long run are defined as a period simply by looking at whether
all the inputs can be varied or not. It is not advisable to define short run and long run in terms of
days, months or years.
In the short run, at least one of the factor – labour or capital cannot be varied and therefore,
remains fixed. In order to vary the output level, the firm can vary only the other factor. The factor
that remains fixed is called the fixed factor and the other factor which the firm can vary is called
the variable factor.
In the long run, all factors of production can be varied. A firm in order to produce different levels of
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 output in the long run may vary both the inputs simultaneously. So, in the long there is no fixed
factor.

3. Mention the types of returns to scale.

Ans: The types of returns to scale are

(a) Constant Returns to Scale
(b) Increasing Returns to Scale
(c) Decreasing Returns to Scale

4. Name the short run costs.

Ans: The short run costs are: Total Fixed cost, Total Variable cost, Total Cost, Average Fixed
Cost, Average Variable Cost, Average Cost and Marginal Cost.

5. What are long costs?

Ans: There are two long run costs namely, (a) Long run Average Cost (b) Long run Marginal
Cost.

v. Assignment and POQ.

6. Find the missing products of the following table.

Factor 1 TP MP1 AP1

0 0 0 0
1 10 - 10
2 24 - 12
3 40 16 13.33
4 - 10 -
5 - 6 11.2
6 57 1 9.5

Factor 1 TP MP1 AP1

0 0 0 0
1 10 10 10
2 24 14 12
3 40 16 13.33
4 50 10 12.5
5 56 6 11.2

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 6 57 1 9.5

Note: TP is summation of MP so 40+10=50; 50+6=56; 56+1=57; MP is TPn – TPn-1 so 10-0=10; 24-

10=14; AP is TP/q so 50/4=12.5;

CHAPTER-4

THE THEORY OF FIRM UNDER PERFECT COMPETITION

I Choose the correct answer

1. The products in a perfect competition are

a) Heterogeneous products c) Luxury goods
b) Homogeneous products d) Necessary goods
Ans: (b) Homogeneous products

2. The increase in total revenue for a unit increase in the output is

a) Marginal Revenue c) Total Revenue
b) Average Revenue d) Fixed Revenue
Ans: (a) Marginal Revenue

3 The Firm’s profit is denoted by

a)∑ b)Δ c) Φ d)π
Ans: d)π

4. When the supply curve is vertical, the elasticity of supply is

a. es=1 b) es=1 c) es=0 d) ex=∞
Ans: c) es=0

5. The revenue per unit of output of a firm is called as

a. TR b) MR c) AR d) None of these.
Ans: c) AR

II Fill in the blanks.

1. Price taking behavior is the single most distinguishing characteristic of .............................. market
Ans: Perfect competitive market.

2. ......................... is a tax that the Government imposes per unit sale of output.
Ans: Unit Tax
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3. For a price taking firm Marginal Revenue is equal to……………………
Ans: Market price

4. The point of minimum AVC where the SMC curve cuts the AVC curves is called a
……………………
Ans: Shut down point

5. ............................... cost of some activity is the gain forgone from the second best activity.
Ans: Opportunity cost

III. Match The Following.

A B
1. MR a) Perfect information
2. π= b) Zero profit
3. AR= c) ΔTR/Δq
4. Normal profit d) TR-TC
5. Perfect competition e) TR/Q

Ans: 1 – (c); 2 – (d); 3 – (e); 4 – (b); 5 – (a)

IV Answer the following questions in four sentences.

1. Mention the conditions needed for profit by a firm under perfect competition.

Ans: The following conditions needed for profit by a firm under perfect competition:
• The Price P must be equal to MC
• Marginal cost must be non-decreasing at q0
• The firm to continue to produce, in the short run, price must be greater than the averagevariable
cost and in the long run, price must be greater than the average cost.

2. Give the meaning of shut down point.

Ans: In the short run, the shut down point is that point of minimum Average Variable Cost where
Short run Marginal Cost curve cuts the Average Variable Cost curve. In the long run, the shut
down point is the minimum of Long Run Average Cost Curve.

3. Write the meaning of opportunity cost with an example.

Ans: Opportunity cost of some activity is the gain foregone from the second best alternative
activity.
For example,If there is an one acre of land.

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 4. Mention the two determinants of a firm’s supply curve.

Ans: The two determinants of a firm’s supply curve are as follows:

(a) Technological progress
(b) Input prices.

5. Give the meaning of price elasticity of supply and write its formula.

Ans: The price elasticity of supply refers to the proportionate change in quantity supplied to a
proportionate change in price of a commodity.

PES= Percentage change in quantity suppliedPercentage change in price

= Δq/Δp x p/q

V. Assignment and project oriented questions.

Compute the total revenue, marginal revenue and average revenue schedules from thefollowing
table when market price of each unit of goods is Rs.10.
Quantity TR MR AR
sold
0
1
2
3
4
5
6

Ans: Hint: For TR Multiply Price and Quantity (PxQ);MR = TRn-TRn-1 and AR = TR/Q
Quantity TR MR AR
sold
0 0 - -
1 10 10 10
2 20 10 10
3 30 10 10
4 40 10 10
5 50 10 10
6 60 10 10

**********

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 CHAPTER 5

MARKET EQUILIBRIUM

I. Choose the correct answer.

1. In perfect competition buyers and sellers are

a) Price makers c) Price analysts
b) Price takers d) None of the above
Ans: (b) Price takers.

2. A situation where the plans of all consumers and firm in the market match.
a) Inequilibrium situation c) Maximisation situation
b) Equilibrium situation d) Partial Equilibrium situation
Ans: (b) Equilibrium situation

3. As a result of increase in the number of firms there is an increase in supply, then supply curve
a) Shifts towards left c) Shifts towards both sides
b) Shifts towards right d) None of the above
Ans: (b) Shifts towards right

4. The firms earn super normal profit as long as the price is greater than the minimum of
a) Marginal cost c) Average cost
b) Total cost d) Fixed cost
Ans: c) Average cost

5. The government imposing upper limit on the price of goods and services is called
a) Price ceiling c) Price floor
b) Selling price d) None of the above
Ans: (a)Price ceiling.

6. The government imposed lower limit on the price of goods and service is called
a) Goods floor c) Price floor
b) Service floor d) None of the above
Ans: c) Price floorII Fill in the blanks.

II. Fill in the Blanks.

1. In a perfectly competitive market, equilibrium occurs when market demand ........................ market
supply
Ans: Equals.

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 2. If the supply curve shifts rightward and demand curve shifts leftward equilibrium price will
be………………..
Ans: Decreasing

3. ......................... is determined at the point where the demand for labour and supply of labour
curves intersect.
Ans: Wage

4. In labour market................................ are the suppliers of labour.

Ans: Households

5. Due to rightward shifts in both demand and supply curves the equilibrium price remains…………..
Ans: Unchanged (constant or same).

6. It is assumed that, in a perfectly competitive market an ........................................is at play.

Ans: Invisible hand

III Match the following

A B
1. Adam smith a) Attraction of new firms
2. Price ceiling b) Operation of invisiblehand
3. Market equilibrium c) Lower limit on price
4. Possibility of supernormalprofit d) Upper limit on price
5. Price floor e) QD=QS

Ans: 1 – (b); 2 – (d); 3 – (e); 4 – (a); 5 – (c);

IV Answer the following questions in 4 sentences

1. Define equilibrium price and quantity.

Ans: Equilibrium price is the price at which equilibrium is reached in the market.
The equilibrium quantity is defined as the quantity which is bought and sold at equilibrium price.
Therefore price and quantity will be at equilibrium whenQd (p*) = qs (p*)

p*denotes the equilibrium price and Qd (p*) and qs (p*) denote the market dmenad and market
supply respectively.

2. Write any two possible ways in which simultaneous shift of both demand and supply curve.
Ans: The simultaneous shifts can happen in four possible ways:
a) Both supply and demand curves shift rightwards.
b) Both supply and demand curves shift leftwards.
c) Supply curve shifts leftward and demand curve shifts rightward
d) Supply curve shifts rightward and demand curve shifts leftward.

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3. What is marginal revenue product labour (MRPL)?

Ans: The extra output produced by one more unit of labour is its marginal product and by selling
each extra unit of output, the additional learning of the firm is the marginal revenue she gets from
that unit.
Therefore, for each extra unit of labour, she gets an additional benefit equal to marginal revenue
times marginal product is called as Marginal Revenue Product of Labour (MRPL).
MRPL = MR x MPL
MR - Marginal Revenue; MPL- Marginal productivity of Labour.

4. Distinguish between excess demand and excess supply.

Excess Demand Excess Supply

• It is situation where market demandexceeds the• It is a situation where the market supplyexceeds
market supply. the market demand.
• Here the price of the product increases. • Here the price of the product decreases.
• Qd > Qs • Qs > Qd.

5. How wage is determined in the labour market?

Ans: The wage rate is determined at the point where the demand for labour and supply of labour
curves intersect. This is shown in the following diagram:

Y
Wage SL

w E

DL

O L Labour (Hrs) X
In the above diagram, hours of labour is measured in X axis and Wage is measured in Y axis. SL is
labour supply curve and DL Labour demand curve. With an upward sloping supply curve and
downward sloping demand curve, the equilibrium wage rate is determined at the point where
thesetwo curves intersect (point E). That means, the wage rate is determined at that point where
the labour that the households wish to supply is equal to the labour that the firms wish to hire.

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1. Suppose the demand and supply curves of wheat are given byqD=200-P and qS=120+P
a) Find the equilibrium price
b) Find the equilibrium quantity of demand and supply
c) Find the quantity of demand and supply when P is greater than equilibrium price
d) Find the quantity of demand and supply when P is lesser than equilibrium price.

Ans:

We know that Qd = Qs

The Demand and supply equations givenqD=200-P and qS=120+P respectively.

For equilibrium For equilibrium Quantity Quantity of demand Quantity of demand

Price (P*) Demanded and Supplied and supply when P is and supply when P
greater than is less than equilibrium
200-P = 120+P qD=200-P equilibrium priceIf price, If P=30
=200-40 P=50
= 200-P -120-P =160
qD=200-P qD=200-P
= 80 – 2P2p= 80 S
q =120+P =200-50 =200-30
=120+40 =150 =170
=160

P= 80/2 D S
qS=120+P qS=120+P
q =q =160 =120+50 =120+30
i.e., P* = 40 =170 =150
So when P ˃ P* So when P ˂ P*
q ˃q
S D
qD˃qS

*****

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