A consumer wants to consume two goods. The prices of the two goods are Rs 4
and Rs 5 respectively. The consumer’s income is Rs 20.
(i) Write down the equation of the budget line.
(ii) How much of good 1 can the consumer consume if she spends her entire
income on that good?
(iii) How much of good 2 can she consume if she spends her entire income on
that good?
(iv) What is the slope of the budget line?
Questions 5, 6 and 7 are related to question 4.
(i) P1 = Rs 4
P2 = Rs 5 M = Rs 20
Equation of the budget line = P1x1 + P2 + x2 =M
4x1+5x2 = 20
(ii) If Rs 20 is entirely spent on good 1, then the amount of good 2 demanded will be zero i.e., x2 = 0 as the consumer has no income left to spend on good 2.
4x1 + 5(0) =20
4x1 = 20 X1= X1 =5
(iii) If Rs 20 is entirely spent on good 2, then x1 = 0 , as the consumer has no income left to spend on good 1.
4(0) + 5x2 = 20
5x2 =
X2 = 4
Amount of good 2 consumed = 4 units
(iv) Slope of the budget line =
= 0.8
Suppose your friend is indifferent to the bundles (5, 6) and (6, 6). Are the preferences of your friend monotonic?
Consider the demand curve D (p) = 10 – 3p. What is the elasticity at price 53?
Suppose there are 20 consumers for a good and they have identical demand functions:
d(p)=10–3pd(p)=10–3p for any price less than or equal to 103103 and d1(p)=0d1(p)=0 at any price greater than 103.
What is budget line?
What do you mean by an ‘inferior good’? Give some examples
Explain why the budget line is downward sloping.
Suppose a consumer wants to consume two goods which are available only in
integer units. The two goods are equally priced at Rs 10 and the consumer’s
income is Rs 40.
(i) Write down all the bundles that are available to the consumer.
(ii) Among the bundles that are available to the consumer, identify those which cost her exactly Rs 40.
What do you mean by substitutes? Give examples of two goods which are substitutes of each other.
Suppose a consumer’s preferences are monotonic. What can you say about her preference ranking over the bundles (10, 10), (10, 9) and (9, 9)?
Suppose a consumer can afford to buy 6 units of good 1 and 8 units of good 2
if she spends her entire income. The prices of the two goods are Rs 6 and Rs 8
respectively. How much is the consumer’s income?
Explain the concept of a production function
What would be the shape of the demand curve so that the total revenue curve is?
(a) A positively sloped straight line passing through the origin?
(b) A horizontal line?
Explain market equilibrium.
Discuss the central problems of an economy.
What are the characteristics of a perfectly competitive market?
What is the total product of input?
From the schedule provided below calculate the total revenue, demand curve and the price elasticity of demand:
Quantity |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
Marginal Revenue |
10 |
6 |
2 |
2 |
2 |
0 |
0 |
0 |
- |
When do we say that there is an excess demand for a commodity in the market?
What do you mean by the production possibilities of an economy?
How are the total revenue of a firm, market price, and the quantity sold by the firm related to each other?
At what level of price do the firms in a perfectly competitive market supply when free entry and exit is allowed in the market? How is the equilibrium quantity determined in such a market?
Explain through a diagram the effect of a rightward shift of both the demand and supply curves on equilibrium price and quantity.
A monopoly firm has a total fixed cost of Rs 100 and has the following demand schedule:
Quantity |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
Marginal Revenue |
100 |
90 |
80 |
70 |
60 |
50 |
40 |
30 |
20 |
10 |
Find the short run equilibrium quantity, price and total profit. What would be the equilibrium in the long run? In case the total cost is Rs.1000, describe the equilibrium in the short run and in the long run.
Explain the concept of a production function
Distinguish between a centrally planned economy and a market economy.
If the price of a substitute Y of good X increases, what impact does it have on the equilibrium price and quantity of good X?
How does an increase in the price of an input affect the supply curve of a firm?
What will happen if the price prevailing in the market is?
i. Above the equilibrium price
Ii. Below the equilibrium price
Comment on the shape of MR curve in case when TR curve is a
(a) Positively sloped straight line
(b) Horizontal straight line
Compare the effect of shift in the demand curve on the equilibrium when the number of firms in the market is fixed with the situation when entry-exit is permitted.