Economics – Class XII. Unit Coverage- 3&4 (Producers' Equilibrium& Market
Competition). Abstract. Friends, till now we were uploading support material in ...
STATE COUNCIL OF EDUCATIONAL RESEARCH &TRAINING VARUN MARG, DEFENCE COLONY, NEW DELHI
Question Bank With Solution For Class XII PGT (Economics) Chief Advisor Ms. Rashmi Krishnan, Director, SCERT Advisors Dr. Pratibha Sharma, Joint Director, SCERT Mohammad Zamir, Principal, DIET Keshav Puram Co- ordinators Dr. Seema Srivastava, Sr. Lecturer, DIET, Moti Bagh Ms. Meenakshi Yadav, Sr. Lecturer, SCERT Contributors Dr. Seema Srivastava, Sr. Lecturer, DIET, Moti Bagh Ms. Meenakshi Yadav, Sr. Lecturer, SCERT Mr Bharat Thakur, PGT (Economics) RPVV, Surajmal Vihar
Support Material For Teachers In Economics – Class XII Co-ordinators : Dr. Seema Srivastava Ms. Meenakshi Yadav Contributors : Dr. Seema Srivastava Ms. Meenakshi Yadav Mr.Bharat Thakur Technical Support :
Sh. Mukesh Yadav Ms. Radha
Question Bank Economics – Class XII Unit Coverage- 3&4 (Producers’ Equilibrium& Market Competition) Abstract Friends, till now we were uploading support material in content areas from the week-wise syllabus from July, 2011.In this section we intend to give you different types of questions based on Board pattern along with expected Answers /Solutions. Hope this will enable you to prepare students accordingly. As preparing test - items for a balanced question paper is an art, answering appropriately and precisely is also a skill which we have to equip our children with. Understanding the question and using appropriate terminology. Language for framing answers is very important for high scoring in examinations. This requires practice and teachers play an important role in providing this skill in class rooms. This is an exemplar, try your own question- bank preparation based on small section of content covered.
I Question Bank (with Answer/Solution) Producers Behavior and Supply Very Short answer Type Questions (1 mark) 1
How does fall in total product affect marginal product?
2
Which Cost Curve is parallel to OX- axis? Why?
3
What do you mean by Fixed Factors of Production?
4
What is meant by Market Period?
5
What causes a downward Movement along the Curve?
6
When does the Elasticity of Supply of commodity is equal to Unity?
7
Draw TVC Curve.
8
“At Producers’ Equilibrium Marginal Cost should be falling.” True/ False. Give reason.
9
What happens to Supply of a Good when price of inputs used rise while producing the same ?
10 The vertical distance between ATC and AVC should fall or rise or remain constant with the increase in output? Give reason. 11
II
In this formula what does P stand for?
Short answer Type Questions (3-4 marks)
1
Draw ATC, AVC and MC Curves in single diagram.
2
Distinguish between Total Fixed Cost and Total Variable Cost.
3
What changes will take place in Total Revenue when: a) Marginal Revenue is falling but is positive b) Marginal Revenue is Zero c) Marginal Revenue is negative
4 Find the level of output yielding maximum profit by MC and MR approach Output AR TC
1 10 10
2 9 11
3 8 14
4 7 18
5 6 25
5 Define Marginal Revenue. Explain the relationship between Average and Marginal Revenue when price is constant at all levels of output. 6 Complete the following table: Output(Unit) 1 3 -
Total Variable cost(Rs) 10 27 -
Average Variable Cost(Rs) 8 10
Marginal Cost(Rs) 6 13
7 Following information is given about a firm: Output(in 0 units) Total 20 Cost(Rs)
1
2
3
4
5
6
25
28
30
36
45
60
From the above information find: a) Average Fixed Cost of producing 4 units.
b) Average Variable Cost of producing 5 units. c) Marginal Cost of producing 3rd unit. d) Average Cost of producing 6 units. 8
Whether statements are True or False? State reasons i) As long as MC is rising, ATC will also rise. ii) At an output of one unit, ATC is equal to MC. iii) Total Revenue declines as long as Marginal Revenue is falling.
9
State three reasons of a Rightward Shift of a Supply Curve.
10
Using diagrams explain the difference between Contraction and Decrease in Supply.
11
In the diagram given below state the nature of Elasticity of Supply of the different Supply Curve
12
A 20% rise in the price of commodity A leads to a rise in its supply from 400 to 500 units. Calculate its Elasticity of Supply and comment on it.
13
The Price elasticity of Supply of a commodity is 2. When its price falls from Rs 10 to 8 per unit, its Quantity Supplied falls by 500 units. Calculate the Quantity Supplied at reduced price.
14
Using a diagram explain how a relatively flatter Supply curve has a higher Elasticity of Supply for a given rise in price?
III
Long Answer Type Questions (6 Marks)
1.
Explain the effect on output when only one input is increased?
2.
Explain three factors that influence the Supply of Ice Creams in the market.
3.
Using a hypothetical example, explain how the Market Supply Curve is determined from Individual Supply Curve of three firms?
4.
a) Explain the effect of technical progress on the supply of a good. Use diagram. b) Using diagram explain the impact of drought on the Market Supply of wheat.
6 Explain the conditions of Producer’s Equilibrium with MC and MR approach. Use schedule & diagram. 7
State whether following statements are true or false. Give reasons: a) Diminishing returns to a factor is applicable only when Average Product starts falling b) AC and AVC Curves do not intersect each other c) Supply remains constant in Market Period.
Answer/Solution Unit 3: Producer Behavior and Supply Very short Answer type Questions
(1 Mark)
1. Marginal Product becomes negative 2. Total Fixed Cost curve is parallel to OX- axis because TFC is always positive even at zero level of output. 3. Fixed factors are those factor inputs whose quantity does not change as level of output changes. 4. The very short period when supply cannot be changed with the change in the price is referred to as Market Period. 5. Fall in the price causes a downward movement along the supply curve. 6. When the value of the Co-efficient of Elasticity of supply is equal to one and supply curve passes through origin is extended. 7.
TVC Curve
8. False. At producers Equilibrium Marginal cost should be rising because falling MC causes more profit. 9. The supply of good decreases as the cost of production rises with the increase in input prices. 10. The vertical distance between ATC and AVC should fall with the increase in output as the difference between ATC and AVC is AFC and that falls with increases in output. 11. In the formula p stands for change in price (New price – Original price)
Short Answer Type Questions
Ans. 1
ATC, AVC and MC Curves
Note: • • •
The vertical distance between ATC & AVC should decreases with increase in output. MC should cut AVC and ATC at its minimum point. The Minimum Point of AVC should come before minimum point of ATC.
2. Distinction between Total Fixed Cost &Total Variable Cost Total Fixed Costs Total Variable Costs Do not vary with the quantity of output Vary with the quantity of output produced produced Can never be zero in the short run. Have to Can fall to zero in the short run, as they are be incurred even if production falls to zero directly related to the level of output produced Example :- Rent Example :- wages 3. The following changes will take place : a) Total Revenue will rise at diminishing rate. b) Total Revenue is maximum c) Total Revenue falls 4 Output 1 2 3 4 5
AR 10 9 8 7 6
TC 10 11 14 18 25
TR 10 18 24 28 30
MC 1 3 4 7
MR 10 8 6 4 2
MR>MC Equilibrium MR= MC MC>MR
At output level of 4 unit, the project is maximum as here MC = MR 5 Marginal Revenue of a firm is the additional revenue it earns when it sells an additional unit of the output. Marginal Revenue = Change in Total Revenue Change in output Since a Firm’s Price is constant, Marginal Revenue is also constant and AR also remains constant and is equal to MR at all output levels. (P = AR). The AR and MR curves are the same and are parallel to x- axis. (AR=MR=Price) y
AR/MR
AR = MR
0
x Output
6
Output
TVC ∑ MC = TVC or AVC x Q
AVC TVC Q
1 2 3 4
MC TVC Output
10 16 27 40
10 8 9 10
10 6 11 13
7 Output 0 1 2 3 4 5 6
TC 20 25 28 30 36 45 60
TFC 20 20 20 20 20 20 20
TVC 0 5 8 10 16 25 40
AFC 20 10 6.6
5 4 3.3
AVC 0 5 4 3.3 4
5 6.6
MC 5 3
2 6 9 15
ATC 25 14 10 9 9 10
Formula Used: AFC = TFC
,
AVC = TVC ,
Output MC =
TC
ATC = TC
Output
Output
TC at 0 level of output is TFC because TVC is 0 at this level.
Output TC = TFC + TVC 8 I.
False, AC can fall even when MC is rising when MC < AC and MC rising.
II.
False, at an output of one unit ATC is equal to TC and MC is less than ATC as MC is change in TVC only.
III.
False, Total Revenue rising at diminishing rate when MR is falling but is positive. TR falls only when MR is negative.
9. Three causes of Rightward Shift of the Supply Curve. I.
Fall in Input Price
II.
Improvement in Technology
III.
Reduction in Taxation Rate
10. Difference between Contraction and Decrease in Supply
Contraction in Supply
Decrease in Supply
A reduction in supply due to a fall in a A decrease in supply is defined as a situation price of the commodity is termed as when the seller is willing to supply lesser of contraction. quantity at the same price. Contraction results in downward Decrease in supply results in leftward shift of movement on the supply curve supply curve because of Increase in Input Price or taxation rate etc.
There is a downward movement from A There is leftward shift of supply curve from SS to B. When the price falls, from P to P1 to SS’ because of change in factors other than and quantity supply at falls from Q to Q1. price.
11
y SA Price
SB SC
Quantity Supplied
X
SA – Unitary Elastic Supply (ES=1) SB - Elastic Supply (ES>1) SC – Inelastic Supply (ESMC; Profit earned in the last unit, overall profit is 2 increasing, therefore increase output
4 5 6 7 decreasing; 8
10 10 10 10
5 7 10 13
MR=MC= Producer’s Equilibrium MRAC. (b) True. AC and AVC curve can not intersect each other though the vertical distance between them keeps on reducing with Increase in output. The reason behind this is falling AFC which can not be zero as TFC cannot be zero. (C) True . Supply remains constant in the Market Period because Market Period is the time period when supply can not be changed to any change in the price level. The time is very short for any changes.
QUESTIONS ON MARKET COMPETITION AND MARKET EQUILIBRIUM (PRICE DETERMINATION) Very Short Answer Questions (1 mark) 1
Under which market form a firm is a Price Taker?
2
Draw a Demand Curve under Perfect Competition.
3
Define Equilibrium price.
4
When does the situation of excess supply Curve arise?
5
What is the Profit Maximisation condition for Perfect Competition?
Short Answer Questions (3-4 marks) 1 Why is a firm under Perfect Competition a price taker? 2 Explain three feature of Perfect Competition. 3 Explain the determination of Equilibrium Price under Perfect Competition with the help of Schedule. 4 Show that an increase in demand leads to a fall in the price of the commodity. 5 Diagrammatically represent the impact of a decrease in Supply on Equilibrium Price. 6 What will be the impact of increase in excise duty on the Equilibrium Price and Quantity of a Commodity? Use diagram. 7 Explain the feature’ Large number of firms and Buyers under Perfect competition’. Long Answer Questions ( 6marks) 1. How does an increase in price of Steel affect the equilibrium price and quantity of cars? Explain with the help of diagram. 2. With the help of a diagram explain how a rise in the income level impacts the Equilibrium Price of shirts. 3. “There is a Simultaneous change in demand and supply of a Commodity and Equilibrium price increases”. Explain this with the help of a example. 4. Explain the following features of Perfect competition: a) Large number of firms and buyers b) Homogeneous Product
ANSWERS OF PERFECT COMPETITION AND MARKET EQUILIBRIUM (PRICE DETERMINATION) VERY SHORT ANSWER TYPE QUESTIONS (01 MARK) 1. Under Perfect Competition a firm is a price taker. 2. Demand Curve under a Perfect Competition. Price
AR/ Demand Curve X
3. Equilibrium Price is the price of a commodity at which its quantity demanded equals to quantity supplied in the market. 4. The situation of Excess supply arise when at a given price, the market supply of a commodity is more than its market demand. 5. The firm maximises profit in perfect competition where MR = MC since AR = MR in perfect competition. So we can also say P = AR = MR = MC
SHORT ANSWER TYPE QUESTIONS (3-4 Marks) 1. FIRM IS A PRICE TAKER IN PERFECT COMPETITION A seller is a price taker in perfect competition. In perfect competition, there are a large number of buyers and sellers in the Market. Each seller sells so little and each buyers buys so little that none of them is able to influence the price in the market. The Industry as a whole determines the price with two market forces demand and supply.
Ans 2. Three Features of Perfect Competition: i)
Very Large number of Buers and Sellers:There is such a large number of buyers and sellers that none of them is in a position to influence the price in a market. The price of good is determined by the whole industry.
Homogeneous Product: Product sold in this kind of market are homogeneous or identical in every respect like quality, size, design, colour etc. The products are perfect substitutes of one- another.
iii)
Free Entry and Exit: Buyers and sellers are free to enter or leave the market at any time they like large profit will induce firms into the market and loss exit if any.
3 Determination of Equilibrium price under Perfect competition: Price is determined in a perfectly competitive market at a point where Market Demand is equal to Market Supply.
Demand and Supply Schedule Price (Rs) 20 30 40 50 60
Market Demand 120 100 80 60 40
Market Supply 40 60 80 100 120
Situation Demand>Supply Demand>Supply Demand=Supply Demand
