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Question Paper
Economics - I (MSF1A3): April 2008
• Answer all 81 questions.
• Marks are indicated against each question.
(b) An increase in supply of air travel because of the liberalization of the aviation sector
(c) A rise in the price of sugar leading to an increased production of sugarcane
(d) A rise in the wages for workers in the software industry leading to an increase in the supply of
software professionals
(e) An increase in the supply of computers because of entry of many firms into the industry. ( 1 mark)
<Answer>
8. The supply and demand functions of a commodity are estimated as
Qd = 1,000 – 200P
Qs = 800P – 2,000
(a) QM + QN = 700
(b) 20 QM + 35 QN = 700
(c) 20 QM – 35 QN = 700
(d)
(e) (20 + QM) (35 + QN) = 700.
( 1 mark)
<Answer>
15. The shape of marginal product curve is
(d) For first unit of variable input the marginal product is the same as total product
(e) Marginal product increases only when the total product is increasing at an increasing rate. ( 1 mark)
<Answer>
23. In case of a homogeneous production function, the expansion path will be
(a) A straight line through origin
(b) Vertical straight line
(c) U–shaped
(d) L–shaped
(e) Horizontal straight line. ( 1 mark)
<Answer>
24. The total cost is a function of
(a) The price of input
(b) The number of different inputs used
(c) The output to be produced
(d) The demand of the product
(e) The nature of the product. ( 1 mark)
<Answer>
25. The time cost, if expressed in terms of money is referred as
(a) Implicit cost
(b) Explicit cost
(c) Indirect cost
(d) Economic cost
(e) Variable cost. ( 1 mark)
<Answer>
26. Which of the following statements is true with regard to cost curves in the short run?
(a) The marginal cost curve intersects the average variable cost curve at its lowest point and the average total
cost curve at its highest point
(b) The marginal cost curve intersects the average variable cost curve at its highest point and the average total
cost curve at its lowest point
(c) The marginal cost curve intersects both the average variable cost curve and the average total cost curve at
their lowest points
(d) The marginal cost curve intersects both the average variable cost curve and the average total cost curve at
their highest points
(e) The marginal cost curve never intersects the average variable cost curve and the average total cost curve. ( 1 mark)
<Answer>
27. Which of the following statements is not true?
(a) The long run average cost is determined by economies of scales
(b) When increase in production of one product leads to decrease in cost of production of another
product, it is termed as economies of scope
(c) Pecuniary economies of scale accrue to a firm when the firm gets discount due to large scale
operation
(d) Economies of scales are classified into internal and external economies of scales
(e) Real economies of scale can be achieved through the increase in the quantity of inputs. ( 1 mark)
<Answer>
28. Which of the following is/are referred as technological change(s)?
I. Innovation of new products.
II. Improvement in the existing product.
III. Reduction in the cost of production.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (II) above
(d) Both (I) and (III) above
(e) All (I), (II) and (III) above. ( 1 mark)
<Answer>
29. If the firm’s total revenue exceeds its economic costs, the residual is considered as
(a) Pure profit
(b) Producer surplus
(c) Accounting profit
(d) Consumer surplus
(e) Marginal revenue. ( 1 mark)
<Answer>
30. Which of the following statements is incorrect?
(a) Fixed cost is incurred even if the production is zero
(b) Total average cost cannot be zero
(c) Average cost is minimum when it is equal to marginal cost
(d) The average total cost curve is flatter than average variable cost curve
(e) The minimum point of average cost curve will be to the left of the minimum point of the
average variable cost curve. ( 1 mark)
<Answer>
31. The ‘reserve capacity economies’ comes under
(a) Production economies
(b) Labor economies
(c) Technical economies
(d) Managerial economies
(e) Marketing economies. ( 1 mark)
<Answer>
32. Which of the following costs can be easily attributed to a product or a process?
(a) Fixed cost
(b) Variable cost
(c) Implicit cost
(d) Private cost
(e) Separate cost. ( 1 mark)
<Answer>
33. Which of the following statements is false about perfect competition?
(a) It is a kind of market structure where no particular firm can influence the price
(b) There is free flow of information
(c) The technical characteristics of the products produced by various firms are identical
(d) The demand curve of an individual firm is infinitely inelastic
(e) The level of market price is determined by the forces of demand and supply. ( 1 mark)
<Answer>
34. In a perfectly competitive market, firms earn only normal profit in the long-run. This is
(a) Due to homogenous products they produce
(b) Because of constant price
(c) Due to existence of large number of buyers
(d) Due to free entry and exit of firms
(e) Because of absence of transport cost. ( 1 mark)
<Answer>
35. In perfect competition, the slope of average revenue curve is
(a) Twice the slope of marginal revenue curve
(b) Half the slope of marginal revenue curve
(c) Zero
(d) Infinity
(e) One. ( 1 mark)
<Answer>
36. Under perfect competition, the supply of an individual firm becomes zero, if the price is
(a) Below the average variable cost
(b) Above the average variable cost
(c) Above the marginal cost
(d) Equal to marginal cost
(e) Equal to average variable cost. ( 1 mark)
<Answer>
37. Under perfect competition which of the following will happen when a specific sales tax is imposed?
(a) The MC curve will shift upward to left and the amount of goods produced at the prevailing
price will reduce
(b) The MC curve will shift downward to right and the amount of goods produced at the
prevailing price will reduce
(c) The MC curve will shift upward to left and the amount of goods produced at the prevailing
price will increase
(d) The MC curve will shift downward to right and the amount of goods produced at the
prevailing price will increase
(e) The MC curve will shift downward to right and the amount of goods produced at the
prevailing price will remain the same. ( 1 mark)
<Answer>
38. Which of the following is/are (an) assumption(s) of the kinked demand curve model?
I. There are few firms in the oligopolistic industry.
II. Each firm produces a product which is close substitute for the other firm’s product.
III. Product qualities vary and firms incur a huge amount on advertising expenditure.
(a) Only (I) above
(b) Only (II) above
If the government imposes a sales tax of Rs.200 per unit, the price increases by
(a) Rs. 100
(b) Rs. 110
(c) Rs. 120
(d) Rs. 130
(e) Rs. 140. ( 2 marks)
<Answer>
51. The marginal utility function of a consumer is estimated to be
MU = 0.70m.
How many units of good m the consumer would be willing to consume if the price of the good m is Rs. 28?
(a) 10 units
(b) 20 units
(c) 30 units
(d) 40 units
(e) 50 units. ( 2 marks)
<Answer>
52. A consumer is indifferent between the combinations X and Y.
(a) 0.50
(b) 1.00
(c) 1.50
(d) 2.00
(e) 0.05. ( 1 mark)
<Answer>
53. For a consumer in equilibrium, Marginal Rate of Substitution of good A for good B (MRSAB) is 5. If price of the
good A (PA) is Rs.95, price of good B (PB) is
(a) Rs. 17
(b) Rs. 19
(c) Rs. 6
(d) Rs. 14
(e) Rs. 15. ( 1 mark)
<Answer>
54. The total utility obtained from the consumption of ice cream for a consumer is given by the equation, TU = X2.5. If
the price of ice cream is given to be Rs. 67.5 per unit, the consumer maximizes his utility by consuming how many
units of ice cream?
(a) 5 units
(b) 7 units
(c) 9 units
(d) 11 units
(e) 12 units. ( 2 marks)
<Answer>
55. Marginal utilities of goods A and B are 500 utils and 1,000 utils respectively. The price of good B is Rs.200. If the
consumer is in equilibrium, the price of good A is
(a) Rs. 60
(b) Rs. 70
(c) Rs. 80
(d) Rs. 90
(e) Rs.100. ( 2 marks)
<Answer>
56. The production function for XYZ Ltd. is estimated as TP = 80L2 – L3. The maximum possible average product of
labor is
(a) 1,200 units
(b) 1,300 units
(c) 1,400 units
(d) 1,500 units
(e) 1,600 units. ( 1 mark)
<Answer>
57. The production function of Singh and co. is given as TPL = 30L – 1.5L2. The number of labor after which marginal
product becomes negative is
(a) 8 units
(b) 9 units
(c) 10 units
(d) 11 units
(e) 12 units. ( 2 marks)
<Answer>
58. The following are the marginal productivity functions of labor and capital for a firm:
MPK = 0.75 , MPL = 0.75 .
If the wage paid to the laborers is Rs.8 per unit and the cost of capital is Rs.5 per unit, the cost minimizing proportion
of L to K is
(a) L= K
(b) L= K
(c) L = (5 + 8) K
(d) L = (5 – 8) K
(e) L = (8 × 5) K. ( 2 marks)
<Answer>
59. The short run production function of a firm is estimated to be
Q = 36L2 – L3.
If the firm is a rational entity, it would employ labor in the range of
(a) 0 to 12 units
(b) 0 to 18 units
(c) 12 to 18 units
(d) 12 to 24 units
(e) 18 to 24 units. ( 2 marks)
<Answer>
60. Which of the following can be considered as long run cost function(s)?
I. C = 20 + 3Q + 0.25Q2.
II. C = 200Q + 0.5Q2.
III. C = 100 + Q – 2Q2.
IV. C = 10Q + 150Q2.
(a) Only (I) above
(b) Only (III) above
(c) Both (II) and (III) above
(d) Both (II) and (IV) above
(e) Both (I) and (III) above. ( 1 mark)
<Answer>
61. The total cost function of ABC Ltd. is given as TC = 20Q – 0.30Q2 + 0.01Q3. What is the output at which marginal
cost is minimum?
(a) 5 units
(b) 4 units
(c) 6 units
(d) 8 units
(e) 10 units. ( 1 mark)
<Answer>
62. The fixed cost of a firm is Rs. 250 and the variable cost is estimated as
VC = 20Q + Q2. What is the total cost incurred by the firm when output is 10 units?
(a) Rs. 550
(b) Rs. 650
(c) Rs. 450
(d) Rs. 750
(e) Rs. 600. ( 1 mark)
<Answer>
63. The long run total cost function of a firm is TC = Q3 – 80Q2 + 1,900Q.What is the minimum possible long run
average cost?
(a) Rs. 170
(b) Rs. 180
(c) Rs. 190
(d) Rs. 200
(e) Rs. 300. ( 2 marks)
<Answer>
64. The total cost function for Suman Ltd. is given as TC = 200 + 8Q + 2Q2. The firm is a perfectly competitive firm and
is selling the product at Rs.48. If the output produced and sold by the firm is 10 units, the profit earned by Suman
Ltd. is
(a) Zero
(b) Rs. 10
(c) Rs. 20
(d) Rs. 25
(e) Rs. 30. ( 2 marks)
<Answer>
65. For a firm, variable cost at various levels of output are given below:
Quantity (units) Variable cost (Rs.)
1 5
2 5
3 10
4 15
5 20
6 25
What is the total cost incurred to produce 5th unit of output, if the total fixed cost is Rs. 20?
(a) Rs. 10
(b) Rs. 20
(c) Rs. 30
(d) Rs. 40
(e) Rs. 50. ( 1 mark)
<Answer>
66. The marginal revenue of a firm is Rs. 2 and the marginal cost is estimated as MC= 82 – Q. What is the profit
maximizing output?
(a) 250 units
(b) 50 units
(c) 40 units
(d) 80 units
(e) 100 units. ( 1 mark)
<Answer>
67. The average cost function of a firm is given as follows:
.What is total cost for the firm at an output of 10 units?
(a) Rs. 1,800
(b) Rs. 1,900
(c) Rs. 1,700
(d) Rs. 1,600
(e) Rs. 2,000. ( 2 marks)
<Answer>
68. Total cost function of a firm is TC = 500 + 5Q. If price of the product sold by the firm is Rs.7 per unit, the break-
even sales revenue is
(a) Rs. 100
(b) Rs. 250
(c) Rs. 700
(d) Rs.1,250
(e) Rs.1,750. ( 1 mark)
<Answer>
69. If total cost function for a firm is TC = 36Q – 0.60Q2 + 0.020Q3, the minimum possible average cost is
(a) Rs.63.00
(b) Rs.36.50
(c) Rs.31.50
(d) Rs.60.00
(e) Rs.48.50. ( 1 mark)
<Answer>
70. The demand function of a firm is estimated as P = 1,000 – 50Q and the average variable cost function of the firm is
given as AVC = 250 + 25Q. At the equilibrium level of output if the average fixed cost is Rs.60, then what is the
total cost at that level of output (assume short run)?
(a) Rs. 2,175
(b) Rs. 2,165
(c) Rs. 2,155
(d) Rs. 2,075
(e) Rs. 2,265. ( 2 marks)
<Answer>
71. A firm operating in a perfectly competitive market has an average variable cost function AVC = 800 – 80Q + 8Q2.
What is the price below which the firm has to shut-down its operations in the short run?
(a) Rs. 200
(b) Rs. 350
(c) Rs. 400
(d) Rs. 550
(e) Rs. 600. ( 2 marks)
<Answer>
72. The demand function for a firm operating in perfect competition is given as P = 40 – 4Q. What is the average
revenue if it sells 4 units of output?
(a) Rs. 24
(b) Rs. 25
(c) Rs. 26
(d) Rs. 27
(e) Rs. 28. ( 1 mark)
<Answer>
73. The Long-run Average Cost function of a firm operating under perfect competition is estimated to be
LAC = 50 – 625Q + 25Q2.
If the current market price of the good produced by the firm is Rs.20, the long run equilibrium output of the firm is
(a) 10.5 units
(b) 11.5 units
(c) 12.0 units
(d) 12.5 units
(e) 15.0 units. ( 2 marks)
74. There are 200 individual firms in a perfectly competitive industry with identical cost functions. The demand function <Answer>
for the industry is estimated to be Qd = 3,000 – 200P and the total cost function of a firm is TC = 200 – 50Q + 2Q2,
equilibrium price of the product is
(a) Rs. 5
(b) Rs. 3
(c) Rs. 2
(d) Rs. 4
(e) Rs. 6. ( 2 marks)
<Answer>
75. The long run average cost function of a firm under perfect competition is estimated LAC = 100 – 20Q + 2Q2. If this
is a constant cost industry and the industry demand function is P = 100 – 0.1Q, how many firms are there in the
industry when the industry is at equilibrium?
(a) 50
(b) 80
(c) 100
(d) 120
(e) 140. ( 2 marks)
<Answer>
76. A monopolist has a marginal revenue function, MR = 1,200 – 40Q. The marginal cost of the firm is Rs.160. What is
the profit maximizing output of the firm?
(a) 19 units
(b) 22 units
(c) 26 units
(d) 29 units
(e) 34 units. ( 1 mark)
<Answer>
77. Demand and cost functions of a monopolist are
P = 800 – 10Q
TC = 300Q + 2.5Q2.
Profit maximizing price for the monopolist is
(a) Rs.350
(b) Rs.400
(c) Rs.600
(d) Rs.650
(e) Rs.700. ( 2 marks)
<Answer>
78. The following is the sales data of various firms operating in an industry.
Firm Sales (in Rs. crore)
I. A 3,000
II. B 2,200
III. C 1,570
IV. D 4,720
V. E 1,248
VI. F 1,008
VII. G 3,132
VIII. H 1,422
The 4-firm and 6-firm concentration ratios of the industry are respectively
(a) 0.66 and 0.74
(b) 0.71 and 0.88
(c) 0.78 and 0.83
(d) 0.66 and 0.87
(e) 0.59 and 0.74. ( 1 mark)
<Answer>
79. A monopolistically competitive firm has the following short run cost and revenue functions
TC = 5,000 + 30Q – 20Q2 + Q3
TR = 30Q – 2Q2
If the firm is maximizing profits at the current level of output, what would be the total cost of the firm?
(a) Rs.2,944
(b) Rs.3,824
(c) Rs.4,062
(d) Rs.4,208
(e) Rs.5,878. ( 2 marks)
<Answer>
80. Two firms, A Ltd., and B Ltd., are duopolists producing a similar product and facing identical demand functions
PA = 100 – QA
If A Ltd., is enjoying price leadership through low-cost, the amount of profit sacrificed by B Ltd. to avoid a price war
is
(a) Rs.1,025
(b) Rs. 25
(c) Rs.2,400
(d) Rs. 125
(e) Rs.2,275. ( 2 marks)
<Answer>
81. In a country a firm Super Ltd., enjoys monopoly power in producing and supplying a product ‘Ultra’. The fixed cost
of the firm is Rs.200 and its average variable cost is constant at Rs.30 per unit. Super Ltd. sells goods in Northern
region and Southern region. The estimated demand functions for the good in Northern region is given as
PN = 40 – 2.5QN and in Southern region it is estimated as PS = 120 – 10QS.
If price discrimination is not practiced, the output produced by Super Ltd. to maximize sales revenue is
(a) 8 units
(b) 10 units
(c) 12 units
(d) 14 units
(e) 16 units. ( 2 marks)
Suggested Answers
Economics - I (MSF1A3): April 2008
Answer Reason
1. b The tendency of market prices to direct individuals pursuing their own interests into < TOP
productive activities that also promote the economic well being of the society, is referred to >
Invisible hand principle
2. e According to general equilibrium analysis Decision making agents are < TOP
>
• Consumers.
• Producers.
• Resource owners.
3. d While plotting the demand curve the price of the commodity is placed on y-axis. < TOP
>
4. d There will an increase in revenue when for an increase in price when the price elasticity is < TOP
either zero or less than one. >
5. D If the institute believes that raising course fees will enhance revenue, it can happen only if the < TOP
demand for the course is inelastic. This implies that as a result of an increase in price, the >
demand for the course do not fall, which helps in increasing revenue.
6. c If the cross price elasticity of demand is negative it means that the goods are complements, e. < TOP
g. an increase in the price of X will shift the demand curve for Y to the left. >
7. d A movement along the supply curve is caused by change in the price and resultant change in < TOP
the quantity supplied. When price of labor (wages) increase, supply of labor increases. All >
other options lead to a shift in the supply curve.
8. c At equilibrium, Qs = Qd < TOP
>
1000 – 200P = 800P – 2000
3000 = 1000P
P = 3.
When P = 3, Qs = 400
Elasticity of supply =
9. d At satiety point the total utility is maximum. < TOP
>
10. a In case of perfect complements the indifference curve is L – shaped. < TOP
>
11. b A good is considered as a luxury good if it’s income elasticity is greater than one. < TOP
>
12. a The locus of points of tangency between budget line and the indifference curves is called as < TOP
the income consumption curve. >
13. c ‘Diamond – water’ paradox explains that the more of a commodity we have, the marginal < TOP
utility starts diminishing. If the availability of the product is less, marginal utility would be >
high.
14. b Based on the given data the budget constraint can be written as < TOP
>
20 QM + 35 QN = 700
15. a The marginal product of a factor increases first and after reaching a certain level it starts < TOP
falling. So due to this the marginal product curve assume an inverted U- shaped. >
16. c An isoquant (equal product curve) is the locus of all those combinations of two inputs, which < TOP
yields a given level of output. Parallel equal product curves do not represent the same >
output. The point where an iso-cost line is tangential to an equal-product curve (isoquant
curve) is the profit maximizing point.
17. A The law of variable proportions states that “ as we increase the number of units of one input < TOP
and keep the other inputs same, the marginal productivity of the variable input increases >
initially and then decrease.
18. c At a stage where the total product is maximum, the marginal product will be Zero. < TOP
>
19. a Expansion path is the locus of different points where the firm’s expenditure increases without < TOP
any change in the price of inputs. >
20. c It is Marginal Rate of Technical Substitution (MRTS) which is expressed through an < TOP
isoquant. Whereas Marginal Rate of Substitution (MRS) is expressed through an indifference >
curve.
21. e Only isoquant curve is convex to origin. < TOP
>
Supply curve slopes upweel from left to right.
Isocost curve slopes downwards from left to right.
Budget line slopes downwards from left to right.
Total product curve is inverted u shape.
22. b The average product will be greater than marginal product only after the point when both of < TOP
them are equal. Before this point the marginal product will greater than average product. >
23. a If the production function is homogeneous then the expansion path will be a straight line < TOP
through origin. >
24. c The cost function shows that the total cost is depended on the output to be produced. < TOP
>
25. a The time cost when expressed in terms of money is referred as implicit cost. < TOP
>
26. c The marginal cost curve intersects both the average variable cost curve and the short run < TOP
average total cost curve at their lowest points >
27. e (a) is true hence it is not the correct answer < TOP
>
(b) is true hence it is not the correct answer
(c) is true hence it is not the correct answer
(d) is true hence it is not the correct answer
(e) is not true because real economies of scale can be achieved through the reduction
in the quantity of inputs. Hence it is the correct answer.
28. e A technological change involves: < TOP
>
• Innovation of new products.
• Improvement in the existing product.
• Reduction in the cost of production.
29. a If the firm’s total revenue exceeds its economic costs, the residual accruing to the < TOP
entrepreneur is called as economic or pure profit. >
30. e Option (e) is not true. The reason for this is that the marginal cost curve cuts the average cost < TOP
curve and the average variable cost curve at their minimum points and as the marginal cost >
curve is upward rising curve and the average cost curve being flatter than average variable
cost curve. Hence the minimum point of average cost will be to the right of the minimum
point of the average variable cost.
31. c The ‘reserve capacity economies’ are part of Technical economies. < TOP
>
32. e Separate cost can be easily attributed to a product or a process. < TOP
>
33. d In perfect competition the demand curve of a individual is infinitely elastic, that means that < TOP
the individual can sell any amount of output at prevailing price. >
34. d In a perfectly competitive market in the long run no firm earns abnormal profit because of < TOP
existence of free entry and free exit into the industry. So when ever there is some extra profit >
in the industry some new firms will enter into the market and compete away the extra profit.
Thus in the perfect competition the firms will earn only normal profits.
35. c In perfect competition the marginal revenue is equal to price which is constant. Hence the < TOP
slope of marginal revenue curve is zero. >
36. a In perfect competition the supply of an individual firm is equal to zero if the price is below < TOP
average variable cost. >
37. a In perfect competition when a specific sales tax is imposed then the MC curve will shift < TOP
upward to left and the amount produced at the prevailing price will reduce. >
41. d If the MC curve of the monopolist is positively sloped then the increase in price will be < TOP
lesser than the specific tax imposed >
42. b To maximize profit the first order condition requires that the MR should equal to MC. A < TOP
monopolist can maximize profits by equating MR with MC. >
43. a A monopolist is said to be in equilibrium where the elasticity of his average revenue curve is < TOP
greater than one. >
46. b The theoretical highest price that can prevail in the market is when the quantity demanded is < TOP
zero. >
6,00,000 – 20 P = 0
6,00,000 = 20 P
P= = Rs. 30,000.
47. e P1 = 8 Q1 = 40 < TOP
>
P2 = 10 Q2 = 60
∆P = 2 ∆Q = 20
Arc EPd = =
EPd = 1.80
∴ 1800 + 6P = 10,000 – 4P
6P + 4P = 10,000 – 1800
10P = 8200
P = 820
∴ Change in Price = 820 – 700 = Rs.120 (Hence the price will increase by Rs. 120)
51. d The consumer will consume till MU = P < TOP
>
MU = 0.7m
0.7m = 28
m = 40 units.
52. a MRSBA = < TOP
>
54. c A rational consumer would consume upto the point where the Marginal utility = price < TOP
>
Marginal utility is given by Derivative of total utility i.e. X 2.5
Given 2.5X 1.5 =67.5 or x 1.5 = 27 or X = 9 units
55. e ∴ PA = = Rs.100. < TOP
>
0.75K0.75/(L0.25 × 8) = 0.75L0.75/(K0.25 × 5)
5K = 8L
Or, L = 5/8K.
59. e First stage of production function ends when APL is highest and second stage ends when < TOP
>
MPL = 0. APL is highest when APL = MPL.
Q = 36L2 – L3
APL = Q/L = 36L – L2
72L – 3L2 = 0
Or, L = 24.
Thus, the second stage of production function is over the range of labor input 18 < L < 24.
A rational firm would operate only in the second stage of production function. This is
because of increasing APL in the first stage and negative MPL in the third stage.
60. d Since functions (I) and (III) have fixed cost components i.e. 20 and 100, they are relevant in < TOP
the short run only. And function such as C = 200Q + 0.5Q2 and >
C = 10Q + 150Q2 are examples of long run cost function because there is no fixed cost
components exist in these two functions.
61. e TC = 20Q – 0.30 Q2 + 0.01Q3 < TOP
>
MC = = 20 – 0.6 Q + 0.03Q2
MC is minimum when =0
= -0.6 + 0.06 Q = 0
0.06 Q = 0.6
Q = 10.
62. a Total cost = Fixed cost + variable cost < TOP
>
When Q = 10, VC = 20(10) + 102
= 200 + 100 = 300
∴ TC = 250 + 300 = Rs.550
63. e LTC = Q3 – 80Q2 + 1900Q < TOP
>
LAC = = Q2 – 80Q + 1900
LAC will be minimum, where
Or,
or, 2Q – 80 = 0
or, 2Q = 80
or, Q =
When Q = 40, LAC = (40)2 – 80 (40) + 1900
= 1600 – 3200 + 1900
= Rs.300.
64. a The total revenue = Price × quantity. < TOP
>
Then it becomes 48Q.Profits = total revenue – total costs
Profits = 48Q – 200 – 8Q – 2Q2
= 40Q – 2Q2 – 200
Profit at the output of 10 units =
40 (10) – 2 (10)2 – 200 = 400 – 200 – 200 = 400 – 400 = 0.
65. d TC = FC + VC = 20 + 20 = Rs. 40. < TOP
>
72. a In perfect competition the price is equal to average revenue so < TOP
>
AR = 40 – 4 Q
Q=4
AR = 40 – 16 = Rs. 24
73. d The firm operating in a perfectly competitive industry earns only normal profits in the long < TOP
run because of free entry and exit of the firms. The firm operating at its minimum average >
cost can only prevail in the market. Thus, the equilibrium condition in the long run is when
the firm is operating at Min. LAC.
If LAC = 50 - 625Q + 25Q2 LTC = 50Q - 625Q2 + 25Q3
LMC = = 50 – 1250Q + 75Q2
LAC is minimum, when LMC =LAC
Thus, 50 - 1250Q + 75Q2 = 50 - 625Q + 25Q2
Or, 625Q = 50Q2
Or, 50Q = 625
Or, Q = 12.5 units.
74. c For a firm operating in a perfectly competitive industry, the MC curve above the AVC curve < TOP
is the supply curve of the firm. >
MC = ∂TC/∂Q = - 50 + 4Q = P
Or, 4Q = P + 50
Or, Q = 0.25P + 12.5
There are 200 firms, hence Qs = 200x Q = 50P + 2500
Equilibrium price is where, Qs = Qd
3000 – 200P = 50P + 2500
Or, 250P = 500
Or, P = Rs.2.
75. c LAC=100 – 20Q + 2Q2 < TOP
>
P=100 – 0.1Q
In the long run, all firms operate at the lowest of their average cost curves.
So,
Or, – 20 + 4Q = 0
Or, 4Q = 20
Or, Q = 5. (Firm’s output)
At Q = 5,LAC=100 – 20 (5) + 2 (5)2=100 – 100 + 50=50
At equilibrium,
LAC = P
When P = 50, 50 = 100 – 0.1Q
or, –0.1Q = –50
or, Q = 500 (Industry’s output)
∴ No. of firms = = = 100.
76. c A monopolist maximizes its profits when MR = MC. < TOP
>
MR = 1,200 – 40Q
MR = MC
1200 – 40Q = 160
40Q = 1040
Q = 26 units.