4 Marks Question

Question 14 Marks

A consumer consumes only two goods A and B and is in equilibrium. Show that when price of good B falls, demand for B rises. Answer this question with the help of utility analysis.

Answer

Let other things being constant, the consumer will be in equilibrium when $\frac{M U_A}{P_A}=\frac{M U_B}{P_B}$ Now, suppose price of good B, i.e. $P _{ B }$ falls. The situation changes. The consumer is no longer on equality with respective prices of the two goods $P _{ A }$ and $P _{ B }$. Other things remai in equilibrium, the above equality turns into an inequality: $\frac{M U_A}{P_A}>\frac{M U_B}{P_B}$
It means that per rupee MU from consumption of B is greater than the consumption of A . This induce the consumer to buy more of $B$ and less of A . The consumer transfers expenditure from A to B .

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Question 24 Marks

From the following table, find out the level of the output at which the producer will be in equilibrium. Give reasons for your answer.

Output (Units)	Marginal Revenue (Rs.)	Marginal Revenue (Rs.)
1	8	10
2	8	8
3	8	7
4	8	8
5	8	9

Answer

Producer's Equilibrium: Equilibrium refers to a state of rest when no change is required. A firm (producer) is said to be in equilibrium when it has no inclination to expand or to contract its output. This state either reflects maximum profits or minimum losses.
A producer strikes his equilibrium when two conditions are satisfied:
i. MR = MC, and
ii. MC is greater than MR after the MC = MR output level.
MR = MC in two situations:
i. when 2 units of output are produced, and
ii. when 4 units of output are produced. However, while in situation 1 (i.e. when output = 2 units) MC is falling, while in situation 2 (when output = 4 units) MC is rising. We know that a producer will strike his equilibrium only when MC is rising. Implying that the equilibrium will be struck when 4 units of output are produced, not then 2 units of output are produced.

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Question 34 Marks

As a producer, how would you adjust your level of output when MR and MC are not equal? Assume that, the price of your product is constant for you, and the law of variable proportions is operative.

Answer

Constant price means AR is constant. If AR is constant, AR = MR. Both AR and MR are, therefore, indicated by a horizontal straight line, parallel to X-axis. When the law of variable proportions is operative, the MC curve tends to be U-shaped. MC tends to decline corresponding to increasing returns, and it tends to rise corresponding to diminishing returns.
As a producer, I will strike my equilibrium at a point when:
(i) MR = MC, and (ii) MC is rising. I may face two situations:
(i) MR > MC, and (ii) MR < MC.
For me,MR is constant in both situations so I will have to adjust my output. So the equality between MR and MC will be achieved only through changes in MC. In situation 1, when MR > MC:
I would like to increase the level of output. This would cause an increase in MC. The process of increasing output is to be continued till MR = MC. In situation 2, when MR < MC:
I would like to decrease the level of output. This would cause a decrease in MC. The process of decreasing output is to be continued till MR = MC.

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Question 44 Marks

Distinguish between Individual's Demand and Market Demand. Name the factors affecting demand for a goods by an individual.

Answer

Individual Demand: It refers to the quantities of a particular commodity that a consumer is willing to purchase at different possible prices.
Market Demand: It refers to the aggregate (total) demand for all the consumers in themarket at different prices.
The factors affecting demand for a commodity are as follows:
i. Price of a given commodity,
ii. Price of other goods,
iii. Income of the consumer,
iv. Consumer's tastes and preferences,
v. Expectation of change in the price in future.

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