Micro Economics Solved Question Paper 2023 [Dibrugaru University B.Com 1st Sem CBCS Pattern]

 Microeconomics Solved Question Paper 2023

Dibrugarh University B. Com 1st Sem CBCS Pattern

1 SEM TDC ME (CBCS) GE 101

COMMERCE (Generic Elective)

Paper: GE – 101 (Microeconomics)

Full Marks: 80

Pass Marks: 32

The figures in the margin indicate full marks for the questions

1. Choose the correct alternatives:    1 x 8 = 8

(a) Supply is _______ concept. (stock/both stock and flow/flow)

Ans: Flow

(b) The total expenditure does not change with change in price, when _______. (Ed < 1/Ed = 1/Ed > 1)

Ans: Ed = 1

(c) The cost of one commodity in terms of the alternative given up is known as _______. (real cost/selling cost/opportunity cost)

Ans: Opportunity Cost

(d) _______ cost increases along with the increase in production. (Average/Variable/Fixed)

Ans: Variable Cost

(e) _______ is the example of fixed cost. (Labour cost/Electricity bill/Salary)

Ans: Salary

(f) For price taking firms, _______. (MR < P/MR = P/MR > P)

Ans: MR = P

(g) Market price is _______ price. (short-run/both short-run and long-run/long-run)

Ans:both short-run and long-run

(h) The firm and the industry are same in case of _______ market. (oligopoly/Monopsony/monopoly)

Ans: Monopoly Market

2. Write short notes on any four (within 150 words each):      4 x 4 = 16

(a) Engel curve.

Ans: Engel Curve

The Engel curve is a graphical representation that shows the relationship between the quantity of a good consumed and the income level of an individual or household, while holding the prices of goods constant. It helps illustrate how changes in income affect the consumption patterns of individuals.

To construct an Engel curve, we plot the quantity of a specific good on the vertical axis and the income level on the horizontal axis. The curve represents different income-consumption combinations for the good being analyzed.

Here are the key features and interpretations of the Engel curve:

1. Positive Slope: The Engel curve typically has a positive slope, indicating a direct relationship between income and the quantity of the good consumed. As income increases, individuals or households tend to consume more of the good.

2. Income Elasticity: The slope of the Engel curve reflects the income elasticity of demand for the particular good. If the curve is steep, it suggests that the good is income-elastic, meaning that the quantity consumed is highly responsive to changes in income. A flatter curve indicates income-inelastic demand, where the quantity consumed is less responsive to changes in income.

3. Different Goods, Different Curves: Each good will have its own Engel curve, reflecting its own income-consumption relationship. Goods can be classified as normal goods or inferior goods based on the shape of their Engel curves.

- Normal Goods: For normal goods, the Engel curve is upward sloping. As income increases, individuals or households consume more of the good, indicating that it is a preferred and higher-quality choice. Examples include luxury items, vacations, and higher-end goods.

- Inferior Goods: For inferior goods, the Engel curve has a negative or downward sloping shape. As income increases, individuals or households consume less of the inferior good and switch to higher-quality alternatives. Examples of inferior goods include low-quality or generic products, lower-priced goods, or second-hand items.

(b) Long-run supply curve under perfect competition.

Ans: Long-run Supply Curve: Long-run is such a period enough to adjust fully the supply of the industry to meet the changes in demand. In the long-run, the firms can enlarge the sizes of the plants and thereby, increase the supply to meet the increased demand for the product. Thus, the shift in demand can be met by greater adjustment in output. In other words, the supply is more dominant force in the price-determination in the long-run. The supply curve is relatively higher elastic. The equilibrium price determined through the interaction of the demand and the long-run supply curve is called ‘normal price’. This is shown in the following figure.

(c) ‘Dead-weight loss’ under monopoly.

Ans: Deadweight loss can be defined as an economic inefficiency that occurs as a result of a policy or an occurrence within a market, that distorts the equilibrium set by the free market. These inefficiencies affect both the demand and supply sides of the market in question. An economic inefficiency refers to a situation where the quantity of goods or services being supplied and the price that it is being exchanged for is not equal to the equilibrium set by the supply and demand components, of that market.

A monopoly can generate a deadweight loss, which represents a reduction in overall economic efficiency. Deadweight loss occurs when there is a loss of consumer and producer surplus in the market due to the monopolistic firm's ability to restrict output and charge higher prices. This loss represents a net reduction in societal welfare.

(d) Business cartel under oligopoly.

Ans: In a cartel type of collusive oligopoly, firms jointly fix a price and output policy through agreements. But under price leadership one firm sets the price and others follow it. The one which sets the price is a price leader and the others who follow it are its followers.

The follower firms adopt the price of the leader, even though they have to depart from their profit-maximising position, as they think that it is to their advantage not to compete with their leader and between themselves.

Originally, the term ‘cartel’ was used for the agreement in which there existed a common sales agency which alone undertook the selling operations of all the firms that were party to the agree­ment. But now-a-days all types of formal or informal and tacit agreements reached among the oligopolistic firms of an industry are known as cartels.

(e) Antitrust laws.

Ans: The antitrust meaning comes from the combination of two words: anti and trust. The word anti means against or opposed to.Antitrust laws are laws that protect consumers from businesses that are trying to take advantage of them and allow all similar businesses a fair chance to represent themselves and grow.Antitrust laws, are also known as competition laws.

The main purpose of antitrust law is to promote competition by preventing any single business entity from developing a monopoly or utilizing unfair business practices to maintain too much control over one market space. Antitrust law does this by prohibiting certain business practices, such as price-fixing, bid-rigging, and market allocation.

3. (a) What are indifference curve and budget line? Discuss the concept of consumer’s equilibrium with the help of indifference curve and budget line.       4 + 10 = 14

Ans: Meaning of Indifference Curve: An indifference curve is a curve which shows different combinations of two commodities yielding equal satisfaction to the consumer. It means all the points located on an indifference curve represent such combinations of two commodities as yield equal satisfaction to the consumer. Since the combination represented by each point on the indifference curve yields equal satisfaction, a consumer becomes indifferent about their choice. In other words, he gives equal importance to all the combinations on a given indifference curve.

According to H.L. Varian: ‘An indifference curve represents all combinations of two commodities that provided the same level of satisfaction to a person. That person is therefore indifference among the combinations represented by the points on the curve”.

Budget Line: The budget line is that line which shows all the different combinations of the two commodities that a consumer can purchase given his money income and the price of two commodities.

Conditions of Consumer’s Equilibrium with the help of Indifference curve and Budget line

There are two conditions of consumer’s equilibrium with the help of indifference curve analysis:

(1) Budget Line or Price Line should be Tangent to Indifference Curve.

(a) Indifference Curve: An indifference curve is a curve which shows different combination of two commodities yielding equal satisfaction to the consumer. Supposing a consumer consumes two goods, namely apples and oranges. The following table and diagram indicates different combination of apples and oranges yielding equal satisfaction.

Combination of Apples & Oranges	Apples	Oranges
A	1	10
B	2	7
C	3	5
D	4	4

 

(b) Budget Line: The budget line is that line which shows all the different combinations of the two commodities that a consumer can purchase given his money income and the price of two commodities.

Explanation: Supposing a consumer has an income of Rs. 4 to be spent on apples and oranges. Price of oranges is Rs. 0.50 per orange and that of apple Rs. 1 per apple. With his given income and given prices of apples and oranges, the different combinations that a consumer can get of these two goods are shown in the following table and diagram:

Income	Apples = Rs. 1.00	Oranges = Rs. 0.50
Four	0	8
Four	1	6
Four	2	4
Four	3	2
Four	4	0

(2) Indifference curve must be convex to the origin.

Consumer’s Equilibrium: Consumer’s equilibrium can be explained with the help of following diagram:

In this figure AB is the budget or price line. IC, IC, IC are the indifference curves. A consumer can buy any of the combinations, A, B, C, D and E of apples and oranges shown on the price line AB. Out of A, B, C, D and E combinations, the consumer will be in equilibrium at combination ‘D’ (4 oranges and 2 apples) because at this point price line is tangent to the indifference curve and indifference curve is convex to the point of the origin.

 

Or

(b) Discuss the concepts of Total Revenue (TR), Average Revenue (AR) and Marginal Revenue (MR) with appropriate diagrams. Explain why the average and marginal revenue curves coincide under perfect competition and sloping left to right under monopoly.                6 + 8 = 14

4. (a) Discuss the concepts of returns to scale with the help of iso-quant and iso-cost lines. What are ‘ridge lines’?12 + 2 = 14

Ans:

Or

(b) Explain ‘economic region of production’ concept with the help of total, average and marginal production curves (TP, AP and MP).        14

Ans: Ridge Lines - The Economic Region of Production:

An isoquant represents combinations of two inputs that yield the same level of output. However, not all points of an isoquant are relevant for production. Such points may be called infeasible points. One should consider only feasible portions of an isoquant. This is because of the fact that no rational producer will produce where marginal product of an input is either zero or negative.

If the isoquant is backward bending and upward sloping, marginal product of any input will be negative, and, hence, this portion of the isoquant may be considered as economically non-sensible region of production. Only the negatively sloped segment of the isoquant is relevant for production or economically feasible.

This is shown in Fig. 3.5 where we have drawn three isoquants showing different levels of output for different labour-capital combinations. This diagram separates economic region of production from uneconomic region of production. Region in which marginal products of all inputs are positive constitutes economic region of production.

Or the region in which input substitution takes place may be called economic region of production. In an uneconomic region, as marginal product of an input becomes either zero or negative, the question of input substitution does not arise. Production in such region is, for obvious reasons, unprofitable or infeasible.

At point A on IQ₁, the firm employs certain units of labour and capital. Since the tangent to IQ₁ at point A is parallel to the vertical axis, marginal product of capital (MP_K) is zero. If more capital is used, marginal product of capital should be negative. In other words, beyond point A, MP_K is negative. At point B on IQ₁, MP_L is zero and beyond point B on IQ₁, MP_L is negative.

Thus, points between A and B represent positive marginal productivities of both labour and capital. Here substitution between two inputs takes place. Similarly, points A₁and A₂ on IQ₂ and IQ₃describe zero MP_L while points beyond A₁ and A₂ describe negative MP_K. Points B₁and B₂ on IQ₂and IQ₃ represents zero MP_K and beyond B₁and B₂ describes negative MP_L.

A rational producer will produce in that region where marginal productivities of inputs are positive. By joining points, A, A₁ and A₂ (i.e., points of zero marginal products) we get OR line and by joining points B, B₁ and B₂ (points of zero marginal products) we get OL line. These lines are called ridge lines. They give the boundaries of the economic region of production where input substitution takes place.

Any point on the Isoquants outside the upper ridge line OR and the lower ridge line OL constitute uneconomic region of production. Production must take place inside the ridge lines. Note that the ridge lines separate the relevant (i.e., negatively sloped) from the irrelevant portions (i.e., positively or zero sloped) of the Isoquants.

5. (a) Discuss the Walrasian and Marshallian stability analysis.       7 + 7 = 14

Ans: Walrasian and Marshallian stability analysis approach

Walrasian Approach:

The Walrasian approach is based on the behavioural assumption that in response to excess demand for output sellers will raise the price of the commodity under consideration. And in the opposite case sellers will lower the price of the commodity. Let the market demand function be p = D(q) and the market supply function be p = S(q).

The market equilibrium is stable in the Walrasian sense if price rise leads to a fall in excess demand for output. We can analyse Walrasian stability under various assumptions about market supply curve. The market demand curve is normally assumed to be downward sloping.

Case I: Normal Situation: Let the market demand curve be downward sloping as usual and the market supply curve be upward sloping. In Fig. 2.6 the current price is P₁. At this price there is excess demand of AB. This Equilibrium excess demand is a reflection of shortage of output. This will induce the sellers to raise the price of the product. Price will continue to rise until excess demand is eliminated and the market is at point E. So the market equilibrium is stable.

Case II: Decreasing Cost Industry: In a decreasing cost competitive industry the supply curve SS is downward sloping. In this case we may face two different situations:

(a) The market supply curve is steeper than the market demand curve.

(b) The market demand curve is steeper than the market supply curve.

Suppose the current market price is OP₁ in Fig. 2.7. At this price AB is the excess demand for output. As before excess demand will push the price up. Price will continue to rise until we reach market equilibrium at E. So equilibrium is stable in the Walrasian sense.

In Fig. 2.8 the market demand curve is steeper than the market supply curve. At current price OP₁ there is an excess supply of AB. Excess supply is a reflection of overproduction. This will induce the producers to decrease the market price. As price falls the market deviates away from equilibrium. So the equilibrium is unstable in the Walrasian sense.

Marshallian Approach:

Unlike the Walrasian stability analysis which focuses on price adjustment to bring about equilibrium, the Marshallian approach stresses quantity adjustment to ensure equilibrium. The Marshallian approach is based on the behavioural assumption that sellers will increase the quantity of output in response to excess demand price and they will decrease the quantity in response to excess supply price.

The demand price refers to the maximum amount that the buyers are willing to pay for a given output and the supply price shows the minimum unit price that must be paid by consumers for a given quantity of output. So equilibrium is stable in the Marshallian sense if the increase in output in response to excess demand price decreases the magnitude of excess demand.

Case I: Stable Equilibrium:

Here we assume that the market demand curve is downward sloping and the market supply curve is upward sloping. Let us suppose the quantity of output offered for sale in the market is 0Q₁. At this quantity demand price is P_d and supply price is P_s. Since P_d is greater than P_s there is excess demand price (when the actual quantity is 0Q₁).

In response to excess demand price sellers will increase the quantity of output. As output rises demand price falls from P_d to P₀ along the AE segment of the demand curve and the supply price rises from P_s to P₀ along the BE segment of the supply curve. This is how the market equilibrium is restored at E. In this case equilibrium is stable in the Marshallian sense.

Case II: Both Stable and Unstable Equilibrium: Equilibria are both stable and unstable in the Marshallian sense in a decreasing cost industry. Here we consider two cases:

(a) The market demand curve is steeper than the market supply curve as shown in Fig. 2.10. Let us suppose the quantity of output offered for sale in the market is 0Q₁ and at this quantity P_d > P_s. This implies that producers will respond to excess demand price by increasing their output. As the quantity supplied rises the market converges towards equilibrium at E. Thus equilibrium is stable in the Marshallian sense.

(b) The market supply curve is steeper than the market demand curve as shown in Fig 2.11. Let us suppose the quantity of output offered for sale is 0Q₁ and at this output P_d > P_s. Now in response to excess demand price sellers will increase their output above 0Q₁. As output rises the market deviates further and further away from equilibrium. Thus equilibrium is unstable in the Marshallian sense.

Or

(b) Compare and contrast perfect competition and monopoly market equilibrium. Why does the perfectly competitive firm have more equilibrium output but lesser price than monopoly market? Discuss.        10 + 4 = 14

Ans: Difference between perfect competition and monopoly market:

Perfect Competition Meaning:

Perfect Competition is a form of market in which there is a large number of buyers and sellers. They sell homogeneous goods. Firm produces only a small portion of the total output produced by the whole industry.

An industry is a group of different firms producing the same product. A single firm cannot affect the price by its individual efforts. Price is fixed by the industry. Firm is only a price taker and not a price-maker. It can sell the desired output only at the price-fixed by the industry. In such a market, price of the commodity is the same at every place.

There is also free entry and exit of the firms. Both the buyers and sellers have perfect information about the prevailing price in the market. Thus perfect competition is the name given to a market in which buyers and sellers compete with one another in the purchase and sale of a commodity.

Monopoly Market Meaning

Monopoly market is one in which there is only one seller of the product having no close substitutes to the commodities sold by the seller. The seller has full control over the supply of that commodity and also he is the price maker. There being only one firm, producing that product, there is no difference between the firm and industry in case of monopoly. Monopoly is a price maker not the price taker as in the case of perfect competition. Its demand curve slopes downward to the right.

In the words of koutsoyiannis,

“Monopoly is a market situation in which there is a single seller, there are no close substitutes for commodity it produced there are barriers to entry of other firms”.

Difference between Perfect Competition and Monopoly

Basis	Perfect competition	Monopoly
1. Number of Buyers and Sellers	There is large number of buyers and sellers.	There exists only one seller.
2. Competition	Presence of perfect competition in such markets.	In monopoly, there is absence of competition.
3. Product	Products are homogenous.	Monopoly may sell homogenous and differentiated products.
4. Entry or exit of firm	Freedom of entry or exit in perfect competition.	Entry of new firms in the market is restricted.
5. Elasticity	Demand is perfectly elastic.	Demand is inelastic
6. Decision making	Independent decision- making by firms.	Total freedom in decision making
7. Price maker or taker	Firms are Price taker in perfectly competitive market.	Monopolist is price maker.
8. Selling cost	There is no scope of selling costs.	No need to incur selling costs.
9. Equilibrium	Equilibrium with rising marginal cost.	Equilibrium with rising, falling and constant marginal cost.
10. Practicability	It is an imaginary market. It is not seen in real life.	It is rarely seen.

 

6. (a) Explain horizontal and vertical integration of firms under monopoly.     14

Or

(b) Discuss Cournot’s duopoly model of oligopoly. Analyze the principles of pricing policy of public utilities according to Dalton.      10 + 4 = 14

Ans: Cournot’s duopoly model

Cournot duopoly, also called Cournot competition, is a model of imperfect competition in which two firms with identical cost functions compete with homogeneous products in a static setting. It was developed by Antoine A. Cournot in his “Researches into the Mathematical principles of the Theory of Wealth”, 1838. Cournot’s duopoly represented the creation of the study of oligopolies, more particularly duopolies, and expanded the analysis of market structures which, until then, had concentrated on the extremes: perfect competition and monopolies.

Cournot really invented the concept of game theory almost 100 years before John Nash, when he looked at the case of how businesses might behave in a duopoly. There are two firms operating in a limited market. Market production is: P(Q)=a-bQ, where Q=q1+q2 for two firms. Both companies will receive profits derived from a simultaneous decision made by both on how much to produce, and also based on their cost functions: TCi=C-qi. 

So, algebraically:

In order to maximise, the first order condition will be:

And, if qi=qj, then both equal:

Therefore, the reaction functions (blue lines), where the key variable is the quantity set by the other firm, will take the following form:

 What all this explains is a very basic principle. Both companies are vying for maximum benefits. These benefits are derived from both maximum sales volume (a larger share of the market) and higher prices (higher profitability). The problem stems from the fact that increasing profitability through higher prices can damage revenue by losing market share. What Cournot’s approach does is maximise both market share and profitability by defining optimum prices. This price will be the same for both companies, as otherwise the one with the lower price will obtain full market share, which makes this a Nash equilibrium, also known for this model the Cournot-Nash equilibrium.

If we consider isoprofit curves (those which show the combinations of quantities that will render the same profit to the firm, red curves) we can see that the equilibrium of the game is not Pareto efficient, since isoprofit curves are not tangent. The outcome is below that of perfect competition and therefore is not socially optimal, but it is better than the monopoly outcome.

Extending the model to more than two firms, we can observe that the equilibrium of the game gets closer to the perfect competition outcome as the number of firms increases, decreasing market concentration.

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