4 Marks Question

Question 14 Marks

A consumer's budget is ₹ 40. He is buying Good-1 and Good-2. Price of Good-1 is ₹ 8 per unit, and of Good-2 is ₹ 10 per unit. Draw a budget line on the basis of these figures.

Answer

Let $X_1$ denotes quantity of Good-1 and $X_2$ denotes quantity of Good-2.
Given,
Consumer's budget, i.e ., consumer's income (Y) = ₹ 40
Price of Good-1 (P₁) = ₹ 8 per unit
Price of Good-2 (P₂) = ₹ 10 per unit
$\begin{array}{l}
P_1 X_1+P_2 X_2=Y \\
8 X_1+10 X_2=40
\end{array}$
When $X _2=0$
$\begin{array}{l}
8 X_1=40 \\
\Rightarrow X_1=5
\end{array}$
Thus, when the entire income of the consumer is spent on Good-1, he can buy 5 units of Good-1.
When $X _1=40$
$\Rightarrow X_2=4$
Thus, when the entire income of the consumer is spent on Good-2, he can buy 4 units of Good-2.
Accordingly, the budget line touches 4 units on Y-axis and 5 units on X -axis, as in figure. Since price ratio remains constant, budget line is a straight line.

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Question 24 Marks

The market demand curve for a commodity and the total cost for a monopoly firm producing the commodity is given by the schedules below. Use the information to calculate the following:

Quantity	0	1	2	3	4	5	6	7	8
Price	52	44	37	31	26	22	19	16	13

Quantity	0	1	2	3	4	5	6	7	8
Total Cost	10	60	90	100	102	105	109	115	125

Use the information given to calculate the following:
a. The MR and MC schedules
b. The quantities for which MR and MC are equal
c. The equilibrium quantity of output and the equilibrium price of the commodity
d. The total revenue, total cost and total profit in the equilibrium

Answer

Quantity (units)	Price / AR (Rs)	$\begin{array}{c} T R = P \times Q ( Rs)\end{array}$	MR = TR_n – TR_n-1	TC (Rs)	$\begin{array}{c}M C=T C_n- T_{n-1}(R s)\end{array}$
0	52	0	-	10	10
1	44	44	44	60	50
2	37	74	30	90	40
3	31	93	19	100	10
4	26	104	11	102	2
5	22	110	6	105	3
6	19	114	4	109	4
7	16	112	-2	115	6
8	13	104	-8	125	10

b. MR equals MC at the 6^th unit of output i.e., 4.
c. At equilibrium, MR equals MC, and here MR equals MC at the 6^th unit of output, where MC is rising and greater than MR. Thus, the equilibrium price is Rs 19.
d. TR = Rs 114 TC = Rs 109 Total profit = TR – TC = Rs 114 – 109 = Rs 5, At any other level of output, Profit will be less than ₹5.

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Question 34 Marks

The following table shows the total cost schedule for a competitive firm. It is given that the price of the good is ₹ 10. Calculate the profit at each output level. Find the profit-maximizing level of output.

Output	TC (₹)
0	5
1	15
2	22
3	27
4	31
5	38
6	49
7	63
8	81
9	101
10	123

Answer

Quantity Sold	Price	TC	$T R = P \times Q$	Profit = TR - TC
0	10	5	$10 \times 0=0$	0 - 5 = -5
1	10	15	$10 \times 1=10$	10 - 15 = -5
2	10	22	$10 \times 2=20$	20 - 22 = -2
3	10	27	$10 \times 3=30$	30 - 27 = 3
4	10	31	$10 \times 4=40$	40 - 31 = 9
5	10	38	$10 \times 5=50$	50 - 38 = 12
6	10	49	$10 \times 6=60$	60 - 49 = 11
7	10	63	$10 \times 7=70$	70 - 63 = 7
8	10	81	$10 \times 8=80$	80 - 81 = -1
9	10	101	$10 \times 9=90$	90 - 101 = -11
10	10	123	$10 \times 10=100$	100 - 123 = -23

Total revenue is the total receipts a seller can obtain from selling goods or services to buyers. It can be written as $P \times Q$, which is the price of the goods multiplied by the quantity of the sold goods.
Profit maximizing output is where the difference between TR and TC is the maximum. This exists at 5 units of output, where the firm is earning a profit of Rs 12.

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Question 44 Marks

The following news was printed in the Economic Times: Petrol and diesel prices were cut by ₹ 2 per litre each as international oil prices slumped to a five-year low.
Use a diagram and economic theory to analyse the impact on the demand for cars in India.

Answer

When the prices of petrol and diesel are cut, the demand for cars is expected to rise. Because car and petrol are complementary goods. It implies that demand curve for cars will shift to the right. More cars are demanded at their existing price.

Initially PK cars were purchased. As price of petrol and diesel decreases, PS cars arepurchased even when price of cars is constant. Accordingly, demand curve for cars shifts forward from D to D₁ .

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