Question 1

Microeconomics deals with which of the following types of analysis in economics?

Accepted Answer

Introduction / Context: This question focuses on the basic difference between microeconomics and macroeconomics. Microeconomics looks at individual economic units such as consumers, firms, and specific markets, while macroeconomics studies the economy as a whole. Being able to distinguish between the two helps students classify problems correctly and apply the right tools and models. Given Data / Assumptions: We are asked specifically what microeconomics deals with. The options mention single variables like demand and broader topics such as unemployment and economic growth. We assume standard textbook definitions of microeconomics and macroeconomics. Concept / Approach: Microeconomics studies individual decision making by consumers, firms, and resource owners, and the functioning of individual markets such as the market for a particular product. It deals with demand and supply for individual goods, price determination, production decisions, and market structures. Macroeconomics, in contrast, focuses on aggregate variables such as national income, general price level, total employment, and overall growth. The question looks for the option that correctly captures the micro level viewpoint. Step-by-Step Solution: Step 1: Examine option B, which mentions the decision making of a single economic variable like demand. Step 2: Recognise that demand for an individual product, supply by a single firm, and pricing in one market are typical microeconomic topics. Step 3: Check option A, the circular flow of income, which is usually discussed at the macro level, linking households, firms, government, and foreign sector. Step 4: Check option C, understanding unemployment, and option D, economic growth, both of which are standard macroeconomic issues. Step 5: Conclude that only option B describes microeconomic analysis correctly. Verification / Alternative check: Think of typical chapter titles in a microeconomics textbook: consumer behaviour, theory of demand, production and cost, market structures, and factor pricing. These topics all focus on individual markets and decision units. In contrast, chapter titles in macroeconomics textbooks include national income accounting, money and banking, inflation, unemployment, and economic growth. This comparison confirms that individual demand decisions are microeconomic, and that topics like unemployment and growth belong to macroeconomics. Why Other Options Are Wrong: Option A, the circular flow of income, describes how income moves between sectors in the whole economy and is a macroeconomic concept. Option C, understanding unemployment, is a macro level issue because it concerns the overall labour market and aggregate employment. Option D, economic growth, is also macroeconomic, involving long term expansion in national income and productivity. None of these options describes the study of individual variables and markets, so they are not correct for microeconomics. Common Pitfalls: Students sometimes assume that any topic involving money or markets is microeconomic, and any topic involving government is macroeconomic, which is an oversimplification. The correct way is to ask whether the issue involves aggregates for the entire economy or individual units. Another mistake is to confuse the circular flow of income diagram with micro level income flows, even though it actually represents an entire economy. Keeping this aggregate versus individual distinction in mind avoids confusion. Final Answer: Microeconomics deals with the decision making of a single economic variable like demand and the behaviour of individual economic units.

Question 2

The minimum price at which a seller was willing to sell an old television set was Rs 37,000. The seller quoted Rs 50,000, but finally the TV was sold for Rs 42,000. This transaction generated which amount of producer surplus for the seller?

Accepted Answer

Introduction / Context: This question focuses on the concept of producer surplus, which is a measure of the benefit a seller receives when the selling price exceeds the minimum price at which the seller was willing to supply the good. Producer surplus is widely used in welfare economics to measure how much better off producers are because of market prices. Understanding how to compute it from simple price information is important in microeconomics. Given Data / Assumptions: Minimum acceptable price (seller's reservation price) = Rs 37,000. Quoted price = Rs 50,000, but this is just an asking price, not the actual transaction price. Actual selling price (market transaction price) = Rs 42,000. Producer surplus is calculated as actual price received minus the minimum price the seller was willing to accept. Concept / Approach: Producer surplus is defined as the difference between the amount a producer actually receives for a unit of output and the minimum amount that the producer would have been willing to accept to supply that unit. It does not depend on any higher quoted or advertised price if the transaction occurs at a lower negotiated price. In this case, producer surplus equals selling price minus minimum acceptable price. We also distinguish this from consumer surplus, which is the difference between a buyer's willingness to pay and the actual price paid. Step-by-Step Solution: Step 1: Identify the minimum acceptable price for the seller. Minimum acceptable price = Rs 37,000. Step 2: Identify the actual selling price. Selling price = Rs 42,000. Step 3: Recall the formula for producer surplus. Producer surplus = Actual price received − Minimum acceptable price. Step 4: Substitute the values. Producer surplus = 42,000 − 37,000 = Rs 5,000. Step 5: Match this calculation with the options, making sure to pick the option that explicitly states producer surplus, not consumer surplus. Verification / Alternative check: To verify, we can think in graphical terms: the minimum acceptable price is like a supply curve point at Rs 37,000, while the market price is Rs 42,000. The producer surplus is the vertical distance between these two price levels for one unit. Numerically it is exactly Rs 5,000. The quoted price of Rs 50,000 does not matter because no transaction took place at that price. Only the final transaction price and the reservation price determine the surplus. Why Other Options Are Wrong: Option A (Rs 5,000 worth of consumer surplus) mislabels the type of surplus; the buyer's willingness to pay is not given, so we cannot compute consumer surplus here. Option B (Rs 8,000 worth of consumer surplus) is also incorrect for the same reason and has the wrong amount. Option D (Rs 8,000 worth of producer surplus) would correspond to a sale price of Rs 45,000 if the minimum acceptable were Rs 37,000, which is not the case here. Therefore, the only correct option is C, which correctly states Rs 5,000 worth of producer surplus. Common Pitfalls: Students may mistakenly use the quoted or advertised price instead of the actual transaction price, which leads to wrong surplus values. Another common error is mixing up consumer surplus and producer surplus, perhaps because both concepts involve differences between willingness to pay or accept and the actual price. To avoid this, always ask whose benefit is being measured, the buyer or the seller, and focus on the relevant prices for that side of the market. Final Answer: The sale of the television generated Rs 5000 worth of producer surplus for the seller.

Question 3

In consumer theory, which term is used for a good whose quantity demanded decreases when consumer income rises (holding prices constant)?

Accepted Answer

Introduction / Context: This question examines understanding of how demand changes with income in microeconomics. Goods are commonly classified as normal or inferior based on the relationship between income and quantity demanded. Recognising these categories is crucial for forecasting demand and understanding consumer behaviour when incomes change due to growth, recession, or policy measures. Given Data / Assumptions: We are told that when consumer income rises, the quantity demanded of the good falls. Prices are assumed to be constant while income changes. We must select the correct term used in economics to describe such a good. Concept / Approach: A normal good is one for which demand increases when income rises, so income elasticity of demand is positive. An inferior good is one for which demand decreases when income rises, so income elasticity is negative. Veblen goods are luxury items where higher prices may increase demand due to status effects, but this is a price effect, not an income effect. The term "exclusive good" is not a standard classification in basic consumer theory. The key is to match the described behaviour with the correct income demand relationship. Step-by-Step Solution: Step 1: Note the direction of change: income increases and demand for the good decreases. Step 2: Recall that for a normal good, demand moves in the same direction as income, so this does not match. Step 3: Recall that for an inferior good, demand moves in the opposite direction to income, which exactly matches the description. Step 4: Recognise that Veblen goods are defined by how demand responds to price, not to income, and are not relevant here. Step 5: Understand that "exclusive good" is not an established technical term in this context. Step 6: Conclude that the good described in the question is an inferior good. Verification / Alternative check: A common everyday example of an inferior good is basic coarse grain or cheap instant noodles. When consumers have low incomes, they may buy large quantities of such low quality foods. As their incomes rise, they switch to higher quality foods and reduce consumption of the cheaper items. This real world pattern matches the definition of an inferior good and illustrates the direction of change described in the question. Therefore, the term inferior good is appropriate. Why Other Options Are Wrong: Option A, Veblen good, refers to goods for which demand may increase as price rises because they serve as status symbols, such as certain designer clothing or luxury cars. This is about price, not income. Option B, normal good, is the opposite of what is described because demand for a normal good increases with income. Option C, exclusive good, does not have a standard definition in consumer theory for this type of behaviour. Only option D, inferior good, refers to goods for which demand declines when income rises. Common Pitfalls: A typical mistake is to assume that inferior means low quality in all respects, which may not always be accurate. Inferior in economics is strictly about the direction of the income demand relationship. Another error is confusing the effect of price with the effect of income; Veblen goods deal with price and status, not income. Keeping track of whether a question is about income changes or price changes helps avoid this confusion. Final Answer: A good whose quantity demanded decreases when consumer income rises is called an inferior good.

Question 4

If the price of an article decreases from an initial price of Rs P1 to Rs 75 and, as a result, the quantity demanded increases from 1,000 units to 1,200 units, and the point elasticity of demand (in magnitude) over this change is 3.2, what is the or…

Accepted Answer

Introduction / Context: This question tests the application of the point price elasticity of demand formula to determine an unknown original price. The point elasticity concept links small percentage changes in quantity demanded to small percentage changes in price at a specific point on the demand curve. Here the price elasticity of demand in magnitude is given as 3.2, and we must work backwards to find the initial price before the change. Given Data / Assumptions: Initial price P1 is unknown. New price P2 = Rs 75. Initial quantity Q1 = 1,000 units. New quantity Q2 = 1,200 units. Point price elasticity of demand Ep has magnitude 3.2 (that is, Ep ≈ −3.2 for a downward sloping demand curve). We use the standard point elasticity approximation based on initial price and quantity. Concept / Approach: Using the initial values, the point price elasticity of demand is approximated as: Ep ≈ (ΔQ / ΔP) * (P1 / Q1), where ΔQ = Q2 − Q1 and ΔP = P2 − P1. For a normal downward sloping demand curve, Ep is negative because price and quantity move in opposite directions. The question gives the magnitude 3.2, which we interpret as Ep = −3.2. By substituting known values and solving for P1, we can determine the original price that is consistent with the given elasticity. Step-by-Step Solution: Step 1: Compute the change in quantity demanded. ΔQ = Q2 − Q1 = 1,200 − 1,000 = 200 units. Step 2: Express the change in price in terms of P1. ΔP = P2 − P1 = 75 − P1. Step 3: Write the point elasticity formula. Ep ≈ (ΔQ / ΔP) * (P1 / Q1). Step 4: Substitute Ep = −3.2, ΔQ = 200, Q1 = 1,000. −3.2 = (200 / (75 − P1)) * (P1 / 1,000). Step 5: Simplify the expression. −3.2 = (200P1) / (1,000(75 − P1)) = (P1) / (5(75 − P1)). Step 6: Multiply both sides by 5(75 − P1). −3.2 * 5(75 − P1) = P1. −16(75 − P1) = P1. Step 7: Expand the left side. −1,200 + 16P1 = P1. Step 8: Group like terms. 16P1 − P1 = 1,200. 15P1 = 1,200. Step 9: Divide to find P1. P1 = 1,200 / 15 = Rs 80. Verification / Alternative check: To verify, substitute P1 = 80 into the elasticity formula. Then ΔP = 75 − 80 = −5. We already know ΔQ = 200 and Q1 = 1,000. Point elasticity Ep ≈ (ΔQ / ΔP) * (P1 / Q1) = (200 / −5) * (80 / 1,000) = (−40) * 0.08 = −3.2. This matches the given magnitude of 3.2, confirming that P1 = Rs 80 is correct. Why Other Options Are Wrong: Option A (Rs 85) would produce a different elasticity value when substituted back into the formula and would not yield magnitude 3.2. Option C (Rs 90) and option D (Rs 95) similarly fail to generate the correct elasticity when used as P1. Only Rs 80 produces the elasticity value of −3.2 that the question specifies. Common Pitfalls: Common errors include treating the elasticity as positive and ignoring the negative sign, miscomputing the change in price, or using the wrong base for P and Q in the formula. Algebraic mistakes when solving for P1 can also lead to incorrect answers. Writing each step clearly and checking the final elasticity by substitution can help confirm that the solution is consistent with the data. Final Answer: The original price P1 of the article was Rs 80.

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