NCERT Textbook Questions Solved
Question 1. What would be the shape of the demand curve so that the total revenue curve is
(a) A positively sloped straight line passing through the origin?
(b) A horizontal line?
Ans. (a) If TR is a positively sloped straight line passing through the origin then AR curve i.e. demand curve will be a straight line.
(b) If TR is a horizontal line, then AR curve i.e. demand curve will be downward sloping.
Question 2. From the schedule provided below calculate the total revenue, demand curve and the price elasticity of demand:
Question 3. What is the value of the MR, when the demand curve is elastic?
Ans. MR is positive.The relationship between MR and ED is that each measurement is important in managerial decisions on price and quantity. For example if a managers understands the elasticity of demand for its product, he or she will be able to make in informed decision on how consumers will react to a price increase or decrease. If the manager decides to raise the price of the product and demand for the product is elastic, consumers will likely purchase less of the product.Formula
MR = Marginal Revenue
P = Price of the Good = AR
E = Own Price Elasticity of Demand
MR = P × [(1 + E)/(E)]
- When E is between negative infinity (exclusive) and –1 (exclusive), then demand is elastic, and the formula implies that MR is positive.
- When E = – 1, demand is unitary elastic, and the formula implies that MR is positive.
- When E is between – 1 (exclusive) and 0 (exclusive),demand is inelastic, and marginal revenue is negative.
Question 4. A monopoly firm has a total fixed cost of rs.100 and has the following demand schedule:
Find the short run equilibrium quantity, price and total profit. What would be the equilibrium in the long run? In case the total cost was ` 1000, describe the equilibrium in the short and in the long run.
Note: Not required as no more in course.
Question 5. If the monopolist firm of Exercise 3, was a public sector firm. The government set a rule for its manager to accept the government fixed as given (i.e. to be a price taker and therefore behave as a firm in a perfectly competitive market), and the government decide to set the price so that demand and supply in the market are equal. What would be the equilibrium price, quantity and profit in this case?
Note: Not required. Not in course.
Question 6. Comment on the shape of the MR. curve in case the TR curve is a (i) positively sloped straight line, (ii) horizontal straight line.
Ans. (i) Based on the relationship between MR and TR it can be said that when TR curve is a positively sloped straight line, then MR curve is a horizontal line. MR and demand curve are the same, and the price (AR) remains constant for different output levels. This happens under perfect competition.
(ii) When TR curve is a horizontal straight line, then MR is zero. Therefore, MR curve is also a horizontal straight line and coincides with the output-axis.
Question 7. 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:
(a) The MR. and MC schedules
(b) The quantities for which the 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 equilibrium.
MR = MC at 6th unit.
After this level MC is rising. Therefore it is equilibrium level of quantity.
Equilibrium price is rs.19.
At this level profit is equal to 5.
Question 8. Will the monopolist firms continue to produce in the short run if a loss is incurred at the best short run level of output?
Ans. If the monopolist firm continues to get losses in the short run, then it will stop production in the long run.
Question 9. Explain why the demand curve facing a firm under monopolistic competition is negatively sloped.
Ans. The demand curve for a firm under monopolistic competition is negatively sloped because of product differentiation. The products of the sellers are differentiated but these are close substitutes of each other. Each seller has some degree of monopoly power depending on the degree of differentiation. It gives birth to downward sloping demand curve in the monopolistic competition.
Question 10. What is the reason for the long run equilibrium of a firm in monopolistic competition to be associated with zero profit?
Ans. The difference between the short-run and the long-run in a monopolistically competitive market is that in the long-run new firms can enter the market, which is especially likely if firms are earning positive economic profits in the short-run. New firms will be attracted to these profit opportunities and will choose to enter the market in the long-run. In contrast to a monopolistic market, no barriers to entry exist in a monopolistically competitive market; hence, it is quite easy for new firms to enter the market in the long-run. Due to entry of new firms, supernormal profits disappear and all firms earn only normal profits.
Question 11. List the three different ways in which oligopoly firms may behave.
Ans. Oligopoly firms may behave in the following three ways:
(1) Cartel : In order to avoid undue competition, oligopolistic firms may engage in formal agreements or contracts. This will not only allow them to maximize their total profits together, but also capture a significant market portion.
(2) Informal understanding : Each firm may decide on its own, how much units of output is to be produced for maximizing its individual profit, assuming that other firms would not change their strategies and decisions regarding the units of output to be produced.
(3) Advertisement and differentiated product : It may happen that the firms realize that price competition will leave them nowhere and consequently they emphasize more on advertising their products. It will enable them to capture the minds of consumers and indirectly increase their market portion.
Question 12. If duopoly behavior is one that is described by Cournot, the market demand curve is given by the equation Q = 200 – 4p, and both the firms have zero costs, Find the quantity supplied by each firm in equilibrium and the equilibrium market price.
Ans. Cournot duopoly model has been deleted from the syllabus.
Question 13. What is meant by prices being rigid? How can oligopoly behavior lead to such an outcome?
Ans. Price rigidity implies that the price is unresponsive to the changes in demand. This is because of the fact that even if any firm raises the price of its product with the motive of earning higher profits, the other firm will not do so, and the first firm will lose its customers. On the other hand, if one firm lowers its price in order to earn higher profits by maximising its sales, then in response, the other firm may also reduce the price. Consequently, the increase in total market sales is shared by both the firms. The firm that initiated selling at a lower price may get a lower share of the increase than expected. Therefore, the firms do not change their prices due to the fear of rival’s reaction. Hence, there is no incentive for any firm to change its price. That is why the prices are regarded as rigid prices or sticky prices.
- NCERT Solutions for Class 12 (All Subjects)
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- Non-Competitive Markets Class 12 Notes Economics Part A Chapter 6