ECODSM-251/252: Economics FYUG Even Semester Exam, 2025
UNIT-I
1. Answer any two of the following questions: 2 x 2 = 4
(a) Write two important features of perfect competition.
- Large number of buyers and sellers.
- Homogeneous products (identical goods).
(b) What are the two conditions required for attaining equilibrium by a firm?
- Marginal Revenue must equal Marginal Cost (MR = MC).
- Marginal Cost curve must cut the Marginal Revenue curve from below at the point of equilibrium.
(c) Define short-run and long-run.
- Short-run: A period where at least one factor of production is fixed (usually capital).
- Long-run: A period where all factors of production are variable and the firm can change its scale of operation.
2. (a) What is meant by equilibrium of the firm? Using total revenue and total cost approach, explain how firm maximize profits to attain equilibrium. 2 + 8 = 10
Equilibrium of a firm refers to a state of stability where the firm has no incentive to expand or contract its level of output because it is earning maximum profit or incurring minimum loss.
Total Revenue (TR) and Total Cost (TC) Approach:
- Profit is the difference between TR and TC (Profit = TR - TC).
- The firm is in equilibrium at the output level where the vertical distance between the TR curve and TC curve is the greatest, provided TR > TC.
- Initially, at low levels of output, TC may be higher than TR (losses).
- As output increases, TR rises and eventually exceeds TC.
- The profit-maximizing point is found where the slopes of TR and TC are equal (which is also where MR = MC).
2. (b) Explain how a firm attains equilibrium under perfect competition during short-run. 10
In the short-run, a perfectly competitive firm is a price taker. It attains equilibrium where P = MR = MC.
- Supernormal Profit: Occurs if at the equilibrium output, Average Revenue (AR) > Average Cost (AC).
- Normal Profit: Occurs if AR = AC at the equilibrium output.
- Loss: Occurs if AR < AC, but the firm may continue if AR covers at least the Average Variable Cost (AVC).
UNIT-II
3. Answer any two of the following questions: 2 x 2 = 4
(a) Point out two important features of monopoly.
- Single seller and large number of buyers.
- No close substitutes for the product.
(b) What is price discrimination?
The practice of charging different prices to different consumers for the same product, where the price difference is not based on cost differences.
4. (b) Analyze the long-run equilibrium of a firm working under monopolistic competition. 10
In the long-run, the entry and exit of firms ensure that all firms earn only normal profits.
- If firms earn supernormal profits, new firms enter, shifting the demand curve left.
- Equilibrium occurs where the demand curve (AR) is tangent to the Long-run Average Cost (LAC) curve.
- At this point, MR = LMC and AR = LAC.
UNIT-III
5. (c) Define economic rent and quasi-rent. 2
- Economic Rent: The payment to a factor of production over and above its transfer earnings (minimum payment to keep it in its current use).
- Quasi-rent: A term introduced by Marshall referring to the short-run return to man-made factors of production (like machinery) whose supply is fixed in the short run.
6. (a) Critically examine the Ricardian theory of rent. 10
Ricardo defined rent as that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.
- Assumptions: Land is limited, fertility varies, and law of diminishing returns applies.
- Criticism: Fertility is not indestructible (it can be exhausted); the order of cultivation (best land first) is not always historically accurate; rent also enters into price according to modern economists.
UNIT-IV
7. (a) Define gross investment and net investment. 2
- Gross Investment: The total amount spent on new capital assets and the replacement of worn-out capital (depreciation).
- Net Investment: Gross investment minus depreciation; it represents the actual addition to the capital stock.
8. (a) Critically discuss Keynes' liquidity preference theory of interest. 10
Interest is a purely monetary phenomenon—the reward for parting with liquidity for a specified period.
- Motives for holding money: Transactionary, Precautionary, and Speculative.
- Equilibrium: Determined by the intersection of money supply and liquidity preference (money demand).
- Criticism: It is indeterminate as it doesn't consider the level of income; it ignores real factors like productivity of capital.
UNIT-V
10. (a) What do you mean by Pareto optimality? Explain the conditions of Pareto optimality. 2 + 8 = 10
Pareto optimality is a state of allocation where it is impossible to make any one individual better off without making at least one individual worse off.
Conditions:
- Efficiency in Exchange: Marginal Rate of Substitution (MRS) between two goods must be equal for all consumers.
- Efficiency in Production: Marginal Rate of Technical Substitution (MRTS) between two factors must be equal for all producers.
- Efficiency in Product Mix: Marginal Rate of Transformation (MRT) in production must equal the MRS in consumption.