FYUG Odd Semester Exam, 2023
ECONOMICS (ECODSC-101T)

Subject: Economics
Paper Name: Introductory Microeconomics
Paper Code: ECODSC-101T
Semester: 1st Semester
Year: 2023 (Held in 2024)
Full Marks: 70 (Pass Marks: 28)
Time: 3 Hours

SECTION-A

Answer ten questions, selecting two from each Unit ($2 \times 10 = 20$ Marks)

UNIT-I

2 Marks

1. Point out any two importances of studying economics.

  • Decision Making: It helps individuals and societies make rational choices in the face of resource scarcity.
  • Policy Formulation: It assists governments in designing effective policies to address issues like inflation, unemployment, and growth.
2 Marks

2. Mention any two points of differences between microeconomics and macroeconomics.

Feature Microeconomics Macroeconomics
Scope Studies individual units (households, firms). Studies the economy as a whole (GDP, inflation).
Objective Aims for price determination and resource allocation. Aims for full employment and price stability.
2 Marks

3. Define production possibility curve.

The Production Possibility Curve (PPC) is a graphical representation showing all possible combinations of two goods that can be produced using given resources and technology efficiently.

UNIT-II

2 Marks

4. Point out any two exceptions to the law of demand.

  • Giffen Goods: Highly inferior goods where demand increases as price rises.
  • Veblen Goods (Conspicuous Consumption): Luxury items like diamonds where higher prices attract more buyers due to status.
2 Marks

5. Draw (a) a perfectly elastic demand curve and (b) a perfectly inelastic demand curve.

(a) Perfectly Elastic: Horizontal line parallel to the X-axis.

(b) Perfectly Inelastic: Vertical line parallel to the Y-axis.

2 Marks

6. Mention any two factors responsible for shifting of a supply curve.

  • Price of Inputs: An increase in the cost of raw materials shifts the supply curve to the left.
  • Technological Advancement: Improvements in technology reduce production costs and shift the supply curve to the right.

UNIT-III

2 Marks

7. State the law of diminishing marginal utility.

The Law of Diminishing Marginal Utility states that as a consumer consumes more units of a specific commodity, the additional satisfaction (utility) derived from each successive unit decreases.
2 Marks

8. How is a budget line different from budget set?

  • Budget Set: Includes all combinations of two goods that a consumer can afford given their income (Px.X + Py.Y ≤ M).
  • Budget Line: A graphical representation of all combinations where the consumer spends their entire income (Px.X + Py.Y = M).
2 Marks

9. Mention any two limitations of cardinal utility analysis.

  • Measurement Difficulty: Utility is a subjective feeling and cannot be measured accurately in numerical units (utils).
  • Constant Marginal Utility of Money: It assumes the utility of money remains constant, which is unrealistic as wealth changes.

UNIT-IV

2 Marks

10. Distinguish between fixed cost and variable cost.

  • Fixed Cost: Costs that do not change with the level of output (e.g., rent, salaries of permanent staff).
  • Variable Cost: Costs that vary directly with the level of output (e.g., raw materials, fuel).
2 Marks

11. Define isocost line with the help of a diagram.

An Isocost Line shows all combinations of labor and capital that a firm can purchase with a given total outlay.
2 Marks

12. Define average revenue and marginal revenue.

  • Average Revenue (AR): Revenue earned per unit of output sold (AR = Total Revenue / Quantity).
  • Marginal Revenue (MR): The change in total revenue resulting from selling one additional unit of output (MR = ΔTR / ΔQ).

UNIT-V

2 Marks

13. Mention any two features of perfect competition.

  • Large number of buyers and sellers: No single entity can influence the market price.
  • Homogeneous Product: Products sold by all firms are identical in quality and appearance.
2 Marks

14. What is social cost of monopoly?

The social cost refers to the deadweight loss caused by a monopoly because it produces less output and charges a higher price than what is socially optimal (perfect competition), leading to a loss of consumer and producer surplus.

2 Marks

15. State the reason why under perfect competition-price = AR = MR.

In perfect competition, a firm is a price taker. Since the price remains constant for every unit sold, the revenue per unit (AR) and the addition to total revenue from an extra unit (MR) are both equal to the market price.

SECTION-B

Answer five questions, selecting one from each Unit ($10 \times 5 = 50$ Marks)

UNIT-I

5+5 = 10 Marks

16. Discuss the subject-matter of economics. Put light on the relationship between scarcity and the problem of choice.

Subject-Matter of Economics:
Economics is the study of how individuals and society choose to employ scarce resources that could have alternative uses to produce various commodities and distribute them for consumption. It covers:

  • Consumption: Study of utility and demand.
  • Production: Study of factors of production and costs.
  • Exchange: Price determination in different markets.
  • Distribution: How national income is shared among land (rent), labor (wages), capital (interest), and entrepreneur (profit).

Relationship between Scarcity and Choice:
Scarcity is the root of all economic problems. It exists because human wants are unlimited while resources are finite. This leads to the Problem of Choice:

  • Since we cannot satisfy all wants, we must choose which ones to satisfy now.
  • Every choice involves an Opportunity Cost (the value of the next best alternative foregone).
  • Therefore, scarcity necessitates choice, and choice leads to the fundamental economic questions of "what," "how," and "for whom" to produce.
5+5 = 10 Marks

17. Explain the central problem of an economy. How are these problems solved by a market economy?

Central Problems:

  1. What to Produce? Deciding the types and quantities of goods (consumer vs. capital goods).
  2. How to Produce? Choosing between labor-intensive or capital-intensive techniques.
  3. For Whom to Produce? Determining the distribution of goods among the population based on purchasing power.

Solution in a Market Economy:
In a market economy (capitalism), these problems are solved via the Price Mechanism:

  • What: Producers produce goods that consumers demand (where profits are highest).
  • How: Producers use the least-cost combination of inputs to maximize profit.
  • For Whom: Goods go to those who have the income and are willing to pay the market price.

UNIT-II

5+5 = 10 Marks

18. Distinguish between movement along a demand curve and shift in demand curve. Make a note on the determination of market equilibrium.

Movement vs. Shift:

Basis Movement Along (Change in Q.D.) Shift in Demand (Change in Demand)
Cause Change in the price of the commodity itself. Change in other factors (income, tastes, etc.).
Effect Expansion or Contraction of demand. Increase or Decrease in demand.
Graph Stays on the same curve. Entire curve moves left or right.

Market Equilibrium Determination:
Market equilibrium is achieved at the price where Quantity Demanded (QD) equals Quantity Supplied (QS).

  • If P > Equilibrium Price: Excess supply leads to competition among sellers, driving the price down.
  • If P < Equilibrium Price: Excess demand leads to competition among buyers, driving the price up.

UNIT-III

4+6 = 10 Marks

20. Why can two indifference curves not intersect each other? In this context discuss consumer's equilibrium with the help of indifference curve and a budget line.

Non-Intersection of ICs:
Indifference curves represent different levels of satisfaction. If two ICs intersected, the point of intersection would represent two different levels of utility for the same combination of goods, which is logically inconsistent (violates transitivity).

Consumer's Equilibrium:
A consumer is in equilibrium when they maximize utility given their budget. Two conditions must be met:

  1. MRSxy = Px / Py: The slope of the IC (MRS) must equal the slope of the budget line (Price ratio).
  2. Convexity: The IC must be convex to the origin at the point of tangency.

UNIT-IV

6+4 = 10 Marks

22. State and explain the law of variable proportion. In this context point out the differences between returns to a factor and returns to scale.

Law of Variable Proportion (Short Run):
As more units of a variable factor (labor) are added to a fixed factor (land), the marginal product (MP) initially increases, then decreases, and eventually becomes negative. It has three stages:

  1. Stage I: Increasing Returns (TP increases at increasing rate).
  2. Stage II: Diminishing Returns (TP increases at diminishing rate; MP is falling but positive).
  3. Stage III: Negative Returns (TP falls; MP is negative).

Returns to Factor vs. Returns to Scale:

  • Returns to Factor: Short-run concept where one factor is variable and others are fixed.
  • Returns to Scale: Long-run concept where all factors are varied in the same proportion.

UNIT-V

6+4 = 10 Marks

24. Discuss the short-run equilibrium of a firm under perfect competition. Show with the help of diagram the possibility of earning supernormal profit, normal profit and incurring loss...

Conditions for Equilibrium:

  1. MR = MC
  2. MC must cut MR from below.

Three Possibilities:

  • Supernormal Profit: Occurs when AR > AC at the equilibrium point.
  • Normal Profit: Occurs when AR = AC (Break-even point).
  • Loss: Occurs when AR < AC. The firm continues if AR ≥ AVC (Shutdown point).

Exam Focus Enhancements

Exam Tips

  • Diagrams are Key: In Microeconomics, always draw a diagram even if not explicitly asked for 5-10 mark questions.
  • Labeling: Ensure all axes (Price/Quantity) and curves (AR/MR/MC) are clearly labeled.

Important Formulas List

  • Elasticity of Demand (Ed): (-) % Change in Q / % Change in P
  • Equilibrium Condition: MR = MC
  • Average Cost (AC): AFC + AVC

Common Mistakes

  • Confusing a "Movement" (Price change) with a "Shift" (Income/Taste change).
  • Drawing the Marginal Cost (MC) curve without cutting the Average Cost (AC) at its minimum point.

Answer Presentation Strategy

For 10-mark questions, follow the I-B-C structure: Introduction (Definition), Body (Diagrams, Conditions, Logical steps), Conclusion (Summary of the result).