Suppose the price elasticity of demand for a good is – 0.2. How will the expenditure on the good be affected if there is a 10 % increase in the price of the good?
Price elasticity of demand = -0.2
Percentage increase in price = 10%
e d=
0.2=
-2 = percentage change in demand Thus, percentage decrease in demand is less than the percentage increase in price. This means that when price increases and
What is the supply curve of a firm in the long run?
The market price of a good changes from Rs 5 to Rs 20. As a result, the quantity supplied by a firm increases by 15 units. The price elasticity of the firm’s supply curve is 0.5. Find the initial and final output levels of the firm.
A firm earns a revenue of Rs 50 when the market price of a good is Rs 10. The market price increases to Rs 15 and the firm now earns a revenue of Rs 150. What is the price elasticity of the firm’s supply curve?
Distinguish between a centrally planned economy and a market economy.
How does the imposition of a unit tax affect the supply curve of a firm?
A consumer wants to consume two goods. The prices of the two goods are Rs 4
and Rs 5 respectively. The consumer’s income is Rs 20.
(i) Write down the equation of the budget line.
(ii) How much of good 1 can the consumer consume if she spends her entire
income on that good?
(iii) How much of good 2 can she consume if she spends her entire income on
that good?
(iv) What is the slope of the budget line?
Questions 5, 6 and 7 are related to question 4.
What is the relation between market price and average revenue of a price-taking firm?
What is budget line?
Suppose there are 20 consumers for a good and they have identical demand functions:
d(p)=10–3pd(p)=10–3p for any price less than or equal to 103103 and d1(p)=0d1(p)=0 at any price greater than 103.
Suppose your friend is indifferent to the bundles (5, 6) and (6, 6). Are the preferences of your friend monotonic?
What do you mean by an ‘inferior good’? Give some examples
Explain market equilibrium.
Suppose a consumer can afford to buy 6 units of good 1 and 8 units of good 2
if she spends her entire income. The prices of the two goods are Rs 6 and Rs 8
respectively. How much is the consumer’s income?
A shift in demand curve has a larger effect on price and smaller effect on quantity when the number of firms is fixed compared to the situation when free entry and exits is permitted. Explain.
How is the wage rate determined in a perfectly competitive labor market?
Compare the effect of shift in the demand curve on the equilibrium when the number of firms in the market is fixed with the situation when entry-exit is permitted.
Suppose the price at which the equilibrium is attained in exercise 5 is above the minimum average cost of the firms constituting the market. Now if we allow for free entry and exit of firms, how will the market price adjust to it?
At what level of price do the firms in a perfectly competitive market supply when free entry and exit is allowed in the market? How is the equilibrium quantity determined in such a market?
How are the equilibrium price and quantity affected when?
(a) Both demand and supply curves shift in the same direction?
(b) Demand and supply curves shift in opposite directions?
Explain why the budget line is downward sloping.