CBSE Class 12 Economics Introduction to Micro Economics Assignment Set C

Very Short answer Type Question

Question. What is likely to be the impact of “Make in India’ appeal to the foreign investors by the Prime Minister of India, on the production possibilities frontier of India? Explain.
Answer: Make in India’ appeal signifies invitation of foreign producers to produce in India. This will lead to increase in resources thus raising production potential of the country. As a result, the PP Curve will shift to the right.

Question. What will be the impact of recently launched ‘Clean India Mission’ (Swachh Bharat Mission) on the Production Possibilities Curve of the economy and why?
Answer: Cleanliness reduces chances of people falling ill and, thus can ensure better health. This in turn will reduce forced absenteeism from work, raise efficiency level and thus raise country’s production potential. As a result, the PP Curve will shift to the right.

Question. Good X and Good Y are substitute goods. If price of Good X increases, discuss briefly its likely impact on the demand for Good Y. 
Answer: Good X and Good Y are substitute goods, if the price of Good X rises, it makes the Good X costlier and Good Y relatively cheaper. As a result demand for Good Y will increase and consumer will substitute Good Y over Good X.

Question. Price elasticity of demand of two goods A and B is (–) 3 and (–) 4 respectively. Which of the two goods has higher elasticity and why? 
Answer: Good B has higher elasticity as compared to A. It is because with change in price by one per cent, percentage change in demand for B is 4% while in case of good A it is only 3%.

Question. If the income of a consumer increases, discuss briefly its likely impact on the demand for an inferior good, Good X. 
Answer: Increase in income of consumer leads to an increase in his purchasing power so the demand for inferior goods falls as consumer will tend to shift from an inferior product to a better quality product.

Question. What will be the impact of “Education for All campaign” (Sarv Shiksha Abhiyan) on the Production Possibilities Curve of the Indian economy and why?
Answer: Education raises efficiency by making a worker a skilled worker. This will increase production potential shifting the PP curve to the right.

Question. Large number of technical training institutions have been started by the government. State its economic  value in the context of production possibilities frontier.
Answer: The economic value of technical training is that it raises the production potential of the country by raising the efficiency of the labour. The production possibilities frontier (PPF) of the economy will shift rightwards. It leads to economic growth.

Short answer Type Question

Question. Explain the effect of the following on the demand for a good: 
(i) Increase in income of its consumer
(ii) Rise in price of its substitute good
Answer: (i) When the good is normal, increase in income of its consumer raises his purchasing power, so he buys more of it.
When the good is inferior, then with an increase in income the demand for such good will fall.
(ii) Rise in the price of substitute goods makes the given good relatively cheaper. So its demand increases and demand for substitute good falls.

Question. ‘‘For a consumer to be in equilibrium position, marginal rate of substitution between the two goods must be equal to ratio of prices of the two goods.’’ Do you agree with the given statement? . 
Answer: The given partially statement is true.
As the consumer will get stable equilibrium only when the following two conditions are satisfied:
(i) Slope of Indifference Curve is equal to the price ratio or MRSxy = Px/Py
(ii) MRSxy must be diminishing.
There may be following two situations that may arise:
• If MRSxy > Px/Py consumer is willing to pay more for commodity X than the price preventing in the market It will induce him to purchase more of X less of Good Y, which leads to decline of MRS. This will continue until MRSxy = Px/Py.
• It must be supported by the second condition i.e. MRS must diminish. Thus, the consumer will get stable equilibrium only when MRSxy = Px/Py and Indifference curve is convex to the origin.

Question.What is the elasticity of demand associated with necessities and luxuries? Give reasons.
Answer: Demand for necessities (e.g. food, textbooks, etc.) is inelastic (eD < 1) because in case of price change, it becomes difficult to reduce its consumption significantly.
Demand for luxuries (e.g. air conditioners, costly furniture, etc.) is very elastic (eD > 1) because luxurious goods generally have many substitutes. If price of a brand rises, the consumer will switch over to other brands. Therefore, a slight change in price affects demand for luxurious goods to a large extent.

Question. State any one valid reason for leftward shift in demand curve.
Answer: Leftward Shift in demand curve:
(i) Fall in the price of substitute goods
(ii) Rise in the price of Complementary goods
(iii) Decrease in the size of population
(iv) Unfavourable Change in taste
(v) Fall in income of the consumer (in case of normal goods) (any one valid reason)

Question. State whether the following statements are true or false. Give valid reasons in support of your Answer.
(a) The coefficient of price elasticity of demand for the commodity is inversely related to the number of alternative uses of the commodity.
(b) Luxury goods often have lower price elasticity of demand. 
Answer: (a) The given statement is false: A commodity with a number of alternative uses carries positive relation with the coefficient of price elasticity of demand. With the fall in the price of such a commodity the quantity demanded increases as people can put it for different uses.
(b) The given statement is false: If the price of luxury goods increases, people may postpone its consumption. Hence the demand is elastic in nature.

Question. Distinguish between normal goods and inferior goods, with examples.
Answer: Normal Goods are those Goods whose demand tends to increase with an increase in the income of a consumer. The demand for the normal goods is directly related to the income of a consumer. Inferior Goods are those goods whose demand decreases with an increase in the income of a consumer. The demand for the inferior goods is inversely related to the income of a consumer.
For example – with an increase in income, more generally, a consumer would like to shift to a smart phone from a simple mobile phone he is using at present. Now, the simple mobile phone is an inferior good for him whereas, the smart phone is a normal good.

Question. A good is an ‘inferior’ good for one and at the same time ‘normal ‘good for another consumer. Do you agree? Explain with the help of an example. 
Answer: Yes, the same good can be inferior for one person and normal for another. Whether a good is normal or inferior is determined by the income level of the consumer. A good which is a normal good for a consumer with a lower income, may become an inferior good for a consumer with higher income.
For example, coarse cloth may be a normal good for a low income consumer, but for a high income consumer it may be an inferior good as she can afford a better quality cloth. Thus, when a consumer moves to a higher income level, she may consider coarse cloth as being below their income status, and has the ability to buy more expensive fine cloth, thus considering coarse cloth as being inferior.

Question.State any three factors causing “increase” in market demand. 
Answer: Factors of increase in market demand:
(i) Rise in income of consumers (in case of a normal goods)
(ii) Favourable change in taste & preferences
(iii) Increase in number of consumers
(iv) Fall in price of complementary goods
(v) Rise in price of substitute goods (any three)

Question. State any six causes of rightward shift of demand curve.
Answer: Causes of rightward shift of demand curve:
(i) Rise in prices of substitute goods
(ii) Fall in price of the complementary good
(iii) Favourable change in taste etc. for the good
(iv) Rise in income of its buyers (in case of a normal good)
(v) Fall in income of its buyers (in case of an inferior good)
(vi) Increase in the number of its buyers

Question. A consumer consumes only two goods X and Y both priced at `3 per unit. If the consumer chooses a combination of these two goods with Marginal Rate of Substitution equal to 3, is the consumer in equilibrium? Give reasons. What will a rational consumer do in this situation? Explain. 
Answer: The consumer is in equilibrium when Marginal Rate of Substitution is equal to the ratio of prices of the two goods X and Y, i.e., MRS = Px/Py.
Since Px = 3 and Py = 3, therefore, Px/Py = 3/3 = 1. MRS = 3
Since MRS < Px/Py, therefore, the consumer is not in equilibrium.
Here, MRS > Px/Py. It meAnswer that to obtain one extra unit of good X the consumer is willing to sacrifice more units of good Y than what he is required to sacrifice in the market. The consumer gains and buys more quantity of good X. As he goes on obtaining more and more units of good X, marginal utility of good X goes on declining due to the operation of the law of diminishing marginal utility. Therefore, the consumer is willing to sacrifice less and less of good Y each time he obtains one extra unit of good X. In other words, MRS continuously falls. The process continues till MRS becomes equal to Px/Py and the consumer is in equilibrium.

Question.Give any three factors that can cause a rightward shift of demand curve. 
Answer: Rightwards shift of demand curve can be caused by:
(i) Fall in price of complementary goods
(ii) Rise in price of substitute good
(iii) Change in preference in favour of the good

Question. A consumer consumes only two goods X and Y whose prices are `4 and `5 per unit respectively. If the consumer chooses a combination of the two goods with marginal utility of X equal to 5 and that of Y equal to 4, is the consumer in equilibrium? Give reasons. What will a rational consumer do in this situation? Use utility analysis.  
Answer: The consumer is in equilibrium when MUx/Px = MU_y/P_y (Law of Equi-Marginal Utility).
Since P_x = 4, Py = 5, MU_x = 5 and MU_y= 4, therefore, MU_x/P_x = 5/4 = 1.25 and MUy/Py = 4/5 = 0.8.
Since MU_x/P_x ≠ MU_y/P_y, therefore, the consumer is not in equilibrium. Here, MU_x/P_x > MU_y/P_y. It meAnswer that the satisfaction a consumer derives from spending a rupee on Good X is greater than the satisfaction derived from spending a rupee on Good Y. The consumer will reallocate his income – substitute Good X for Good Y. As the consumption of Good X increases its marginal utility will fall. As the consumption of Good Y decreases, its marginal utility will increase. This is due to the law of diminishing marginal utility. This process will continue till MU_x/P_x becomes equal to MU_y/P_y and the consumer is in equilibrium.

Question. If a rational consumer is consuming only two Goods X and Y, state her likely behaviour to attain consumer’s equilibrium if she faces a situation where MU_x/P_x < MU_y/P_y. 
Answer: When MU_x/P_x < MU_y/P_y, the consumer is obtaining greater marginal utility per rupee in case of good Y as compared to good X. Therefore, he would prefer to buy more units of good Y and lesser units of good X. This will lead to a decline in MUy and rise in MUX. The consumer will continue to buy more of Y till he attains equilibrium at a point where MU_x/P_x = MU_y/P_y.

Question. Explain the following conditions:
(a) Movement along the same indifference curve.
(b) Shift from a lower to a higher indifference curve.
Answer: (a) Movement along the same indifference curve shows various bundles of two goods that provide equal satisfaction to the consumer. In order to increase the consumption of one commodity, the consumer has to sacrifice the consumption of the other and he moves up or down on the same indifference curve.
(b) A consumer will shift from a lower indifference curve to a higher indifference curve when he wants to have a new bundle of two goods, which has more quantity of at least one good and no less of the other good (monotonic preference). Alternatively, the new bundle may offer more quantity of both the goods, thereby providing the consumer greater level of satisfaction.

Question. A consumer, Mr. Aman is in state of equilibrium consuming two goods X and Y, with given prices P_x and P_y. Explain what will happen if: 
(a) MU_x/P_x  is greater than MU_y/P_y.
(b) Py falls
Answer: (a) If MU_x/P_x  > MUy/Py, then it meAnswer that satisfaction of Mr. Aman, derived from spending a rupee on Good X is greater than the satisfaction derived from spending a rupee on Good Y. Mr. Aman, will reallocate his income by substituting Good X for Good Y. As the consumption of Good X increases its marginal utility will fall. As the consumption of Good Y decreases, its marginal utility will increase. This is due to the law of diminishing marginal utility. This process will continue till MU_x/P_x  becomes equal to MUy/Py and the consumer is in equilibrium. (b) If Py falls, MU_x/P_x  < MU_y/P_y, then it meAnswer that satisfaction derived from spending a rupee on Good X is lesser than the satisfaction derived from spending a rupee on Good Y. Mr. Aman will reallocate his income by substituting Good Y for Good X. As the consumption of Good Y increases the marginal utility derived from it goes on diminishing and reverse proposition occurs for Good X, this process will continue till MU_x/P_x becomes equal to MU_y/P_y.

Question. Explain the meaning of budget line. What can cause a change in it ? Explain. 
Answer: A budget line is the locus of points that represent such combinations of two goods on which total expenditure equals total income.
Causes of change in budget line are –
(i) Change in income of the consumer.
(ii) Change in prices of one or both the commodities. 
(i) Change in income shifts the budget line parallel because consumer can now buy more or less of either of the goods in the same proportion.
(ii) Change in price changes the maximum quantity consumer can buy of one or both the goods, changing one or both the ends of budget line.

Question. Why should marginal rate of substitution diminish for a stable consumer’s equilibrium? 
Answer: Marginal rate of substitution (MRS) is the rate at which consumer is willing to trade-off one good for the other. It depends on the quantity of the two goods s/he is consuming. A rational consumer will sacrifice lesser units of Good Y so as to acquire additional units of Good X, due to the application of law of diminishing marginal utility. MRS should be diminishing as additional consumption of Commodity X, symbolises fall in marginal utility due to which the consumer will not further increase its consumption. If it does not fall, s/he will keep on increasing the consumption of Commodity-X and will not reach a stable equilibrium.

Question. What is the effect of unemployment on the production possibilities curve? Explain.
Answer: There will be no effect on the PPC because a PPC shows only what an economy can potentially produce, and not what it actually produces. Unemployment in the economy implies under-utilisation of resources. So, production takes place at any point below the PPC. That is, production in the economy is below its potential.

Question. ‘‘Scarcity and choice problem go together.’’ Do you agree with the statement? Give reasons in support of your answer.
Answer: The given statement is true. Scarcity of resources is the root cause of an economic problem. We live in a world of scarcity. All of us want better food, clothing, housing, schooling, entertainment, etc. But resources are not enough to meet all our wants. Even the richest economy (like USA) cannot satisfy all the needs of people. Scarcity of resources gives rise to the problem of choice, i.e., economic problem. If resources were available in plenty, there would not have been any problem of choice.

Question. Assuming that no resource is equally efficient in production of all goods, name the curve which shows production potential of the economy. State its properties.
Answer: The curve is called Production Possibilities Curve (PPC) or Production Possibilities Frontier (PPF). Properties of PPC:
(i) PPC is downward sloping from left to right (negatively sloped) because to produce more of a good (Good X), the economy has to sacrifice some production of other good (Good Y).
(ii) PPC is concave to the origin because of increasing Marginal Rate of Transformation (MRT) as we move downwards along the PPC curve from left to right.

Question. The government has started promoting foreign capital. What is its effect on Production Possibilities Frontier?
Answer: It will increase inflow of foreign capital. It implies increase in resources. This will increase the production potential in the economy, i.e., the economy may be able to produce more output. As a result, production possibilities frontier (PPF) will shift to the right. Rise in production potential will lead to economic growth.

Question. What is a budget line ? Why the budget line is left to right downward sloping? 
Answer: Budget line is a graphical presentation of all those combinations of two goods which costs the consumer exactly his income.
 It is downward sloping because to buy more of one good, the consumer must reduce the purchase of the other goods as income remains same.

Question. What is the effect on MRT as we move downwards along a PPC?
Answer: As we move downwards along a PPC, the slope of the concave PP curve increases. Since Marginal Rate of Transformation (MRT) is the measure of slope of PPC, MRT increases. It is based on the assumption that no resource is equally efficient in production of both the goods. As more of one good is produced by reducing the production of the other good, less and less efficient resources are transferred. So, marginal opportunity cost (technically termed as MRT) increases.

Question. Why does the problem of choice arise for producers and for consumers?
Answer: The problem of choice arises for producers because resources are limited and have alternative uses. Since resources are available in limited quantities and a resource can be used for producing more than one product , this creates a problem of choice which product should be produced. The problem of choice arises for the consumers because their wants are unlimited while resources to fulfill these wants are limited. Since a resource can be used for satisfying more than one want, this creates a problem of choice which want should be satisfied first.

Question. State giving reasons whether the following statements are true or false:
(a) The PP curve is a graphical medium of highlighting the central problem of ‘How to produce’.
(b) Growth of resources shifts the production possibility frontier towards right.
(c) In an economy, production takes place always on the PPC.
Answer: (a) False: The PP curve is a graphical medium of highlighting the central problem of ‘what to produce’.
(b) True: Growth of resources increase the production potential of the economy, i.e., it can now produce more output. Therefore, the PPF shifts towards right.
(c) False: Production in the economy may also take place at any point below the PPC if the given resources are either under-utilised or inefficiently utilised or both.

Question. A consumer consumes only two goods X and Y and is in equilibrium. Show that when the price of the good X rises, the consumer buys less of good X. Explain using the law of Equi-Marginal Utility. 
Answer: According to the law of Equi-Marginal Utility, the consumer is in equilibrium when MU_x/P_x = MU_y/P_y. Now, given that Px rises, then MU_x/P_x < MU_y/P_y. Since per rupee MUx is lower than per rupee MUy, it meAnswer that satisfaction derived from consumption of good X is less than the satisfaction derived from consumption of good Y.Therefore, the consumer will buy less of X. It shows that when P_x rises, demand for X falls.

Question. A consumer consumes only two goods A and B and is in equilibrium. If the price of good B rises, explain the likely reaction of the consumer under utility analysis. 
Answer: In case of two goods A and B, a consumer will at equilibrium when:
• MU of good A/Price of good A = MU of good B/Price of good B
• MU falls as consumption increases
If the price of Good B rises the per rupee Marginal Utility derived from the consumption of
Good A will be more than the consumption of Good B. This will create a situation where:
MU of good A/Price of good A > MU of good B/Price of good B
This will induce the consumer to reallocate his expenditure from Good B (less satisfying) to Good A (more satisfying). Therefore, consumer will buy more of Good A and less of Good B.
As a result, MU derived from consumption of Good A decreases gradually while the MU derived from consumption of Good B increases. Eventually, this process will continue till MU of good A/Price of good A = MU of good B/Price of good B

Question. Name four goods having inelastic demand. Give reasons why demand for salt or water bottle is inelastic?
Answer: Goods having inelastic demand: Food, newspapers, toothpaste, match-box Demand for salt or water bottle is inelastic because:
(i) It has no close substitute.
(ii) It is a necessity.
(iii) A very small proportion of a consumer’s income is spent on its purchase.