﻿ Why are the firms said to be interdependent in an oligopoly market? Explain.  from Class 12 CBSE Previous Year Board Papers | Economics 2014 Solved Board Papers

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# CBSE Class 12 Economics Solved Question Paper 2014

#### Long Answer Type

11.

Explain the conditions of consumer's equilibrium with the help of the indifference curve analysis.

Consumer equilibrium refers to a situation, in which a consumer derives maximum satisfaction, with no intention to change it and subject to given prices and his given income. The point of maximum satisfaction is achieved by studying indifference map and budget line together. On an indifference map, higher indifference curve represents a higher level of satisfaction than any lower indifference curve. So, a consumer always tries to remain at the highest possible indifference curve, subject to his budget constraint.

Conditions of Consumer’s Equilibrium:
The consumer’s equilibrium under the indifference curve theory must meet the following two conditions:
(i) MRSXY = Ratio of prices or PX/PY:
Let the two goods be X and Y. The first condition for consumer’s equilibrium is that
MRSXY = PX/PY

a) If MRSXY > PX/PY, it means that the consumer is willing to pay more for X than the price prevailing in the market. As a result, the consumer buys more of X. As a result, MRS falls till it becomes equal to the ratio of prices and the equilibrium is established.
b) If MRSXY < PX/PY, it means that the consumer is willing to pay less for X than the price prevailing in the market. It induces the consumer to buys less of X and more of Y. As a result, MRS rises till it becomes equal to the ratio of prices and the equilibrium is established.

(ii) MRS continuously falls:
The second condition for consumer’s equilibrium is that MRS must be diminishing at the point of equilibrium, i.e. the indifference curve must be convex to the origin at the point of equilibrium. Unless MRS continuously falls, the equilibrium cannot be established.
Thus, both the conditions need to be fulfilled for a consumer to be in equilibrium. In Fig, IC1, IC2 and IC3 are the three indifference curves and AB is the budget line. With the constraint of budget line, the highest indifference curve, which a consumer can reach, is IC2. The budget line is tangent to indifference curve IC2 at point ‘E’. This is the point of consumer equilibrium, where the consumer purchases OM quantity of commodity ‘X’ and ON quantity of commodity ‘Y. All other points on the budget line to the left or right of point ‘E’ will lie on lower indifference curves and thus indicate a lower level of satisfaction.

Thus, we can conclude that if the consumer is consuming any bundle other than the optimum one, then he would rearrange his consumption bundle in such a manner that the equality between the MRS and the price ratio is established and he attains the state of equilibrium.

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12.

Explain the three properties of the indifference curves.

1) Indifference curves slope downward to the right:
This property implies that an indifference curve has a negative slope If the preferences are monotonic, an increase in the amount of good: 1. along the indifference curve is associated with a decrease in the amount of good 2. This implies that the slope of the indifference curve is negative. Thus, monotonicity of preferences implies that the indifference curves are downward sloping to the right.
2) Indifference curves are convex to the origin:
Another important property of indifference curves is that they are usually convex to the origin. In other words, the indifference curve is relatively flatter in its right hand portion and relatively steeper in its left-hand portion. This is because as the consumers consume more and more of one good, the marginal utility good fall. In other words, the consumer is willing to sacrifice less and less for each additional unit of the other good consumed. Thus, as we move down the IC, MRS diminishes. This suggests the convex shape of indifference curve.
3) Slope of IC: The Slope of an IC is given by the Marginal Rate of Substitution (MRS). Marginal rate of substitution refers to the rate at which a consumer is willing to substitute one good for each additional unit of the other good.

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#### Short Answer Type

13.

What are demand deposits?

Demand Deposits also known as Current Account deposits refer to those deposits that provide the depositor the liberty to withdraw money at any point of time. That is, the account holder of the demand deposits can demand these deposits at any point of time as per their discretion and convenience. Such deposits do not offer any rate of interest.

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14.

What happens to the demand of a good when consumer's income changes? Explain.

Income of consumer is an important determinant of demand. The rise and fall of the demand for a good as per the rise in income of consumers depends upon the nature of good. Normal goods have a positive income elasticity of demand, so as consumers' income rises, more will be the demand. A rise in the income of the consumer will increase the demand for the good. In the case of Luxury goods and services, demand rises more than proportionate to a change in income. Inferior goods have a negative income elasticity of demand meaning that demand falls as income rises.

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15.

A consumer consumes only two goods. Explain consumer's equilibrium with the help of utility analysis.

The consumer’s equilibrium in case of consumption of two goods is explained by the Law of Equi-Marginal Utility. As per this law, a consumer allocates his expenditure between two commodities in such a manner that the utility derived from each additional unit of the rupee spent on each of the commodities is equal to the marginal utility of money.
In case the price of one commodity rises, less of this commodity and more of the other commodities will be purchased so that the proportion will be restored. In the case of durable goods, it may not be possible to maintain proportionality.

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16.

What is involuntary unemployment?

Involuntary unemployment refers to a situation when a person who is able and is willing to work does not get work at the going wage rate.

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#### Long Answer Type

17.

Market of a commodity is in equilibrium. Demand for the commodity "increases." Explain the chain of effects of this change till the market again reaches equilibrium. Use diagram.

An increase in the demand for the commodity leads to an increase in the equilibrium price and quantity. Here,
D1D1 and S1S1 represent the market demand and market supply respectively. The initial equilibrium occurs at E1, where the demand and the supply intersect each other. Due to the increase in the demand for the commodity, the demand curve will shift rightward parallel fromD1D1 to D2D2, while the supply curve will remain unchanged. Hence, there will be a situation of excess demand, equivalent to (q1' − q1). Consequently, the price will rise due to excess demand. The price will continue to rise until it reaches E2 (new equilibrium), where D2D2 intersects the supply curve S1S1. The equilibrium price increases from P1 to P2 and the equilibrium output increases from q1 to q2.

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#### Short Answer Type

18.

State the behaviour of marginal product in the law of variable proportions. Explain the causes of this behaviour.

Law of Variable Proportions:
The law of variable proportions state that as the quantity of one factor is increased, keeping the other factors fixed, the marginal product of that factor will eventually decline. This means that up to the use of a certain amount of variable factor, marginal product of the factor may increase and after a certain stage it starts diminishing.

Behaviour of MP

 Stages Stage's Name MP Range I Increasing Returns to a factor MP increases till point U From 0 to point U II Diminishing Returns to a factor MP falls  and touches x-axis From U  onwards III Negative Returns to a factor MP becomes negative Beyond x-axis The main reason behind this behaviour of MP is Law of Diminishing Marginal Product. According to the Law of Diminishing Marginal Product, if the employment of variable factor is kept on increasing along with the constant level of the fixed factor, then finally a point will be reached where after, the marginal product of the variable factor will start falling and after this point the marginal product of any additional variable factor can be zero and even be negative.
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#### Long Answer Type

19.

From the following information about a firm, find the firms equilibrium output in terms of marginal cost and marginal revenue. Give reasons. Also find profit at this output.

 Output (units) Total Revenue (Rs.) Total Cost (Rs.) 1 7 8 2 14 15 3 21 21 4 28 28 5 35 36

 Output(units) Total Revenue(Rs.) Total Cost(Rs.) Marginal Revenue(Rs.) Marginal Cost(Rs.) Profits(TR - TC) 1 7 8 - - -1 2 14 15 7 7 -1 3 21 21 7 6 0 4 28 28 7 7 0 5 35 36 7 8 -1

According to the MR-MC approach, the firm (or producer) attains its equilibrium, where the following two necessary and sufficient conditions are fulfilled.
1. MR = MC
2. MC must be rising after the equilibrium level of output
Thus from the table, we can say that the firm is in equilibrium at output equal to 4 units. When output is 4 units, MR= MC (thus, the first condition is satisfied) and MC increases after the 4th unit of output (therefore, the second condition is satisfied).
At output less than 4 units, if the firm produces slightly lesser level of output than 4 units, then the firm is facing price that exceeds the MC. This implies that higher profits can be achieved by increasing the level of output to 4 units. On the other hand, if the firm produces slightly higher level of output than 4 units, then the firm's MC exceeds its MR, thereby making profits negative. This implies that higher profits can be achieved by reducing the output level to 4 units. Thus, point E is the producer's equilibrium and 4 units of output is the profit maximising output level, where Price = MC and also MC is rising.

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# 20.Why are the firms said to be interdependent in an oligopoly market? Explain.

An oligopoly is a market structure in which a few firms dominate. When a market is shared between a few firms, it is said to be highly concentrated. One of the main characteristics of oligopoly market is interdependence. Firms that are interdependent cannot act independently of each other. A firm operating in a market with just a few competitors must take the potential reaction of its closest rivals into account when making its own decisions. For example, if a petrol retailer wishes to increase its market share by reducing price, it must take into account the possibility that close rivals may reduce their price in retaliation. Firms that are interdependent cannot act independently of each other. A firm operating in a market with just a few competitors must take the potential reaction of its closest rivals into account when making its own decisions.

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