Unit 3 Business Economics PYQ’s 26th Nov 2021 Shift 1

The correct answer is – Increasing returns to scale

Key Points

Cobb-Douglas production function:

• The Cobb-Douglas production function is based on Paul H. Douglas and C.W. Cobb’s empirical analysis of the American manufacturing industry.
• It is a degree one linear homogeneous production function that considers two inputs, labour and capital, for the total output of the manufacturing industry.
• The Cobb-Douglas production function is expressed as Q = AKaLß
  where Q is output and L and С are inputs of labour and capital, respectively. A, a and β are positive parameters where = a > O, β > O.

Important Points

The Cobb Douglas production function exhibits the three types of returns:

• If a+b>1, there are increasing returns to scale.
• If a+b=1, we get constant returns to scale.
• If a+b<1, we get decreasing returns to scale.

The correct answer is – Black marketing

Key Points

• If the price is below the equilibrium level, then the quantity demanded will exceed the quantity supplied.
• There will be Excess demand and Shortage of goods will exist.
• This can possibly result in black marketing.

Important Points

• The Shortage of the commodity and black marketing economy drives out legitimate industries that can’t compete with the lower costs of illegal operations.
• Some black market players deliberately create shortages in legal goods to force people to purchase from them.
• The tax-free nature of the black market means the government loses revenue.

Additional Information

• Commodity Glut an excessive quantity i.e. oversupply a glut of the commodity on the market.

The correct answer is – Negative

Key Points

Cross Price Elasticity:

• Cross elasticity of demand evaluates the relationship between two products when the price in one of them changes.
• It shows the relative change in demand for one product as the price of the other rises or falls.

Complementary Goods: Complementary goods are those goods which are used together to satisfy a human want. For Eg: Bread and butter

Important Points

Cross-price elasticity of demand for complementary commodities:

• The cross elasticity of demand for complementary goods is always negative.
• This implies that the demand for product Y declines as the price of product X rises.
• When consumers observe a product’s price increase, they actually buy less of the other product.

The correct answer is – Oligopoly

Key Points

Oligopoly:

• It is a market structure with a few firms, none of which can stop the others from having a significant value.
• When a market is shared by only a few firms, it is said to be highly concentrated, and it helps in the survival of the firm

Important Points

Characteristics of an Oligopoly Market:

• A Few Firms with Large Market Share: Even though a market may contain thousands of sellers, it can be categorised as an oligopolistic market if the aggregate market share of the top 5 companies is greater than 50%. This is a result of the market being controlled by a few number of vendors who have the majority of the power.
• High Barriers to Entry: Several barriers to entry help oligopolistic businesses maintain their dominance. Brand loyalty, patents, and expensive startup fees are just a few examples. These make it challenging for new competitors to establish a presence in the market and draw clients. Brand loyalty is a big obstacle to overcome in sectors like retail.
• Very high degree of competition: There is intense competition among the firms in the market. To sustain the competition forms to make frequent technological and product improvements. This help them to make better product and satisfy the customer better than its competitors.

Additional Information

Perfect competition:

• It is a market structure where there are a large number of buyers and sellers, easy entry, and exit from the market.
• A perfectly competitive firm is also known as a price taker.
• Thus, in perfect competition, it is easier to increase the market size.

Monopoly:

• It is a market structure where there is a single seller selling a unique product in the market.
• It is a price maker and thus known for the Intimation of a product or service.

Monopolistic Competition:

• Monopolistic competition is a type of imperfect competition such that there are many producers competing against each other, but selling products that are differentiated from one another and hence are not perfect substitutes.
• It influences the buying behaviour of the consumer.

The correct answer is – A, B, C and D

Key Points

Long-run Average Cost Curve

• A planning curve is also called a long-run average cost curve.
• This is so that a company can choose a plant on the long run average cost curve that corresponds to the production it intends to create in the long run.
• It assists the company in choosing the best plant size to produce the necessary output at the lowest possible cost.

Important Points

Assumptions to U shaped Long run Average Cost curve:

• Falling long run average costs and increasing economies of scale due to internal and external economies of scale.
• Rising long run average costs and diminishing economies of scale due to internal and external diseconomies of scale.
• Benefits of the division of labour and specialisation accrue more at the lower scale of production
• Managerial inefficiencies are prone to a higher scale of operations

The correct answer is – A, C and D only

Key Points

Price discrimination:

Price discrimination occurs when a seller charges different rates for the same good or service to different customers for reasons unrelated to variations in cost.

Important Points

Conditions that a firm must meet to practice Price Discrimination

• The seller must have some degree of control over the product’s supply. It takes monopoly strength like this to differentiate prices.
• The market should be split into at least two submarkets by the seller (or more).
• The product’s price elasticity must vary depending on the market. Therefore, the monopolist can set a high price for those purchasers whose price-elasticity of demand for the product is less than 1.
• In other words, even if the supplier raises the price, these customers do not cut back on their purchases.
• The product shouldn’t be able to be sold to customers from the high-priced market by low-priced customers.

The correct answer is – A – lll, B – lV, C – l, D – ll

Key Points

Income Elasticities of Demand – Income elasticity of demand is the degree of responsiveness of changes in quantity demanded of goods to the changes in consumer’s income.

Income Elasticity of Demand = % Change in Demand Quantity / % Change in Income of Consumer

Important Points

Normal goods – Normal goods are commodities with positive income elasticity of demand. It describes a situation where a commodity’s demand increases with an increase in consumer income and decreases with a decrease in consumer income. Thus Income elasticity of Normal Goods is Greater than zero or Positively Elastic.

Inferior goods- Inferior goods are those goods whose demand decreases with increase in income of consumer. That’ why income elasticity of inferior goods is negative and less than one which describes a situation in which demand for a commodity increases as consumer income increases and drops when consumer income decreases.

Luxurious commodities -Luxury goods are directly correlated with consumer income. Consumers buy more of these things when their income rises and vice versa. Income elasticity of these goods is more than one.

Necessities -It reflects the condition in which increased household income has little effect on the production of commodities. We call these products “necessary goods.” Income Elasticity of Necessities goods will be Between zero and one which is unitary.