Unit 3 Business Economics PYQ’s 27th June 2025

The correct answer is – (-) 16%

Key Points

• Cross Price Elasticity
  • Cross price elasticity measures how the demand for one good changes in response to a change in the price of another good.
  • A negative cross price elasticity (-0.8) indicates that the two goods are complements, meaning they are consumed together.
• Calculation
  • Formula: % Change in Demand for Good A = Cross Price Elasticity × % Change in Price of Good B.
  • Substitute the values: (-0.8) × 20% = (-) 16%.
  • This means the demand for Good A will decrease by 16% as the price of Good B rises by 20%.

Additional Information

• Types of Cross Price Elasticity
  • Negative: Indicates goods are complements, e.g., coffee and sugar.
  • Positive: Indicates goods are substitutes, e.g., tea and coffee.
  • Zero: Indicates goods are independent, e.g., books and shoes.
• Importance of Cross Price Elasticity
  • Helps businesses understand market relationships and plan pricing strategies.
  • Useful for policymakers to assess the impact of taxation or subsidies on complementary and substitute goods.

The correct answer is – MR = AR x (e – 1) / e

Key Points

• Marginal Revenue (MR)
  • It represents the additional revenue generated by selling one more unit of a good or service.
  • MR is derived from the relationship between Average Revenue (AR) and the Price Elasticity of Demand (e).
• Correct Relationship:
  • The formula MR = AR x (e – 1) / e is derived from the following:
  • Price Elasticity of Demand (e) measures the percentage change in quantity demanded in response to a percentage change in price.
  • The Marginal Revenue is linked to the price elasticity of demand, where:
    • If demand is elastic (e > 1), MR is positive.
    • If demand is inelastic (e < 1), MR is negative.
• Formula Application:
  • The given relationship MR = AR x (e – 1) / e ensures the correct calculation of MR by incorporating AR and Price Elasticity of Demand.

Additional Information

• Price Elasticity of Demand (e):
  • It is calculated as: e = (% Change in Quantity Demanded) / (% Change in Price).
  • When e = 1, demand is unit elastic, and MR is zero.
  • When e > 1, demand is elastic, and MR is positive.
  • When e < 1, demand is inelastic, and MR is negative.
• Relationship between AR and MR:
  • AR represents the revenue per unit sold.
  • When price elasticity of demand is known, MR can be derived using the formula MR = AR x (e – 1) / e.
  • The formula shows that MR depends on both AR and the price elasticity of demand.
• Revenue Concepts:
  • Total Revenue (TR) = Price x Quantity Sold.
  • Average Revenue (AR) = TR / Quantity.
  • Marginal Revenue (MR) = Change in TR / Change in Quantity.

The correct answer is – 48

Key Points

• Price Elasticity of Demand (PED)
  • Formula: PED = (% Change in Quantity Demanded) ÷ (% Change in Price).
  • Given: PED = 1.5, Original Price = 100, New Price = 60.
  • % Change in Price = (−40÷100)×100=−40%(−40÷100)×100=−40%.
  • % Change in Quantity Demanded = 1.5 × (-40%) = -60%.
  • Since price falls, quantity demanded rises by +60%.
  • New Quantity = 30+(30×0.6)=4830+(30×0.6)=48.

Additional Information

• Types of Price Elasticity
  • Elastic demand: PED > 1 (quantity demanded changes more than price).
  • Inelastic demand: PED < 1 (quantity demanded changes less than price).
  • Unitary elasticity: PED = 1 (proportional change in price and quantity).
• Factors affecting PED
  • Availability of substitutes – More substitutes make demand more elastic.
  • Nature of the good – Necessities are inelastic; luxuries are elastic.
  • Proportion of income spent – Higher share increases elasticity.
  • Time period – Demand is more elastic in the long run than in the short run.
• Exam Tip
  • Always apply the formula correctly: PED = %ΔQ ÷ %ΔP.
  • Remember: A negative price change leads to a positive change in demand (law of demand).

The correct answer is – A, B, and C Only

Key Points

• Macro Economics
  • It studies the economy as a whole and focuses on aggregate economic variables.
  • Key areas include national income, balance of payments, and the level of savings and investment.
• National Income
  • Represents the total value of goods and services produced in a country.
  • Used to measure economic growth and standard of living.
• Balance of Payments
  • Records all transactions between residents of a country and the rest of the world.
  • Includes trade balance, foreign investment, and financial transfers.
• Level of Savings and Investment
  • Crucial for determining the economy’s capacity for growth and development.
  • Higher savings lead to increased investment, fueling economic progress.

Additional Information

• Micro Economics
  • Focuses on individual economic units like firms, households, and industries.
  • Examples include location of industry and behavior of firms.
• Difference Between Macro and Micro Economics
  • Macro Economics deals with large-scale economic factors like national income and inflation.
  • Micro Economics examines small-scale factors like pricing strategies and consumer behavior.
• Key Focus Areas for Exams
  • Understand the definitions and distinctions between macro and microeconomic concepts.
  • Recognize which variables belong to macroeconomics (e.g., national income, balance of payments) and which belong to microeconomics (e.g., firm behavior).

The correct answer is – A, B, and D Only

Key Points

• Microeconomics
  • Microeconomics focuses on individual units like households, firms, and specific markets.
  • The study of product pricing (A) is part of microeconomics as it examines how prices are determined in individual markets.
  • Understanding consumer behaviour (B) is also central to microeconomics, as it analyzes how individuals make decisions about spending their resources.
  • Factor pricing (D), which refers to the pricing of production factors like land, labor, and capital, is another important topic within microeconomics.
• Interest Rate (C)
  • Interest rate determination is primarily studied in macroeconomics, as it involves the overall financial system and monetary policies rather than individual market behavior.

Additional Information

• Difference Between Microeconomics and Macroeconomics
  • Microeconomics focuses on individual and business-level decisions, while macroeconomics deals with the economy as a whole.
  • Key topics in microeconomics include demand and supply, market structures, and resource allocation.
  • Macroeconomics studies broader issues such as inflation, unemployment, and GDP.
• Applications of Microeconomics
  • Microeconomics helps businesses in pricing strategies by analyzing market demand and competition.
  • It aids policymakers in understanding how changes in taxes or subsidies affect specific industries or groups.
  • It is also used to study the impact of market regulations on consumer welfare and producer efficiency.

The correct answer is – A-I, B-II, C-IV, D-III

Key Points

• Total Utility (A-I)
  • Total Utility is the sum of all Marginal Utilities derived from each unit of consumption.
  • The formula is MU1 + MU2 + MU3 + … + MUn.
  • This concept helps in understanding the overall satisfaction gained from consuming multiple units.
• Marginal Utility (B-II)
  • Marginal Utility refers to the additional utility gained from consuming one more unit of a good.
  • The formula is TUn – TUn-1, where TUn is the total utility from the nth unit, and TUn-1 is the total utility from the previous unit.
  • This concept explains the principle of diminishing marginal utility.
• Average Fixed Cost (C-IV)
  • Average Fixed Cost is calculated by dividing the Total Fixed Cost by the quantity of output.
  • The formula is TFC / Q, where TFC is the total fixed cost and Q is the quantity produced.
  • This value decreases as production increases due to the spreading of fixed costs over more units.
• Marginal Cost (D-III)
  • Marginal Cost refers to the additional cost incurred for producing one more unit of output.
  • The formula is TC / AQ, where TC is the change in total cost and AQ is the change in quantity produced.
  • This concept is crucial for decision-making in production and pricing strategies.

Additional Information

• Total Utility and Marginal Utility
  • Total Utility increases as more units are consumed but at a decreasing rate due to the principle of diminishing marginal utility.
  • Marginal Utility is critical in understanding consumer behavior and optimizing consumption.
• Cost Concepts
  • Fixed Costs remain constant regardless of the level of production.
  • Marginal Cost is key for determining the most cost-effective level of production.
  • Average Fixed Cost decreases as production increases due to the spreading effect.
• Applications in Economics
  • These concepts are used in pricing strategies, profit maximization, and resource allocation.
  • Understanding these formulas helps in solving numerical problems in exams.

The correct answer is – A-IV, B-III, C-II, D-I

Key Points

• Production Function (A-IV)
  • A production function represents the relationship between inputs (like capital, labor) and the output produced.
  • Its formula is expressed as Q = f(a, b, c, ….n), where Q is the output, and a, b, c, etc., are input variables.
• Average Product (B-III)
  • The Average Product (AP) is calculated as the Total Product divided by the number of units of the variable factor.
  • It measures the efficiency of each unit of the variable factor used in production.
• Marginal Product (C-II)
  • The Marginal Product (MP) is the additional output produced by using an extra unit of input.
  • Its formula is expressed as MP = Tn – Tn-1, where Tn is the total output at n units of input, and Tn-1 is the total output at n-1 units of input.
• Constant Return to Scale (D-I)
  • Constant Return to Scale refers to a situation where increasing all inputs by a certain proportion leads to an equal proportion increase in output.
  • Its representation is typically shown as K(K, L), where K and L are capital and labor inputs.

Additional Information

• Total Product
  • Total Product (TP) refers to the total quantity of output produced by all units of a variable factor.
  • It is the sum of all outputs produced at different levels of input.
• Returns to Scale
  • Returns to scale are classified as:
    • Increasing Returns to Scale: Output increases by a greater proportion than inputs.
    • Constant Returns to Scale: Output increases in the same proportion as inputs.
    • Decreasing Returns to Scale: Output increases by a lesser proportion than inputs.
• Law of Diminishing Marginal Returns
  • This law states that as more units of a variable factor are added to a fixed factor, the marginal product eventually decreases.
  • It is a key concept in microeconomics and helps explain production efficiency.

The correct answer is – Oligopoly

Key Points

• Oligopoly
  • An oligopoly is a market structure where a small number of sellers dominate the market.
  • These sellers offer competing products to a large number of buyers.
  • The key feature of this structure is interdependence, where each seller’s actions influence and are influenced by the actions of other sellers.
  • Examples of oligopolistic industries include the automobile and airline industries.

Additional Information

• Market Structures
  • Monopoly
    • A market structure where there is only one seller and no competition.
    • The seller has complete control over the price and supply of the product.
    • Example: Utility companies like electricity providers in some regions.
  • Monopolistic Competition
    • A market structure where there are many sellers offering similar but differentiated products.
    • Examples include restaurants, clothing brands, and cosmetic products.
  • Perfect Competition
    • A market structure where there are a large number of sellers and buyers, and all products are homogeneous.
    • There is no control over price by individual sellers.
    • Example: Agricultural markets like wheat or rice.
• Key Characteristics of Oligopoly
  • Few Sellers: The market is dominated by a small number of firms.
  • Barriers to Entry: High entry costs or other obstacles prevent new competitors from entering easily.
  • Non-Price Competition: Firms often compete on factors other than price, such as advertising, product differentiation, and customer service.

The correct answer is – A, B, C and D

Key Points

• Price of the Commodity
  • The price of a commodity directly influences its demand; generally, higher prices lead to lower demand (law of demand).
  • Consumers evaluate the value they derive from a product relative to its cost.
• Income of the Consumer
  • Consumer demand for goods is positively related to their income; higher income increases purchasing power.
  • For normal goods, demand increases with income, while for inferior goods, demand may decrease as income rises.
• Taste and Preferences of Consumer
  • Consumer preferences significantly affect demand; a shift in taste towards a commodity increases its demand.
  • Factors like advertising, trends, and cultural influences impact consumer preferences.
• Size of Population
  • A larger population typically leads to higher aggregate demand for goods and services.
  • Population demographics, such as age distribution and urbanization, also play a role in determining demand patterns.

Additional Information

• Other Factors Influencing Demand
  • Substitute Goods: Availability and pricing of substitutes can affect demand for the original product.
  • Complementary Goods: Demand for one product can be influenced by the demand for complementary goods (e.g., cars and fuel).
  • Future Expectations: Expectations about future price changes or income levels can affect current demand.
  • Government Policies: Taxes, subsidies, and regulations can influence demand patterns for various goods.
• Elasticity of Demand
  • Price Elasticity: Measures how sensitive demand is to changes in price.
  • Income Elasticity: Reflects the change in demand based on variations in consumer income.
  • Cross Elasticity: Indicates how demand for a product changes in response to the price of related goods.