3rd Sept 2024 Shift 2:
| Examination: | UGC NET |
| Subject: | COMMERCE (Paper 2) |
| Exam cycle: | 3rd Sept 2024 Shift 2 |
| Types of Paper: | PYQ’s (Previous Year Questions) |
| Which Unit? | Unit 3 Business Economics |
Question No.1
A company prices one litre bottle of its mineral water at ₹ 20/- but 100 ml of the same water in a moisturizer spray for ₹ 50/-. This is an example of which one of the following pricing practices?
- Customer-Segment Pricing
- Image Pricing
- Product-form Pricing
- Mark-up Pricing
Solutions:
The correct answer is Product-form Pricing.
Key Points
● Product-form Pricing:
o Product-form pricing involves setting different prices for different versions of a product, even though the cost to produce them may be similar. In this case, the company charges significantly more for the same water when it is packaged in a moisturizer spray form compared to a regular bottle. This demonstrates how the form or presentation of a product can justify a higher price.
● Customer-Segment Pricing:
o This involves different prices for different customer segments, not based on the form of the product. For example, student discounts or senior citizen discounts are common forms of customer-segment pricing. This is not applicable here as the pricing difference is due to the product form, not the customer segment.
● Image Pricing:
o Image pricing involves setting a price based on the perceived image or status of the product. For instance, luxury brands often use image pricing to justify higher prices. However, in this case, the price difference is due to the product form and its utility, not merely its image.
● Mark-up Pricing:
o Mark-up pricing involves adding a standard markup to the cost of the product. While this could explain general pricing strategies, it does not specifically address the significant price difference between the two forms of the same product.
Additional Information
● Customer-Segment Pricing is not applicable here:
o The price difference is not based on different customer segments, but on the different forms of the product.
● Image Pricing is not the reason for the price difference:
o While image pricing can justify higher prices for products with a perceived luxury or status, the significant price difference in this case is due to the product’s form and utility.
● Mark-up Pricing does not explain the significant price difference:
o Mark-up pricing generally involves a consistent addition to the cost price, but it does not account for the drastic difference seen in product-form pricing where the form and utility of the product lead to higher prices.
Question No.2
The price of one kg of tea is ₹ 30. At this price ₹ 5 kg of tea is demanded. If the price of coffee rises from ₹25 to ₹35 per kg, the quantity demanded of tea rises from 5 kg to 8 kg. Find the cross price elasticity of tea.
- (+) 0.5
- (+) 1.0
- (+) 1.5
- (-) 1.8
Solutions:
The correct answer is 1.5.
Key Points
● Cross Price Elasticity of Demand (XED):
o Cross price elasticity of demand measures the responsiveness of the quantity demanded of one good when the price of another good changes.
o The formula to calculate Cross Price Elasticity of Demand is:
XED = (% Change in Quantity Demanded of Tea) / (% Change in Price of Coffee)
● Step 1: Calculate the % Change in Quantity Demanded of Tea:
o Initial Quantity Demanded of Tea = 5 kg
o New Quantity Demanded of Tea = 8 kg
o Change in Quantity Demanded of Tea = 8 kg – 5 kg = 3 kg
o % Change in Quantity Demanded of Tea = (3 / 5) * 100 = 60%
● Step 2: Calculate the % Change in Price of Coffee:
o Initial Price of Coffee = ₹25 per kg
o New Price of Coffee = ₹35 per kg
o Change in Price of Coffee = ₹35 – ₹25 = ₹10
o % Change in Price of Coffee = (10 / 25) * 100 = 40%
● Step 3: Calculate Cross Price Elasticity of Demand:
o XED = (60% Change in Quantity Demanded of Tea) / (40% Change in Price of Coffee)
o XED = 60% / 40%
o XED = 1.5
● The positive cross price elasticity indicates that tea and coffee are substitute goods.
Additional Information
● Interpreting Cross Price Elasticity Values:
o A positive XED value indicates that the two goods are substitutes. The demand for one increases when the price of the other increases.
o A negative XED value indicates that the goods are complements. The demand for one decreases when the price of the other increases.
o A zero XED value indicates that the goods are independent, meaning the change in the price of one good does not affect the demand for the other.
Question No.3
The supply function is given as q = -100 + 10p. Find the elasticity of supply (Es) using point method, when price is Rs. 15.
- Es = 2
- Es = 3
- Es = 3.5
- Es = 4
Solutions:
The correct answer is Es = 3.
Key Points
● Elasticity of supply using the point method is given by:
o Es = (dq/dp) * (p/q), where dq/dp is the derivative of the supply function with respect to price.
● The supply function is given as q = -100 + 10p:
● Differentiate q with respect to p:
o dq/dp = 10
● When price (p) is Rs. 15:
o q = -100 + 10 * 15
o q = -100 + 150
o q = 50
● Substitute values into the elasticity formula:
o Es = (10) * (15/50)
o Es = 150/50
o Es = 3
● Supply elasticity of 3 indicates a relatively elastic supply:
o For a 1% increase in price, the quantity supplied increases by 3%.
Additional Information
● Understanding Elasticity:
o Price Elasticity of Supply (Es) measures the responsiveness of the quantity supplied to a change in price:
● High elasticity (Es > 1) indicates that suppliers can ramp up production easily when prices rise.
● Low elasticity (Es < 1) suggests that production capacity is limited or adjustments take longer.
o Importance for financial enterprises:
● Companies need to understand supply elasticity to manage inventory, production planning, and pricing strategies effectively.
● Elasticity insights help in forecasting revenue impacts due to price changes, critical for financial planning and stability.
o Interplay with Market Dynamics:
● Elasticity affects decision-making in resource allocation, investment, and competitive positioning within a market.
