Principles of MicroEconomics Solved Question Paper 2022 [Dibrugarh University BCOM 5th SEM CBCS Pattern]

Principles of MicroEconomics Solved Question Paper 2022
[Dibrugarh University BCOM 5th SEM CBCS Pattern]

5^th SEM TDC PM (CBCS) GE 501

COMMERCE (Generic Elective)

Paper: GE 501 (Principles of Microeconomics)

Full Marks: 80

Pass Marks: 32

Time: 3 hours.

The figures in the margin indicate full marks for the questions.

1. Answer the following as directed: 1x8=8

(a) Value of cross-elasticity of demand is positive for substitute goods. (Write True or False)

Ans: True.

(b) What is the shape of PCC in case of Giffen good?

Ans: Backward-sloping shape

Ans: True

(d) The shape of total fixed cost curve is

(1) upward sloping.

(2) downward sloping.

(3) parallel to X-axis.

(4) parallel to Y-axis (Choose the correct answer)

Ans: (3) parallel to X-axis.

(e) What do you mean by production function?

Ans: A production function is a mathematical representation of the relationship between inputs (factors of production) and outputs (quantity of goods or services) in the production process.

(f) The firms under perfect competition in the long run can earn

(1) normal profit.

(2) super normal profit.

(3) loss.

(4) All of the above. (Choose the correct answer)

Ans: (1) normal profit.

(g) What is price discrimination?

Ans: Price discrimination means the practice of selling the same commodity at different prices to different buyers.

(h) Mention one characteristics of oligopoly.

Ans: Under Oligopoly, there are only few sellers producing either a homogenous product which are close substitutes but not perfect substitutes or similar products.

2. Write short notes on any four of the following: 4x4=16

(a) Compensated demand curve.

Ans: The concept of the compensated demand curve was developed by economist Sir John Hicks as a way to separate the income and substitution effects of a price change. By compensating for the income effect, the compensated demand curve allows economists to analyze the impact of price changes on consumer choices, considering only the substitution effect.

The compensated demand curve typically slopes downwards due to the law of demand, which states that as the price of a good decreases, the quantity demanded increases, assuming other factors remain constant. It captures how consumers reallocate their consumption based on relative prices, while keeping their utility constant.

(b) Properties of isoquant.

Ans: Properties or Features of Isoquant

The following are the important properties of isoquants:

1. Isoquant is downward sloping to the right. This means that if more of one factor is used less of the other is needed for producing the same output.

2. A higher isoquant represents larger output.

3. No isoquants intersect or touch each other. If so it will mean that there will be a common point on the two curves. This further means that same amount of labour and capital can produce the two levels of output which is meaningless.

4. Isoquants need not be parallel to each other. It so happens because the rate of substitution in different isoquant schedules need not necessarily is equal. Usually they are found different and therefore, isoquants may not be parallel.

5. Isoquant is convex to the origin. This implies that the slope of the isoquant diminishes from left to right along the curve. This is because of the operation of the principle of diminishing marginal rate of technical substitution.

(c) Movement vs. shift in demand curve.

Ans: Movement in the Demand Curve: A movement in the demand curve refers to a change in the quantity demanded of a product or service in response to a change in price, while other factors remain constant. It shows how the quantity demanded varies as the price changes, assuming all other factors affecting demand remain unchanged. According to the law of demand, as the price of a good or service decreases, the quantity demanded increases, and vice versa. A movement along the demand curve represents a change in quantity demanded due to a change in price, assuming no other factors have changed.

Shift in the Demand Curve: A shift in the demand curve occurs when there is a change in demand at every price level, caused by factors other than price. It indicates a shift in the entire demand schedule. Various factors can cause a shift in the demand curve, including changes in consumer income, preferences, prices of related goods, population, and expectations. When any of these factors change, the entire demand curve shifts either to the right (increase in demand) or to the left (decrease in demand). A rightward shift suggests that at each price level, consumers are willing to purchase a larger quantity, while a leftward shift indicates a decrease in quantity demanded at each price level.

(d) Characteristics of a perfectly competitive firm.

Ans: Features of Perfect Competition

1. Large number of small, unorganized firms: The first condition which a perfectly competitive market must satisfy is concerned with the seller’s side of the market. The market must have such a large number of sellers that on one seller is able to dominate in the market. No single firms can influence the price of the commodity. These firms must be all relatively small as compared to the market as a whole. Their individual outputs should be just a fraction of the total output in the market.

2. A large number of small, unorganized buyers: On the buyer’s side the perfectly competitive market must also satisfy this condition. There must be such a large number of buyers that no one buyer is able to influence the market price in any way. Each buyer should purchase just a fraction of the market supplies. Further the buyers should not have any king of union or organization so that they compete for the market demand on an individual basis.

3. Homogeneous products: Another pre-requisite of perfect competition is that all the firms or sellers must sell completely identical or homogeneous goods. Their products must be considered to be identical by all the buyers in the market. There should not be any differentiation of products by sellers by way of quality, variety, colour, design, packing or other selling conditions of the product.

4. Free entry and free exit for firms: Under perfect competition, there is absolutely no restriction on entry of new firms in the industry or the exit of the firms from the industry which want to leave it. This condition must be satisfied especially for long period equilibrium of the industry.

(e) Dead weight loss.

Ans: Deadweight loss refers to the loss of economic efficiency that occurs when the allocation of goods and resources in a market deviates from the optimal level. It is a measure of the economic welfare that is not realized due to market inefficiency.

Deadweight loss typically arises in situations where there are market distortions such as taxes, subsidies, price controls, or market power. These distortions result in a mismatch between the quantity of goods or services that would be produced and consumed in a perfectly competitive and efficient market and the actual quantity produced and consumed in the presence of these market imperfections.

The concept of deadweight loss can be visualized graphically as the triangular area between the demand and supply curves, representing the unfulfilled transactions or lost consumer and producer surplus due to the market inefficiency. It represents the value that could have been gained if the market were operating efficiently.

3. (a) What do you mean by demand? Mention its determinant. State the law of demand. Derive a demand curve using an imaginary demand schedule. 2+3+2+5=12

Ans: Meaning of Demand: Demand refers to the quantity of a product or service that consumers are willing and able to purchase at various prices during a specific period of time. It represents the relationship between the price of a product and the quantity of that product that consumers are willing to buy.

Several factors influence demand, including the price of the product, consumer preferences, income levels, prices of related goods, and overall market conditions. When the price of a product decreases, ceteris paribus (all other factors remaining constant), the quantity demanded typically increases, reflecting the law of demand. Conversely, when the price of a product increases, the quantity demanded generally decreases.

Factors Determining Demand/Determinants of Demand

Demand Schedule and Law of Demand state the relationship between price and quantity demanded by assuming other things remaining the same. When there is a change in these other things, the whole demand schedule or demand curve undergoes a change. The following are the factors which determine demand for goods are listed below:

1. Price of a commodity: Price of the commodity is the most important factor that determines demand. An increase in price of a commodity leads to a reduction in demand and a decrease in price leads to an increase in demand.

2. Price of related goods: Demand for a commodity depends on Price of related goods also. Related goods include both substitutes and complementary goods.

a) Substitutes are those goods which can be used one another or the goods with same use are substitutes. e.g.:- tea and coffee. When price of tea falls demand for coffee also falls. Because when price of tea falls people buy more tea and less coffee.

b) Complementary goods are those goods which can be used only jointly. e.g.: - car, petrol or pen, ink. When price of a commodity raises demand for its complementary goods falls. If x and y are complementary goods we cannot use x without y. When price of x raises demand for x falls and y cannot be used without x and demand for y also falls.

3. Income of the consumer: Income of the consumer and demand for a commodity are positively related. For normal goods when income increases demand also increases and vice versa. But for inferior goods there is a negative relationship between income and demand. So when income increases, demand decreases.

4. Taste and Preferences of consumers: Taste and Preferences of consumers also brings out changes in demand for a commodity. Tendency to imitate other fashions, advertisements etc. affect demand for a commodity. It changes from person to person, place to place and time to time.

5. Rate of Interest: Higher will be demanded at lower rates of interest and lower will be demanded at higher rate of interest.

Law of Demand

The law of demand expresses the functional relationship between price and quantity demanded. It is the most important laws of economic theory which states that, other things being equal, if price of a commodity falls, the quantity demanded of it will rise, and if price of the commodity rises, its quantity demanded will decline. Thus, according to the law of demand, there is inverse relationship between price and quantity demanded. However, it should be remembered that the law is only an indicative and not a quantitative statement. This means that it is not necessary that such variation in demand be proportionate to the change in price.

(b) Discuss the different methods measuring price elasticity of demand. 12

Ans: Measurement of Elasticity of Demand

Elasticity of demand can be measured through three popular methods. These methods are:

1. Percentage method or Arithmetic method

2. Total Outlay method

3. Graphic method or point method.

4. ARC Method

5. Revenue Method

1. Percentage method:

According to this method elasticity is estimated by dividing the percentage change in amount demanded by the percentage change in price of the commodity.

Ep = [Percentage change in demand / Percentage change in price]

In this method, three values of ‘Ep’ can be obtained. Viz., Ep = 1, Ep > 1, Ep < 1.

If 5% change in price leads to exactly 5% change in demand, i.e. percentage change in demand is equal to percentage change in price, Ep = 1, it is a case of unit elasticity.

If percentage change in demand is greater than percentage change in price, Ep > 1, it means the demand is Relatively elastic.

If percentage change in demand is less than that in price, Ep < 1, meaning thereby the demand is Relatively Inelastic.

2. Total Outlay Method:

The elasticity of demand can be measured by considering the changes in price and the consequent changes in demand causing changes in the total amount spent on the goods. The change in price changes the demand for a commodity which in turn changes the total expenditure of the consumer or total revenue of the seller.

If a given change in price fails to bring about any change in the total outlay, it is the case of unit elasticity. It means if the total revenue (price x Quantity bought) remains the same in spite of a change in price, ‘Ep’ is said to be equal to 1

If price and total revenue are inversely related, i.e., if total revenue falls with rise in price or rises with fall in price, demand is said to be elastic or e > 1.

When price and total revenue are directly related, i.e. if total revenue rises with a rise in price and falls with a fall in price, the demand is said to be inelastic or e < 1.

3. Graphic method or Point method:

Graphic method is otherwise known as point method or Geometric method. According to this method elasticity of demand is measured on different points on a straight line demand curve. The price elasticity of demand at a point on a straight line is equal to the lower segment of the demand curve divided by upper segment of the demand curve.

4. ARC method:

The concept of ARC elasticity was provided by Dalton and then it was further developed by Lerner. This method for the measurement of price elasticity of demand is applied when the change in price is somewhat large or the price elasticity over an ARC of demand is provided. ARC elasticity of demand is the elasticity between distinct points on the demand curve. It is an increase of average responsiveness to price change shown by a demand curve. Any two points on demand curve make an ARC.

5. Revenue Method:

Mrs. Joan Robinson has given this method. She says that elasticity of demand can be measured with the help of average revenue and marginal revenue.

4. (a) What do you mean by ordinal utility? Discuss consumer’s equilibrium with the help of ordinal utility analysis. 2+9=11

Ans: Meaning of Ordinal Utility: Ordinal utility is a concept in economics that focuses on the ranking or ordering of preferences rather than quantifying the exact level of satisfaction or utility derived from consuming goods or services. It is based on the assumption that consumers can rank their preferences and determine their relative levels of satisfaction without assigning specific numerical values to those preferences.

Consumer’s Equilibrium

In consumer's equilibrium, a consumer maximizes their satisfaction or utility given their budget constraint and the prices of goods. The consumer aims to allocate their limited income in a way that provides the highest possible level of satisfaction.

To understand consumer's equilibrium using ordinal utility analysis, we consider indifference curves. Indifference curves represent combinations of goods that yield the same level of satisfaction to the consumer. These curves are downward sloping, indicating the trade-off between goods.

Consumer's equilibrium occurs at the point where the highest indifference curve is tangent to the budget line. The budget line represents the combinations of goods that can be purchased given the consumer's income and the prices of goods. The tangent point indicates that the consumer is allocating their income in a way that they cannot increase their satisfaction by reallocating their spending.

At consumer's equilibrium, the marginal rate of substitution (MRS), which measures the willingness of the consumer to trade one good for another, is equal to the ratio of the prices of the goods. This equality ensures that the consumer is allocating their spending in the most efficient manner, considering the relative prices and their preferences.

If the consumer is not at equilibrium, they can increase their satisfaction by adjusting their consumption bundle. They will continue to reallocate until they reach the point where the MRS equals the price ratio, indicating consumer's equilibrium.

Ordinal utility analysis helps us understand how consumers make choices based on their preferences and the prices they face. It provides insights into the trade-offs consumers are willing to make and helps explain the concept of consumer's equilibrium where utility is maximized given the budget constraint.

(b) What is price effect? Explain price effect with the help of diagram. Can PCC be parallel? Explain. 2+6+3=11

Ans: Price Effect: The price effect may be defined as the change in the consumption of goods when the price of either of the two goods changes while the price of the other goods and the income of the consumer remain constant.

According to Lipsey, “The price effect shows how much satisfaction of the consumer varies due to the change in the consumption of two goods as the price of one changes the price of the other and money income remains constant”.

Price effect can be explained with the help of following diagram:

In this figure IC is the original indifference curve and AB the original budget line and consumer is in equilibrium at point ‘E’. When the income of the consumer and the price of oranges remain constant but the price of apples falls, then new budget line assumes the shape of AD which touches higher indifference curve IC1 at point G, the new equilibrium point. In other words, demand for apples will increase from ON to OT i.e. by NT which is what we call “Price effect” of a fall in price. On the other hand, if the price of apples increases, other things remaining constant, the budget line will move inwards to AC. It touches indifference curve IC2 at new equilibrium point F. It shows that demand for apples will decrease from ON to OM i.e. by MN which represents price effect of a rise in price. By joining together different equilibrium points like E, F, G one gets price consumption curve (PCC).

Can PCC be parallel?

No, the concept of "PCC" (Price Consumption Curve) cannot be parallel. The Price Consumption Curve represents the different combinations of two goods or services that a consumer can purchase at different price levels while maintaining the same level of utility or satisfaction.

The PCC is typically downward sloping, reflecting the inverse relationship between the price of a good and the quantity consumed. As the price of a good decreases, the consumer can afford to purchase more of it and may reduce consumption of the other good to maintain a constant level of satisfaction. Conversely, as the price of a good increases, the consumer will purchase less of it and allocate their spending to the other good.

Since the PCC represents different combinations of goods at different price levels, it cannot be parallel. It will exhibit a negative slope, demonstrating the trade-offs and substitution effects between goods as prices change. The slope of the PCC indicates the marginal rate of substitution, representing the rate at which the consumer is willing to substitute one good for another while maintaining a constant level of satisfaction.

5. (a) Discuss the law of variable proportion with the help of diagram. Which stage of production is ideal for the producer and why? 8+3=11

Ans: The law of variable proportion is one of the fundamental laws of economics. It is also known as the 'Law of Diminishing Marginal Returns' or the 'Law of Diminishing Marginal Productivity.' This Law of variable proportion shows the input-output relationship or production function with one variable factor, i.e., a factor, which can be changed, while other factors of production are kept constant.

In short-period when the output of a good is sought to be increased by way of additional application of the variable factor, law of variable proportions comes into operation. When the number of one factor is increased while all other factors remain constant, then the proportion between the factors is altered. On account of change in the proportion of factors there will also be a change in total output at different rates. In economics, this tendency is called Law of Variable Proportions. The law states that as the proportion of factors is changed, the total production at first increases more than proportionately, then equi-proportionately and finally less than proportionately.

According to Samuelson, “The law states than an increase in some inputs relative to other fixed input will, in a given state of technology, cause total output to increase, but after a point the extra output resulting from the same addition of extra inputs is likely to become less and less.”

Explanation of the Law of Variable Proportion with the help of an example

Law of variable proportion can be explained with the help of following table and diagram:

Units of Land	Units of Labour	Total Product	Marginal Product	Average Product
1	1	2	2	2
1	2	5	3	2.5
1	3	9	4	3
1	4	12	3	3
End of the first State Beginning of the Second Stage
1	5	14	2	2.8
1	6	15	1	2.5
1	7	15	0	2.1
End of the Second Stage Beginning of the Third Stage
1	8	14	-1	1.7

Explanation:

From the above Table and Diagrams drawn on the assumption that production obeys the law of variable proportions, one can easily understand three stages of production. These are elucidated in the following table:

Three Stages of Production

Stages	Total Product	Marginal Product	Average Product
1^st Stage	Initially it increases at an increasing rate. Later at diminishing rate.	Initially increases and reaches the maximum point. The starts decreasing.	Increases and reaches its maximum point
2^nd Stage	Increases at diminishing rate and reaches its maximum point.	Decreases and becomes zero.	After reaching its maximum begins to decrease.
3^rd Stage	Begins to fall	Becomes Negative.	Continues to diminish.

Which stage of production is ideal for the producer and why?

The second stage of production, situated between the first and third stages, is considered the ideal stage for the producer. In this stage, the marginal product of the variable input is still positive, although it is decreasing. The producer is maximizing their productivity and efficiency, achieving the highest level of output for a given level of inputs.

During the second stage, the producer benefits from economies of scale, effective resource utilization, and increased efficiency. Costs per unit of output are generally lower compared to the first stage. The producer can take advantage of specialization, improved production techniques, and optimized input combinations.

(b) Discuss the economies of scale with the help of suitable example. 11

Ans: Now-a-days, goods are produced on a very large scale in modern factories. When the production is carried on a large scale the producer derives a number of advantages or economies. These advantages of large scale production are called economies of scale. This is the reason why entrepreneurs try to expand the size of their factories.

Economies of scale refer to the cost advantages that a firm can achieve as it increases its scale of production. In other words, as a firm expands its output and operates at a larger scale, it experiences cost savings and efficiency improvements that result in lower average costs per unit of production. Let's explore economies of scale with the help of a suitable example:

Example: Automobile Manufacturing

Consider an automobile manufacturing company that initially produces 1,000 cars per year. As the company increases its production and expands its scale, it can benefit from economies of scale in various ways:

1. Purchasing Economies: As the firm buys raw materials, components, and other inputs in larger quantities, it can negotiate bulk discounts and lower prices. Suppliers are often willing to offer lower prices to firms with higher purchasing volumes, resulting in cost savings.

2. Technical Economies: With a larger scale of production, the company can invest in more advanced and efficient production technologies. This can include automated assembly lines, robotics, and computerized systems, which streamline production processes and reduce labour requirements. By adopting such technologies, the firm can achieve higher output levels with lower per-unit costs.

3. Specialization and Division of Labour: As production expands, the company can divide tasks and assign specialized workers to specific production stages. This division of labour allows workers to specialize in their respective tasks, improving efficiency and productivity. Specialization reduces duplication of effort and increases efficiency, leading to lower costs per unit of production.

4. Marketing and Advertising Economies: With a larger scale of production, the company can spread its marketing and advertising costs over a greater number of units. Advertising campaigns, distribution networks, and brand recognition can be leveraged more effectively, leading to cost savings in promoting and selling the products.

5. Financial Economies: Larger firms often have better access to financial resources and can borrow at lower interest rates. They may have enhanced bargaining power with financial institutions, allowing them to secure favourable loan terms. Lower borrowing costs translate into reduced financial expenses, contributing to overall cost savings.

These are just a few examples of how economies of scale can be realized in automobile manufacturing. By leveraging these cost advantages, the company can achieve lower average costs per unit of production as it expands its scale and increases output.

It is important to note that economies of scale are not indefinite and can reach a point of diminishing returns or diseconomies of scale if the firm becomes too large or faces inefficiencies due to coordination challenges or excessive bureaucracy. Nonetheless, in the early stages of scaling up, economies of scale provide significant cost benefits and competitive advantages to firms.

6. (a) Discuss the price and output determination of a perfectly competitive firm and industry under short run. 11

Ans: Short-run Equilibrium of the Firm

The short run is a period of time in which the firm can vary its output by changing the variable factors of production in order to earn maximum profits or to incur minimum losses. The number of firms in the industry is fixed because neither the existing firms can leave nor new firms can enter it. The firm is in equilibrium when it is earning maximum profits as the difference between its total revenue and total cost. A firm is short run equilibrium may face any of the three situations:

1) Super Normal Profits (AR > AC):

A firm is in equilibrium when its marginal cost is equal to marginal revenue and marginal cost curve cuts marginal revenue from below. A firm is in equilibrium earns super normal profit, when average revenue is more than its average cost. It can also be explained with the help of following diagram:

In this figure, output of the firm is shown on OX-axis and cost/revenue on OY-axis. MC is the marginal cost and AC is average cost curve. PP is the average revenue and marginal revenue curve (MR = AR). Supposing OP is the price determined by the industry. At this price, firm’s equilibrium will be at point E, where marginal cost is equal to marginal revenue and marginal cost curve cuts marginal revenue curve from below.

Equilibrium output is OM. At this output AR (price) = EM and AC = AM. Since AR (EM) > AC (AM), firm is earning EA super normal profit per unit of output.

Per Unit super normal profit = EA

Total Super-Normal Profit = EABP

2) Normal Profits (AR = AC):

Normal profits cover just the reward for entrepreneurial services and are included in the cost of production. So that, a firm in equilibrium earns normal profits when its average cost is equal to the average revenue i.e. AC = AR.

Normal Profits = MC = MR = AC = AR.

3) Minimum Loss (AR < AC)

A firm in equilibrium may incur minimum loss when the average cost is more than the average revenue and average revenue is equal to average variable cost. Even if, the firm discontinues its production, in the short run, it will have to bear the loss of fixed costs. Loss of fixed costs is the minimum loss of the firm.

At equilibrium point an (AC) is more than EN (AR). In other words, average cost is more than average revenue by AE which represents per unit loss. As such firm’s total loss is AEPB.

Per Unit Loss = AE

Total Loss = AEPB

From the above discussion, we may conclude from the above discussion that in the short-run each firm may be making either supernormal profits, or normal profits or losses depending upon the price of the product.

Short Run Equilibrium of the Industry

The industry is in equilibrium at that price at which quantity demanded is equal to quantity supplied. But for industry to be in full equilibrium, in the short run, is very rare. Full equilibrium position is possible only when all firms earn just normal profit. But in the short run, some firms may be earning super-normal profit and others may be incurring losses.

Short-run equilibrium is explained with the help of following diagram:

In this figure, DD is the demand curve and SS the supply curve of industry. They both intersect at point E. So point E, indicates equilibrium of industry. In this case OP is the equilibrium price and OQ is the equilibrium output. But it will not be full equilibrium of industry, if some firms are getting super normal profit and others are incurring losses. In Figure (B) the firm is getting super normal profit at the prevailing price OP as shown by ABEP shaded area. Figure (C) firm is incurring losses at the prevailing price OP as shown by PERT shaded area.

In short the industry is in equilibrium at that price at which the demand for and supply of its production are equal. But in the position of equilibrium of industry, the firms may earn super normal profit or incur losses. As such, industry is ordinarily not in full equilibrium in short period.

(b) Write a note on discriminating monopoly. 11

Ans: Price discrimination means the practice of selling the same commodity at different prices to different buyers. Under monopoly the producer usually restricts output and sells it at a higher price, thereby making maximum profit. If the monopolist charges different prices from different customers for the same commodity, it is called price discrimination or discriminating monopoly. The idea is to get from each customer whatever profits could be squeezed out of him depending on his ability to pay and intensity of demand. When a seller charges Rs.20 for a commodity from a customer A and Rs.22 for the same commodity from customer B, he is practicing price discrimination. Joan Robinson defines price discrimination as, “the act of selling the same article produce under a single control at different prices”. Price discrimination may also be defined as, “the sale of technically similar products at prices which are not proportional to marginal cost”.

Types of price discrimination

There are different types of price discrimination. They are

1. Personal discrimination: in personal discrimination, the monopolist will charge different prices from different customers on the basis of their ability to pay. Rich customers will be asked to pay more and poor customers to pay less. This is possible in specialized personal services of doctors and lawyers. If it is a commodity the discrimination will not be done openly but in a disguised manner. For e.g. the book of a famous Author can be sold in the market at different prices to different class of customers – deluxe edition is higher than the popular edition at a considerably lower price. Though the cost of producing deluxe edition is higher than the popular edition, the price fixed for the former will be very high than the price fixed for the latter. The content of the book is the same for which different customers pay the different prices. The deluxe edition will command a market among the richer class and it will have prestige value. Thus personal discrimination can be mad by making some superficial changes.

Similar principle of personal discrimination adopted in railways or transport organization. The upper class passengers pay more than the lower class for the same services rendered.

2. Place discrimination: monopolist having different markets in different regions may charge different prices for the same commodity in the different regions or localities. The locality in which his market is situated will be the criteria in fixing up the price. Suppose a monopolist has a shop in an aristocratic locality and also in a slum. He will charge higher prices in the former shop and lesser price in the slum shop on the understanding that aristocrats will not go for shopping in the slum. Generally, the extra price charge in an aristocratic locality will not be felt by the customers as this shop would cater to their extra needs such as ‘drive - in ‘facility, ‘door - delivery’ etc. sometimes the monopolist may charge lower prices in a foreign country than in the home market. This is also place discrimination. This method is adopted for “dumping” the goods in the foreign markets

3. Trade discrimination: this can also be called ‘use discrimination’. By this method, the monopolist will charge different price for the same commodity for different types of users to which the commodity is put to. For instance, electricity will be sold at cheaper rates for industrial establishments and charged at a higher rate for domestic consumption. Similarly, accessories like small springs, bolts, nuts, etc. will be charged at a higher price for automobiles and a lower price when the same material is used for bicycles and for domestic purposes.

Conditions necessary for price discrimination

1. Firm is a price maker: The firm must operate in imperfect competition; it must be a price maker with a downwardly sloping demand curve.

2. Separate markets: The firm must be able to separate markets and prevent resale. E.g. stopping an adults using a child’s ticket. Prevent business travellers from buying discount tickets.

3. Different elasticities of demand: Different consumer groups must have elasticities of demand. E.g. students with low income will be more price elastic and sensitive to price. Business travellers will have more inelastic demand.

4. Low admin costs: It must be relatively cheap to separate markets and implement price discrimination.

7. (a) Discuss the concept of product differentiation in monopolistic competition. Explain the concept of excess capacity in monopolistic competition. 5+6=11

Ans: Concept of Product differentiation: Product differentiation refers to the strategy used by firms in monopolistic competition to distinguish their products from those of their competitors. In this market structure, firms produce similar but not identical products, allowing them to create a perceived uniqueness and establish brand loyalty among consumers.

The concept of product differentiation in monopolistic competition involves incorporating features such as branding, packaging, design, quality, customer service, and marketing to make the product distinct and more desirable to consumers. By differentiating their products, firms aim to create a perceived value that sets them apart from competitors and allows them to charge a higher price.

Product differentiation leads to greater market power for each firm, as they have some control over the price and quantity of their unique product. However, since products are not perfect substitutes, each firm faces a downward-sloping demand curve, indicating that consumers are willing to pay a premium for the differentiated features.

Excess capacity

The concept of excess capacity in monopolistic competition refers to a situation where firms in this market structure produce less than the efficient scale of production. Excess capacity arises because firms in monopolistic competition face downward-sloping demand curves and must operate with a degree of market power, which limits their ability to fully utilize their production capacity.

Due to product differentiation, each firm has a narrower customer base compared to perfect competition. This leads to a situation where firms do not produce at the level of maximum efficiency or the minimum average cost of production. Instead, they operate with excess capacity, which means they have the potential to produce more output than they currently do.

The presence of excess capacity in monopolistic competition results in inefficiencies. Firms could potentially reduce their costs and increase their output by operating at a larger scale, but they choose not to do so due to the desire to maintain product differentiation and preserve their perceived uniqueness in the market. This inefficiency can be seen as a trade-off for the benefits of product differentiation and the ability to charge higher prices.

Product differentiation allows firms in monopolistic competition to create a competitive advantage through unique product features, while the concept of excess capacity highlights the inefficiencies that arise from operating below the efficient scale of production.

(b) Compare and contrast between monopolistic competition and oligopoly. Analyze the dilemma of oligopolistic firm. 7+4=11

Ans: Monopolistic Competition Meaning: Monopolistic competition, as the name itself implies, is a blend of monopoly and perfect competition. It refers to the market situation in which many producers produce and sell goods which are closely related to each other and close substitutes but they are not identical. In this respect each firm will have some monopoly at the same time the firm has to compete in the market will other firms as they produce close substitutes. Also they are large number of sellers who follow an independent price policy.

Oligopoly Meaning

“Oligopoly” is a term derived from two Greek words “Oligos” meaning a few “pollein” meaning to sell. Thus Oligopoly refers to that form of imperfect competition where there will be only few sellers producing either a homogenous product which are close substitutes but not perfect substitutes or similar products.

There are only few sellers of a product under oligopoly due to which actions taken by any individual seller have a significant impact on other sellers. There is a personalized competition under oligopoly. All firms act as rivals of each other. The most important feature of oligopolistic market is interdependence in decision making.

Difference between Monopolistic Competition and Oligopoly

Basis	Monopolistic Competition	Oligopoly
1. Number of Buyers and Sellers	There is large number of buyers and sellers.	There is only few sellers and large number of buyers.
2. Competition	Competition amongst monopolists	Competition amongst the few sellers.
3. Product	Products are different but close substitute of one another.	Similar/identical products
4. Entry or exit of firm	Freedom of entry or exit of firms into the market.	Blocked entry / threat to entry of new firms.
5. Elasticity	Demand is highly elastic.	Indefinite demand.
6. Decision making	Independent decision making	Decision of one firm may affect the decision of other firm.
7. Price maker or taker	Prices are competitive in monopolistic competition.	Prices are competitive in monopolistic competition.
8. Selling cost	Selling costs are important in monopolistic competition.	Selling costs are most important in oligopoly.

The dilemma faced by oligopolistic firms arises from the interdependence among the few large firms that dominate the market. An oligopoly is a market structure characterized by a small number of firms that have significant market power, leading to complex strategic interactions. The dilemma of oligopolistic firms is given below:

a) Price Competition vs. Collusion: Oligopolistic firms face a dilemma between competing aggressively on price and risking profit erosion or colluding with competitors to maximize collective profits.

b) Uncertainty and Strategic Decision-Making: Oligopolistic firms must make strategic decisions without complete information about competitors' actions, leading to uncertainty about market outcomes.

c) Balancing Cooperation and Self-Interest: Oligopolistic firms need to strike a balance between cooperating with competitors for mutual benefits and protecting their own self-interests.

d) Barriers to Entry and Market Dominance: Oligopolistic firms benefit from significant barriers to entry but must decide how aggressively to defend their market dominance against potential entrants.

e) Reputation and Long-Term Strategies: Oligopolistic firms face a dilemma between short-term profit maximization and long-term investment in building and preserving a reputation for quality, innovation, and customer loyalty.

Principles of MicroEconomics Solved Question Paper 2022 [Dibrugarh University BCOM 5th SEM CBCS Pattern]