How Choice Arises in Economics

Topics: Economics, Money, Economics of production Pages: 11 (2694 words) Published: November 7, 2011
Q 1)Why do central problems arise in an economy? 1 Marks

Ans. Central problems arise in an economy due to scarcity of resources having alternative uses in relation to unlimited wants.

Q 2)What is the general shape of the APP curve? 1 Marks
Ans. APP curve first rises and then falls when more units of a factor are employed.

Q 3)What do the returns to scale refer to?
Returns to scale relates to increase in output when all the inputs are increased in the same proportion.

Q 4)What are volume discount? 1 Marks
ANS-Volume discount is the discount on price when a large quantity is purchased

Q 5)Define monopoly. 1 Marks
Ans.Monopoly refers to a market situation in which there is a single seller and there is no close substitute of the commodity sold by the monopolist.

Q 6)Explain how scarcity and choice go together? 3 Marks

ANS- Resources refer to all the factors of production. Scarcity means that resources which produce goods and services are less in relation to their demand. Though these resources are scarce they can be used for producing different goods. Due to scarcity of these resources, an economy cannot produce all the goods and services as required by its citizens. So some wants will have to remain unfulfilled. Therefore choice has to be made which means decision-making. If the resources were unlimited like sunshine or air then there would be no problem of choice. So scarcity and choice is inseparable.

Q 7)What do you understand by the term Rationality in economics? 3 Marks

Ans. Rationality refers to the tendency of an individual to promote his self-interest. A consumer is rational in his behavior if he attempts to maximise his satisfaction while he is spending money on the purchase of different goods and services. Likewise a producer is rational, if he attempts to maximise his profits.

Q.8 Explain concept of marginal cost with the help of an example.

Ans. It is the addition to the total cost by using an additional unit of a commodity for example cost of 10 kg sugar is Rs. 200 while cost of 11kg sugar is Rs. 220 therefore the marginal cost is Rs 20 (220-200).

Classify the following into Fixed Cost and Variable Cost:
1) Rent for a shed 4) Wages to permanent staff 2) Minimum Telephone Bill 5) Interest on Capital
3) Cost of Raw Material 6) Payment for transportation of goods

Ans. Fixed Cost - (1),(2),(4),(5)
Variable Cost - (3),(6),(7),(8)
Q 9)What is meant by law of diminishing return to scale? Why do they arise? 3 Marks

ANS: Law of diminishing return to scale refers to a proportionate increase in the output is less than the proportionate increase in input. For example if there is 20% increase in input as a result of that only 15% increase in output

Diminishing returns to scale are due to diseconomies to scale. As the scale of production continues to be expanded beyond a certain limit, there is a difficulty of management and coordination. This leads to wastage, decline in efficiency, etc. and causes diminishing returns to scale.

Q.10 State three features of Monopoly market. Describe any one.

Ans. Following are the three features of monopoly market:
1) A single seller
2) No close substitute of the product
3) No freedom of entry of new firm
1) A single Seller:
There is only one seller (or firm) of a commodity in the market with the reason that there is no distinction between industry and firm. The firm itself is the industry and has full control over the supply of the commodity. The monopolist may be an individual, a firm or a group of firm or a government corporation or even government itself.

Q.11 Explain the meaning of normal goods and inferior goods.

Ans. Normal Goods: Normal goods are those goods for which the demand rises with every increase in the income of the consumer. In other words, in case of normal goods, there is a direct relationship...
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