Q.1. What will happen if the price prevailing in the market is:

Ans. (i) Above the equilibrium price.

(ii) Below the equilibrium price.

(i) a. If the market price is above the equilibrium price, there will be excess supply of the commodity. Every seller will try to sell his products to the limited customers.

b. The competition among sellers will bring the price down to its equilibrium level.

(ii) a. When the market price is below the equilibrium price, there will be excess demand. Since quantity supplied will be less than the quantity demanded, there will be competition among buyers.

b. Consequently, market price will keep on rising till it reaches the equilibrium level.

Q.2. Suppose the demand and supply curve of commodity X in a perfectly competitive market are given by:

Ans. Qd = 700-p

Qs = 500+ 3p

Find equilibrium price and equilibrium quantity.

Qd=700-p

Qs = 500+ 3p

Equilibrium is when

Qd = 700-p = 500+ 3p

4p = 200

p = 50

Equilibrium quantity = Qd = 700 – p

= 700 – 50 = 650 units

Or Qs = 500+ 3p

= 500 + 150

= 650 units

Q.3. Suppose the market demand rent for apartments is too high for common people to afford. If the government comes forward to help those seeking apartments on rent by imposing control on rent, what impact will it have on the market for apartments?

Ans.

If the government comes forward and imposes control on maximum rent to be charged for apartments, it will have to be below the equilibrium price OR.

If it is fixed as say OR1, it will lead to:

(i) Excess demand to the extent of Q1Q2.

(ii) Black marketing by landlords i.e., they will charge higher rent than what has been fixed by the government, illegally of course.

Q.4. What is the reason for the long run equilibrium of a firm in monopolistic competition to be associated with zero profit?

Ans. i. A firm under monopolistic competition will earn zero profit in the long nm because of free entry and exit of firms.

ii. If firms are earning super normal profits in the short run, new firms will be attracted to the industry. With the increase in supply, the profits will come down to the level of normal profits only.

iii. Similarly if firms are incurring losses in the short run, some firms will leave the industry and the remaining firm will start earning normal profits.

iv. Thus in the long run firms under monopolistic competition can not earn super normal profit.

v. Profit really implies super normal profit but normal profit is considered as being just equivalent to the cost of production.

vi. Hence it can be said that the long run equilibrium of a monopolistic firm is associated with zero profit.

Q.5. Giving reason, distinguish between the behaviour of demand curves of firms under perfect competition and monopolistic competition.

Ans. (i) Under Perfect competition. Demand Curve/AR curve is perfectly elastic or parallel to x-axis because the firm can sell any amount at a given price.

(ii) Under Monopolistic competition. Demand Curve/AR Curve is downward sloping because more can be sold only at a lower price.

Q.6. Why is the demand curve more elastic under monopolistic competition than under monopoly? Explain.

Ans. The demand curve under monopolistic competition is more elastic than under monopoly because a large number of close substitutes are available in the monopolistic market. In monopoly, there are no close substitutes available.

Q.7. Supreme Court of India has banned smoking in public areas. How is it going to make an impact on equilibrium price and quantity of cigarettes?

Ans. Due to ban on smoking in public areas, demand for cigarettes will fall and their demand curve will shift towards left. Demand curve too will shift towards left from DD to D1D1 With this, equilibrium price will fall from OP to OP1 and equilibrium quantity will also fall from OQ to OQ1

Q.8. Suppose the market demand rent for apartments is too high for common people to afford. If the government comes forward to help those seeking apartments on rent by imposing control on rent, what impact will it have on the market for apartments?

Ans.

If the government comes forward and imposes control on maximum rent to be charged for apartments, it will have to be below the equilibrium price OR.