Economics (030) Class Xii (2014-15) Worksheet Page 10
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21Since this price is below equilibrium price, there is excess demand in the
market. With shortages, sellers tend to hoard the product. It could also lead to
black marketing.
(2)
OR
‘Price floor’ is the minimum price fixed by the government at which sellers can legally sell
their product.
(1)
Since this price is above equilibrium price, there is excess supply in the market. Since
there is surplus, sellers can attempt to sell their product at a price below the floor price.
(2)
8.
Freedom of entry and exit of firms under perfect competition means that there are no
costs or barriers a firm faces to enter or exit the market. The implication of this is that in
the long run each firm earns only normal profit.
Suppose in the short run, existing firms are earning super normal profits, new firms enter
the industry as they are attracted by profits. This raises the market supply and reduces
the market price. As firms accept the lower market price, profits reduces. This process
continues till profits reduce to normal levels in the long run.
The opposite occurs if firms are earning losses as firms leave the industry. This reduces
market supply and raises market price till losses get wiped out and firms earn only
normal profit in the long run.
(3)
9.
Yes, the same good can be inferior for one person and normal for another.
Whether a good is normal or inferior is determined by the income level of the
consumer. A good which is a normal good for a consumer with a lower income,
may become an inferior good for a consumer with higher income.
(2)
For example, coarse cloth may be a normal good for a low income consumer, but for a
high income consumer it may be an inferior good as she can afford a better quality cloth.
Thus, when a consumer moves to a higher income level, she may consider coarse cloth as
being below their income status, and has the ability to buy more expensive fine cloth,
thus considering coarse cloth as being inferior.
(2)
10. An indifference curve is convex to the origin due to diminishing marginal rate of
substitution (MRS). Diminishing MRS means that the number of units of 'Good Y' that a
consumer wants to substitute for one extra unit of 'Good X' goes on decreasing as the
consumption of Good X increases. As consumption of Good X increases, the willingness
to pay for it diminishes (due to the law of diminishing marginal utility). This payment is
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