Perfect Competition and Supply for CUET Economics

AnswerB · A large number of buyers and sellers of a homogeneous product

1. Perfect competition has many buyers and sellers, identical products, free entry and exit, and perfect knowledge.

AnswerD · price taker

1. Each firm is too small a part of the market to change the price; it takes the market price as given.

AnswerA · the market (industry) demand and supply

1. The industry's demand and supply fix the price; each firm then sells at that price.

AnswerC · only normal profit

1. Supernormal profit draws new firms in, raising supply and lowering price; losses drive firms out, raising price.

2. This continues until price equals minimum AC: only normal profit remains.

AnswerB · buyers see every firm's product as identical

1. Because the products are identical, no buyer will pay more to one firm than to another.

2. That is one reason every firm must sell at the same market price.

AnswerA · Both A and R are true, and R is the correct explanation of A.

1. Both are true.

2. Knowing every price and seeing no difference in products (R), buyers simply go to another firm if one charges more (A).

AnswerA · Only I

1. I is true: the firm can sell any amount at the market price.

2. II is false: the market demand curve slopes downward, by the law of demand.

AnswerD · buyers and sellers know the market price everywhere

1. With full information about prices, no seller can charge more and no buyer will pay more than the market price.

AnswerC · A large wholesale market for wheat of one grade

1. Many farmers sell an identical product to many buyers, and no single farmer can move the price.

2. Brands, a single railway and a patent all give some control over price.

AnswerD · A is false, but R is true.

1. A is false: with identical products and a given price, advertising cannot win a firm a higher price.

2. R is true, and it is why advertising is pointless here.

AnswerC · price = MC, with MC rising

1. For a price taker MR = P, so the MC = MR rule becomes P = MC, on the rising part of MC.

AnswerA · S, the lowest point of AVC, at a price of ₹6

1. In the short run a firm keeps producing as long as price covers AVC, because fixed cost must be paid anyway.

2. Below ₹6, the minimum AVC, it loses less by shutting down: S is the shut-down point.

AnswerD · B, the lowest point of AC, at a price of ₹15

1. At B, price = minimum AC = ₹15, so TR = TC: the firm earns only normal profit.

2. Above ₹15 it earns supernormal profit; below it, a loss.

AnswerB · the rising part of its MC curve above minimum AVC

1. At each price the firm supplies where P = MC, so MC traces out the quantities supplied.

2. Below minimum AVC it supplies nothing, so the curve starts at that point.

AnswerD · the rising part of its long-run MC curve above minimum long-run AC

1. In the long run all costs are variable, so the firm must cover its whole AC or leave.

2. So its supply starts at minimum long-run AC.

AnswerD · A is false, but R is true.

1. A is false: in the short run the test is AVC, not AC.

2. R is true.

AnswerA · Only I

1. I is true: P = AC means TR = TC.

2. II is false: normal profit is counted as part of cost, so at break-even the firm earns normal profit, not zero.

AnswerD · at each price the firm produces where price = MC

1. For each market price, reading across to the rising MC curve gives the quantity the firm offers.

2. That price–quantity pairing is exactly what a supply curve is.

AnswerC · normal profit, enough to keep it in the industry

1. Costs in economics include the normal return the owner could earn elsewhere.

2. So TR = TC means the owner earns exactly that normal return: normal profit.

AnswerC · Both I and II

1. Both are true: short run, AVC is the bar; long run, all costs are variable, so AC is the bar.

AnswerC · produces where MC = ₹24 and earns supernormal profit, since ₹24 is above minimum AC

1. The firm goes up its MC curve to where MC = ₹24.

2. At that output AC is below ₹24 (its minimum is ₹15), so price exceeds AC: supernormal profit.

AnswerA · Produces at a loss, because ₹13 covers AVC but not AC

1. ₹13 lies between minimum AVC (₹6) and minimum AC (₹15).

2. Producing covers all variable cost and part of fixed cost; shutting down would lose all the fixed cost. So it produces at a smaller loss.

AnswerA · Both A and R are true, and R is the correct explanation of A.

1. Both are true.

2. Since fixed cost is lost either way (R), producing is better as long as price covers AVC, even if not AC (A).

AnswerB · Shuts down, because ₹5 is below minimum AVC of ₹6

1. Below minimum AVC, producing cannot even cover variable cost.

2. Shutting down limits the loss to the fixed cost, so the firm supplies nothing.

AnswerA · the quantity supplied of a good rises when its price rises

1. A higher price makes production more profitable, so firms offer more: price and quantity supplied move together.

AnswerA · the sum of the quantities supplied by all firms at each price

1. Like market demand, it is the horizontal sum of the individual curves.

AnswerD · a movement up the supply curve from A to B: an extension of supply

1. A change in the good's own price moves sellers along the same supply curve.

2. Quantity supplied rises from 20 to 40: an extension of supply.

AnswerB · An improvement in the technology of producing it

1. Better technology lowers the cost of each unit, so firms offer more at every price.

2. Dearer inputs and a unit tax raise costs (shift left); own price moves along the curve.

AnswerC · More firms enter the industry

1. At ₹6, supply rises from 30 to 50: more is offered at the same price, so supply has increased.

2. More firms add to market supply. Higher wages or a tax would shift it left; own price moves along it.

AnswerC · shifts to the left (upward)

1. The tax adds to the cost of each unit, so firms need a higher price to offer the same quantity.

2. That is a leftward (upward) shift: a decrease in supply.

AnswerB · decreases: the wheat supply curve shifts left

1. Mustard is now the more rewarding use of the land, so some land moves out of wheat.

2. Less wheat is offered at every wheat price: a decrease in supply.

AnswerD · decreases, as they hold back stock to sell later

1. Selling later at a higher price pays more, so sellers offer less today.

AnswerC · 45

1. q₁ = 2 × 10 = 20; q₂ = 3 × 10 − 5 = 25.

2. Market supply = 20 + 25 = 45.

AnswerA · Both A and R are true, and R is the correct explanation of A.

1. Both are true.

2. A firm's supply curve is its MC curve; higher MC at every output (R) means less offered at every price (A).

AnswerD · A is false, but R is true.

1. A is false: an increase in supply is a rightward shift, caused by something other than own price.

2. R is true: own price moves sellers along the curve.

AnswerA · Only I

1. I is true: a subsidy lowers producers' cost per unit.

2. II is false: fewer firms supply less at each price, a leftward shift.

AnswerD · A-II, B-IV, C-I, D-III

1. A better seed is better technology: supply increases. Dearer fertiliser raises cost: supply decreases.

2. Rice's own price rising is an extension; fewer farmers is a decrease.

AnswerC · 31

1. At ₹30: 15 + 16 = 31.

AnswerB · A fall in the good's own price

1. Contraction is a movement down the same supply curve, caused only by a fall in own price.

2. The others shift the curve left: a decrease in supply.

AnswerA · About 144%

1. Market supply: at ₹20, 10 + 8 = 18; at ₹40, 20 + 24 = 44.

2. Rise = (44 − 18) ÷ 18 × 100 ≈ 144%. Price rose 100%, so supply is elastic here (eₛ ≈ 1.44).

AnswerA · percentage change in quantity supplied ÷ percentage change in price

1. eₛ = (ΔQ ÷ Q) ÷ (ΔP ÷ P). It is positive, since price and quantity supplied move together.

AnswerB · 1.5

1. % change in quantity supplied = 30 ÷ 100 = 30%. % change in price = 2 ÷ 10 = 20%.

2. eₛ = 30 ÷ 20 = 1.5: elastic supply.

AnswerB · 10%

1. % change in quantity supplied = 0.5 × 20% = 10%.

AnswerC · S₁, which starts at the origin

1. A straight supply curve through the origin has eₛ = 1 everywhere, whatever its slope.

2. On it, quantity and price change in the same proportion.

AnswerB · inelastic

1. The day's catch is fixed and cannot be stored, so the quantity offered hardly responds to price.

AnswerA · firms have time to change all inputs and new firms can enter

1. Given time, producers can expand plants and others can join, so output responds more to price.

AnswerA · Both A and R are true, and R is the correct explanation of A.

1. Both are true, and R explains A: same-direction changes give a positive ratio.

AnswerD · inelastic, eₛ = 0.4

1. eₛ = 4% ÷ 10% = 0.4, less than 1: inelastic.

AnswerA · Both A and R are true, and R is the correct explanation of A.

1. Both are true, and R explains A: storage lets quantity offered respond to price.

AnswerB · S₂, which meets the price axis

1. A straight supply curve that cuts the price axis has eₛ > 1 at every point.

2. One that cuts the quantity axis has eₛ < 1; through the origin, eₛ = 1.

AnswerC · Both I and II

1. Vertical: the quantity does not change with price, eₛ = 0. I is true.

2. Horizontal: any quantity at one price, eₛ = ∞. II is true.

AnswerC · 240

1. % change in price = 5 ÷ 50 = 10%.

2. % change in quantity = 2 × 10% = 20%, so supply = 200 × 1.2 = 240.