Extra Questions Answers - Price Determination Notes | Study Crash Course of Micro Economics -Class 12 - Commerce

Commerce: Extra Questions Answers - Price Determination Notes | Study Crash Course of Micro Economics -Class 12 - Commerce

The document Extra Questions Answers - Price Determination Notes | Study Crash Course of Micro Economics -Class 12 - Commerce is a part of the Commerce Course Crash Course of Micro Economics -Class 12.
All you need of Commerce at this link: Commerce

EXTRA QUESTION’s

(Q1) What kind of supply shock do you expect in the market when the rice crop is severally damaged by the drought ? How will the market adjust itself to the supply shock ? What suggestions would you offer to tackle  the problems arising out of the supply shock?

Ans: When a drought severally damages the rice crop, output of rice will significantly fall. It leads to supply shock in the market. The supply curve shifts to the left. Thus creating high price of rice.
The problem of low supply of rice be addressed in two : 

(a) The government can release more rice from its buffer stock , and 

(b) The government can import rice from rest of the world.

 The problem of high price of rice can be addressed by fixing a price ceiling The government can fix maximum price of rice in the market. 

(Q2) Farmers may suffer a loss even when there is a good harvest. Does your supply-demand analysis provide an answer to this paradox?

Ans: Good harvest causes a glut (of supply) in the market. This causes a price-crash.  Owing to their poverty (need for cash) farmers often sell their produce at a low price. Thus the total revenue of the farmer decreases even when his output/sale is more than before.

(Q3) Owing to political considerations, Russia has banned the import of seafood from the European Countries. How would you analyse the impact of this decision
(i) on the export of seafood from the Indian market, and
(ii) on the domestic supplies of seafood in India?

Ans: (i) It generates an opportunity for the Indian exporters to send supplies of seafood to the Russian market. India can earn foreign exchange which can be used to import military hardware from Russia.

(ii) If seafood is exported to Russia, domestic supplies will reduce in India. Supply curve of seafood in the Indian domestic market will shift to the left. OTBC, it would lead to increase in price in the domestic market.

(Q4) On 15th July, 2016 Government of India banned onion’s exports from India. How will it affect Market Offer Curve of consumer buying green chilies and onions assuming no changes in the price of green chillies.

Ans: Banning exports of onions from India, there will be surplus supply of this product by which market price of onion will fall . Assuming green chillies prices remaining constant, market offer curve of both these products will rotate rightwards. Consumer in question, will be able to buy more onions within the same budget.

(Q5) Why should MSP (Minimum Support Price) be offered to the farmers for the production of rice even when Ed for rice is low, and low yield would mean high market price for the farmers ?

Ans: MSP is offered to the farmers to protect their income when high yield leads to low market price.  The government would never want to have a  situation when the farmers grow less rice to be sold at a higher price.  Such a situation would be a threat to domestic food supplies and therefore, food security of the people.

(Q6) If necessary goods like sugar, wheat were left free to the market forces of demand and supply, then poor people may not afford them at the market determined price.  What should then be done by the government ?

Ans: (a) Price Ceiling / Control price     (b) Rationing 

(Q7) Nearly two decades ago, there was a massive gap between demand and supply of telephone service.  This gap does no longer exist. How has this benefited the consumers?  Explain.

Ans: As a result of tremendous growth of telecom sector, the charges for outgoing and incoming calls have come down drastically. Also Indian consumer is now free to avail phone service from any company that offers him best bargain.

(Q8) Explain why internet cafe rates have come down drastically over time.

Ans: This has been caused by following factors :

(1) The price of computers has declined.

(2)The internet access charges by internet service provides  ISPs have come down.

(3) In connecting to the ISPs instead of phone lines, cable lines could be used which are cheaper and through which the connection can be kept  interrupted for 24 hrs a day.

(Q8) Suppose the market determined 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 fixes the rent below the market determined (equilibrium) rent, quantity supplied in the market will be less than quantity demanded.  It will lead to excess demand of the apartments for rent . In order to meet this situation, the government has to arrange apartments at controlled rent.  If the government cannot do it , it will lead to black marketing.

(Q9) How is withdrawal of subsidy on the inputs used in the production of fertilizers likely to affect the supply and demand for fertilizers in India?  Explain its implications for the farmers.

Ans: Withdrawal of subsidy on the inputs used in the production of fertilizers will increase the cost of production of fertilizers.  Accordingly, supply curve of fertilizers will shift to the left ( decreases) Decrease in the supply of fertilizers would lead to a rise in the price of fertilizers , implying that the demand for fertilizers will tend to shrink.

 Thus  the use of fertilizers by the farmers is bound to fall.  It will lead to a fall in productivity of farm products.  Consequently, a fall in income of the farmers.

(Q10) Competitiveness of Indian producers in the international market is very low.  Accordingly, the exports are low.  Do you think a cut in excise duty on the production of export goods will solve the problem?

Ans: A cut in excise duty on the production of export goods will reduce the cost of production of the export goods.  Keeping the profits margin same as earlier, Indian producers can reduce the prices of the export goods and become more competitive in international markets.  However, a fall in price should be accompanied by increase in the quality and innovativeness of the export goods. 

(Q11)  Why do the subsistence farmers in arid zones of Rajasthan continue to grow bajra even when it is profitable to grow pulses ?

Ans: Subsistence farmers, by definition, are those farmers who focus on the production of subsistence crops (crops they need for self-consumption, like bajra).  Accordingly, their supply-response to the market price of commercial crops (pulses) is insignificant.

(Q12) How would rise in MSP (minimum support price) for cotton affect the supply of rice in the domestic economy, when rice and cotton are the only two crops grown?  Would you favour any such decision by the government?

Ans: If MSP of cotton is raised, it becomes relatively more profitable for the farmers to grow cotton in place of rice .  Accordingly, even when price of rice has not changed, less of rice would be grown. I would not favour this decision , Lower production of rice would lead to a rise in its price.  It would lead to food-deficiency for those who cannot afford to buy it.  Import of rice would lead to dependence on the rest of the world.  It would mean uncertainty of food supplies.

(Q13) In case of electricity which is sold by a government at a subsidized price, how can the government lower its losses without lowering the subsidy ?

Ans: The only way out to reduce losses is to lower the cost of production.  The government must use more cost-efficient technology to produce electricity .  Also, loss of revenue due to transmission losses and pilferage of electricity must be stopped

(Q14) What needs to be done for producers of essential goods to save them from income fluctuations?

Ans: If producers of growers (farmers) of essential products like wheat, rice, sugarcane, etc. suffer from wide fluctuation in prices, government should follow Support price policy  Since support price is high than equilibrium price, it leads to more supply and short demand.  As a result, there is always some surplus which should be purchased by the government at the support price.

(Q15) Market for essential goods is competitive in which the existing firms are earning       extra-normal (abnormal) profit.  How can policy of liberalization by the government be made in making the market more competitive in the interest of consumers ?

Ans: Firstly, policy of liberalisation will remove certain barriers like licensing, quotas, etc.  as a result new firms will join the industry , make the market more competitive causing increase in supply of essential goods.  Other things remaining the same, this will lead to fall in equilibrium price and rise in equilibrium quantity. Abnormal profits will be wiped out and consumers are expected to enjoy large quantity at a lower price.

(Q16) In India, retail price of petrol has significantly fallen during the past six months. But, demand for cars has not shown any significant rise. Use your economics to explain this fact.

Ans: Car is expensive consumer good. Demand for cars is expected to rise only when
(a) there is a significant rise in income of the buyers, or 

(b) there is a significant fall in the price of cars , or 

(c) there is a significant cut in the interest rate for car loans. 

(Q17) A shift in demand curve has a larger effect on price and smaller effect on quantity when the number of firms is fixed compared to the situation when free entry and exit is permitted?  Explain.

Ans: Fixed Number of firms :: When the number of firm is fixed, a shift in the demand curve will affect the equilibrium price as well as equilibrium quantity.  A rightward shift in the demand curve will increase the equilibrium price and quantity.  A leftward shift in the demand curve will decrease the equilibrium price and quantity.

Free entry or Exit of firms :: On the other hand, when free entry and exit of firms is permitted, a shift in the demand curve will not affect the equilibrium price but will affect the equilibrium quantity.  A rightward shift in the demand curve will increase the equilibrium quantity and a leftward shift in the demand curve will decrease the equilibrium quantity.

(Q18) Do you agree with the view that the market absorbs the impact of increase or decrease in demand only through the process of ‘extension and contraction of demand and supply’ ? Give reason.

Ans: Yes, When there is increase in demand, demand curve shifts to the right. Excess demand emerges in the market. Price tends to be higher than the equilibrium price. It leads to extension of supply and contraction of demand. It is through this that excess demand is eliminated and new equilibrium is established in the market.

(Q19) The equilibrium price of exhaustible sources of energy like LPG is rising continuously.  What should be done to bring their price under control ?

Ans: To avoid rise in price of such commodities their economical use is recommended.  Their uneconomic use is the reason behind their rise in price, as it shifts supply curve to the left due to shortage.

(Q20) (a) Smoking at public places is banned by the Supreme Court of India.  Will it affect average price of cigarettes and its quantity sold            

(b) Explain the chain effects on the market equilibrium of the ban imposed on sale of GUTKA in Delhi.

Ans: (a) Yes, since smoking of cigarettes is banned at public places, demand for cigarettes will fall.  This will result in the fall in price of cigarettes and its quantity sold.

(b) When there is ban on the sale of ‘GUTKA’ supply will be reduced and firms producing GUTKA will shift their factors of production in the production of other goods. Consumer demanding GUTKA will reduce and hence demand and supply will fall , keeping price of this product as consant.

(Q21) Suppose the price at which equilibrium is attained is above the minimum average cost of the firms constituting the market.  Now if we allow for free entry and exit of firms, how will the market price adjust to it ?

Ans: If the equilibrium price is above the minimum average cost of the firms, it indicates that the existing firms have an opportunity to earn abnormal profits.  With freedom of entry and exit of firms, new firms will enter the industry, which will increase the market supply and will shift the supply curve towards right.  This rise in supply will lead to fall in equilibrium price till it becomes equal to the minimum average cost.

(Q22) Demand for a good is elastic whereas its supply is inelastic. What impact it will have on price, when demand for good increases ? Explain.

Ans: When supply is inelastic, it means supply for such a product cannot be increased. Now when demand for it increases , it will raise price for such a good 

(Q23)  Certain goods are rationed.  Why ?  or 

Governments, normally, introduce rationing for those commodities whose supply is perfectly inelastic.  Why?

Ans: These goods are necessities of life with inelastic demand . Rationing ensures that even poor consumers get these at reasonable price.  It is to help the poor.  Market system will result in a higher price and drive the consumers out of the market.

(Q24) If consumers’ demand for a product is inelastic ‘government should regulate the industry.’ Why?

Ans: The producers would attempt to exploit the consumers.  The consumers need to be protected.  In the bargaining process, consumers are weaker and hence liable for exploitation.

(Q25) When a government resorts to rationing of a commodity which is in short supply, it (the Government) ends up being a silent spectator.  Comment.
or 

Measures like rationing are not effective if at the controlled maximum price quantity supplied is less than quantity demanded.  Comment.

Ans: Black marketing will emerge, i.e., those persons who have lesser utility for the commodity will pass on their ration-quota to those persons who are willing to pay more.

(Q26) ) Whom do the buffer stock effects; producers or consumers ?
Ans: (Both)

(Q27)  A bumper crop of onion spells disaster for producers.  Why should government intervene?

Ans: By guaranteeing a minimum support price, the government attempts to help small farmers.  Agricultural products being highly perishable a bumper crop only means a crash in prices and hence it brings disaster for the farmer.

(Q28) In face of rising demand for petroleum products, the government has no choice but to increase the price of petroleum products. Do you agree ?

Ans:The govt. should adopt policies that would encourage more production.

(Q29) Whenever there is a shortage of supply, producers begin to hoard the commodity. This puts more pressure on price. How to check it ?

Ans: Government can take steps
(a) to increase the supply, and 

(b) to check hoarding and black marketing

(Q30) The market for motorcycles is in equilibrium. Suppose the price os steel parts (used in motorcycles) increases. Explain the effect of rise in the price of steel parts on the equilibrium price and quantity of motorcycles. (Use diagram)

Ans: Since steel parts are the inputs used in the production of motorcycles, therefore, with the rise in the price of inputs, the cost of production for the producer will also rise which will lead to decreasing profit margins for him. Thus, it will finally result in a decrease in supply.

(Q31) ‘ Due to excessive rainfall, the price of umbrellas soared up in the state of West Bengal.’ Use a diagram and economic theory to analyse the statement.

Ans: Due to excessive rainfall in West Bengal, the demand for umbrellas soared up.  As a result, they raise the market price. 

(Q32) ‘Sugarcane crop got damaged in Uttar Pradesh, it sent price of sugar roaring in Delhi.’ Use a diagram and economic theory to analyse the statement.    

Ans: Analysing the effect of sugarcane crop getting damaged in Uttar Pradesh, we infer the supply of sugarcane will decrease, thereby leading to price of sugar roaring in delhi.

(Q33) ‘Due to prolong heat in Jammu, demand for woolen clothes did not pick up in December.’ What is the impact of this on the demand for thermal wears in the market.

Ans: That the demand for thermal wears will decrease.  There emerges a situation of excess supply, the new equilibrium price falls.

(Q34) How can tax policy of Govt. be effective in controlling the supply of liquor like harmful product  

Ans: Govt. will impose heavy excise duty of liquor which will decrease its supply. It will raise the market price of liqour which can help in checking the consumption of it.

(Q35) In a particular market, demand by all consumers for a particular item is 300 units at a price of Rs. 2 per unit and at the same price supply made by all firms in the market is 100 units. What is this situation called and what the business man should do if the equation price of such commodity is Rs. 5 per unit where demand and supply are both 150 units each ?

(Q36) China is a manufacturer of telephone instruments. It has recently become a member of WTO, which means that it can sell its product in other member countries like India. Suppose that it does export a large number of telephone instruments to India :

(i) How will it affect the price and quantity sold of telephone instruments in India ?

(ii) Suppose that the demand for telephone instruments is relatively elastic. How will it affect India’s total expenditure on telephone instruments ?

(Q37) Business Process Outsourcing (BPO) is bringing in attractive jobs to the educated urban youth in India. Though highly remunerative, these jobs involve long and inconvenient working hours. What is the impact of BPO on the supply of labour ?

(Q38) In a market, the government lowers the excise duty to encourage the producers but at the same time general consumer reduces its interest in the product due to change in fashion. These changes affect the market in such a way that quantity bought and sold still increases. Explain how ? Use digaram.

(Q39) Market for coffee is in equilibrium. Suppose price of tea falls. Explain the effect of fall in price of tea on the equilibrium price and quantity ? (Use diagram)

(Q40) Give reasons for the following :

(i) An increase in supply will not result in a change in equilibrium quantity if the demand for a commodity is perfectly inelastic.

(ii) An increase in supply will not result in a change in equilibrium quantity if the demand for a commodity is perfectly elastic.

(Q41) “Subsidy for the import of defence goods rises from 4% to 6%.”  Using a suitable diagram, analyse the impact of the above on the supply of defence goods is the domestic economy.

(Q42) At a price of Rs. 15 per unit of a good, demand of the good is 200 units while supply is 300 units. What is likely to be its effect on price of this good ?

(Q43) Compare the effect of shift in demand curve on the equilibrium when the number of firms in the market is fixed with the situation when entry and exit are permitted.

The document Extra Questions Answers - Price Determination Notes | Study Crash Course of Micro Economics -Class 12 - Commerce is a part of the Commerce Course Crash Course of Micro Economics -Class 12.
All you need of Commerce at this link: Commerce

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