Essay on How Choice Arises in Economics

2680 Words Nov 22nd, 2011 11 Pages
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
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In other words there is an inverse relationship between the income of a consumer and his demand for normal goods. Eg. Peanuts and tonned milk are the normal goods.

Q.12 What is meant by returns to a factor? What lead to increasing returns to a factor?

Ans. Returns to a factor relates to the behaviour of total output as one variable input say labour is varied. It is a short run concept.
Following factors lead to increasing returns to a factor:
1) Optimum combination of factors: In the beginning when quantities of a variable factors are applied to fixed factors, the system moves towards achievement of optimum combination of factors because then underutilised fixed factors (building, machine, land etc) are better and more fully used leading to increasing returns. 2) Specialisation: A greater degree of division of labour greatly raises productivity of labour and other factors.

Q.13 Which cost, fixed or variable, determines marginal cost?

Ans. Variable cost determines marginal cost. The reason is that the fixed cost do not change with change in level of output. It is the variable cost only which changes with the level of output. MC by definition is the addition made to total cost due to an additional unit of commodity produced. And this addition, in TC is due to variable cost only as fixed cost remains constant. Therefore, MC

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