EEC-11_EM_2024-25 IGNOU SOLVED ASSIGNMENT PDF

Section- A
Long Answer Questions (Answer in about 500 words each) 2 x 20 = 40
1. (i) State the conditions to be satisfied for consumer’s equilibrium under
cardinal and ordinal approach.
(ii) What is production possibility curve (PPC)? How does a PPC provide an
economy’s menu of choices?
(i) Conditions for Consumer’s Equilibrium under Cardinal and Ordinal Approach
Cardinal Utility Approach
The Cardinal Utility Approach assumes that utility is measurable and consumers
derive satisfaction from the consumption of goods in units. A consumer achieves
equilibrium when they maximize total utility within their budget constraints. The
conditions are:
1. Law of Diminishing Marginal Utility (MU):
o Marginal utility of a good diminishes as its consumption increases.
o To achieve equilibrium, the consumer must allocate their income such
that the ratio of the marginal utility (MU) of each good to its price is
equal across all goods. Mathematically:
MUXPX=MUYPY=⋯=MUmfrac{MU_X}{P_X} = frac{MU_Y}{P_Y} =
cdots = MUm
Where MUXMU_X is the marginal utility of good X, PXP_X is the price of
good X, and MUmMUm is the marginal utility of money.
2. Budget Constraint:
o Total expenditure on all goods should not exceed the consumer’s
income:
PX⋅QX+PY⋅QY=MP_X cdot Q_X + P_Y cdot Q_Y = M
o Where QXQ_X and QYQ_Y are quantities of goods X and Y consumed,
and MM is the income.
3. Non-Satiation Assumption:
o Consumers prefer more of a good rather than less.
Ordinal Utility Approach
The Ordinal Utility Approach (based on Indifference Curve Analysis) assumes that
utility cannot be measured but can be ranked. Consumer equilibrium is achieved
when the consumer maximizes satisfaction by reaching the highest possible
indifference curve within their budget.
1. Tangency Condition:

o The consumer’s equilibrium occurs where the budget line is tangent to
the highest attainable indifference curve.
o At this point, the slope of the indifference curve (Marginal Rate of
Substitution, MRSMRS) equals the slope of the budget line (Price Ratio):
MRSXY=PXPYMRS_{XY} = frac{P_X}{P_Y}
2. Budget Constraint:
o The consumer must spend within their income limit:
PX⋅QX+PY⋅QY=MP_X cdot Q_X + P_Y cdot Q_Y = M
3. Convexity of Indifference Curve:
o Indifference curves are convex to the origin, reflecting diminishing
MRSMRS. This ensures that the consumer moves toward a balanced
consumption bundle.
4. Rational Behavior:
o The consumer is assumed to be rational, aiming to maximize
satisfaction.
(ii) Production Possibility Curve (PPC) and the Economy’s Menu of Choices
Definition of PPC
The Production Possibility Curve (PPC) is a graphical representation of all possible
combinations of two goods or services that an economy can produce with its given
resources and technology, assuming full and efficient utilization of resources. It is
also known as the Production Possibility Frontier (PPF).
Shape and Features of PPC
1. Downward Sloping:
o PPC slopes downward, reflecting the trade-off between the production
of two goods (opportunity cost). Producing more of one good requires
sacrificing some of the other due to resource limitations.
2. Concave to the Origin:
o The curve is typically concave because of the Law of Increasing
Opportunity Cost, which states that as more of one good is produced,
increasingly larger amounts of the other good must be given up.
Economic Concepts Illustrated by PPC
1. Scarcity:
o Points outside the PPC are unattainable due to resource constraints.
2. Efficiency and Inefficiency:

o Points on the PPC represent efficient use of resources.
o Points inside the curve indicate inefficiency or underutilization of
resources.
3. Opportunity Cost:
o The slope of the PPC represents the opportunity cost of producing one
good in terms of the other.
4. Economic Growth:
o An outward shift in the PPC indicates economic growth, achieved
through technological advancements or increased resources.
PPC as the Economy’s Menu of Choices
1. Allocation of Resources:
o The PPC shows the trade-offs an economy faces in allocating resources
between two goods. For example, an economy can choose between
producing more consumer goods or capital goods.
2. Decision-Making:
o The PPC helps policymakers decide how to allocate resources to
achieve desired economic objectives, such as increasing employment or
fostering technological development.
3. Choices in Priorities:
o The curve provides the "menu of choices" for the economy by showing
combinations of goods that can be produced. For example, in times of
war, more resources might be allocated to defense goods, moving the
economy toward a point favoring defense production.
Conclusion
The PPC is a fundamental economic tool illustrating scarcity, trade-offs, and
opportunity costs while providing a framework for resource allocation and policy-
making. It enables an economy to evaluate its production possibilities and prioritize
efficiently, ensuring maximum benefit from limited resources.
2. Identify the constituents of national income in three phases-production,
income and expenditure. Which methods are used to estimate national income
of India.
Constituents of National Income in Three Phases

National income represents the monetary value of all goods and services produced
within a nation over a specific period. It can be analyzed through three interrelated
phases: Production, Income, and Expenditure.
1. Production Phase
This phase measures the total value of goods and services produced in an economy.
• Gross Domestic Product (GDP): The market value of all final goods and
services produced within a country's borders.
• Value Added: The national income is calculated as the sum of the value
added at each stage of production across all industries (agriculture,
manufacturing, services).
o Primary Sector: Agriculture, forestry, fishing, and mining.
o Secondary Sector: Manufacturing, construction, and industry.
o Tertiary Sector: Services like banking, healthcare, education, and IT.
Key Metric:
National Income=Sum of Value Added in All Sectorstext{National Income} =
text{Sum of Value Added in All Sectors}
2. Income Phase
This phase focuses on the distribution of income generated from production among
various factors of production. The national income is calculated by summing up the
income earned by individuals and institutions.
• Components of Income:
o Wages and Salaries: Payment for labor services.
o Rent: Income from land.
o Interest: Income from capital.
o Profit: Income earned by entrepreneurs.
Key Metric:
National Income=Wages+Rent+Interest+Profittext{National Income} = text{Wages}
+ text{Rent} + text{Interest} + text{Profit}
3. Expenditure Phase
This phase measures national income by aggregating all expenditures made in the
economy.
• Major Components of Expenditure:
o Consumption Expenditure: Spending by households on goods and
services.

o Investment Expenditure: Expenditure on capital goods like machinery
and infrastructure.
o Government Expenditure: Spending on public services and
infrastructure.
o Net Exports (Exports - Imports): The value of goods sold to other
countries minus imports.
Key Metric:
National Income=C+I+G+(X−M)text{National Income} = text{C} + text{I} + text{G}
+ (text{X} - text{M})
Where CC = Consumption, II = Investment, GG = Government Expenditure, XX =
Exports, MM = Imports.
Methods to Estimate National Income in India
India uses three principal methods for estimating national income:
1. Production Method
• Used to calculate the Gross Value Added (GVA) at factor cost.
• It involves aggregating the value added at each stage of production in the
primary, secondary, and tertiary sectors.
• Suitable for sectors with measurable physical output (e.g., agriculture,
manufacturing).
2. Income Method
• Focuses on summing up the incomes generated by the factors of production
in the economy.
• Includes wages, salaries, rent, interest, and profit.
• Applied to sectors like services and self-employed individuals.
3. Expenditure Method
• Calculates national income by summing up total expenditure on goods and
services.
• Involves estimating consumption expenditure, investment, government
spending, and net exports.
• Widely used in sectors like trade, finance, and government services.
Conclusion
National income is a comprehensive measure of a country’s economic performance,
analyzed through production, income, and expenditure phases. In India, the
combination of production, income, and expenditure methods ensures accurate

estimation. By understanding these phases and methods, policymakers can devise
strategies to address economic challenges and ensure balanced growth.
Section-B
Medium-Answer Questions (Answer in about 250 words each) 4 x 12 = 48
3. Distinguish between positive and normative economics? In what sense is
economics a science?
Positive vs. Normative Economics
Economics can be divided into positive economics and normative economics
based on their objectives and approaches:
1. Positive Economics
• Definition: It deals with objective analysis, describing and explaining
economic phenomena without any value judgments.
• Focus: “What is” – It examines facts, causes, and effects.
• Nature: Empirical and descriptive, focusing on testable hypotheses.
• Examples:
o "Increasing taxes on cigarettes reduces consumption."
o "India's GDP grew by 6.8% last year."
2. Normative Economics
• Definition: It involves value judgments, prescribing economic policies based
on subjective opinions about what ought to be.
• Focus: “What ought to be” – It emphasizes ethical and moral considerations.
• Nature: Prescriptive and subjective, often influenced by personal beliefs.
• Examples:
o "The government should provide free healthcare to all."
o "Taxes on the wealthy should be increased to reduce inequality."
Key Difference: Positive economics is factual and testable, while normative
economics is opinion-based and subjective.
Economics as a Science
Economics qualifies as a science due to its systematic approach to studying human
behavior and decision-making:
Scientific Characteristics of Economics:
1. Empirical Analysis: Economics relies on data collection, observation, and
experiments to analyze real-world phenomena.
2. Theoretical Framework: It develops models (e.g., supply-demand, IS-LM) to
explain economic behaviors.

3. Predictability: Economic theories help forecast outcomes, like inflation trends
or unemployment rates.
4. Causality: Economics examines cause-effect relationships, such as how
interest rate hikes affect investment.
Limitations:
Unlike physical sciences, economics is less precise because human behavior is
unpredictable and influenced by multiple factors. Despite this, economics is a social
science that combines empirical methods with theoretical analysis to address societal
challenges.
4. Discuss the three stages of production. Why does the law of diminishing
returns operate?
Three Stages of Production
Production refers to the process of combining inputs (like labor, capital, and raw
materials) to produce goods and services. The production process is divided into
three stages based on the behavior of the total output as more units of a variable
input (e.g., labor) are added to fixed inputs (e.g., machinery):
1. Stage I: Increasing Returns to the Variable Factor
• In this stage, as more units of the variable input are added, the total output
increases at an increasing rate.
• Explanation: The fixed factors (such as land or machinery) are underutilized
initially, so adding more labor or capital increases productivity.
• Example: When more workers are hired, the existing machinery and space can
be used more efficiently, leading to higher output per additional unit of labor.
2. Stage II: Diminishing Returns to the Variable Factor
• In this stage, the total output still increases, but at a decreasing rate.
• Explanation: The fixed factors become more congested, and additional
workers cannot be as productive as earlier workers, leading to reduced
efficiency.
• Example: After a certain point, adding more workers results in overcrowding
or equipment shortages, causing a decline in the marginal output.
3. Stage III: Negative Returns to the Variable Factor
• In this stage, adding more of the variable input results in a decrease in total
output.
• Explanation: The workspace or machinery becomes excessively overloaded,
and productivity begins to fall.

• Example: If too many workers are added, they may get in each other's way,
and production may actually decrease.
Why the Law of Diminishing Returns Operates
The Law of Diminishing Returns states that as more units of a variable input are
added to fixed inputs, the marginal output (additional output produced) will
eventually decrease. This happens because:
1. Fixed Resources Limitation: The fixed factors (e.g., land, machinery) can only
support a limited amount of variable inputs. When this capacity is exceeded,
the efficiency of additional units of the variable input falls.
2. Overcrowding: With too many workers or too much capital, each additional
unit of input has less space and fewer resources to work with, reducing its
contribution to production.
5. What is the difference between monopoly and monopolist competition?
Explain the characteristics of firm’s equilibrium under monopolistic
competition.
Difference Between Monopoly and Monopolistic Competition
Monopoly:
• Definition: A monopoly exists when a single firm is the sole producer of a
product or service with no close substitutes in the market. The firm has
significant market power and can control prices.
• Number of Firms: One firm dominates the market.
• Barriers to Entry: High barriers, preventing other firms from entering the
market.
• Price Maker/Price Taker: A monopolist is a price maker, meaning it can set
the price of the product.
• Market Power: Monopolists have significant control over supply and pricing.
• Examples: Utility companies, such as water and electricity suppliers.
Monopolistic Competition:
• Definition: Monopolistic competition is a market structure where many firms
produce similar but differentiated products. Firms compete based on product
differentiation, which gives them some control over prices.
• Number of Firms: There are many firms in the market.
• Barriers to Entry: Low barriers, allowing new firms to enter easily.
• Price Maker/Price Taker: Firms have some control over prices due to product
differentiation but are still influenced by competitors.

• Market Power: Firms have limited market power compared to monopolies.
• Examples: Restaurants, clothing brands, and other consumer goods.
Firm’s Equilibrium Under Monopolistic Competition
A firm under monopolistic competition reaches equilibrium where marginal cost
(MC) equals marginal revenue (MR), but the price is set above marginal cost due to
product differentiation.
Characteristics of Firm’s Equilibrium:
1. Profit Maximization: A firm maximizes profit by producing the quantity
where MC = MR. At this point, the firm’s total revenue is as high as possible
relative to its costs.
2. Normal Profit in the Long Run: In the short run, a firm can earn supernormal
profits, but in the long run, the entry of new firms (due to low barriers) leads
to normal profits (zero economic profits) due to increased competition.
In summary, the equilibrium under monopolistic competition ensures that firms
produce at the level where MC = MR, but the price is higher than marginal cost due
to product differentiation and some market power.
6. (i) State the relationship between total cost and marginal cost.
(ii) From a given total cost
TC= 100+0.5q+0.4
Find out the fixed cost, average variable cost, and marginal cost.
6. (i) Relationship Between Total Cost and Marginal Cost
The relationship between Total Cost (TC) and Marginal Cost (MC) can be
understood as follows:
1. Total Cost (TC): It is the total cost incurred by a firm to produce a given
quantity of output. It consists of two components:
o Fixed Cost (FC): The cost that does not change with the level of
output.
o Variable Cost (VC): The cost that changes with the level of output. So,
TC=FC+VCtext{TC} = text{FC} + text{VC}.
2. Marginal Cost (MC): It is the additional cost incurred by producing one more
unit of output. It is the rate of change of total cost with respect to output.
Mathematically,
MC=ΔTCΔqtext{MC} = frac{Delta text{TC}}{Delta q}
or the first derivative of total cost with respect to quantity produced.

MC=d(TC)dqtext{MC} = frac{d(text{TC})}{dq}
o MC and TC Relation:
▪ When MC > AC (Average Cost), total cost is increasing at an
increasing rate.
▪ When MC = AC, total cost is increasing at a constant rate.
▪ When MC < AC, total cost is increasing at a decreasing rate.
Thus, marginal cost reflects the change in total cost as output increases by one unit.
6. (ii) Calculation of Fixed Cost, Average Variable Cost, and Marginal Cost from
Given Total Cost Function
The given total cost function is:
TC=100+0.5q+0.4q2text{TC} = 100 + 0.5q + 0.4q^2
Step 1: Finding Fixed Cost (FC)
The Fixed Cost (FC) is the cost component that does not change with the level of
output. It is represented by the constant term in the total cost function.
From the given TC equation:
TC=100+0.5q+0.4q2text{TC} = 100 + 0.5q + 0.4q^2
The Fixed Cost (FC) is the constant term:
FC=100text{FC} = 100
Step 2: Finding Average Variable Cost (AVC)
The Variable Cost (VC) is the portion of the total cost that depends on the level of
output. It is represented by the terms in the total cost equation that involve qq,
which are 0.5q+0.4q20.5q + 0.4q^2.
To find Average Variable Cost (AVC), we divide the variable cost by the quantity
produced (q):
AVC=VCq=0.5q+0.4q2q=0.5+0.4qtext{AVC} = frac{text{VC}}{q} = frac{0.5q +
0.4q^2}{q} = 0.5 + 0.4q
Thus, the Average Variable Cost (AVC) is:
AVC=0.5+0.4qtext{AVC} = 0.5 + 0.4q
Step 3: Finding Marginal Cost (MC)
The Marginal Cost (MC) is the derivative of the total cost function with respect to
quantity qq. So, we differentiate the total cost function:
MC=d(TC)dq=ddq(100+0.5q+0.4q2)text{MC} = frac{d(text{TC})}{dq} =
frac{d}{dq}(100 + 0.5q + 0.4q^2) MC=0+0.5+0.8qtext{MC} = 0 + 0.5 + 0.8q
Thus, the Marginal Cost (MC) is:
MC=0.5+0.8qtext{MC} = 0.5 + 0.8q
Summary:

1. Fixed Cost (FC) = 100
2. Average Variable Cost (AVC) = 0.5 + 0.4q
3. Marginal Cost (MC) = 0.5 + 0.8q
Section C
Short Answer Questions (Answer in about 100 words each) 2 x 6 = 12
7. Distinguish between any four of the following: 2 x 3 = 6
ii. Income Effect and Substitution Effect
• Income Effect: The income effect refers to the change in the quantity
demanded of a good or service due to a change in the consumer's real
income or purchasing power. If the price of a good falls, the consumer's real
income increases, leading to an increase in the demand for that good,
assuming it is a normal good.
• Substitution Effect: The substitution effect occurs when a change in the price
of a good makes it more or less attractive relative to other goods. When the
price of a good falls, it becomes relatively cheaper, leading to an increase in
demand for the good as consumers substitute it for other more expensive
alternatives.
ii. General Equilibrium and Partial Equilibrium
• General Equilibrium: General equilibrium refers to the state where all
markets in an economy are in equilibrium simultaneously. It is concerned with
the interaction of supply and demand in multiple markets and how they reach
an equilibrium condition in all sectors of the economy.
• Partial Equilibrium: Partial equilibrium focuses on a single market or sector
of the economy while holding other markets constant. It examines the
equilibrium condition in one specific market without considering the effects
on other markets.
iii. Demand and Demand Function
• Demand: Demand refers to the quantity of a good or service that consumers
are willing and able to purchase at different prices, during a given period,
ceteris paribus (with other factors remaining constant).
• Demand Function: The demand function is a mathematical representation
that shows the relationship between the quantity demanded of a good and
various factors that affect it, particularly its price. It typically takes the form of

Qd=f(P,Y,T,etc.)Q_d = f(P, Y, T, etc.), where PP is price, YY is income, and TT is
tastes and preferences.
iv. Independent and Dependent Variables
• Independent Variable: An independent variable is the variable that is
manipulated or changed in an experiment or model to observe its effect on
the dependent variable. It is often represented on the x-axis of a graph. For
example, in the demand curve, the price of a good is the independent
variable.
• Dependent Variable: A dependent variable is the variable that is being
measured or affected in an experiment or model. It depends on the changes
in the independent variable. For example, in the demand curve, the quantity
demanded is the dependent variable, as it changes in response to price
changes.
8. Explain any three of the followings: 2 x 3 = 6
i. Cross Elasticity of Demand (XED)
Cross elasticity of demand refers to the responsiveness of the quantity demanded of
one good when the price of a different good changes. It is calculated as:
•
• If the value of XED is positive, it indicates that the goods are substitutes. An
increase in the price of good Y leads to an increase in the quantity demanded
of good X.
• If the value of XED is negative, it indicates that the goods are complements.
An increase in the price of good Y leads to a decrease in the quantity
demanded of good X.
• If XED is zero, it means the goods are independent of each other, and a
change in the price of one does not affect the demand for the other.
ii. Marginal Efficiency of Capital (MEC)
Marginal efficiency of capital refers to the rate of return expected from an additional
unit of capital investment. It is the ratio of the expected return on a unit of capital to
its cost. The concept is crucial in investment decisions as it helps determine whether
additional investments will generate profitable returns.

• If the marginal efficiency of capital is higher than the cost of capital, firms will
be encouraged to invest more.
• Conversely, if MEC is lower than the cost of capital, firms are likely to reduce
their investment, as the returns do not justify the expenditure.
The marginal efficiency of capital tends to decrease with the accumulation of more
capital, which leads to the diminishing returns as more capital is added.
iii. Implicit Costs
Implicit costs are the opportunity costs of using resources that are already owned by
a business or individual, without making an explicit monetary payment. These costs
represent the foregone benefits that could have been obtained from using those
resources in an alternative way.
• For example, if a business owner uses their own building to run their business
instead of renting it out, the implicit cost would be the rental income that
could have been earned.
• Similarly, if a business owner works in their own business without drawing a
salary, the implicit cost would be the wages they could have earned working
elsewhere.
Unlike explicit costs, which involve actual monetary payments, implicit costs reflect
the value of foregone alternatives.
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