PREVIOUS YEAR SOLVED PAPERS - January 2017
11. Match the items of List-I with the items of List-II and denote the code of correct matching.
| List–I | List–II |
| (a) Hypothesis of Sales Revenue Maximization | 1. W.J. Baumol |
| (b) Hypothesis of Maximization of Firm’s Growth Rate | 2. Robin Marris |
| (c) Hypothesis of Maximization of Managerial Utility Function | 3. O.E. Williamson |
| (d) Hypothesis of Satisfying Behaviour | 4. Cyert and March |
CODES
| (a) | (b) | (c) | (d) | |
| 1 | 2 | 1 | 3 | 4 |
| 2 | 2 | 3 | 1 | 4 |
| 3 | 1 | 2 | 3 | 4 |
| 4 | 1 | 4 | 2 | 3 |
| Codes | Price elasticity coefficient | Change in price | Change in total revenue |
| 1 | Zero | Increase Decrease | Increase Decrease |
| 2 | Less than one | Increase Decrease | Decrease Increase |
| 3 | Equal to one | Increase Decrease | No change No change |
| 4 | More than one | Increase Decrease | Decrease Increase |
- Option : B
- Explanation : Relationship between price elasticity and total revenue
Total revenue from the sale of a good is equal to the price times the quantity. Price elasticity is an important concept because if demand is elastic an increase in sales price results in a decrease in total revenue for all producers. If demand is unitary total revenue remains the same if price changes, and total revenue increases if price is increased when demand is inelastic. These relationships are shown in the following table:
13. The short-run production function for a firm is as follows:
Q = –L3 + 15L2 + 10L
Where Q denotes total output in physical units and L denotes units of labour which are homogeneous, but are not perfectly divisible and change in labour does not tend to become zero.
Statement I : In this production function, the marginal product of 5th unit of labour is 85.
Statement II : Similarly, in this production function, the average product of the 5th unit of labour is 60.
14. The Kinked demand curve model of oligopoly was developed by
- Option : D
- Explanation : The Kinked demand curve model was developed by Paul Sweezy in 1939. The model attempts at explaining as to why prices are rigid or sticky in spite of moderate changes in demand and cost under conditions of oligopoly. The argument, which is generally given, is that in such market structures where there are only a few firms which are interdependent on each other if a firm reduces its price other firms in the industry will also match the decrease in price. Hence, the firm, which initially reduced the price, will not be in any way better off. If a firm increases its price, other firms in the industry will not increase their price. Hence, the firm which initially increased the price will suffer a loss. Hence, firms are unwilling to change the price of their good.
The assumptions in the model are as follows:
(i) The firms recognize their interdependence but do not collude in any way.
(ii) The behavioural assumption is that firms in the industry match decreases in the price but not any increases. A price decrease by one firm in the industry leads to a decrease in the price by the others and hence the firm will not benefit in any way. A price increase by one firm is not matched by a price increase by the others and hence the firm would lose its customers. Thus, there is a non-price competition between the firms.
15. For the success of the penetration price policy, which one of the following is not desirable?
- Option : C
- Explanation : A penetration pricing policy involves setting prices of products relatively low compared to those of similar products in the hope that they will secure wide market acceptance, which will allow the company to raise the prices at a later date. Such a policy if often adopted when the firm expects competition from similar products within a short time and when largescale production and marketing will produce substantial reductions in overall costs. The low price is adopted with the aim of keeping out the competition and it is essential that the company should maintain its low-price position since the market is highly price sensitive. Production and distribution costs are expected to fall as sales volumes increase. A penetration pricing policy is appropriate when demand is elastic. The marketers obtained as many customers as possible through a low price and established a position for their product in the market.
