PREVIOUS YEAR SOLVED PAPERS MCQ - November 2017

Economists’ concept of profit is of pure profit. It is also called ‘economic profit’ or ‘just profit’. ‘Pure profit’ is a return over and above the opportunity cost, i.e., the payment that would be ‘necessary to draw forth the factors of production from their most remunerative alternative employment’. Pure profit may thus be defined as ‘a residual left over after all contractual costs have been met, including the transfer costs of management, insurable risks, depreciation, and payments to shareholders sufficient to maintain investment at its current level’. In other words, pure profit equals net profit less opportunity costs of management, insurable risk, depreciation of capital, necessary minimum payments to shareholders that can prevent them from withdrawing their capital from its current use.

Assumptions: The theory of consumer behaviour based on the cardinal utility approach seeks to answer the above questions on the basis of the following assumptions.
(a) Rationality: It is assumed that the consumer is a rational being in the sense that he satisfies his wants in the order of their preference. That is, he or she buys that commodity first which yields the highest utility and the last which gives the least utility.
(b) Limited money income: The consumer has a limited money income to spend on the goods and services he chooses to consume. Limitedness of income, along with utility maximization objective makes the choice between goods inevitable.<br(c) Maximization of satisfaction: Every rational consumer intends to maximize his satisfaction from his/her given money income.
(d) Utility is cardinally measurable: The cardinalists have assumed that utility is cardinally measurable and that utility of one unit of a commodity equals the units of money which a consumer is prepared to pay for it and that 1 util = 1 unit of money.
(e) Diminishing marginal utility: Following the law of diminishing marginal utility, it is assumed that the utility gained from the successive units of a commodity consumed decreases as a person consumes them. This is an axiom of the theory of consumer behaviour.
(f) Constant marginal utility of money: The cardinal utility approach assumes that marginal utility of money remains constant whatever the level of a consumer’s income. This assumption is necessary to keep the scale of measuring rod of utility fixed. It is important to recall in this regard that cardinalists used ‘money’ as a measure of utility.
(g) Utility is additive: Cardinalists assumed not only that utility is cardinally measurable but also that utility derived from various goods and services consumed by a consumer can be added together to obtain the total utility. Suppose a consumer consumes X₁, X₂, X₃, ... X_n units of a commodity X and that he derives U₁, U₂, U₃, ...., U_n, utils respectively, from the various units of commodity X consumed. Given the assumption, the total utility that the consumer derives form n units of commodity X can be expressed as
U_n = U₁(X₁) + U₂(X₂) + U₃(X₃) + ... + U_n(X_n).

Indifference curves for normal goods have not only a negative slope, but are also convex with reference to the origin. The convexity of the indifference curves implies that:
∎ The two goods are imperfect substitutes for one another.
∎ The MRS between the two goods decreases as a consumer moves along an indifference curve. Convexity in the indifference curve is caused by the diminishing MRS.
Properties of Indifference Curve
Indifference curves have the following four basic properties:
1. Indifference curves have a negative slope;
2. Indifference curves of imperfect substitutes are convex to the origin;
3. Indifference curves do not intersect nor are they tangent to one another;
4. Upper indifference curves indicate a higher level of satisfaction.

In general, the principles of measurement (scaling) has three characteristics:
1. Numbers are ordered. One number is less than, equal to or greater than another number.
2. Difference between numbers are ordered. The difference between any pair of numbers is greater than, less than or equal to the difference between any other pair of numbers.
3. The number series has a unique origin indicated by the number zero.
The combinations of these characteristics of order, distance and origin provide the following widely used classification of measurement scales:

Scale of Measurement	Characteristics of Measurement	Basic Empirical Operation
∎ Nominal	No order, distance or origin	Determination of categorical information. Numbers only identify groups which cannot be ordered.
∎ Ordinal	Order but no distance or unique origin	Determination of greater or lesser values. Numbers allow ranking but no arithmetic.
∎ Interval	Both order and distance but not unique	Determination of equality of intervals or differences. Intervals between numbers are meaningful.
∎ Ratio	Order, distance and unique origin	Determination of equality of ratios. Intervals between numbers are meaningful and also their ratio as the lowest value is a meaningful zero.