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B.Com. LL.B. (Five Years) Sem 1 Micro Economics 2017 Dec Question Paper with Solutions - KSLU

KSLU Solved Question Papers

Micro Economics

Previous Year Question Paper with Solution

B.Com. LL.B. (Five Years) · Sem 1

2017 Dec Examination

munotes.in

Mumbai

First published on munotes.in on 21 October 2026.

Published by munotes.in, Mumbai.

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Duration 3 hours · Total marks 100 · 13 questions answered

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Read the original question paper

Q1Define Micro Economics. What are the uses and limitations of Micro Economics ?[16]

Answer

For full marks, cover: a definition of microeconomics, in your own words and in Boulding's as usually quoted, with the origin of the term (Frisch, 1933); what it studies and how it grew (Smith, Marshall, Chamberlin and Robinson, Hicks and Allen); its uses for understanding the economy, for decisions and for policy, each with an example, and a worked price-ceiling case; its limitations, including the fallacy of composition with a worked case; how microeconomics and macroeconomics depend on each other; and a conclusion that weighs the two.

Definition

Microeconomics is the part of economics that studies the behaviour of individual units of the economy. These are a consumer, a firm, an industry, or the market for one commodity or one factor. It asks how each of them makes choices, and how the price of each good and factor is fixed.

K.E. Boulding's definition, in the form usually quoted, describes it as the study of "particular firms, particular households, individual prices, wages, incomes, individual industries, particular commodities".

The term was introduced by the Norwegian economist Ragnar Frisch in 1933, from the Greek mikros, small. Because the price of each good is its central concern, microeconomics is also called price theory.

What it studies. It covers consumer behaviour and demand, production and cost, and the pricing of goods under different market forms. It also covers the pricing of factors (wages, rent, interest and profit) and economic welfare.

How microeconomics grew

Adam Smith, in The Wealth of Nations (1776), described how a person pursuing his own gain is "led by an invisible hand to promote an end which was no part of his intention". Explaining that hand, the price mechanism, became the task of microeconomics.
Alfred Marshall's Principles of Economics (first published 1890) built the theory of demand, supply and price in a single market. He compared demand and supply to the two blades of a pair of scissors.

Edward Chamberlin and Joan Robinson, both in 1933, extended price theory from perfect competition and monopoly to the markets in between.
J.R. Hicks and R.G.D. Allen, in 1934, rebuilt the theory of demand on indifference curves, without measuring utility.

Uses of microeconomics

A. For understanding the economy

How free markets decide what is produced. Rising prices draw resources to goods in short supply, falling prices push them away. Microeconomics explains this working of the price mechanism.
Why some goods and services cost more. A diamond is dearer than water, and a surgeon earns more than a clerk. The theory of value and of factor prices explains why.

B. For decisions by households and firms

Spending. It shows a household how to divide a limited budget for the greatest satisfaction.
Running a business. It tells a firm what output gives the most profit, what price to charge, and whether to stay open when prices are low.

C. For public policy

Taxes and subsidies. It predicts how a tax on one good changes its price and sales, and who pays it.
Controls. It shows the effect of a support price, a price ceiling or a minimum wage in one market.
Competition. It shows how monopoly harms buyers, which guides competition law.

D. For judging efficiency

Welfare economics, built on microeconomics, sets out the conditions for the best use of resources and shows where markets fail, as with monopoly and pollution.

Questions microeconomics answers

The uses become clearer from the kind of everyday question that microeconomics can answer:

Why does the price of tomatoes jump after heavy rains, and fall back a few weeks later?
Will a cut in the tax on two-wheelers raise their sales by much, and who will gain from it?
Why does a surgeon earn more than a nurse, and a nurse more than a ward attendant?
Should a bus company lower its fares to fill more seats, or raise them?

Why do a few large firms dominate cement, while thousands of small shops sell vegetables?
Does a minimum wage help workers in a small town with only one large employer?

Each question concerns particular buyers, sellers, prices or markets. Each is answered with the tools of demand, supply, cost, market structure and factor pricing.

A worked use: a ceiling on rent

In a town, the monthly demand for rented rooms is Qd = 1,000 - 10P and the supply is Qs = 10P - 200. P is the rent in hundreds of rupees.

Without control, demand equals supply where 1,000 - 10P = 10P - 200, so P = 60 (Rs 6,000 a month) and 400 rooms are let.
With a ceiling at Rs 5,000 (P = 50), tenants want 1,000 - 500 = 500 rooms, but owners offer only 500 - 200 = 300.
The result is a shortage of 200 rooms. The ceiling also discourages owners from building or repairing rooms to let, so the shortage tends to grow over time. Microeconomics predicts the queues, waiting lists and side payments that follow, and helps the government weigh the ceiling against other ways of helping tenants.

Limitations of microeconomics

It cannot explain the economy as a whole. National income, total employment, inflation and the trade cycle need macroeconomics.
It usually assumes full employment. It studies how given resources are shared among uses, not why some of them lie idle.
The fallacy of composition. What is true of one unit may be false for all units together.
Its assumptions are often unrealistic. Perfect competition, perfect knowledge and fully rational buyers are rarely found.
It studies one market at a time. In this partial equilibrium approach, other markets are held constant, though in reality markets affect one another.
It is largely static. It compares positions of rest more than it traces changes over time.

A worked case of the fallacy of composition. A textile mill pays 100 workers Rs 500 a day. If it alone cuts wages by 10 per cent, its cost falls by Rs 5,000 a day. Its sales hardly change, since its workers are a tiny part of its buyers, so it gains. If every firm in the country cuts wages by 10 per cent, workers everywhere have less to spend. Sales fall in all markets, and firms may end up worse off. The reasoning that is right for one firm is wrong for the whole economy. That question belongs to macroeconomics.

Microeconomics and macroeconomics compared

Point	Microeconomics	Macroeconomics
Unit of study	One consumer, firm, industry or market	The whole economy
Central question	How a particular price is fixed	How national income, employment and the price level are fixed
Typical tools	Demand, supply, cost, revenue	Aggregate demand, saving, investment, money supply
Usual assumption	Total income given	Prices of single goods given

How microeconomics and macroeconomics depend on each other

Macroeconomics builds on micro behaviour. Total consumption is the sum of household choices, and total investment the sum of firms' choices.
Microeconomics takes macro conditions as given. A firm's demand depends on national income, and its costs on the general level of wages and prices.
Some problems need both. A rise in petrol prices changes particular markets, such as transport and cars, and also the general price level. Microeconomics traces the first effect and macroeconomics the second.

Weighing the two

The limitations do not make microeconomics less useful. They mark out its field. It is the right tool for questions about particular prices, firms and markets, and macroeconomics is the right tool for questions about totals. Each needs the other.

Conclusion. Microeconomics, a term introduced by Frisch in 1933, studies individual households, firms, industries and markets, and is also called price theory. It is used to understand how prices allocate resources and to guide household and business decisions. It also helps shape taxes, controls and competition policy, and judge efficiency. Its limits are that it cannot explain the economy as a whole, assumes full employment and unrealistic conditions, and falls into the fallacy of composition. In the worked cases, a rent ceiling at Rs 5,000 leaves a shortage of 200 rooms. A wage cut that helps one mill could hurt all firms if every firm made it. The two branches of economics depend on each other.

B.Com. LL.B. (Five Years) Sem 1 Micro Economics 2017 Dec Question Paper with Solutions

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