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Tag: UGC NET December 2025

  • UGC NET Economics Unit 1-Efficiency Criteria — Pareto Optimality, Kaldor–Hicks, and Wealth Maximization

    1. Introduction

    Economic efficiency is a fundamental goal of welfare economics. It deals with how resources are allocated in society to maximize total satisfaction or welfare.

    To judge whether an economic change or policy improves social welfare, economists have developed efficiency criteria— rules or tests to determine whether a given allocation or change increases overall economic efficiency.

    The three major criteria are:

    1. Pareto Optimality (Pareto Efficiency)

    2. Kaldor–Hicks Compensation Principle

    3. Wealth Maximization Criterion

    2. Pareto Optimality (Vilfredo Pareto, 1906)

    Definition

    An allocation of resources is Pareto optimal (or Pareto efficient) when no one can be made better off without making someone else worse off.

    In other words, all mutually beneficial gains from exchange have already been realized.

    2.1 Pareto Improvement

    A change from allocation A to B is a Pareto improvement if:

    • At least one person is better off, and

    • No one is worse off.

    If no such improvement is possible, the allocation is Pareto Optimal.

    2.2 Pareto Efficiency Conditions

    A society achieves Pareto efficiency when three efficiency conditions are met:

    Type of Efficiency Condition Explanation
    (i) Exchange Efficiency MRSXYA=MRSXYB Marginal rates of substitution between goods are equal for all consumers.
    (ii) Production Efficiency MRTSLKX=MRTSLKY
    		 Marginal rates of technical substitution between factors are equal across all firms.
    (iii) Product-Mix Efficiency MRSXY=MRTXY The rate at which consumers trade goods equals the rate at which producers can transform them.

    When all three hold simultaneously, the economy is in general equilibrium and is Pareto optimal.

    2.3 Graphical Representation

    • In an Edgeworth Box (Exchange), Pareto efficiency occurs at tangency points of the two consumers’ indifference curves — forming the Contract Curve.

    • In Production, it occurs where the isoquants of two firms are tangent (equal MRTS).

    • Combining both gives the Production Possibility Frontier (PPF), where efficiency requires MRS=MRT.

    2.4 Limitations of Pareto Criterion

    1. No Interpersonal Comparison of Utility:
      It cannot decide between policies that help one person and harm another.

    2. Insensitive to Distribution:
      A situation with extreme inequality can still be Pareto efficient.

    3. Static Criterion:
      It doesn’t account for long-term growth or dynamic welfare.

    4. Unrealistic in Policy:
      Real-world changes usually benefit some and hurt others — true Pareto improvements are rare.

    3. Kaldor–Hicks Compensation Principle

    Because Pareto efficiency was too restrictive, economists Nicholas Kaldor (1939) and John Hicks (1940) proposed a more practical test for welfare improvement.

    3.1 The Kaldor–Hicks Criterion

    A change or policy is considered welfare-improving if:

    “The gainers from a policy could compensate the losers and still be better off — even if no actual compensation occurs.”

    This is known as the Potential Pareto Improvement.

    3.2 Example

    Suppose a new project increases firm profits by ₹100 crore but reduces workers’ income by ₹40 crore.
    → Even if the firm could hypothetically compensate workers ₹40 crore and still gain ₹60 crore, the project passes the Kaldor–Hicks test.

    3.3 Hicks’s Version

    Hicks proposed the same idea from the loser’s point of view:

    “A policy is desirable if the losers cannot bribe the gainers enough to stop the change.”

    3.4 Diagrammatic Explanation

    On a utility possibility frontier (UPF):

    • Each point represents combinations of utilities of two individuals (A and B).

    • Movement from point P to Q that makes A better off and B worse off is Kaldor-improving if A could compensate B to reach a higher potential welfare frontier.

    3.5 Advantages of Kaldor–Hicks

    1. Allows for trade-offs between gains and losses.

    2. Practical for cost–benefit analysis and policy evaluation.

    3. Focuses on potential improvements, not actual compensation.

    3.6 Limitations

    1. No guarantee of actual compensation: losers may remain worse off.

    2. Distributional bias: may favor the rich if their monetary gains outweigh the poor’s losses.

    3. Reversibility problem (Scitovsky Paradox):

      • A move from A → B may satisfy Kaldor’s test,

      • but a move back from B → A may also satisfy Hicks’s test,
        showing inconsistency.

    4. Wealth Maximization Criterion (Harold Demsetz, Richard Posner)

    The Wealth Maximization approach comes from the Chicago School of Law and Economics, particularly Richard Posner (1979).
    It is often used in law, policy, and corporate economics as a decision criterion.

    4.1 Definition

    A policy, decision, or allocation is considered efficient if it maximizes the total monetary value of society’s wealth, irrespective of individual welfare distribution.

    It focuses on aggregate wealth, not on utility or satisfaction.

    4.2 Basic Principle

    • All goods and rights are valued by what people are willing to pay for them (market prices).

    • If resources are reallocated to higher-valued uses, total wealth increases, even if some individuals lose.

    4.3 Relation to Kaldor–Hicks

    Wealth maximization is essentially a monetized version of the Kaldor–Hicks principle.
    It assumes market prices reflect individuals’ utilities and preferences.

    4.4 Application

    Used in:

    • Corporate decision-making — maximize shareholder wealth.

    • Legal analysis — efficient laws are those that maximize total wealth (Posner’s view).

    • Cost–Benefit Analysis — projects with the highest net monetary gain are preferred.

    4.5 Advantages

    1. Practical and measurable: uses monetary value as a common yardstick.

    2. Objective: avoids subjective utility comparisons.

    3. Decision-making simplicity: clear rule for economic policy and business evaluation.

    4.6 Limitations

    1. Neglects distribution and equity: benefits the rich more if they have higher “willingness to pay.”

    2. Ignores non-market values: such as environment, justice, or ethics.

    3. Assumes perfect markets and rational valuation, which are rarely true.

    5. Comparative Overview

    Criteria Key Idea Test for Welfare Improvement Advantages Limitations
    Pareto Optimality Efficiency without harming anyone At least one better off, no one worse Exact and morally appealing Too restrictive, ignores equity
    Kaldor–Hicks Potential compensation principle Gainers could compensate losers Practical, used in policy No actual compensation, may favor rich
    Wealth Maximization Maximize total monetary value Higher total wealth = efficiency Simple, objective Ignores fairness and non-market values

    6. Summary

    • Pareto Optimality: Ideal but impractical criterion for efficiency; no one can be hurt.

    • Kaldor–Hicks Efficiency: Practical, allows trade-offs; used in cost–benefit analysis.

    • Wealth Maximization: Simplifies efficiency into total monetary value; widely used in law and business, but ignores distribution.

    Thus, these criteria form a progressive relaxation of constraints:

    Pareto (Strict)  ⇒  Kaldor–Hicks (Flexible)  ⇒  Wealth Maximization (Pragmatic)

    7. Key Terms

    Term Meaning
    Pareto Improvement A change that benefits someone without hurting anyone else.
    Compensation Principle Welfare improves if gainers can potentially compensate losers.
    Scitovsky Paradox Both forward and reverse moves may satisfy Kaldor–Hicks test.
    Utility Possibility Frontier (UPF) Curve showing all efficient utility combinations for two individuals.
    Wealth Maximization Economic criterion emphasizing total wealth increase, not fairness.

    8. Important UGC NET Short Notes

    • First Welfare Theorem: Every competitive equilibrium is Pareto Efficient.

    • Second Welfare Theorem: Any Pareto Efficient allocation can be reached through redistribution of initial endowments.

    • Kaldor–Hicks Criterion = Potential Pareto Improvement.

    • Wealth Maximization is the operational form of Kaldor–Hicks efficiency used in Law and Economics.

    📖 9. Suggested Readings

    1. D.N. Dwivedi – Microeconomics: Theory and Applications

    2. Koutsoyiannis – Modern Microeconomics

    3. Hal R. Varian – Intermediate Microeconomics

    4. A.K. Sen – Collective Choice and Social Welfare

    5. Richard Posner – Economic Analysis of Law

  • UGC NET Economics Unit 1-General Equilibrium Analysis MCQs

    Part A – Fundamentals of General Equilibrium (Q1–Q10)

    1. The general equilibrium approach was first developed by:

    (A) Alfred Marshall (B) Léon Walras ✅ (C) Vilfredo Pareto (D) Adam Smith

    Explanation:
    Léon Walras introduced the concept of general equilibrium in his 1874 book Elements of Pure Economics. He used simultaneous equations to show how all markets in an economy reach equilibrium together.

    2. The partial equilibrium analysis assumes:

    (A) Interdependence of all markets
    (B) Simultaneous equilibrium of all markets
    (C) Other things remain constant ✅
    (D) Constant returns to scale

    Explanation:
    Partial equilibrium (Marshallian) isolates one market at a time, assuming ceteris paribus — all other factors such as incomes, prices of related goods, and tastes remain constant.

    3. General Equilibrium analysis considers:

    (A) One market in isolation
    (B) All interrelated markets simultaneously ✅
    (C) Only factor markets
    (D) Only goods markets

    Explanation:
    General equilibrium recognizes interdependence among all markets (goods and factors) and determines prices and quantities in all of them together.

    4. Equality of demand and supply in all markets simultaneously is known as:

    (A) Microeconomic equilibrium
    (B) General equilibrium ✅
    (C) Partial equilibrium
    (D) Market failure

    Explanation:
    General equilibrium occurs when demand equals supply in every market of an economy at the same time.

    5. The Walrasian system uses which mathematical method?

    (A) Differential equations
    (B) Simultaneous equations ✅
    (C) Regression analysis
    (D) Integral calculus

    Explanation:
    Walras modeled markets as a system of simultaneous equations, where all prices and quantities are determined together.

    6. In Walrasian analysis, “unknowns” represent:

    (A) Quantities only
    (B) Prices only
    (C) Prices and quantities of all commodities and factors ✅
    (D) Profits and wages only

    Explanation:
    The Walrasian model includes as many unknowns (prices and quantities) as independent equations for all goods and factors in the system.

    7. Walras’ Law states that:

    (A) The sum of excess demands across markets equals zero ✅
    (B) Total supply always exceeds demand
    (C) Only one market can be in equilibrium
    (D) Demand always exceeds supply

    Explanation:
    Walras’ Law implies that if n-1 markets are in equilibrium, the nth market must also be in equilibrium — the sum of excess demands times prices is always zero.

    8. If all but one market are in equilibrium, then according to Walras’ Law:

    (A) No equilibrium exists
    (B) The last market must also be in equilibrium ✅
    (C) Prices will diverge
    (D) Supply exceeds demand

    Explanation:
    Because total value of excess demand is zero, equilibrium in all but one market automatically ensures equilibrium in the remaining market.

    9. The existence of a general equilibrium solution requires:

    (A) More unknowns than equations
    (B) Equal number of independent equations and unknowns ✅
    (C) Fewer equations than unknowns
    (D) No mathematical relationship

    Explanation:
    A basic mathematical requirement for solvability of the Walrasian system is equality between the number of independent equations and the number of unknown variables.

    10. The Arrow–Debreu model proved:

    (A) Instability of equilibrium
    (B) Existence of general equilibrium ✅
    (C) Monopoly equilibrium
    (D) Disequilibrium in markets

    Explanation:
    Kenneth Arrow and Gérard Debreu (1954) gave a rigorous proof that, under convex preferences and continuous production functions, a general equilibrium always exists.

    Part B – Existence, Uniqueness & Stability (Q11–Q20)

    11. The existence of equilibrium depends on:

    (A) Equality of equations and unknowns
    (B) Convex preferences and diminishing returns ✅
    (C) Constant costs
    (D) Increasing returns

    Explanation:
    Arrow–Debreu showed that general equilibrium exists if preferences are convex and production exhibits constant or diminishing returns.

    12. Uniqueness of equilibrium means:

    (A) Multiple equilibria
    (B) Only one set of prices clears all markets ✅
    (C) No solution
    (D) Negative prices

    Explanation:
    Uniqueness ensures a single consistent price–quantity combination that balances all markets; otherwise, multiple equilibria can arise.

    13. A stable equilibrium is one where:

    (A) Disturbances push the system away
    (B) The system returns to equilibrium after disturbance ✅
    (C) Output stays fixed
    (D) Price never changes

    Explanation:
    Stability means that self-correcting forces (supply and demand) restore equilibrium when disturbed — essential for market resilience.

    14. The Cobweb theorem illustrates:

    (A) Market failure
    (B) Dynamic stability and instability ✅
    (C) Monopoly behavior
    (D) Welfare loss

    Explanation:
    The Cobweb theorem analyzes oscillations in price and output over time due to lagged supply responses, showing conditions for stability.

    15. In the Cobweb model, if demand is steeper than supply (|dP/dQ| < |sP/dQ|):

    (A) The system is stable ✅
    (B) The system diverges
    (C) It is neutral
    (D) Unattainable equilibrium

    Explanation:
    When the demand curve is flatter (less steep) than the supply curve, price and quantity adjustments converge toward equilibrium.

    16. If slopes of demand and supply are equal in Cobweb model:

    (A) Stable
    (B) Neutral oscillations (undamped) ✅
    (C) Explosive
    (D) Divergent

    Explanation:
    Equal slopes cause constant oscillations around equilibrium — neither converging nor diverging — known as neutral or undamped cycles.

    17. Multiple equilibria occur when:

    (A) Demand curve is backward bending ✅
    (B) Supply curve is linear
    (C) Cost curve is flat
    (D) Production is constant

    Explanation:
    Backward-bending demand (as for inferior goods) can intersect supply more than once, yielding multiple equilibrium points.

    18. The Arrow–Debreu model assumes:

    (A) Convex preferences, no externalities ✅
    (B) Increasing returns
    (C) Non-convex utility
    (D) Monopoly

    Explanation:
    For equilibrium to exist, Arrow–Debreu required convex preferences, continuous functions, and absence of externalities or joint production.

    19. A unique and stable equilibrium exists under:

    (A) Perfect competition and diminishing returns ✅
    (B) Monopoly power
    (C) Increasing returns
    (D) Oligopoly

    Explanation:
    Perfect competition with diminishing returns ensures no incentive for divergence — yielding stable and unique equilibrium.

    20. The automatic adjustment process in general equilibrium works best under:

    (A) Government price control
    (B) Perfect competition ✅
    (C) Monopoly
    (D) Price rigidity

    Explanation:
    Only under perfect competition can prices freely adjust through supply and demand, restoring equilibrium automatically.

    Part C – Pareto Efficiency & Welfare (Q21–Q30)

    21. Pareto Efficiency occurs when:

    (A) Total utility is maximized
    (B) No one can be made better off without making someone worse off ✅
    (C) Equal income distribution
    (D) Government maximizes welfare

    Explanation:
    A Pareto efficient allocation means all possible mutual gains from trade have been exhausted.

    22. Efficiency in Exchange requires:

    (A) MRTS equality
    (B) MRT equality
    (C) Equal MRS between individuals ✅
    (D) Equal incomes

    Explanation:
    Exchange efficiency holds when the Marginal Rate of Substitution (MRS) between goods is the same for all consumers.

    23. Efficiency in Production requires:

    (A) MRTS_X = MRTS_Y ✅
    (B) MRT = MRS
    (C) MU_X = MU_Y
    (D) Equal factor prices only

    Explanation:
    Production efficiency occurs when the Marginal Rate of Technical Substitution (MRTS) between factors is equal across firms.

    24. Efficiency in Product Mix requires:

    (A) MRS = MRT ✅
    (B) MRTS_X = MRTS_Y
    (C) MC = MR
    (D) Equal profits

    Explanation:
    For optimal output mix, the Marginal Rate of Transformation (MRT) in production equals consumers’ MRS in consumption.

    25. Pareto Efficiency is achieved when:

    (A) Exchange, production, and product-mix efficiencies all hold ✅
    (B) Only exchange is efficient
    (C) Factor allocation is fixed
    (D) Price = average cost

    Explanation:
    All three efficiencies (exchange, production, and product mix) together define a Pareto optimal general equilibrium.

    26. First Welfare Theorem states:

    (A) Every Pareto efficient allocation is competitive
    (B) Every competitive equilibrium is Pareto efficient ✅
    (C) Equity and efficiency coincide
    (D) Monopoly leads to efficiency

    Explanation:
    Under perfect competition and no externalities, market equilibrium automatically leads to Pareto efficiency.

    27. Second Welfare Theorem states:

    (A) Equity and efficiency can’t coexist
    (B) Any Pareto efficient outcome can be achieved via redistribution ✅
    (C) Government must fix prices
    (D) No equilibrium exists

    Explanation:
    The theorem separates efficiency from equity — government can redistribute initial endowments, and the market then achieves efficiency.

    28. The Kaldor–Hicks criterion allows improvement if:

    (A) Everyone gains equally
    (B) Gainers could compensate losers ✅
    (C) No one loses
    (D) Income is equal

    Explanation:
    Under Kaldor–Hicks, an action is welfare-improving if winners could compensate losers, even if compensation doesn’t occur.

    29. The Social Welfare Function was introduced by:

    (A) Walras
    (B) Bergson and Samuelson ✅
    (C) Hicks
    (D) Pareto

    Explanation:
    The Bergson–Samuelson Social Welfare Function (SWF) expresses collective welfare as a function of individual utilities.

    30. Pareto Optimum is not achieved when:

    (A) MRS_A = MRS_B
    (B) MRTS_X = MRTS_Y
    (C) MRT ≠ MRS ✅
    (D) All resources are fully employed

    Explanation:
    If the marginal rate of transformation (production) doesn’t equal the marginal rate of substitution (consumption), the product mix is inefficient.

    Part D – Edgeworth Box, Contract Curve & Core (Q31–Q40)

    31. The Edgeworth Box represents:

    (A) Two consumers and two goods ✅
    (B) One good and two consumers
    (C) Two producers and one good
    (D) Government and consumer

    Explanation:
    It graphically shows allocations of two goods between two consumers (or factors between two producers).

    32. The origin for Consumer A in the Edgeworth Box is:

    (A) Bottom-left ✅ (B) Top-right (C) Center (D) Bottom-right

    Explanation:
    Consumer A’s quantities are measured from the bottom-left corner of the box.

    33. The origin for Consumer B is:

    (A) Top-right ✅ (B) Bottom-left (C) Center (D) Left edge

    Explanation:
    B’s origin is diagonally opposite A’s, so both measure goods in opposite directions.

    34. Every point inside the Edgeworth Box shows:

    (A) One consumer’s utility
    (B) An allocation of goods between A and B ✅
    (C) Production level
    (D) National income

    Explanation:
    Each point indicates how total goods X and Y are divided between the two individuals.

    35. The Contract Curve represents:

    (A) All possible allocations
    (B) All Pareto-efficient allocations ✅
    (C) Inefficient allocations
    (D) The PPF

    Explanation:
    The contract curve is the locus of tangency points between A’s and B’s indifference curves—Pareto efficient allocations.

    36. At every point on the Contract Curve:

    (A) MRS_A ≠ MRS_B
    (B) MRS_A = MRS_B ✅
    (C) MRTS_X = MRTS_Y
    (D) Total utility minimum

    Explanation:
    When the marginal rate of substitution between goods is equal for both individuals, no further mutually beneficial trade is possible.

    37. The Core of Exchange includes:

    (A) Entire contract curve
    (B) Efficient allocations preferred to initial endowment ✅
    (C) Inefficient points
    (D) Only one allocation

    Explanation:
    The core is the subset of Pareto-efficient points that both individuals prefer to their starting point (initial endowment).

    38. In the production version of the Edgeworth Box, indifference curves are replaced by:

    (A) Isoquants ✅ (B) Iso-cost lines (C) Demand curves (D) CICs

    Explanation:
    In production, isoquants (equal-output curves) replace indifference curves to show combinations of inputs producing equal output.

    39. In the production Edgeworth Box, efficiency occurs when:

    (A) MRTS_LK^X = MRTS_LK^Y ✅
    (B) MRS_A = MRS_B
    (C) MRT = MRS
    (D) MU_X = MU_Y

    Explanation:
    Factor efficiency is achieved when both industries have the same marginal rate of technical substitution between labour and capital.

    40. When MRS = MRT, the economy achieves:

    (A) Efficiency in exchange
    (B) Efficiency in production
    (C) Efficiency in product mix ✅
    (D) Market disequilibrium

    Explanation:
    Equality between consumer preferences (MRS) and production trade-off (MRT) ensures the right combination of goods is produced.

  • UGC NET Economics Unit 1-General Equilibrium Analysis

    1. Introduction

    The concept of general equilibrium represents one of the core analytical tools in microeconomics. While partial equilibrium examines individual markets in isolation, general equilibrium analysis studies the simultaneous equilibrium of all interrelated markets — goods, services, and factors — within an economy.

    This framework was developed by Léon Walras, whose Elements of Pure Economics (1874) provided the mathematical foundation for modern equilibrium theory. His approach, known as the Walrasian General Equilibrium Model, remains the cornerstone of equilibrium analysis.

    2. Partial vs. General Equilibrium

    Partial Equilibrium Analysis

    • Introduced by Alfred Marshall, this method isolates one market or variable while assuming all others remain constant (ceteris paribus).

    • It is suitable for studying specific issues like:

      • Demand and supply in a single commodity market.

      • Price determination in isolation.

    • Limitations:

      • Ignores interdependence between markets.

      • Assumes other prices, incomes, and tastes remain unchanged.

    General Equilibrium Analysis

    • Developed by Walras, this approach considers simultaneous interaction of all markets.

    • It acknowledges that a change in one market affects others (e.g., a rise in food prices affects wages, cost of production, and factor markets).

    • Objective: To determine whether a set of prices exists that brings equilibrium in all markets simultaneously.

    3. Walrasian General Equilibrium Model

    Assumptions

    1. Perfect competition in all markets.

    2. Rational consumers maximize utility; firms maximize profits.

    3. Factors and goods are homogeneous and perfectly divisible.

    4. All markets clear — supply equals demand.

    Structure of the Model

    Suppose the economy has:

    • n commodities, m factors, and h households.

    Each market has:

    • Demand functions: Qid=Di(P1,P2,...,Pn,M1,M2,...,Mh)

    • Supply functions: Qis=Si(P1,P2,...,Pn,V1,V2,...,Vm)

    • Factor demand functions: Rkd=Dk(Q1,...,Qn,P1,...,Pn,V1,...,Vm)

    • Factor supply functions: Rks=Sk(V1,V2,...,Vm;Rk1,Rk2,...,Rkh)

    Walras’ Law

    The sum of excess demands across all markets is zero:

    \sum (P_i Q_i^d – P_i Q_i^s) = 0
    ]
    This means that if all but one market are in equilibrium, the last one must also be in equilibrium.

    4. Graphical Illustration (2×2×2 Model)

    Consider:

    • 2 goods (X and Y)

    • 2 factors (Labour L and Capital K)

    • 2 consumers (A and B)

    When demand for one good (say X) rises:

    • Price of X rises → firms in X earn supernormal profits.

    • Resources (L, K) move from industry Y to X.

    • Price of Y falls → firms in Y incur losses.

    • Over time, this reallocation of resources restores equilibrium across both goods and factor markets.

    This automatic adjustment mechanism demonstrates how the market tends toward general equilibrium.

    5. Existence, Uniqueness, and Stability of General Equilibrium

    1️⃣ Existence

    A general equilibrium exists if a set of prices makes aggregate demand = aggregate supply in all markets.

    • Walras proved existence mathematically using simultaneous equations.

    • Modern proofs (Arrow–Debreu, 1954) showed equilibrium exists under:

      • Convex preferences,

      • Continuous, decreasing returns to scale,

      • No externalities.

    2️⃣ Uniqueness

    Equilibrium is unique if there is only one set of prices that clears all markets.

    • Uniqueness requires:

      • Strict convexity of preferences,

      • Non-intersecting excess demand curves.

    • If demand curves are backward-bending (as in Giffen goods), multiple equilibria can exist.

    3️⃣ Stability

    An equilibrium is stable if deviations from it trigger market forces that restore equilibrium.

    • Stable Equilibrium: When market adjustment brings the system back (demand < supply → prices fall → equilibrium restored).

    • Unstable Equilibrium: Divergence from equilibrium continues.

    • Stability depends on relative slopes of demand and supply curves and adjustment mechanisms.

    6. Pareto Efficiency and General Equilibrium

    A general equilibrium is Pareto efficient when no reallocation of resources can make someone better off without making someone else worse off.

    Conditions for Pareto Optimality:

    1. Efficiency in Consumption:

      • MRS (A) = MRS (B)

    2. Efficiency in Production:

      • MRTS (X) = MRTS (Y)

    3. Efficiency in Product Mix:

      • MRT (production) = MRS (consumption)

    When these three conditions are met, the economy achieves Pareto optimality.

    7. Extensions of General Equilibrium

    • Kaldor–Hicks Efficiency: Improvement is efficient if gainers could compensate losers.

    • Social Welfare Function (Bergson–Samuelson): Aggregates individual preferences into a measure of societal welfare.

    • Second Welfare Theorem: Any Pareto optimal allocation can be achieved through appropriate redistribution and competitive equilibrium.

    8. Limitations of General Equilibrium Analysis

    1. Assumes perfect competition, rarely observed in reality.

    2. Neglects time-lags and dynamic processes.

    3. Requires complete information and rationality.

    4. Ignores externalities and public goods.

    5. Complex mathematical modeling limits empirical application.

    9. Key Terms

    Concept Description
    Partial Equilibrium Analysis of one market in isolation.
    General Equilibrium Simultaneous equilibrium in all markets.
    Walrasian System A system of simultaneous equations determining all prices and quantities.
    Pareto Optimality Resource allocation where no one can be made better off without hurting another.
    Walras’ Law If all but one markets are in equilibrium, the last one must also be.
    Stability The tendency of a system to return to equilibrium after a disturbance.

    10. Summary for UGC NET Preparation

    • Distinguish between Partial and General Equilibrium.

    • Understand Walrasian Model and Walras’ Law.

    • Learn the conditions of existence, uniqueness, and stability.

    • Relate General Equilibrium to Welfare Economics (Pareto, Kaldor–Hicks).

    • Review the Arrow–Debreu model for modern proofs.

    • Remember diagrams for 2×2×2 model, Edgeworth Box, and Production Possibility Frontier.

    Suggested Readings

    • D.N. Dwivedi, Microeconomics: Theory and Applications.

    • Hal R. Varian, Microeconomic Analysis.

    • Koutsoyiannis, Modern Microeconomics.

    • Mas-Colell, Whinston, Green, Microeconomic Theory.

     

    General Equilibrium Analysis (Extended Notes with Edgeworth Box & Pareto Efficiency)

    (UGC NET Economics – Unit 1: Microeconomics)

    1. Introduction to the Edgeworth Box

    The Edgeworth Box Diagram is one of the most important tools for understanding General Equilibrium and Pareto Efficiency in both exchange and production.

    It was developed by Francis Ysidro Edgeworth (1881) and later refined by Vilfredo Pareto (1906).

    The Edgeworth Box provides a graphical representation of a two-person, two-good economy, showing how resources or goods can be distributed between two individuals (or firms) to achieve efficient allocations.

    2. Structure of the Edgeworth Box

    Assumptions:

    1. Two consumers (A and B)

    2. Two goods (X and Y)

    3. Fixed total quantities of X and Y

      XA+XB=Xˉ,YA+YB=Yˉ

    4. Preferences of both consumers are convex, continuous, and represented by indifference curves.

    5. There is no production — only exchange.

    Diagram Description

    Imagine a rectangle (the box):

    • The width of the box represents the total quantity of good X available.

    • The height represents the total quantity of good Y.

    • The origin for consumer A is at the bottom-left corner (Oₐ).

    • The origin for consumer B is at the top-right corner (Oᵦ).

    Each point inside the box represents one possible distribution of goods X and Y between A and B.

    Indifference Curves

    • ICₐ = Indifference curves of consumer A (convex to Oₐ).

    • ICᵦ = Indifference curves of consumer B (convex to Oᵦ).

    • The point of tangency between ICₐ and ICᵦ shows a state where both consumers cannot be made better off without hurting the other — a Pareto efficient allocation.

    3. The Contract Curve

    Definition:

    The Contract Curve is the locus of all tangency points between the indifference curves of A and B inside the Edgeworth Box.

    It represents all Pareto Efficient (optimal) allocations of the two goods between the two individuals.

    Mathematical Condition:

    At Pareto Efficiency, the Marginal Rate of Substitution (MRS) of both individuals must be equal:

    MRSXYA=MRSXYB

    That is,

    MUXAMUYA=MUXBMUYB

    When this condition holds, neither A nor B can be made better off without making the other worse off.

    Interpretation:

    • Every point on the Contract Curve is Pareto Efficient, but not all points are socially desirable.

    • The final outcome depends on initial endowments and bargaining power (see the core of exchange below).

    4. The Core of Exchange

    • The Core is the subset of Pareto-efficient points on the contract curve that both individuals prefer over their initial endowment.

    • It represents the possible range of mutually beneficial trades.

    Thus:

    Core⊂Contract Curve

    At any point outside the core, one or both individuals would reject the trade.

    5. Edgeworth Box for Production

    In the production version of the Edgeworth Box:

    • Consumers are replaced by firms.

    • Goods X and Y are replaced by two factors of production (Labour L and Capital K).

    • Isoquants represent combinations of inputs (L, K) producing the same output.

    Production Efficiency Condition:

    For efficiency in production,

    MRTSLKX=MRTSLKY

    That is, the Marginal Rate of Technical Substitution between labour and capital must be equal for both industries.

    This ensures that no reallocation of resources can increase total output of one good without reducing that of another.

    6. Combining Exchange and Production: The General Equilibrium

    Once efficiency in production and efficiency in exchange are achieved, we combine both through the Production Possibility Frontier (PPF) and the Community Indifference Curve (CIC).

    Efficiency in Product Mix:

    MRTXY=MRSXY

    Where:

    • MRT = Marginal Rate of Transformation (slope of PPF)

    • MRS = Marginal Rate of Substitution (slope of CIC)

    This ensures the optimal combination of goods produced matches the pattern of consumers’ preferences.

    🧮 7. Three Conditions for Pareto Efficiency

    Type of Efficiency Condition Meaning
    Efficiency in Exchange MRSXYA=MRSXYB Goods are allocated efficiently among consumers.
    Efficiency in Production MRTSLKX=MRTSLKY
    		 Factors are optimally allocated among producers.
    Efficiency in Product Mix MRSXY=MRTXY
    		 Output mix matches consumers’ preferences.

    When all three hold simultaneously, the economy is in general equilibrium and Pareto efficient.

    8. Graphical Summary

    • The Edgeworth Box (Exchange) shows efficient distribution of goods between consumers.

    • The Edgeworth Box (Production) shows efficient allocation of factors among firms.

    • The PPF–CIC Framework shows efficient combination of goods matching social preferences.

    These three layers together form the General Equilibrium Model of the economy.

    9. Welfare Theorems and General Equilibrium

    First Fundamental Theorem of Welfare Economics

    Under perfect competition, every general equilibrium allocation is Pareto Efficient.

    Second Fundamental Theorem of Welfare Economics

    Any Pareto Efficient allocation can be achieved by suitable redistribution of initial endowments and then allowing competitive equilibrium.

    This implies that equity and efficiency can be separated — government can redistribute endowments without distorting market efficiency.

    10. Key Takeaways for UGC NET

    Concept Key Formula / Condition UGC NET Focus
    General Equilibrium All markets clear simultaneously Difference from partial equilibrium
    Walras’ Law ∑(Excess Demand × Price) = 0 Importance for equilibrium
    Pareto Efficiency No reallocation can improve welfare of one without hurting another Concept of welfare optimality
    Contract Curve MRSₐ = MRSᵦ Set of all efficient allocations
    Production Efficiency MRTS_x = MRTS_y Optimal use of factors
    Product-Mix Efficiency MRS = MRT Equilibrium between production and consumption
    First & Second Welfare Theorems Competitive equilibrium ↔ Pareto efficiency Role of redistribution

  • UGC NET Economics Unit-1-Factor Pricing-MCQs

    UGC NET ECONOMICS: FACTOR PRICING

    1.

    Factor pricing theory is also known as:
    A) Theory of Value
    B) Theory of Cost
    C) Theory of Distribution
    D) Theory of Exchange
    Answer: C

    2.

    The Marginal Productivity Theory states that each factor is paid:
    A) The total value of its contribution
    B) According to its marginal product
    C) According to average productivity
    D) A fixed wage rate
    Answer: B

    3.

    According to Marginal Productivity Theory, a firm is in equilibrium when:
    A) MRP=MFC
    B) MR=MC
    C) AR=AC
    D) MFC=MP
    Answer: A

    4.

    Under perfect competition, the equilibrium condition in factor markets is:
    A) MRP=MFC=Pf
    B) MRP>MFC
    C) MFC=0
    D) Pf>MR
    Answer: A

    5.

    Value of Marginal Product (VMP) equals:
    A) MP×MR
    B) MP×Price
    C) MR−MC
    D) MP/Price
    Answer: B

    6.

    When product market is imperfect, the relationship between VMP and MRP is:
    A) VMP=MRP
    B) VMP<MRP
    C) VMP>MRP
    D) VMP=0
    Answer: C

    7.

    The demand for a factor is:
    A) Autonomous
    B) Independent
    C) Derived demand
    D) Complementary demand
    Answer: C

    8.

    Which of the following is not an assumption of the Marginal Productivity Theory?
    A) Perfect competition
    B) Homogeneous factors
    C) Imperfect knowledge
    D) Full employment
    Answer: C

    9.

    The Marginal Revenue Product (MRP) of a factor is the:
    A) Additional output per extra unit of factor
    B) Extra revenue earned from one more unit of factor
    C) Average revenue per unit of factor
    D) Price per unit of factor
    Answer: B

    10.

    The Marginal Productivity Theory was refined and popularized by:
    A) Ricardo and Mill
    B) Marshall and Clark
    C) Adam Smith and Keynes
    D) Hicks and Kaldor
    Answer: B

    11.

    The Modern Theory of Factor Pricing determines factor prices by:
    A) Productivity alone
    B) Supply of factors alone
    C) Interaction of demand and supply of factors
    D) Government intervention
    Answer: C

    12.

    When MRP<MFC, a profit-maximizing firm should:
    A) Employ more of the factor
    B) Reduce employment of the factor
    C) Keep employment constant
    D) Increase factor price
    Answer: B

    13.

    Under monopsony in a labour market, equilibrium occurs when:
    A) W=MRPL
    B) MFC=MRPL
    C) W>MRPL
    D) W=MFC
    Answer: B

    14.

    Under monopsony, the wage rate is:
    A) Higher than in perfect competition
    B) Equal to MRP
    C) Lower than in perfect competition
    D) Always zero
    Answer: C

    15.

    The Ricardian Theory of Rent assumes that rent arises due to:
    A) Scarcity of land
    B) Fertility differences among lands
    C) Monopoly power
    D) Labour productivity
    Answer: B

    16.

    According to Ricardo, no-rent land refers to:
    A) The most fertile land
    B) The least fertile land under cultivation
    C) Unused barren land
    D) Land with highest productivity
    Answer: B

    17.

    Economic rent is:
    A) Payment to land only
    B) Surplus over opportunity cost
    C) Equal to transfer earnings
    D) Dependent on sunk costs
    Answer: B

    18.

    The Modern Theory of Rent (Scarcity Rent) was proposed by:
    A) David Ricardo
    B) Marshall
    C) Hicks
    D) Robbins
    Answer: B

    19.

    The Subsistence Theory of Wages was given by:
    A) J.S. Mill
    B) Ricardo
    C) David Ricardo and Lassalle
    D) Adam Smith
    Answer: C

    20.

    According to Marginal Productivity Theory of Wages, the wage rate equals:
    A) Average productivity of labour
    B) Marginal revenue productivity of labour
    C) Total revenue divided by number of workers
    D) Wage fund per worker
    Answer: B

    21.

    The Loanable Funds Theory explains the determination of:
    A) Rent
    B) Wage
    C) Interest rate
    D) Profit
    Answer: C

    22.

    According to Loanable Funds Theory, the rate of interest is determined by:
    A) Demand and supply of loanable funds
    B) Marginal productivity of capital
    C) Government policy
    D) Saving alone
    Answer: A

    23.

    The Keynesian Liquidity Preference Theory suggests that:
    A) Interest is reward for saving
    B) Interest is reward for productivity
    C) Interest is reward for parting with liquidity
    D) Interest equals rate of return on capital
    Answer: C

    24.

    According to Knight’s Risk Theory, profit is:
    A) A reward for innovation
    B) A return for bearing uncertainty
    C) A payment for management
    D) A premium on capital
    Answer: B

    25.

    According to Schumpeter’s Innovation Theory, profit arises due to:
    A) Monopoly power
    B) Risk-taking
    C) Innovations and technological changes
    D) Labour productivity
    Answer: C

    26.

    In general equilibrium, factor prices are determined:
    A) Independently in each market
    B) Simultaneously in all markets
    C) By the government only
    D) By consumer preferences
    Answer: B

    27.

    In a perfectly competitive factor market, the supply curve of a factor is:
    A) Perfectly elastic
    B) Perfectly inelastic
    C) Backward bending
    D) Upward sloping
    Answer: A

    28.

    Under imperfect product markets, the MRP curve lies:
    A) Above VMP curve
    B) Below VMP curve
    C) Coincides with VMP curve
    D) Equal to average cost curve
    Answer: B

    29.

    When demand for labour increases while supply remains constant, equilibrium wage will:
    A) Fall
    B) Rise
    C) Remain same
    D) Become negative
    Answer: B

    30.

    In a bilateral monopoly (one buyer and one seller of labour), wages are determined by:
    A) Government policy
    B) Collective bargaining
    C) Marginal productivity
    D) Random negotiation
    Answer: B

  • UGC NET Economics Unit 1-Factor Pricing

    (Unit 1 – Microeconomics)
    Based on the UGC NET Economics syllabus and referenced from your uploaded MA Microeconomics textbook.

    1. Introduction to Factor Pricing

    Factor pricing deals with how the rewards (prices) of factors of production—land, labour, capital, and entrepreneurship—are determined in the factor market.
    These rewards are:

    Factor Reward
    Land Rent
    Labour Wages
    Capital Interest
    Entrepreneurship Profit

    Thus, factor pricing theory is also known as the theory of distribution because it explains how the national income is distributed among the different factors of production.

    2. Meaning and Scope

    The study of factor pricing focuses on:

    1. Determining the price (remuneration) of each factor.

    2. Understanding factor demand and supply.

    3. Explaining functional distribution (income distribution among factors).

    4. Analysing market imperfections and their effect on factor earnings.

    It answers:

    • Why do workers receive different wages?

    • Why is rent earned by land?

    • Why does capital earn interest?

    • Why do entrepreneurs make profits or incur losses?

    3. Theories of Factor Pricing

    There are two broad approaches:

    A. Macro Theory of Distribution

    • Deals with total national income and its division among the factors.

    • Concerned with the shares of wages, rent, interest, and profit in national income.

    • Example: Ricardian distribution theory.

    B. Micro Theory of Distribution

    • Deals with the reward of a particular factor in a specific industry.

    • Example: Marginal Productivity Theory of Distribution.

    4. Marginal Productivity Theory of Distribution

    This is the most prominent theory of factor pricing.

    Assumptions

    1. Perfect competition in product and factor markets.

    2. Homogeneous factors.

    3. Perfect mobility of factors.

    4. Full employment.

    5. Diminishing marginal productivity.

    6. Profit-maximizing firm.

    Concept

    A rational firm will employ a factor up to the point where:

    Marginal Revenue Product (MRP)=Marginal Factor Cost (MFC)

    In a perfectly competitive factor market:

    MFC=Price (of the factor)

    Thus, equilibrium occurs when:

    MRP=Factor Price

    Diagrammatic Explanation

    ![MRP Curve](conceptual representation)

    • The MRP curve is downward-sloping due to diminishing marginal productivity.

    • The MFC line (wage rate or factor price) is horizontal under perfect competition.

    • The intersection determines equilibrium employment and factor price.

    Mathematical Expression

    MRP=MP×MR

    • Under perfect competition, MR=P, so:

    MRP=MP×P

    Hence, factor price = MRP at equilibrium.

    Implications

    • Every factor is paid according to its contribution to production.

    • Explains both demand and price determination for factors.

    • Income distribution is based on productivity, not exploitation.

    5. Concepts Related to Marginal Productivity Theory

    Concept Meaning
    Average Product (AP) Output per unit of factor employed.
    Marginal Product (MP) Additional output from one more unit of factor.
    Value of Marginal Product (VMP) MP × Price of output.
    Marginal Revenue Product (MRP) MP × Marginal Revenue (under imperfect competition).
    Marginal Factor Cost (MFC) Additional cost from employing one more unit of a factor.

    Under perfect competition:

    VMP=MRP=FactorPrice

    6. Criticisms of Marginal Productivity Theory

    1. Unrealistic assumptions (perfect competition rarely exists).

    2. Circular reasoning – price of factor depends on product price, which depends on cost, which again depends on factor prices.

    3. Static model – ignores time and technological changes.

    4. Immobility of factors in reality.

    5. Non-measurable productivity for collective factors (e.g., teamwork).

    Despite these, the theory is foundational and forms the basis of modern factor pricing models.

    7. Modern Theory of Factor Pricing

    The modern approach integrates both demand and supply of factors.
    A factor’s price is determined by the interaction of its demand (MRP) and supply.

    Equilibrium Condition:

    Df=Sf

    where
    Df = Demand for factor (MRP curve)
    Sf = Supply of factor (upward sloping)

    The intersection gives the equilibrium factor price (wage, rent, interest, or profit).

    Determination of Factor Price

    Market Condition Outcome
    Perfect competition (factor & product) MRP=MFC=P
    Imperfect product market P>MR, so MRP<VMP
    Imperfect factor market MFC>wage, so lower employment

    8. Theories of Individual Factor Pricing

    A. Rent (Land) – Ricardian Theory of Rent

    • Rent arises due to differences in fertility of land.

    • Rent = Surplus over the cost of cultivation on the marginal land.

    Economic Rent=Total Revenue−Total Cost

    B. Wages (Labour) – Marginal Productivity Theory & Modern Theories

    • Wages determined where:

    MRPL=W

    • Under monopoly, wages may be below MRP.

    • Modern extensions include bargaining, efficiency wage, and labour union effects.

    C. Interest (Capital) – Classical and Modern Theories

    1. Classical Theory: Interest determined by demand (investment) and supply (saving).

    2. Loanable Funds Theory: Interest = interaction of demand and supply of loanable funds.

    3. Keynesian Theory: Interest determined by liquidity preference and money supply.

    i=f(LP,M)

    D. Profit (Entrepreneurship) – Risk and Innovation Theories

    1. Risk Theory (Knight): Profit is a reward for bearing uncertainty.

    2. Innovation Theory (Schumpeter): Profit arises due to innovation and entrepreneurial dynamism.

    3. Dynamic Theory: Profit results from changes in demand, technology, and organisation.

    9. Modern View: General Equilibrium of Factor Markets

    Using Walrasian General Equilibrium, all factor prices are interdependent:

    • Each factor’s demand depends on product demand.

    • Product price depends on factor costs.

    • Hence, equilibrium requires simultaneous determination of all factor prices.

    Mathematically, equilibrium is achieved when:

    ∑iDi=∑iSifor all factors i

    10. Efficiency and Welfare Implications

    Efficiency Type Factor Market Condition Achieved When
    Allocative Efficiency Pfactor=MRP Yes (Perfect Competition)
    Distributive Efficiency Each factor paid according to productivity Yes
    Pareto Optimality No reallocation can improve welfare Achieved in equilibrium

    11. Factor Pricing under Imperfect Competition

    Type Key Features Outcome
    Monopsony in Labour Market Single buyer of labour MFC>Wage; lower employment
    Monopoly in Product Market MR<P; MRP<VMP Lower factor demand
    Bilateral Monopoly Single buyer & single seller Wage set through bargaining
    Oligopsony Few buyers Wages depressed below competitive level

    12. Summary Table

    Factor Classical Theory Modern/Keynesian Theory Key Determinant
    Land (Rent) Differential fertility (Ricardo) Scarcity rent Productivity & scarcity
    Labour (Wages) Subsistence & marginal productivity Demand-supply equilibrium Productivity & bargaining
    Capital (Interest) Abstinence (saving) Liquidity preference Supply of money & savings
    Entrepreneur (Profit) Risk & uncertainty Innovation & monopoly power Change, risk, innovation

    13. UGC NET Focus Areas

    Subtopic Weightage Concepts to Master
    Marginal Productivity Theory 25% MRP=MFC, efficiency
    Rent Theories 20% Ricardian & scarcity rent
    Wage Determination 20% Competitive vs monopsony
    Interest & Profit 20% Loanable funds, innovation theory
    General Equilibrium of Factor Markets 15% Pareto efficiency

    14. Key Takeaways

    • Factor pricing explains income distribution across productive agents.

    • Marginal productivity is the cornerstone of classical and neoclassical thought.

    • Modern theories integrate demand and supply to form realistic explanations.

    • Market imperfections (monopoly, monopsony, unions) alter equilibrium prices.

    • Efficient factor markets ensure Pareto optimal allocation of resources.

  • UGC NET Economics UNIT 1-MARKET STRUCTURES AND EFFICIENCY-MCQs

    1.

    In perfect competition, each firm is a:
    A) Price maker
    B) Price taker
    C) Quantity setter
    D) Collusive participant
    Answer: B

    2.

    Under perfect competition, a firm attains equilibrium where:
    A) AR=AC
    B) MC=MR
    C) MC>MR
    D) TR=TC

    Answer: B

    3.

    In long-run equilibrium under perfect competition, which holds true?
    A) P=MC=AC=MR
    B) P>MC
    C) P<AC
    D) P>MR
    Answer: A

    4.

    Allocative efficiency is achieved when:
    A) P>MC
    B) P<MC
    C) P=MC
    D) MR=MC
    Answer: C

    5.

    Which of the following ensures productive efficiency?
    A) Output is maximized.
    B) Production occurs at minimum AC.
    C) Firms make zero profit.
    D) MC=MR
    Answer: B

    6.

    A monopolist faces a downward-sloping demand curve because:
    A) Entry barriers are low.
    B) It produces homogeneous products.
    C) It is the sole producer with no substitutes.
    D) It acts as a price taker.
    Answer: C

    7.

    In monopoly equilibrium:
    A) P=MC
    B) P=MR
    C) P>MR=MC
    D) P=AC=MC
    Answer: C

    8.

    Which one is true for perfect competition but not for monopoly?
    A) P=MC
    B) Downward-sloping demand curve
    C) Entry barriers exist
    D) Firm determines price
    Answer: A

    9.

    The condition P>MC under monopoly implies:
    A) Allocative efficiency
    B) Productive efficiency
    C) Welfare loss
    D) Increasing returns to scale
    Answer: C

    10.

    The deadweight loss in monopoly arises due to:
    A) Perfect knowledge
    B) Overproduction
    C) Restriction of output
    D) Constant returns to scale
    Answer: C

    11.

    The Lerner Index measures:
    A) Profit rate
    B) Monopoly power
    C) Efficiency loss
    D) Output elasticity
    Answer: B

    L=P−MCP

    12.

    Which of the following market structures shows zero long-run economic profit?
    A) Monopoly
    B) Oligopoly
    C) Monopolistic Competition
    D) Duopoly
    Answer: C

    13.

    In monopolistic competition, each firm faces:
    A) Perfectly elastic demand curve
    B) Downward-sloping demand curve
    C) Perfectly inelastic demand curve
    D) Horizontal marginal revenue curve
    Answer: B

    14.

    The key feature distinguishing monopolistic competition from perfect competition is:
    A) Entry restrictions
    B) Product differentiation
    C) Price control
    D) Number of firms
    Answer: B

    15.

    Under monopolistic competition, the firm achieves equilibrium when:
    A) MC=MR and P=MC
    B) MC=MR and P>MC
    C) MC=MR=AC
    D) MR=AR
    Answer: B

    16.

    Which of the following statements is true for long-run equilibrium in monopolistic competition?
    A) Firms earn supernormal profits.
    B) Firms produce at minimum AC.
    C) Firms earn normal profits but not at minimum AC.
    D) Price equals MC.
    Answer: C

    17.

    Excess capacity in monopolistic competition arises because:
    A) Firms overproduce
    B) Entry is restricted
    C) Firms produce less than optimal scale of output
    D) Price equals MC
    Answer: C

    18.

    In oligopoly, firms are:
    A) Independent in pricing
    B) Interdependent in pricing
    C) Non-profit-maximizing
    D) Price takers
    Answer: B

    19.

    Which of the following is a model of oligopoly?
    A) Cournot Model
    B) Walrasian Model
    C) Arrow-Debreu Model
    D) Ricardian Model
    Answer: A

    20.

    In Cournot Duopoly, each firm assumes that the rival’s output:
    A) Will remain constant
    B) Will increase proportionally
    C) Will decrease as own output increases
    D) Is unknown
    Answer: A

    21.

    In Bertrand Competition, firms compete by choosing:
    A) Output levels
    B) Prices
    C) Market shares
    D) Advertising levels
    Answer: B

    22.

    The Kinked Demand Curve model of oligopoly explains:
    A) Price discrimination
    B) Sticky prices
    C) Collusion
    D) Entry barriers
    Answer: B

    23.

    Price rigidity in the kinked demand model arises because:
    A) Marginal cost fluctuates
    B) Firms fear rival reactions to price changes
    C) Demand is perfectly elastic
    D) Firms have identical costs
    Answer: B

    24.

    A collusive oligopoly tends to behave like:
    A) Perfect competition
    B) Monopoly
    C) Duopoly
    D) Monopolistic competition
    Answer: B

    25.

    Allocative inefficiency is present when:
    A) P=MC
    B) P>MC
    C) MC>MR
    D) AR=MR
    Answer: B

    26.

    In long-run equilibrium under perfect competition, welfare is:
    A) Maximized
    B) Reduced
    C) Constant
    D) Uncertain
    Answer: A

    27.

    Dynamic efficiency is most likely to occur in:
    A) Perfect competition
    B) Monopoly and oligopoly
    C) Monopolistic competition
    D) Duopoly only
    Answer: B

    🟩 Because large profits can fund R&D and innovation.

    28.

    The deadweight loss triangle in monopoly represents:
    A) Excess profit
    B) Lost consumer and producer surplus
    C) Minimum efficiency output
    D) Social gain
    Answer: B

    29.

    Which market structure shows both competition and differentiation?
    A) Monopoly
    B) Oligopoly
    C) Monopolistic Competition
    D) Perfect Competition
    Answer: C

    30.

    When the government regulates a natural monopoly, its aim is usually to:
    A) Maximize monopolist’s profit
    B) Reduce consumer surplus
    C) Bring P closer to MC
    D) Restrict entry further
    Answer: C

     

  • UGC NET Economics Unit 1-Market Structures, Competitive and Non-Competitive Equilibria, and Their Efficiency Properties

    (Unit 1 – Microeconomics)

    1. Introduction

    The concept of market structure refers to the nature and degree of competition prevailing in a particular market or industry. It is defined by characteristics such as number of firms, nature of the product, entry and exit conditions, market power, and price control.

    Market structures influence how firms behave, determine equilibrium prices and outputs, and affect economic efficiency and welfare.

    2. Classification of Market Structures

    Market Structure No. of Sellers Type of Product Price Control Entry/Exit Barriers
    Perfect Competition Many Homogeneous None Free
    Monopolistic Competition Many Differentiated Limited Free
    Oligopoly Few Homogeneous/Differentiated Considerable High
    Monopoly One Unique Absolute Very High

    Each market structure leads to a different price-output determination and distinct efficiency outcomes.

    3. Perfect Competition

    Characteristics

    1. Large number of buyers and sellers

    2. Homogeneous product

    3. Perfect knowledge

    4. Free entry and exit

    5. Perfect mobility of factors

    6. Firms are price takers

    Short-Run Equilibrium

    A firm is in equilibrium when:

    MC=MR

    and the MC curve cuts the MR curve from below.

    Depending on cost and price levels, the firm may earn supernormal profits, normal profits, or losses.

    Long-Run Equilibrium

    In the long run, entry and exit of firms drive all firms to earn normal profits.

    P=MC=MR=AR=AC

    This represents productive and allocative efficiency.

    Efficiency under Perfect Competition

    Type of Efficiency Explanation Achieved?
    Allocative Efficiency P=MC ensures resources are optimally allocated. ✅ Yes
    Productive Efficiency Firms produce at minimum AC. ✅ Yes
    Dynamic Efficiency Innovation over time. ⚙️ Moderate
    Distributive Efficiency No exploitation of consumers. ✅ Yes

    Thus, perfect competition is socially optimal.

    4. Monopoly

    Features

    1. Single seller and no close substitutes

    2. Barriers to entry

    3. Price maker

    4. Firm = Industry

    Equilibrium

    MC=MR

    but price (P) > MC, since the monopolist faces a downward-sloping demand curve.

    Condition Implication
    MR=MC Profit maximization
    P>MR Market power
    P>MC Allocative inefficiency

    Welfare Implications

    Monopoly leads to:

    • Higher price and lower output than perfect competition.

    • Deadweight loss (DWL) due to misallocation of resources.

    Efficiency under Monopoly

    Efficiency Type Status Reason
    Allocative Efficiency ❌ P>MC → underproduction
    Productive Efficiency ❌ X-inefficiency due to lack of competition
    Dynamic Efficiency ⚙️ Sometimes achieved Large profits may fund R&D
    Distributive Efficiency ❌ Consumer surplus transferred to producer

    5. Monopolistic Competition

    Features

    1. Many sellers, product differentiation

    2. Freedom of entry and exit

    3. Some control over price

    4. Heavy non-price competition (advertising, branding)

    Equilibrium

    Each firm faces a downward-sloping demand curve (AR).
    In equilibrium:

    MC=MR

    but

    P>MC

    In the long run, new entrants eliminate supernormal profits → only normal profits remain.

    Efficiency

    • Allocative Inefficiency: P>MC

    • Productive Inefficiency: Firms don’t produce at minimum AC

    • Excess Capacity: Output is below optimum scale

    However, variety and consumer choice increase welfare partially.

    6. Oligopoly

    Features

    1. Few large firms dominate

    2. Mutual interdependence

    3. Product differentiation (or homogeneity)

    4. Entry barriers

    5. Strategic behaviour (Game theory relevance)

    Models of Oligopoly

    Model Description Key Outcome
    Cournot Duopoly Firms choose quantities simultaneously Intermediate output
    Bertrand Model Firms compete in prices Price = MC (competitive outcome)
    Sweezy’s Kinked Demand Curve Price rigidity; firms reluctant to change prices Sticky prices
    Collusive Oligopoly Firms cooperate via cartel Monopoly-like price

    Efficiency

    • Allocative Efficiency: Not achieved; P>MC

    • Productive Efficiency: Not achieved; high AC due to inefficiency

    • Dynamic Efficiency: Often high (innovation driven by rivalry)

    7. Comparative Equilibrium Analysis

    Feature Perfect Competition Monopoly Monopolistic Competition Oligopoly
    Price Lowest Highest Moderate Moderate–High
    Output Highest Lowest Less than PC Less than PC
    Entry Free Blocked Free Restricted
    Profit (Long Run) Normal Abnormal Normal May persist
    Efficiency High Low Moderate Mixed

    8. Efficiency Properties and Welfare Implications

    A. Allocative Efficiency

    • Achieved when P=MC → society values goods as much as they cost to produce.

    • Only perfect competition satisfies this condition.

    B. Productive Efficiency

    • Achieved when firms produce at minimum AC.

    • Only perfect competition attains this in the long run.

    C. Dynamic Efficiency

    • Relates to technological innovation and R&D investment.

    • Often higher in monopolistic and oligopolistic markets due to profit incentives.

    D. X-Inefficiency

    • Monopoly and oligopoly may exhibit inefficiency due to slack management.

    E. Welfare and Deadweight Loss

    Deadweight loss under monopoly or oligopoly arises because:

    P>MC⇒Qm<Qc

    — representing lost consumer and producer surplus.

    9. Competitive vs. Non-Competitive Equilibria

    Criterion Competitive Markets Non-Competitive Markets
    Price Determination Market demand & supply Firm’s market power
    Output Efficient allocation Restricted output
    Profit Normal Supernormal
    Entry/Exit Free Restricted
    Welfare Maximized Reduced
    Market Power None Present

    10. Efficiency and Market Failure

    Market Failure Causes

    • Monopoly power (restrictive output, higher prices)

    • Externalities

    • Public goods

    • Asymmetric information

    When markets fail to achieve Pareto optimality, government intervention (regulation, taxation, antitrust) may restore efficiency.

    11. Policy Implications

    1. Promote Competition: Encourage entry and discourage collusion.

    2. Antitrust Laws: Prevent monopoly abuse.

    3. Regulation: Control prices in natural monopolies (utilities).

    4. Subsidies for R&D: Enhance dynamic efficiency.

    5. Public Provision: Where private markets fail (education, healthcare).

    12. Summary

    Concept Key Points
    Market Structure Framework defining number and behaviour of firms
    Perfect Competition Maximizes welfare, allocative and productive efficiency
    Monopoly Leads to deadweight loss and inefficiency
    Monopolistic Competition Product variety with some inefficiency
    Oligopoly Interdependence and strategic behaviour dominate
    Efficiency Properties Only perfect competition ensures Pareto efficiency
    Policy Measures Needed to correct market failures in non-competitive equilibria

    13. Visual Summary (for Diagrams)

    1. Perfect Competition: P=MC=MR, lowest price, highest output.

    2. Monopoly: P>MC, restricted output, deadweight loss.

    3. Monopolistic Competition: P>MC, excess capacity.

    4. Oligopoly: Price rigidity, interdependent demand curves.

    14. UGC NET Focus Areas

    Subtopic Expected Weightage Common Questions
    Perfect vs Imperfect Markets 25% Price & output equilibrium
    Efficiency Conditions 25% P=MC, AC=MC
    Monopoly Welfare Loss 20% Deadweight triangle analysis
    Oligopoly Models 15% Cournot, Bertrand, Kinked demand
    Market Failure & Regulation 15% Policy implications

    15. Key Takeaway

    Perfect competition is the benchmark for maximum efficiency.
    All non-competitive structures—monopoly, monopolistic competition, and oligopoly—deviate from Pareto optimality, leading to welfare loss.
    However, dynamic gains in innovation may sometimes justify moderate market power.

  • UGC NET Economics Unit 1-GAME THEORY: NON-COOPERATIVE GAMES-MCQs

    1.

    Game Theory was first developed systematically by:
    A) Adam Smith
    B) John Nash
    C) von Neumann and Morgenstern
    D) Edgeworth
    Answer: C
    🟩 They developed Game Theory in their 1944 book “Theory of Games and Economic Behavior.”

    2.

    A game in which players act independently without binding agreements is called:
    A) Cooperative Game
    B) Non-Cooperative Game
    C) Sequential Game
    D) Constant-Sum Game
    Answer: B

    3.

    In a non-cooperative game, each player:
    A) Tries to maximize joint payoffs
    B) Acts according to others’ commands
    C) Maximizes own payoff given others’ strategies
    D) Chooses randomly
    Answer: C

    4.

    A strategy in game theory refers to:
    A) The payoffs obtained in the game
    B) A complete plan of action for a player
    C) The utility of outcomes
    D) The probability of success
    Answer: B

    5.

    A dominant strategy is one that:
    A) Maximizes payoff regardless of opponents’ choices
    B) Minimizes losses in all cases
    C) Depends on the probability of other outcomes
    D) Requires cooperation
    Answer: A

    6.

    A Nash Equilibrium occurs when:
    A) All players achieve maximum payoffs
    B) No player can improve payoff by unilaterally changing strategy
    C) All players follow dominant strategies
    D) Each player earns equal payoffs
    Answer: B

    7.

    In a Nash Equilibrium, each player’s strategy is a best response to:
    A) The dominant strategy
    B) The random strategy
    C) The other player’s strategy
    D) The cooperative outcome
    Answer: C

    8.

    Which of the following best describes a zero-sum game?
    A) Both players can win simultaneously
    B) One player’s gain equals another’s loss
    C) Total payoffs always increase
    D) All outcomes are uncertain
    Answer: B

    9.

    In a non-zero-sum game, players’ interests are:
    A) Perfectly opposed
    B) Independent
    C) Interdependent; both can gain or lose
    D) Random
    Answer: C

    10.

    The Prisoner’s Dilemma demonstrates that:
    A) Cooperation always yields maximum gain
    B) Rational self-interest can lead to sub-optimal outcomes
    C) Players always act irrationally
    D) Equilibrium is Pareto optimal
    Answer: B

    11.

    In the Prisoner’s Dilemma, mutual defection is:
    A) Dominant strategy equilibrium
    B) Pareto optimal
    C) Mixed strategy equilibrium
    D) Cooperative solution
    Answer: A

    12.

    A Nash Equilibrium that is not Pareto optimal implies:
    A) Mutual cooperation
    B) Inefficient outcome
    C) Maximum collective welfare
    D) Repeated game
    Answer: B

    13.

    If each player has a dominant strategy, then the game has:
    A) Multiple equilibria
    B) No equilibrium
    C) Dominant strategy equilibrium
    D) Sequential equilibrium
    Answer: C

    14.

    A player’s payoff depends on:
    A) Only his own choice
    B) Others’ choices as well
    C) Random factors
    D) Market conditions alone
    Answer: B

    15.

    Which of the following is a feature of non-cooperative games?
    A) Binding agreements between players
    B) Rational decision-making in isolation
    C) Centralized coordination
    D) Mutual contracts
    Answer: B

    16.

    The concept of Mixed Strategy Nash Equilibrium allows:
    A) Fixed choices
    B) Randomization of strategies with probabilities
    C) Cooperation between players
    D) Sequential decisions
    Answer: B

    17.

    The expected payoff in a mixed strategy game is:
    A) Always zero
    B) The probability-weighted sum of possible payoffs
    C) The minimum of payoffs
    D) The dominant outcome
    Answer: B

    18.

    Which of the following games always has at least one Nash Equilibrium (pure or mixed)?
    A) Infinite games
    B) Cooperative games
    C) Any finite game
    D) Zero-sum games only
    Answer: C
    🟩 Nash’s theorem states that every finite game has at least one equilibrium.

    19.

    In an oligopoly, Game Theory is applied to study:
    A) Demand forecasting
    B) Price and output interdependence
    C) Production planning
    D) Capital formation
    Answer: B

    20.

    The Advertising Game between firms typically results in:
    A) Cooperative outcome
    B) Dominant strategy equilibrium
    C) Zero-sum outcome
    D) Pareto optimal equilibrium
    Answer: B

    21.

    In a repeated game, cooperation may emerge due to:
    A) Short-term profit motives
    B) Absence of retaliation
    C) Future punishment and reputation effects
    D) Lack of communication
    Answer: C

    22.

    The Stackelberg Model of oligopoly is an example of a:
    A) Simultaneous game
    B) Sequential game
    C) Repeated game
    D) Zero-sum game
    Answer: B

    23.

    If one player’s optimal strategy changes with another’s, the game is:
    A) Independent
    B) Strategic
    C) Cooperative
    D) Static
    Answer: B

    24.

    The Maximin strategy in non-cooperative games is suitable for:
    A) Optimistic players
    B) Pessimistic players
    C) Indifferent players
    D) Neutral players
    Answer: B

    25.

    A game in which both players can gain by cooperating is called:
    A) Zero-sum
    B) Non-zero-sum
    C) Negative-sum
    D) Sequential
    Answer: B

    26.

    The equilibrium in the Prisoner’s Dilemma is:
    A) Pareto optimal
    B) Sub-optimal but stable
    C) Unstable and non-existent
    D) Cooperative
    Answer: B

    27.

    The Best Response Function of a player shows:
    A) The strategies that maximize his payoff given others’ strategies
    B) The probability of success
    C) The market equilibrium
    D) The Pareto frontier
    Answer: A

    28.

    In a two-player zero-sum game, the sum of both players’ payoffs equals:
    A) Zero
    B) One
    C) Infinity
    D) A positive constant
    Answer: A

    29.

    The dominance rule in game theory is used to:
    A) Eliminate inferior strategies
    B) Find maximum payoffs
    C) Calculate Nash Equilibrium
    D) Determine cooperative payoffs
    Answer: A

    30.

    Game Theory fundamentally assumes that players are:
    A) Irrational and emotional
    B) Rational and strategic
    C) Unaware of others’ choices
    D) Myopic decision-makers
    Answer: B

    GAME THEORY: NON-COOPERATIVE GAMES

    1.

    Game Theory was first developed systematically by:
    A) Adam Smith
    B) John Nash
    C) von Neumann and Morgenstern
    D) Edgeworth
    Answer: C
    🟩 They developed Game Theory in their 1944 book “Theory of Games and Economic Behavior.”

    2.

    A game in which players act independently without binding agreements is called:
    A) Cooperative Game
    B) Non-Cooperative Game
    C) Sequential Game
    D) Constant-Sum Game
    Answer: B

    3.

    In a non-cooperative game, each player:
    A) Tries to maximize joint payoffs
    B) Acts according to others’ commands
    C) Maximizes own payoff given others’ strategies
    D) Chooses randomly
    Answer: C

    4.

    A strategy in game theory refers to:
    A) The payoffs obtained in the game
    B) A complete plan of action for a player
    C) The utility of outcomes
    D) The probability of success
    Answer: B

    5.

    A dominant strategy is one that:
    A) Maximizes payoff regardless of opponents’ choices
    B) Minimizes losses in all cases
    C) Depends on the probability of other outcomes
    D) Requires cooperation
    Answer: A

    6.

    A Nash Equilibrium occurs when:
    A) All players achieve maximum payoffs
    B) No player can improve payoff by unilaterally changing strategy
    C) All players follow dominant strategies
    D) Each player earns equal payoffs
    Answer: B

    7.

    In a Nash Equilibrium, each player’s strategy is a best response to:
    A) The dominant strategy
    B) The random strategy
    C) The other player’s strategy
    D) The cooperative outcome
    Answer: C

    8.

    Which of the following best describes a zero-sum game?
    A) Both players can win simultaneously
    B) One player’s gain equals another’s loss
    C) Total payoffs always increase
    D) All outcomes are uncertain
    Answer: B

    9.

    In a non-zero-sum game, players’ interests are:
    A) Perfectly opposed
    B) Independent
    C) Interdependent; both can gain or lose
    D) Random
    Answer: C

    10.

    The Prisoner’s Dilemma demonstrates that:
    A) Cooperation always yields maximum gain
    B) Rational self-interest can lead to sub-optimal outcomes
    C) Players always act irrationally
    D) Equilibrium is Pareto optimal
    Answer: B

    11.

    In the Prisoner’s Dilemma, mutual defection is:
    A) Dominant strategy equilibrium
    B) Pareto optimal
    C) Mixed strategy equilibrium
    D) Cooperative solution
    Answer: A

    12.

    A Nash Equilibrium that is not Pareto optimal implies:
    A) Mutual cooperation
    B) Inefficient outcome
    C) Maximum collective welfare
    D) Repeated game
    Answer: B

    13.

    If each player has a dominant strategy, then the game has:
    A) Multiple equilibria
    B) No equilibrium
    C) Dominant strategy equilibrium
    D) Sequential equilibrium
    Answer: C

    14.

    A player’s payoff depends on:
    A) Only his own choice
    B) Others’ choices as well
    C) Random factors
    D) Market conditions alone
    Answer: B

    15.

    Which of the following is a feature of non-cooperative games?
    A) Binding agreements between players
    B) Rational decision-making in isolation
    C) Centralized coordination
    D) Mutual contracts
    Answer: B

    16.

    The concept of Mixed Strategy Nash Equilibrium allows:
    A) Fixed choices
    B) Randomization of strategies with probabilities
    C) Cooperation between players
    D) Sequential decisions
    Answer: B

    17.

    The expected payoff in a mixed strategy game is:
    A) Always zero
    B) The probability-weighted sum of possible payoffs
    C) The minimum of payoffs
    D) The dominant outcome
    Answer: B

    18.

    Which of the following games always has at least one Nash Equilibrium (pure or mixed)?
    A) Infinite games
    B) Cooperative games
    C) Any finite game
    D) Zero-sum games only
    Answer: C
    🟩 Nash’s theorem states that every finite game has at least one equilibrium.

    19.

    In an oligopoly, Game Theory is applied to study:
    A) Demand forecasting
    B) Price and output interdependence
    C) Production planning
    D) Capital formation
    Answer: B

    20.

    The Advertising Game between firms typically results in:
    A) Cooperative outcome
    B) Dominant strategy equilibrium
    C) Zero-sum outcome
    D) Pareto optimal equilibrium
    Answer: B

    21.

    In a repeated game, cooperation may emerge due to:
    A) Short-term profit motives
    B) Absence of retaliation
    C) Future punishment and reputation effects
    D) Lack of communication
    Answer: C

    22.

    The Stackelberg Model of oligopoly is an example of a:
    A) Simultaneous game
    B) Sequential game
    C) Repeated game
    D) Zero-sum game
    Answer: B

    23.

    If one player’s optimal strategy changes with another’s, the game is:
    A) Independent
    B) Strategic
    C) Cooperative
    D) Static
    Answer: B

    24.

    The Maximin strategy in non-cooperative games is suitable for:
    A) Optimistic players
    B) Pessimistic players
    C) Indifferent players
    D) Neutral players
    Answer: B

    25.

    A game in which both players can gain by cooperating is called:
    A) Zero-sum
    B) Non-zero-sum
    C) Negative-sum
    D) Sequential
    Answer: B

    26.

    The equilibrium in the Prisoner’s Dilemma is:
    A) Pareto optimal
    B) Sub-optimal but stable
    C) Unstable and non-existent
    D) Cooperative
    Answer: B

    27.

    The Best Response Function of a player shows:
    A) The strategies that maximize his payoff given others’ strategies
    B) The probability of success
    C) The market equilibrium
    D) The Pareto frontier
    Answer: A

    28.

    In a two-player zero-sum game, the sum of both players’ payoffs equals:
    A) Zero
    B) One
    C) Infinity
    D) A positive constant
    Answer: A

    29.

    The dominance rule in game theory is used to:
    A) Eliminate inferior strategies
    B) Find maximum payoffs
    C) Calculate Nash Equilibrium
    D) Determine cooperative payoffs
    Answer: A

    30.

    Game Theory fundamentally assumes that players are:
    A) Irrational and emotional
    B) Rational and strategic
    C) Unaware of others’ choices
    D) Myopic decision-makers
    Answer: B

  • UGC NET Economics Unit 1– Decision Making under Uncertainty and Attitude towards Risk – MCQs

    1.

    Decision-making under risk differs from decision-making under uncertainty because:
    A) Under risk, probabilities of outcomes are known.
    B) Under uncertainty, outcomes are known but not probabilities.
    C) Both A and B are correct.
    D) Neither A nor B.
    Answer: C

    2.

    Which of the following statements describes the Expected Utility Theory?
    A) Individuals maximize expected income.
    B) Individuals maximize expected satisfaction.
    C) Individuals maximize expected utility.
    D) Individuals minimize expected loss.
    Answer: C

    3.

    The concept of Expected Utility was introduced by:
    A) Adam Smith
    B) von Neumann and Morgenstern
    C) J.R. Hicks
    D) Milton Friedman
    Answer: B

    4.

    Expected Utility is calculated as:

    EU=∑pi×U(xi)

    This implies that:
    A) Utility depends only on income.
    B) Expected utility is the weighted average of utilities.
    C) Probabilities are irrelevant.
    D) Only risk-free options matter.
    Answer: B

    5.

    A person is said to be risk-averse if:
    A) They prefer risky outcomes to certain ones.
    B) They are indifferent between risky and certain outcomes.
    C) They prefer certainty to risk with the same expected value.
    D) They dislike certainty.
    Answer: C

    6.

    For a risk-averse individual, the utility function is:
    A) Linear
    B) Concave to the origin
    C) Convex to the origin
    D) Vertical
    Answer: B

    7.

    A risk lover has a utility function that is:
    A) Concave
    B) Linear
    C) Convex
    D) Steeply declining
    Answer: C

    8.

    A risk-neutral person has:
    A) Diminishing marginal utility of income
    B) Constant marginal utility of income
    C) Increasing marginal utility of income
    D) No marginal utility
    Answer: B

    9.

    The Certainty Equivalent (CE) refers to:
    A) Expected value of income
    B) Guaranteed income providing same utility as expected utility of risky prospect
    C) Minimum income level
    D) The probability of a risky event
    Answer: B

    10.

    If a person is risk-averse, then the certainty equivalent will be:
    A) Greater than expected income
    B) Less than expected income
    C) Equal to expected income
    D) Independent of expected utility
    Answer: B

    11.

    The Risk Premium is defined as:
    A) The amount paid to avoid risk
    B) The extra return for taking risk
    C) The probability of success in risky projects
    D) The difference between utility and income
    Answer: A

    12.

    The mathematical expression for the Risk Premium is:

    RP=E(W)−CE

    For a risk-averse individual, this will be:
    A) Positive
    B) Negative
    C) Zero
    D) Undefined
    Answer: A

    13.

    The Arrow-Pratt Measure of Risk Aversion is given by:

    r(W)=−U′′(W)U′(W)

    It measures:
    A) Risk tolerance
    B) Curvature of the utility function
    C) Expected value of risk
    D) Marginal probability
    Answer: B

    14.

    When U′′(W)<0, the individual is:
    A) Risk-averse
    B) Risk-neutral
    C) Risk-loving
    D) Indifferent
    Answer: A

    15.

    Under the Maximin Criterion, the decision-maker:
    A) Chooses the alternative with the maximum possible payoff
    B) Chooses the alternative with the maximum of the minimum payoffs
    C) Chooses based on highest average payoff
    D) Ignores the worst outcomes
    Answer: B

    16.

    The Maximax Criterion is typically adopted by:
    A) Pessimists
    B) Optimists
    C) Realists
    D) Neutral decision-makers
    Answer: B

    17.

    The Hurwicz Criterion uses:
    A) Probabilities of all outcomes
    B) Coefficient of optimism between 0 and 1
    C) Only maximum payoff
    D) Only minimum payoff
    Answer: B

    18.

    The Laplace Criterion assumes:
    A) Equal probabilities for all outcomes
    B) Unequal probabilities
    C) Extreme pessimism
    D) Extreme optimism
    Answer: A

    19.

    The Minimax Regret Criterion focuses on:
    A) Maximizing profit
    B) Minimizing maximum possible loss
    C) Minimizing maximum regret
    D) Maximizing minimum gain
    Answer: C

    20.

    Which decision rule is associated with a pessimistic outlook?
    A) Maximax
    B) Maximin
    C) Laplace
    D) Hurwicz
    Answer: B

    21.

    According to Expected Utility Theory, rational individuals will choose:
    A) The option with maximum expected income
    B) The option with maximum expected utility
    C) The option with least variance
    D) The option with least cost
    Answer: B

    22.

    Which of the following correctly represents risk aversion?
    A) U(E(W))=E[U(W)]
    B) U(E(W))>E[U(W)]
    C) U(E(W))<E[U(W)]
    D) U(E(W))=0
    Answer: B

    23.

    The concept of risk premium arises because of:
    A) Diminishing marginal utility of income
    B) Increasing marginal utility of income
    C) Constant marginal utility
    D) No marginal utility
    Answer: A

    24.

    The Expected Monetary Value (EMV) criterion differs from Expected Utility Theory because:
    A) It ignores risk preferences
    B) It measures subjective utility
    C) It uses non-probabilistic outcomes
    D) It considers regret
    Answer: A

    25.

    If the utility function is linear, the person is:
    A) Risk-averse
    B) Risk-neutral
    C) Risk-loving
    D) Risk-ignorant
    Answer: B

    26.

    In the Prospect Theory by Kahneman and Tversky, individuals:
    A) Evaluate outcomes based on absolute wealth
    B) Evaluate outcomes relative to a reference point
    C) Always act rationally
    D) Ignore losses
    Answer: B

    27.

    According to Prospect Theory, individuals exhibit:
    A) Risk-seeking behaviour in gains and risk aversion in losses
    B) Risk aversion in gains and risk-seeking in losses
    C) Neutral behaviour
    D) Indifference between gain and loss
    Answer: B

    28.

    In real-world decision-making, individuals often satisfice rather than maximize. This concept was proposed by:
    A) John von Neumann
    B) Herbert Simon
    C) Milton Friedman
    D) Kenneth Arrow
    Answer: B

    29.

    A risk-neutral firm evaluates projects based on:
    A) Expected profit only
    B) Expected utility
    C) Risk premium
    D) Certainty equivalent
    Answer: A

    30.

    Which of the following statements is true about decision-making under uncertainty?
    A) Probabilities of outcomes are precisely known.
    B) Expected utility can always be calculated.
    C) Decision depends on subjective attitude towards risk.
    D) Risk premium is always zero.
    Answer: C

  • UGC NET Economics Unit 1-Decision Making under Uncertainty and Attitude towards Risk

    1. Introduction

    In the real world, economic agents—consumers, firms, and investors—often make choices without knowing future outcomes.
    Decision-making under uncertainty deals with how individuals behave when probabilities of outcomes are unknown or imperfectly known.

    While decision-making under risk assumes that probabilities can be assigned to possible outcomes, uncertainty implies that such probabilities cannot be objectively known.

    Understanding this distinction helps explain how economic agents form expectations, manage risks, and make rational choices under limited information.

    2. Types of Decision-Making Situations

    Situation Knowledge of Outcomes Knowledge of Probabilities Example
    Certainty Complete Complete Buying a fixed-return bond
    Risk Known outcomes Probabilities known Gambling, insurance
    Uncertainty Known outcomes Probabilities unknown Launching a new product in a new market

    In uncertainty, the decision-maker cannot assign a specific probability to outcomes. Instead, choices depend on attitudes toward risk, beliefs, and subjective expectations.

    3. Decision-Making under Risk: The Expected Utility Theory

    The Expected Utility Theory (EUT), developed by John von Neumann and Oskar Morgenstern, explains how rational individuals make risky choices.

    The theory assumes that individuals choose among risky alternatives to maximize expected utility, not expected monetary value.

    Formula:

    EU=∑pi×U(xi)

    Where:

    • EU = Expected Utility

    • pi = Probability of outcome i

    • U(xi) = Utility from outcome xi

    Thus, individuals prefer the choice with the highest expected utility.

    Example

    A person faces two choices:

    Option Possible Income (₹) Probability Utility (U = √x)
    A 100 1.0 10
    B 50 (p = 0.5), 150 (p = 0.5) – 0.5(√50)+0.5(√150)=0.5(7.07)+0.5(12.25)=9.66

    Even though both options have the same expected value (₹100), Option A gives higher utility (10) — showing risk aversion.

    4. Attitude towards Risk

    Individuals differ in their willingness to take risks.
    These attitudes can be represented through the shape of their utility function.

    A. Risk Averse

    • Prefers certainty over risk with the same expected value.

    • Concave utility function (U’’ < 0).

    • Diminishing marginal utility of income.

    • Example: Buying insurance against uncertain loss.

    B. Risk Neutral

    • Indifferent between risky and certain options with same expected value.

    • Linear utility function.

    • Concerned only with expected income, not variability.

    C. Risk Lover (Risk Seeker)

    • Prefers risky prospects with the same expected value.

    • Convex utility function (U’’ > 0).

    • Increasing marginal utility of income.

    • Example: Gambling behaviour.

    Attitude Utility Function Curve Shape Example
    Risk Averse U(W)=W Concave Insurance buyer
    Risk Neutral U(W)=W Linear Investor in T-bills
    Risk Lover U(W)=W2 Convex Gambler

    5. Measurement of Risk Attitudes

    Economists use several measures to quantify risk preference:

    (a) Risk Premium

    The risk premium is the maximum amount of money a risk-averse person is willing to pay to avoid risk.

    Risk Premium=E(W)−CE

    Where:

    • E(W) = Expected income

    • CE = Certainty Equivalent (guaranteed income yielding same utility as risky income)

    For a risk-averse person:

    Risk Premium>0

    For a risk lover:

    Risk Premium<0

    (b) Certainty Equivalent (CE)

    The certainty equivalent is the amount of sure income that gives the same utility as the expected utility of a risky prospect.

    If:

    U(CE)=EU

    then the person is indifferent between CE and the risky prospect.

    (c) Arrow-Pratt Measure of Risk Aversion

    Proposed by Kenneth Arrow and John Pratt, this is a quantitative measure of risk aversion:

    r(W)=−U′′(W)U′(W)

    • Higher r(W) indicates greater risk aversion.

    • It measures the curvature (concavity) of the utility function.

    6. Decision-Making under Uncertainty

    When probabilities of outcomes are not known, several decision criteria are used to guide rational choice:

    Criterion Description Typical Decision-Maker
    Maximin (Wald’s Criterion) Choose the alternative with the best of the worst possible outcomes. Pessimist (Risk-averse)
    Maximax Criterion Choose the alternative with the best of the best outcomes. Optimist (Risk-loving)
    Hurwicz Criterion Weighted average of max and min payoffs; includes a coefficient of optimism (α) between 0 and 1. Realist
    Laplace Criterion Treat all outcomes as equally probable; choose the option with the highest average payoff. Neutral decision-maker
    Minimax Regret Criterion (Savage) Choose the decision that minimizes the maximum regret. Cautious decision-maker

    7. Application of Risk and Uncertainty in Economics

    1. Insurance Markets:
      Risk-averse individuals pay a premium to avoid uncertainty.
      Explains why insurance companies thrive.

    2. Investment Decisions:
      Investors diversify portfolios to reduce risk without reducing returns (Markowitz portfolio theory).

    3. Agricultural Decisions:
      Farmers choose crop patterns balancing expected yield and weather risk.

    4. Firm Behaviour:
      Firms hedge against price fluctuations using forward contracts and options.

    5. Public Policy:
      Governments design social safety nets considering citizens’ risk aversion.

    8. Behavioural Insights: Beyond Expected Utility

    Empirical studies show that real-world decisions often deviate from expected utility predictions.
    Key developments include:

    • Prospect Theory (Kahneman and Tversky):

      • People evaluate gains and losses relative to a reference point.

      • Losses are felt more intensely than equivalent gains (loss aversion).

      • Explains anomalies like insurance purchase and gambling behaviour.

    • Bounded Rationality (Herbert Simon):

      • Individuals “satisfice” rather than maximize, due to limited information and computation ability.

    9. Graphical Representation

    1️⃣ Utility under Risk:

    • Concave utility curve for risk-averse behaviour.

    • Expected Utility < Utility of Certainty Equivalent.

    2️⃣ Certainty Equivalent and Risk Premium:

    • The vertical gap between the expected utility point and certainty equivalent utility represents the risk premium.

    10. Summary

    Concept Explanation
    Risk vs Uncertainty Risk has measurable probabilities; uncertainty does not.
    Expected Utility Foundation of rational decision-making under risk.
    Risk Attitudes Individuals can be risk-averse, risk-neutral, or risk-loving.
    Risk Premium Price of avoiding risk for risk-averse individuals.
    Arrow-Pratt Measure Quantitative indicator of risk aversion.
    Decision Criteria under Uncertainty Maximin, Maximax, Laplace, Hurwicz, and Minimax Regret.
    Prospect Theory Real-world deviations from expected utility theory.

  • UGC NET Economics Unit 1-Theory of Production and Costs MCQs-1

    1.

    The production function expresses:
    A) A financial relationship between cost and output
    B) The physical relationship between inputs and output
    C) The functional relationship between price and output
    D) The demand for factors of production
    Answer: B

    2.

    In the short run, at least one factor of production is:
    A) Variable
    B) Fixed
    C) Unavailable
    D) Indivisible
    Answer: B

    3.

    Which of the following best defines the law of variable proportions?
    A) All inputs change in the same proportion
    B) At least one input is fixed and one is variable
    C) Returns increase indefinitely with input usage
    D) Output remains constant despite input change
    Answer: B

    4.

    In the law of variable proportions, diminishing returns occur because:
    A) Technology improves
    B) Fixed factors are overused
    C) Variable inputs become cheaper
    D) Inputs become more productive
    Answer: B

    5.

    The Marginal Rate of Technical Substitution (MRTS) measures:
    A) How much capital substitutes for labour keeping cost constant
    B) The rate at which one input substitutes another keeping output constant
    C) The ratio of marginal products to total cost
    D) The ratio of input prices
    Answer: B

    6.

    Which of the following statements about isoquants is correct?
    A) Isoquants slope upward to the right
    B) Higher isoquants show lower levels of output
    C) Isoquants are convex to the origin due to diminishing MRTS
    D) Isoquants can intersect each other
    Answer: C

    7.

    The slope of an iso-cost line is equal to:
    A) −wr

    B) −MPLMPK

    C) PxPy
    D) TCQ
    Answer: A

    8.

    Producer’s equilibrium occurs where:
    A) MRTS = price ratio of inputs
    B) Isoquant intersects iso-cost
    C) MP of each factor is equal
    D) Total cost equals total revenue
    Answer: A

    9.

    An isoquant is analogous to which concept in consumer theory?
    A) Indifference Curve
    B) Demand Curve
    C) Budget Line
    D) Utility Function
    Answer: A

    10.

    When all inputs are doubled and output more than doubles, the firm experiences:
    A) Constant returns to scale
    B) Increasing returns to scale
    C) Decreasing returns to scale
    D) Diminishing marginal product
    Answer: B

    11.

    Increasing returns to scale arise due to:
    A) Managerial inefficiency
    B) Indivisibility and specialization
    C) Coordination problems
    D) Use of inferior factors
    Answer: B

    12.

    In the long run, all factors of production are:
    A) Fixed
    B) Variable
    C) Partly fixed and partly variable
    D) Non-existent
    Answer: B

    13.

    The expansion path shows:
    A) Output combinations at different prices
    B) Least-cost combinations of inputs for different output levels
    C) Demand curve of a firm
    D) Isoquants for the same cost
    Answer: B

    14.

    The shape of the short-run average cost curve is:
    A) Downward sloping
    B) U-shaped
    C) Horizontal
    D) Upward sloping
    Answer: B

    15.

    The Law of Variable Proportions operates in:
    A) Long run only
    B) Short run only
    C) Both short and long run
    D) Very long period only
    Answer: B

    16.

    When marginal cost (MC) is less than average cost (AC), then:
    A) AC rises
    B) AC falls
    C) AC remains constant
    D) Nothing can be inferred
    Answer: B

    17.

    At the minimum point of AC curve, MC:
    A) Equals AC
    B) Lies above AC
    C) Lies below AC
    D) Is zero
    Answer: A

    18.

    The L-shaped long-run average cost curve implies:
    A) Costs rise continuously as output increases
    B) Costs fall initially, then remain constant
    C) Costs always decline due to technology
    D) Costs increase after a certain point
    Answer: B

    19.

    In the short run, Total Cost (TC) is equal to:
    A) TFC+TVC
    B) AVC+AFC
    C) AC×Q
    D) MC×Q
    Answer: A

    20.

    The Modern Theory of Costs differs from the traditional theory mainly because:
    A) It assumes rising marginal costs
    B) It finds the LAC curve L-shaped rather than U-shaped
    C) It ignores economies of scale
    D) It assumes perfect competition
    Answer: B

    21.

    Economies of scale refer to:
    A) Increasing unit cost with expansion
    B) Decreasing unit cost with expansion
    C) Constant cost per unit
    D) No change in efficiency
    Answer: B

    22.

    Diseconomies of scale are primarily caused by:
    A) Specialization
    B) Efficient coordination
    C) Management inefficiency and communication breakdown
    D) Technological innovation
    Answer: C

    23.

    If the marginal product of labour rises, the marginal cost of output:
    A) Rises
    B) Falls
    C) Remains unchanged
    D) Becomes infinite
    Answer: B

    24.

    Which one of the following is an explicit cost?
    A) Depreciation
    B) Interest on owner’s capital
    C) Wages paid to workers
    D) Rent foregone on own land
    Answer: C

    25.

    An isoquant map represents:
    A) Cost combinations
    B) Output levels with different input combinations
    C) Prices of inputs
    D) Firm’s demand curve
    Answer: B

    26.

    When MC = AC, the AC curve is:
    A) Rising
    B) Falling
    C) At its minimum
    D) Horizontal
    Answer: C

    27.

    Social cost includes:
    A) Only private cost
    B) Only external cost
    C) Private cost plus external cost
    D) None of these
    Answer: C

    28.

    In the short run, fixed cost per unit:
    A) Rises with output
    B) Remains constant
    C) Falls as output increases
    D) First falls then rises
    Answer: C

    29.

    If MC < AC, this implies:
    A) Decreasing returns to scale
    B) Increasing returns to scale
    C) Constant returns to scale
    D) None of these
    Answer: B

    30.

    Which of the following relationships is correct?
    A) TC=TFC+TVC
    B) AC=AVC−AFC
    C) MC=AVC−AFC
    D) AFC=TVC/Q
    Answer: A

  • UGC NET Economics Unit 1-Theory of Production and Costs

    (Unit 1 – Microeconomics | UGC NET Economics)

    1. Introduction

    The Theory of Production examines how resources (inputs) are transformed into goods and services (outputs) efficiently.
    Production is not limited to manufacturing — it includes any process that adds value by converting inputs into more valuable outputs.

    This topic explores two major areas:

    1. Theory of Production – how firms combine inputs to produce output efficiently.

    2. Theory of Costs – how costs behave as output changes and influence production decisions.

    2. Classification of Inputs

    Production uses a variety of inputs, broadly categorized as:

    Input Type Examples Characteristics
    Labour Human effort in production Variable and mobile
    Capital Machinery, buildings, tools Fixed in short run, variable in long run
    Land Natural resources Fixed supply
    Raw Materials Inputs directly used in production Variable with output
    Time Production duration Affects cost and efficiency
    Technology Knowledge, innovation Determines production efficiency

    3. Production Function

    The production function represents the technological relationship between inputs and output:

    Q=f(L,K)

    Where:
    Q = Output,
    L = Labour,
    K = Capital.

    It expresses maximum output possible for given input combinations under existing technology.

    Features

    • Shows technological possibilities, not costs.

    • Can be short-run (with fixed inputs) or long-run (all inputs variable).

    • Helps derive marginal productivity and returns to scale.

    4. Short-Run and Long-Run Production

    Time Frame Characteristics Example
    Short Run Only one factor (usually labour) is variable; capital fixed. Hiring more workers in an existing plant.
    Long Run All factors variable; firms can change production scale. Building a new plant or expanding capacity.

    5. Law of Variable Proportions (Short Run)

    Also known as the Law of Diminishing Returns.
    It explains the effect of varying one input while keeping others fixed.

    Statement

    When additional units of a variable factor (e.g., labour) are applied to a fixed factor (e.g., land or capital), total output initially increases at an increasing rate, then at a diminishing rate, and eventually may decline.

    Three Stages of Production

    Stage Behaviour of Output Economic Meaning
    Stage I – Increasing Returns TP and MP rise rapidly Underutilization of fixed factor
    Stage II – Diminishing Returns TP rises at decreasing rate Optimal production zone
    Stage III – Negative Returns TP declines; MP negative Overcrowding of variable input

    6. Isoquant Analysis (Long-Run Production)

    Isoquant

    An isoquant curve represents combinations of two inputs (labour and capital) yielding the same level of output.
    It is analogous to an indifference curve in consumer theory.

    Properties of Isoquants

    • Downward sloping: To maintain output, more of one input requires less of the other.

    • Convex to origin: Reflects diminishing Marginal Rate of Technical Substitution (MRTS).

    • Do not intersect: Each represents distinct output level.

    • Higher isoquants: Indicate higher output levels.

    MRTSLK=−dKdL=MPLMPK

    Iso-Cost Line

    Represents all input combinations a firm can buy for a given cost:

    C=wL+rK

    Where w = wage rate and r = rental rate of capital.
    Slope = -w/r

    Producer’s Equilibrium

    Occurs where the isoquant is tangent to an iso-cost line:

    MPLMPK=wr

    This represents the least-cost combination of inputs.

    7. Returns to Scale (Long Run)

    Examines how output responds to a proportionate change in all inputs.

    Type Description Example
    Increasing Returns to Scale (IRS) Output increases more than proportionally. Inputs ↑ 100% → Output ↑ > 100%
    Constant Returns to Scale (CRS) Output increases proportionally. Inputs ↑ 100% → Output ↑ 100%
    Decreasing Returns to Scale (DRS) Output increases less than proportionally. Inputs ↑ 100% → Output ↑ < 100%

    Determinants of Returns to Scale

    • Indivisibility of inputs (e.g., machinery)

    • Specialization and division of labour

    • Managerial and technical efficiencies

    • Coordination challenges (for decreasing returns)

    8. Theory of Costs

    Cost refers to the expenditure incurred in producing goods and services.
    It links production theory with financial decision-making.

    Types of Costs

    Cost Type Definition Example
    Explicit (Actual) Direct payments for inputs Wages, rent, raw materials
    Implicit (Imputed) Value of self-owned resources Owner’s labour, capital
    Business Costs Explicit + depreciation Operational cost
    Full Costs Business + opportunity + normal profit Economic cost
    Out-of-Pocket Cash payments Wages, transport
    Book Costs Non-cash, accounting Depreciation
    Fixed Costs (TFC) Remain constant with output Rent, salaries
    Variable Costs (TVC) Vary with output Raw materials, wages

    Cost Functions

    TC=TFC+TVC
    AC=TCQ
    MC=TC(n)−TC(n−1)

    Relationships:

    • When MC < AC → AC falls

    • When MC > AC → AC rises

    • MC intersects AC at its minimum point

    9. Cost Curves

    Short-Run Cost Curves

    • AFC decreases continuously.

    • AVC and ATC are U-shaped due to economies and diseconomies of scale.

    • MC cuts both AVC and ATC at their minimum points.

    Long-Run Cost Curves

    • All costs are variable.

    • LAC is the envelope of SRACs.

    • Traditionally U-shaped: reflects economies → constant returns → diseconomies of scale.

    Modern (L-Shaped) Long-Run Cost Curve

    • Empirical evidence shows costs flatten out at high output.

    • Due to:

      • Reserve capacity of plants

      • Learning curve and technical improvement

      • Economies persisting at large scale

    10. Economies and Diseconomies of Scale

    Economies Diseconomies
    Internal: technical, managerial, marketing, financial, risk spreading Managerial inefficiency, coordination failure, communication delays
    External: industry growth, localization, shared infrastructure Resource scarcity, input price rise

    11. Relationship Between Production and Cost

    MC=wMPL

    • As Marginal Product rises → Marginal Cost falls.

    • When MP falls → MC rises.
      Thus, productivity curves and cost curves are mirror images.

    12. Private and Social Costs

    Type Meaning
    Private Cost Costs borne by the firm itself.
    Social Cost Private + external costs (e.g., pollution, congestion).

    13. Key Definitions

    Term Definition
    Isoquant Curve showing input combinations yielding same output
    MRTS Rate of technical substitution between inputs
    Fixed Cost Cost that does not vary with output in short run
    Marginal Cost Cost of producing one additional unit
    Economies of Scale Cost advantages from larger scale
    Social Cost Total cost to society (private + external)

    14. Important Graphs

    1️⃣ Law of Variable Proportions
    2️⃣ Isoquant–Iso-Cost Tangency (Producer’s Equilibrium)
    3️⃣ Returns to Scale Curve
    4️⃣ L-shaped Long-Run Average Cost Curve

    (Refer to the attached academic diagrams page for illustration.)

    15. Summary Table for UGC NET

    Concept Focus Key Relation
    Short-Run Law Variable proportions TP, MP, AP behaviour
    Long-Run Law Returns to scale IRS, CRS, DRS
    Isoquant Analysis Producer equilibrium MPL/MPK=w/r
    Cost Analysis U and L-shaped curves MC–AC interaction
    Scale Effects Economies vs. Diseconomies Internal & External

  • UGC NET Economics Unit-1 Theory of Consumer Behaviour MCQs-2

    1.

    In the indifference curve approach, consumer equilibrium is achieved when:
    A) MUx/Px=MUy/Py
    B) MRSxy=Px/Py
    C) MRSxy=MUx/MUy
    D) Px/Py=MUy/MUx
    Answer: B

    2.

    Which of the following assumptions is not necessary for the ordinal utility approach?
    A) Rational behaviour
    B) Measurability of utility
    C) Diminishing MRS
    D) Transitivity of preferences
    Answer: B

    3.

    The shape of an indifference curve showing perfect complements will be:
    A) Downward-sloping straight line
    B) Convex to the origin
    C) L-shaped
    D) Upward-sloping
    Answer: C

    4.

    If a consumer’s income and all prices double, the budget line will:
    A) Shift outward parallelly
    B) Rotate about the origin
    C) Remain unchanged
    D) Become flatter
    Answer: C

    5.

    The Law of Diminishing Marginal Utility forms the basis of:
    A) Law of Demand
    B) Law of Supply
    C) Theory of Factor Pricing
    D) Indifference Curve Analysis
    Answer: A

    6.

    In Revealed Preference Theory, if a consumer chooses bundle A over B when both are affordable, it implies:
    A) A is less preferred than B
    B) A and B are equally preferred
    C) A is revealed preferred to B
    D) Prices are identical
    Answer: C

    7.

    The slope of the budget line is equal to:
    A) −Px/Py
    B) −Py/Px
    C) MUx/MUy
    D) MRSxy
    Answer: A

    8.

    The indifference curve is convex to the origin because of:
    A) Increasing MRS
    B) Constant MRS
    C) Diminishing MRS
    D) Negative utility
    Answer: C

    9.

    A straight-line indifference curve indicates:
    A) Perfect substitutes
    B) Perfect complements
    C) No relation between goods
    D) Inferior goods
    Answer: A

    10.

    If MRS diminishes at a decreasing rate, indifference curves will be:
    A) Linear
    B) Steeper than normal
    C) More convex
    D) Less convex
    Answer: D

    11.

    Consumer Surplus is the:
    A) Difference between total utility and total expenditure
    B) Difference between marginal utility and price
    C) Ratio of utility to price
    D) Product of utility and price
    Answer: A

    12.

    Who first introduced the concept of Consumer Surplus?
    A) J.R. Hicks
    B) Alfred Marshall
    C) Vilfredo Pareto
    D) Paul Samuelson
    Answer: B

    13.

    In the Hicksian method, Consumer Surplus is measured through:
    A) Marginal Utility
    B) Compensating and Equivalent Variations
    C) Money Income
    D) Revealed Preferences
    Answer: B

    14.

    According to Samuelson’s Revealed Preference Theory, the Law of Demand can be derived without:
    A) Indifference curves
    B) Utility measurement
    C) Budget constraints
    D) Price ratios
    Answer: B

    15.

    The tangency point between the budget line and indifference curve represents:
    A) Minimum satisfaction
    B) Maximum satisfaction
    C) Equal satisfaction
    D) Minimum expenditure
    Answer: B

    16.

    If income increases and the prices of both goods remain constant, the budget line:
    A) Shifts outward parallelly
    B) Shifts inward parallelly
    C) Rotates clockwise
    D) Becomes vertical
    Answer: A

    17.

    When the consumer’s equilibrium shifts due to a fall in price of good X, it is an example of:
    A) Income effect only
    B) Substitution effect only
    C) Both income and substitution effects
    D) Price effect
    Answer: D

    18.

    The slope of the indifference curve measures:
    A) Marginal Utility
    B) Marginal Rate of Substitution
    C) Price Ratio
    D) Total Utility
    Answer: B

    19.

    The Law of Equi-Marginal Utility states that a consumer allocates his expenditure such that:
    A) MUx=MUy
    B) MUx/Px=MUy/Py
    C) MUx/MUy=Px/Py
    D) MUx=Py
    Answer: B

    20.

    Which of the following statements is true about a Giffen good?
    A) Income effect is positive and greater than substitution effect
    B) Substitution effect dominates income effect
    C) Price effect is negative
    D) Income effect and substitution effect are equal
    Answer: A

    21.

    The Slutsky Equation decomposes the price effect into:
    A) Income and substitution effects
    B) Income and price effects
    C) Price and demand effects
    D) Substitution and cross-price effects
    Answer: A

    22.

    A consumer’s equilibrium can also be expressed as:
    A) MUx/Px=MUy/Py=MUm
    B) MUx/MUy=Py/Px
    C) MRSxy=Px/Py
    D) All of the above
    Answer: D

    23.

    If two indifference curves intersect, it violates:
    A) Non-satiation
    B) Rationality
    C) Consistency and transitivity
    D) Convexity
    Answer: C

    24.

    The Ordinal Utility Theory was introduced by:
    A) Alfred Marshall
    B) Vilfredo Pareto
    C) Lionel Robbins
    D) Adam Smith
    Answer: B

    25.

    The Revealed Preference Theory improves on Indifference Curve Analysis by:
    A) Using real-life behaviour instead of assumptions
    B) Measuring utility in numbers
    C) Ignoring rationality
    D) Using only one good
    Answer: A

    26.

    The indifference curve approach was popularized through the work of:
    A) Hicks and Allen
    B) Pareto and Marshall
    C) Robbins and Pigou
    D) Keynes and Fisher
    Answer: A

    27.

    A horizontal budget line implies that:
    A) The price of good Y is zero
    B) The price of good X is zero
    C) The consumer has zero income
    D) The goods are perfect complements
    Answer: B

    28.

    If both income and the price of X double while the price of Y remains constant, the budget line will:
    A) Shift outward
    B) Shift inward
    C) Rotate about the Y-axis
    D) Remain unchanged
    Answer: C

    29.

    In consumer theory, the substitution effect isolates:
    A) Change in quantity demanded due to change in real income
    B) Change due to change in relative prices
    C) Change in utility level
    D) Total price effect
    Answer: B

    30.

    Under the Revealed Preference Hypothesis, preferences are assumed to be:
    A) Random and inconsistent
    B) Transitive, consistent, and rational
    C) Constant but non-transitive
    D) Dependent on income only
    Answer: B

  • UGC NET Economics Unit-1 Theory of Consumer Behaviour MCQs-1

    1.

    The Indifference Curve technique assumes:
    A) Utility is measurable in cardinal numbers.
    B) Consumer behaviour is inconsistent.
    C) Utility is comparable only in order of preference.
    D) Marginal utility of money is diminishing.
    Answer: C

    2.

    According to the Ordinal Utility approach, consumer equilibrium is obtained when:
    A) The consumer attains maximum utility subject to income constraint.
    B) Marginal utilities of goods are equal.
    C) Price of one good equals its marginal utility.
    D) Income equals total expenditure.
    Answer: A

    3.

    Which of the following is not an assumption of the Indifference Curve analysis?
    A) Rationality of the consumer
    B) Constant income
    C) Interdependence of utilities
    D) Transitivity of preferences
    Answer: C

    4.

    The Law of Equi-Marginal Utility can be expressed as:
    A) MUx=MUy=MUz
    B) MUx/Px=MUy/Py=MUz/Pz
    C) MUx×Px=MUy×Py
    D) MUx/MUy=Px/Py
    Answer: B

    5.

    The slope of the Indifference Curve equals:
    A) Marginal Rate of Substitution
    B) Ratio of total utilities
    C) Price ratio of goods
    D) Marginal utilities of income
    Answer: A

    6.

    If the price of good X falls and all else remains constant, the new equilibrium point will:
    A) Move upward along the indifference map
    B) Move downward along the same curve
    C) Shift to a higher indifference curve
    D) Remain unchanged
    Answer: C

    7.

    Under Revealed Preference theory, a consumer reveals preference for bundle A over B when:
    A) Bundle A is cheaper than B.
    B) Both bundles yield equal utility.
    C) A is chosen even when B was affordable.
    D) Prices of goods remain constant.
    Answer: C

    8.

    The Diminishing Marginal Rate of Substitution implies that:
    A) Indifference curves are convex to the origin.
    B) Indifference curves are straight lines.
    C) Consumer preferences are inconsistent.
    D) Goods are perfect complements.
    Answer: A

    9.

    Which of the following combinations depicts consumer equilibrium under the Ordinal Utility approach?
    A) MRSxy=MUx/MUy
    B) MRSxy=Px/Py
    C) MUx/Px=MUy/Py
    D) MUx=MUy=0
    Answer: B

    10.

    The substitution effect shows:
    A) Change in consumption due to change in real income.
    B) Change due to change in relative prices of goods.
    C) Change in total utility.
    D) Shift in budget line parallelly outward.
    Answer: B

    11.

    When two goods are perfect substitutes, the indifference curves will be:
    A) Concave to the origin.
    B) Convex to the origin.
    C) L-shaped.
    D) Straight lines.
    Answer: D

    12.

    In Marshall’s concept of Consumer Surplus, utility is:
    A) Ordinal
    B) Cardinal and measurable in money terms
    C) Relative
    D) Socially determined
    Answer: B

    13.

    Hicksian measurement of consumer surplus is based on:
    A) Compensating and Equivalent Variations.
    B) Law of Diminishing Marginal Utility.
    C) Demand function only.
    D) Revealed preferences.
    Answer: A

    14.

    In the Indifference Curve analysis, the consumer’s budget line shifts parallelly outward when:
    A) Prices fall in the same proportion.
    B) Income increases.
    C) Prices rise in the same proportion.
    D) Income decreases.
    Answer: B

    15.

    The Revealed Preference approach assumes that consumer behaviour is:
    A) Irrational but measurable.
    B) Consistent and transitive.
    C) Random and unpredictable.
    D) Dependent only on income.
    Answer: B

    16.

    The equilibrium between marginal utilities and prices in the Cardinal approach indicates:
    A) Maximization of satisfaction.
    B) Minimization of expenditure.
    C) Constant total utility.
    D) Equality of total utilities.
    Answer: A

    17.

    Which one of the following correctly expresses consumer equilibrium in the Cardinal Utility approach?
    A) MUx/MUy=Px/Py
    B) MUx/Px=MUy/Py=MUm
    C) MUx=Px=MUy=Py
    D) MUx+MUy=MUm
    Answer: B

    18.

    The Slutsky Equation divides the price effect into:
    A) Income effect + Substitution effect
    B) Price effect + Utility effect
    C) Income effect + Wealth effect
    D) Price effect + Demand effect
    Answer: A

    19.

    If two indifference curves intersect, the assumption violated is:
    A) Rationality
    B) Transitivity of preferences
    C) Diminishing MRS
    D) Completeness of choice
    Answer: B

    20.

    The Law of Demand under Revealed Preference Theory can be derived because:
    A) Utility is measurable.
    B) Consumers behave inconsistently.
    C) Price-quantity relationship is observable.
    D) Consumers’ income remains fixed.
    Answer: C

    21.

    Under Cardinal Utility theory, the marginal utility of money is assumed to be:
    A) Constant
    B) Increasing
    C) Decreasing
    D) Negative
    Answer: A

    22.

    A rightward rotation of the budget line around the Y-axis indicates:
    A) Fall in price of good X.
    B) Increase in price of good Y.
    C) Rise in consumer income.
    D) Fall in income.
    Answer: A

    23.

    In case of Giffen goods:
    A) Both income and substitution effects reinforce each other.
    B) Negative income effect outweighs substitution effect.
    C) Substitution effect dominates income effect.
    D) Price effect is positive.
    Answer: B

    24.

    Consumer equilibrium changes to a higher indifference curve when:
    A) Income decreases.
    B) Price of one good rises.
    C) Income increases or price falls.
    D) Budget line becomes steeper.
    Answer: C

    25.

    The Indifference Map represents:
    A) All combinations giving different levels of satisfaction.
    B) Combinations yielding the same utility.
    C) Price combinations of goods.
    D) Income levels at equilibrium.
    Answer: A

    26.

    An upward-sloping indifference curve would indicate:
    A) Normal goods.
    B) Inferior goods.
    C) Giffen goods.
    D) Both goods are ‘bads’.
    Answer: D

    27.

    In consumer theory, the substitution effect is always:
    A) Negative
    B) Positive
    C) Neutral
    D) Equal to price effect
    Answer: B

    28.

    If the income effect is zero, the good must be:
    A) Normal
    B) Inferior
    C) Neutral
    D) Giffen
    Answer: C

    29.

    The convexity of indifference curves reflects:
    A) Diminishing MRS
    B) Increasing MRS
    C) Constant MRS
    D) Increasing marginal utility
    Answer: A

    30.

    According to Hicks, the main advantage of the Ordinal approach over the Cardinal one is:
    A) It does not require utility measurement.
    B) It eliminates the need for demand theory.
    C) It measures satisfaction in monetary terms.
    D) It assumes increasing marginal utility.
    Answer: A

     

  • UGC NET DEC 2025 Notification

    UGC NET December 2025 Notification — Conducted by NTA

    The National Testing Agency (NTA) has officially released the notification for the University Grants Commission – National Eligibility Test (UGC NET) December 2025. The exam determines eligibility for Junior Research Fellowship (JRF), Assistant Professor, and Ph.D. admission in Indian universities and colleges.

    📅 Important Dates

    Event Date
    Online Registration & Submission of Application 07 October 2025 – 07 November 2025 (upto 11:50 PM)
    Last Date for Fee Payment 07 November 2025 (upto 11:50 PM)
    Correction Window 10 November – 12 November 2025 (upto 11:50 PM)
    Intimation of Exam City To be announced later
    Admit Card Release To be announced later
    Exam Dates To be announced later
    Result Declaration To be announced later

    Official Websites:
    🔗 https://ugcnet.nta.nic.in
    🔗 https://nta.ac.in

    💰 Application Fee

    Category Fee
    General / Unreserved ₹1150/-
    Gen-EWS / OBC (Non-Creamy Layer) ₹600/-
    SC / ST / PwD / PwBD / Third Gender ₹325/-

    Payment can be made via Debit/Credit Card, Net Banking, or UPI.

    🎓 Eligibility Criteria

    Educational Qualification:

    • General/EWS: 55% marks in Master’s Degree or equivalent.

    • OBC (NCL)/SC/ST/PwD/PwBD/Third Gender: 50% marks in Master’s Degree or equivalent.

    • Candidates pursuing a Master’s degree or awaiting results can apply provisionally.

    Four-Year Bachelor’s Degree Holders:

    • Must have at least 75% aggregate marks (5% relaxation for reserved categories).

    • Eligible for JRF and Ph.D. admission, but not for Assistant Professor posts.

    Age Limit (as on 01 December 2025):

    • JRF: Maximum 30 years (Relaxation up to 5 years for OBC-NCL/SC/ST/PwD/PwBD/Women candidates and others as per rules).

    • Assistant Professor / Ph.D. Admission: No upper age limit.

    📘 Subjects Covered

    UGC NET December 2025 will be conducted for 83 subjects in the fields of:

    • Humanities (including Languages)

    • Social Sciences

    • Commerce

    • Computer Science & Applications

    • Electronic Science

    • Environmental Science

    • Management

    • and more.

    👉 Full subject list and codes are available in Appendix-II of the official Information Bulletin.

    🖥️ Exam Format

    Paper Marks Questions Description Duration
    Paper I 100 50 Tests teaching/research aptitude, reasoning, comprehension, and general awareness 3 hours (180 minutes)
    Paper II 200 100 Subject-specific questions based on candidate’s chosen subject

    • Mode: Computer-Based Test (CBT)

    • Type: Objective, Multiple Choice Questions

    • Marking Scheme: +2 for each correct answer, no negative marking

    • Medium: English and Hindi (except language subjects)

    ♿ Reservation Policy

    Applicable as per Government of India norms:

    • SC – 15%

    • ST – 7.5%

    • OBC (NCL) – 27%

    • EWS – 10%

    • PwD / PwBD – 5% (within each category)

    📄 How to Apply

    1. Visit https://ugcnet.nta.nic.in

    2. Click on “Apply for UGC NET December 2025”

    3. Complete registration with valid email & mobile number

    4. Fill in the application form and upload:

      • Photograph (10–200 KB)

      • Signature (4–30 KB)

    5. Pay the exam fee online and download the confirmation page.

    📢 Key Highlights

    • Conducted twice a year by NTA in Computer Based Test (CBT) mode.

    • Qualifying NET opens opportunities for JRF, Assistant Professorship, and Ph.D. admissions.

    • Validity of NET score for Ph.D. admission (categories 2 & 3) – 1 year.

    • No negative marking in any paper.

    • Candidates can check the mock test at https://nta.ac.in/Quiz.

    🧾 Important Notes

    • Candidates should apply only once; multiple applications will be rejected.

    • The Admit Card will be available only on the NTA website.

    • NTA does not send admit cards by post.

    • No re-evaluation/re-checking of results will be entertained.

    📍For More Details:
    Visit the official NTA portal — https://ugcnet.nta.nic.in