AIOU 0402 Economics Solved Assignment 2 Spring 2025
AIOU 0402 Assignment 2
Q.1 What is meant by a market? Write a note on the types of markets in detail. Also, discuss those factors which determine the scope of a market.
Answer:
A market refers to a place or platform where buyers and sellers interact to exchange goods, services, or resources. It can be physical or virtual.
Types of Markets:
1. Perfect Competition – Many buyers and sellers, homogeneous products, free entry, price determined by supply and demand.
2. Monopoly – A single seller controls the entire market, no close substitutes exist.
3. Oligopoly – Few large sellers dominate, strategic interactions influence prices.
4. Monopolistic Competition – Many sellers offer differentiated products.
5. Factor Market – Markets for inputs like labor, capital, and raw materials.
6. Financial Market – Where securities, stocks, and bonds are traded.
Factors Determining the Scope of a Market:
1. Consumer Preferences: Demand for goods influences market size.
2. Technology: Online platforms expand market accessibility.
3. Geographical Reach: Local, national, or international trade.
4. Legal Framework: Regulations shape competition and trade.
5. Transportation and Communication: Efficient infrastructure increases market scope.
Q.2 Explain the equilibrium of a firm under perfect competition in the short-run and long-run.
Answer:
A firm under perfect competition reaches equilibrium when Marginal Cost (MC) = Marginal Revenue (MR).
Short-run Equilibrium:
1. Firms may earn supernormal profits, normal profits, or losses depending on price levels.
2. If price is above Average Cost (AC) → Firms earn profits.
3. If price is below AC but above Average Variable Cost (AVC) → Firms operate at a loss.
4. If price is below AVC → Firms shut down.
Long-run Equilibrium:
1. Firms experience normal profits because of free entry and exit.
2. If firms earn supernormal profits, new firms enter, increasing supply and lowering prices.
3. If firms suffer losses, some exit, reducing supply and raising prices.
Q.3 Explain the role of marginal productivity theory in the determination of factor prices with the help of tables and diagrams.
Answer:
The Marginal Productivity Theory states that the price of a factor (labor, capital, etc.) is determined by its contribution to output.
The factor price equals its Marginal Revenue Product (MRP), calculated as:
MRP = Marginal Product (MP) × Marginal Revenue (MR)
| Units of Labor | Output (Units) | Marginal Product (MP) | Marginal Revenue (MR) | MRP |
|---|---|---|---|---|
| 1 | 10 | 10 | 50 | 500 |
| 2 | 18 | 8 | 50 | 400 |
| 3 | 24 | 6 | 50 | 300 |
As more units are employed, MP decreases due to diminishing returns.
Firms hire factors until MRP = Factor Cost (Wage/Price of Capital).
Q.4 Define wage and its two major types. Also, discuss different theories of wages in detail.
Answer:
Wage refers to compensation paid to labor in exchange for work.
Types of Wages:
1. Nominal Wage – The money paid without adjusting for inflation.
2. Real Wage – Adjusted for inflation, represents purchasing power.
Theories of Wages:
1. Subsistence Theory: Wages are at subsistence level (enough for survival).
2. Wage Fund Theory: Employers allocate a fixed fund for wages.
3. Residual Claimant Theory: Wages are determined after other costs (rent, interest, profits).
4. Bargaining Theory: Wages depend on negotiation power between employers and workers.
5. Marginal Productivity Theory: Wages equal marginal productivity of labor.
Q.5 (a) What is meant by a weighted index number? Explain the steps for constructing an index number in detail.
Answer:
A weighted index number assigns different weights to items based on their importance.
Steps to Construct an Index Number:
1. Select Base Year: Choose a reference year for comparison.
2. Determine Items and Weights: Important items get higher weights.
3. Collect Price and Quantity Data: Obtain price and quantity for each item.
4. Choose Formula: Use Laspeyer’s, Paasche’s, or Fisher’s index formula.
5. Calculate the Index Number: Compute weighted averages.
Q.5 (b) Write down the formulas of the weighted index number. Calculate the index number by Laspeyer's formula from the given table.
Answer:
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