BECC 132 Solved Guess Paper 2026 | Principles of Microeconomics-II for IGNOU BAG and BAM

Sample 1: Long-run equilibrium under perfect competition and monopoly

Question: Compare the long-run equilibrium of perfect competition and monopoly with the help of a diagram.

Meaning of the two market forms

Under perfect competition, price is equal to average cost which is equal to marginal cost at the equilibrium output. Under monopoly, the price is always greater than marginal cost.

Both markets are profit-maximising, and in each the firm is in equilibrium only where MR = MC and the MC curve cuts the MR curve from below. Beyond this common rule, the two forms differ sharply.

Points of comparison

1. Output and price: Under perfect competition price equals average cost and marginal cost at equilibrium; under monopoly price is always greater than marginal cost and, because the monopolist keeps super-normal profit, above average cost as well.
2. Entry: Perfect competition has no restriction on entry or exit of firms; under simple monopoly there are strong barriers to entry and exit.
3. Profits: The gap between price and average cost gives the monopolist super-normal profits, while a perfectly competitive firm earns only normal profits in the long run.
4. Supply curve: The competitive firm's supply curve is knowable as all firms sell the desired quantity at the prevailing price; under monopoly the supply curve cannot be known and the MC curve is not the monopolist's supply curve.
5. Slope of demand curve: The competitive demand curve is perfectly elastic with AR = MR; under monopoly the AR curve slopes downward and AR and MR are separate.
6. Price comparison: Monopoly price is higher than the perfect-competition price; in the long run the competitive price equals average cost while the monopoly price is higher.
7. Output comparison: Perfect-competition output is higher than monopoly output; the monopolist restricts output to the level where MC = MR.

Conclusion: In long-run equilibrium both firms equate MR with MC, but the competitive firm produces a larger output at a lower price earning only normal profit, while the monopolist restricts output, charges a higher price and retains super-normal profit.

Sample 2: Kinked demand curve and sticky prices in oligopoly

Question: Explain the equilibrium of a firm in an oligopolistic market facing a kinked demand curve. Why are prices sticky in this market?

Meaning of the kinked demand curve

Because of this asymmetric pattern of reaction of the rivals, the demand curve of each firm would have a kink at the prevailing price of its product.

The model was developed independently by Paul M. Sweezy and by R. C. Hall and C. J. Hitch, to explain price stability in oligopoly.

Why the kink arises

1. Price rise not followed: If a firm raises its price, rivals keep their prices unchanged, so it loses many customers and its demand falls along the relatively flat, elastic segment.
2. Price cut followed: If a firm lowers its price, rivals also cut prices to avoid losing customers, so the firm gains little and moves along the relatively steep, inelastic segment.
3. Resulting kink: This asymmetric reaction makes the demand curve flatter above the prevailing price and steeper below it, producing a kink at that price.

Equilibrium and sticky prices

1. Discontinuous MR: Because the demand curve has a kink, the marginal revenue curve is not continuous and shows a vertical gap below the kink.
2. Stable price: The MC curve can shift within this gap without changing the profit-maximising price or output, so the prevailing price tends to remain rigid.
3. No incentive to change: Neither raising nor lowering price benefits the firm, so prices stay sticky at the kink.

Conclusion: The kinked demand curve explains why oligopoly prices, once set, remain rigid: the discontinuity in MR absorbs cost changes and removes the firm's incentive to alter price.

Sample 3: Ricardian theory of rent vs the modern theory of rent

Question: Compare the Ricardian theory of rent with the modern theory of rent. Explain how the elasticity of supply of land affects rent.

Meaning of rent

Rent is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil. (David Ricardo)

Three theories of rent have been put forward: the classical or Ricardian theory, Marshall's theory of quasi-rent, and the modern theory of rent.

Ricardian theory of rent

1. Original powers of soil: David Ricardo, a 19th-century economist, held that rent is paid for the use of the original and indestructible powers of the soil and accrues from both extensive and intensive cultivation.
2. Diminishing returns: Rent arises because the law of diminishing returns operates: as more labour and capital are applied to the same land, agricultural yield declines.
3. Surplus of superior land: Land of superior quality generates a surplus over marginal land, and this surplus is rent; rent is the excess earnings over the cost of production.

Marshall's quasi-rent

1. Short-run surplus: Alfred Marshall extended the rent concept to other factors as quasi-rent, the surplus earnings of man-made factors whose supply is fixed in the short run.
2. Disappears in the long run: Quasi-rent vanishes in long-run competitive equilibrium when the supply of man-made goods is restored, but the rent of land persists as its supply is permanently fixed.

Modern theory of rent

1. Demand-supply framework: The modern theory, developed further by J.S. Mill and Joan Robinson, determines rent through demand and supply, where rent arises from the scarcity (fixed nature) of land.
2. Transfer earnings: The area under the supply curve is transfer earnings, the minimum payment needed to retain a factor in its present use (its opportunity cost). Thus Rent = Actual earnings minus Transfer earnings.
3. Role of elasticity: The more inelastic the supply of land, the larger the surplus over transfer earnings, hence more rent; with a perfectly elastic supply the entire factor payment becomes transfer earnings and rent is zero.

Conclusion: Ricardo treats rent as a differential surplus arising from the original powers of land, while the modern theory explains it through demand and supply, where the more inelastic the supply, the greater the rent.

Sample 4: Public goods and the need for government intervention

Question: What are public goods? Explain their two key properties and the need for government intervention in their provision.

Meaning of public goods

Public goods are those goods whose consumption cannot be restricted to only those who pay for them.

Such goods are beneficial for society, but private firms find no reason to produce them, which is a major source of market failure. Examples are street lights, the judicial system and national defence, also called social goods.

Two key properties

1. Non-excludability: We cannot exclude non-payers from consuming the good; for example, defence services at national borders protect the whole nation and no one can be excluded from that protection.
2. Non-rivalry: When a person consumes the good it does not diminish another person's share; adding one more user does not reduce the benefit available to existing members, unlike a rival good such as a pizza.

Related concepts

1. Combinations of goods: Goods may be pure public (national defence, street lights), common resources (ocean fishing, village grazing), toll goods (theatres, toll roads) or pure private (pizza, mobile phones).
2. Free-rider problem: Public goods carry an extreme positive externality; the free-rider problem arises when a person uses the good without paying for it, so voluntary payment never covers the cost of supply.

Need for government intervention

1. Private under-provision: Because buyers cannot be identified and charged, private firms have no incentive to supply public goods, so the market fails to provide them adequately.
2. Positive externalities: Public goods generate large positive externalities that the market price does not capture, justifying public provision.
3. Welfare role of the state: The government steps in to supply such goods and finance them collectively (for instance through taxation), so that society receives benefits the private market would not deliver.

Conclusion: Public goods are non-excludable and non-rival, so the free-rider problem prevents private firms from supplying them; government intervention is therefore necessary to provide these socially beneficial goods and correct the resulting market failure.

Sample 5: Absolute advantage, comparative advantage and the Heckscher-Ohlin theory

Question: How is Ricardo's comparative advantage theory an improvement over Adam Smith's absolute advantage theory? How is the Heckscher-Ohlin theory an improvement over the Ricardian theory?

Absolute advantage theory

A country should specialise in those products which it can produce efficiently, measured in terms of absolute labour costs.

Adam Smith, in The Wealth of Nations, first explained why trade should take place between nations. Trade is based on absolute cost advantage: each nation specialises in the commodity in which it is more efficient and exchanges part of it for the other commodity, so the output of both goods rises.

Comparative advantage as an improvement over Smith

1. Trade still beneficial: David Ricardo (1817), in Principles of Political Economy and Taxation, showed that trade can benefit two countries even if one has an absolute advantage in all products and the other has none.
2. Specialise by comparative cost: A nation gains by exporting the good in which its comparative advantage is greatest and importing the one in which its absolute disadvantage is greater.
3. Wider application: Ricardo's law therefore extends the gains from trade to cases the absolute advantage theory could not explain, making it the more general principle.

Heckscher-Ohlin as an improvement over Ricardo

1. Explains the cause of cost differences: The Heckscher-Ohlin theory, set out by Bertil Ohlin from Eli Heckscher's analysis, begins where Ricardo ends: Ricardo states that comparative cost differences are the basis of trade but does not explain why they arise, while H-O explains the real cause.
2. Factor-endowment theory: Differences in relative prices arise from differences in factor endowments, which is why it is also called the factor-endowment theory.
3. Trade pattern: Countries rich in labour export labour-intensive goods and countries rich in capital export capital-intensive goods.

Conclusion: Ricardo improves on Smith by showing trade gains even without absolute advantage, while Heckscher-Ohlin improves on Ricardo by tracing comparative cost differences to differences in factor endowments between countries.