economics i 1005

8/9/2019 Economics I 1005

1/23

Question Paper

Economics-I (121) : October 2005 Answer all questions.

Marks are indicated against each question.

1. Which of the following statements correctly describe perfectly price elastic demand?

(a) The change in quantity demanded is directly proportional to the change in income

(b) The change in quantity demanded is proportional to the change in price(c) There is an infinite change in quantity demanded due to a small change in price(d) There is no change in quantity demanded on account of a change in price

(e) Quantity demanded changes inversely with change in income.

(1 mark)

< Answer >

2. Consider the following data:

If the demand for wheat is unit-elastic, the quantity demanded when the price is Rs.10 per kg will be

(a) 5Kgs (b) 6 kgs (c) 10Kgs (d) 12Kgs (e)

20Kgs.

(1 mark)

Price per Kg (Rs.) Demand for wheat (Kg)

12 510 ?

< Answer >

3. If the demand curve for product B shifts to the right as the price of product A declines, it can beconcluded that

(a) A and B are substitute goods(b) A and B are complementary goods(c) A and B are not related goods(d) A is a superior and B is an inferior good(e) B is a superior and A is an inferior good.

(1 mark)

< Answer >

4. The profit maximizing output for a monopolist is

(a) Greater than the revenue maximizing output(b) Equal to the revenue maximizing output(c) Less than the revenue maximizing output(d) Greater than the competitive output(e) Equal to the competitive output.

(1 mark)

< Answer >

5. Refer to the diagram below :

The kinked demand curve model explains

(a) Price flexibility (b) Price rigidity(c) Quantity flexibility (d) Quantity rigidity (e) Quality flexibility.

(1 mark)

< Answer >

6. The amount of money spent by a cigarette smoker on two brands of cigarettes, X and Y, is given by M.< Answer >

age 1 of 23


2/23

If the income of the consumer increases from M to M1

and prices of cigarettes remain constant, the new

budget line will be

(a) Below the original budget line(b) Having the same slope as the original budget line(c) Steeper than the original budget line(d) Less in slope than the original budget line

(e) Tangential to the original budget line.

(1 mark)

7. The production function of a firm is represented by 50K 1/2L1/2. If the capital labor ratio is 4:1,the

marginal product of labor will be

(a) 100 (b) 200 (c) 400 (d) 50 (e)150.

(1 mark)

< Answer >

8. The production function of XYZ Ltd. is

Q = 200L0.5K0.5

The current wages (w) and cost of capital (r) are Rs.50 and Rs.25, respectively. Market price of thegood produced by the company is Rs.5. If XYZ Ltd. is currently using 100 units of capital (K), thequantity of labor that the firm should use to maximize its total profit is

(a) 10,000 (b) 500 (c) 5,000 (d) 25,000 (e)1,000.

(2 marks)

< Answer >

9. In a production process, if the inputs are perfect complements of each other, the shape of the isoquantwill be

(a) L-shaped (b) Downward sloping straight line(c) Concave to the origin (d) Convex to the origin(e) U-shaped.

(1 mark)

< Answer >

10. Demand and supply functions of cigarettes are given by the following functions:

QD

= 5,800 80P

QS

= 1,000 + 40P

If the government imposes a tax of Rs.12 on each unit to discourage smoking, what would be the newequilibrium price?

(a) Rs.40.0 (b) Rs.44.0 (c) Rs.48.0 (d) Rs.52.0 (e)Rs.42.5.

(2 marks)

< Answer >

11. The effect of imposition of a lump sum tax on a perfectly competitive firm is

I. The lump sum tax will shift the average fixed cost curve but not the average total cost curve.II. The lump sum tax will affect the equilibrium position of the firm both in the short run and in the

long run.III. If the firm was earning just normal profits, the imposition of the lump sum tax will cause the exit

of the firm from the industry in the long run.

IV. The marginal cost curve and the average variable cost curves of the firm will be affected by thelump sum tax.V. The lump sum tax will not affect the equilibrium position of the firm in the short run.

(a) Only (I) and (III) above (b) Only (II) and (IV) above

(c) Only (I) and (V) above (d) Only (II) and (V) above(e) Only (III) and (V) above.

(1 mark)

< Answer >

12. There are 100 firms, with identical cost functions, in a perfectly competitive industry. The demandfunction for the industry is estimated to be

Qd

= 2000 200P

If the cost function of a firm is TC = 200 50Q + 2Q2,equilibrium price of the product is

(a) Rs. 9.93 (b) Rs. 3.33 (c) Rs.16.35 (d) Rs.14.98 (e)

< Answer >

age 2 of 23


3/23

Rs.18.10.

(2 marks)

13. Price discrimination is possible when

(a) Various sub markets are having same price elasticity of demand(b) A high price is charged in the relatively price elastic sub market and a low price in the relatively

inelastic sub market(c) The same price is charged in both the relatively elastic and the relatively inelastic sub markets

(d) A high price is charged in the relatively price inelastic sub market and a low price in the relativelyprice elastic sub market

(e) It is possible to shift output from the market, which earns relatively less marginal revenue to the

market, which earns more marginal revenue.

(1 mark)

< Answer >

14. A cloth merchant, who supplies cotton cloth in both Andhra Pradesh and Tamil Nadu, has thefollowing demand functions:

Andhra Pradesh : PA

= 600 QA

Tamil Nadu : PT

= 400 QT

The average cost function of the merchant is estimated to be AC = + 100

If price discrimination is legalized, what is the maximum possible profit the monopolist can earn?

(a) Rs.1,24,640.00 (b) Rs.65,000.00 (c) Rs.70,000.00

(d) Rs.1,24,840.00 (e) Rs.1,24,862.50(2 marks)

15,000

Q

< Answer >

15. Ring tone, a firm specializing in mobile handsets, faces a monopolistically competitive market. In thelong run, the company will earn only normal profits because of

(a) Advertising outlay incurred for the product(b) Freedom of entry and exit(c) Product differentiation

(d) Downward sloping demand curve(e) Small size of the market.

(1 mark)

< Answer >

16. Which of the following conditions is true regarding the equilibrium condition of a profit-maximizingfirm in the labor market?

I. Marginal cost of labor equals average cost of labor.II. Marginal cost of labor equals marginal product of labor.III. Marginal cost of labor equals wage rate.IV. Wage rate equals marginal revenue product of labor.V. Wage rate equals average product of labor.

(a) Only (I) above (b) Only (II) above(c) Both (II) and (III) above (d) Both (IV) and (V) above(e) Both (III) and (IV) above.

(1 mark)

< Answer >

17. Assume that a 20% increase in the price of good Y causes a 10% decline in the quantity demanded ofgood X. The coefficient of cross elasticity of demand between good X and good Y is

(a) Negative and therefore these goods are substitutes(b) Negative and therefore these goods are complements(c) Negative and therefore these goods are independent(d) Positive and therefore these goods are substitutes

(e) Positive and therefore these goods are complements.

(1 mark)

< Answer >

18. A toy manufacturer manufactures two brands of toys, X and Y, catering to the needs of children in the

5-10 age group. The past experience of the firm indicates the following relationships between price,income and quantity demanded of toys.

Price of X

(Rs)Price of Y

(Rs)

Quantity demanded of X

(units)

Per capita Income

(Rs)15 20 5,000 1,000

17.5 22.5 5,500 1,050

< Answer >

age 3 of 23


4/23

The point cross elasticity of demand between X and Y will be

(a) 0.95 (b) 0.82 (c) 0.58 (d) 0.72 (e)0.73.

(2 marks)

17.5 25 6,000 1,05020 25 5,500 1,05020 25 6,500 1,250

19. A survey by a market research firm estimated the supply schedule for apples as follows:

The estimated supply function for apples is

(a) Qs = 50 +100P (b) Qs = 100 +50P

(c) Qs =100 + 0.5P (d) Qs = 0.5 +100P (e) Qs = 0.5P.

(1 mark)

Price (Rs) Quantity supplied (units)50 25100 50150 75

< Answer >

20. The elasticity of demand for life-saving drugs is found to be zero in country X. In the Drug PriceControl Order, the Government decided to impose a tax of t per unit on the manufacturers of drugs.The burden of tax on the buyers of the drugs will be equal to

(a) 0 (b) t(c) Less than t (d) Greater than t (e) t/2

(1 mark)

< Answer >

21. If the demand curve is a rectangular hyperbola the numerical value of price elasticity of demand will beequal to

(a) 1.00 (b) 0.25 (c) 0.75 (d) 0.50 (e)

.

(1 mark)

< Answer >

22. The equilibrium of a consumer is represented by the following combination of goods given as A and B.

The absolute value of marginal rate of substitution of X for Y is

(a) 1.0 (b) 0 (c) 0.5 (d) 1.5 (e).

(1 mark)

Combination Good X Good Y

A 10 12

B 12 14

< Answer >

23. An econometric study of a cotton firm in India indicates that the production function of the cotton firm

is 50K0.12L0.92. If the quantities of both labor and capital are increased by 1%, the output wouldincrease by

(a) 0.92% (b) 0.12% (c) 1.00% (d) 1.04% (e)0.80%.

(1 mark)

< Answer >

24. Which of following statements is true with regard to marginal cost?

(a) Marginal cost is the total variable cost divided by output(b) Marginal cost is the total fixed cost divide by output(c) Marginal cost is the slope of the average total cost function(d) Marginal costs is the addition to total cost from an additional unit of output

(e) Marginal cost is the total fixed cost divided by output.

(1 mark)

< Answer >

25. If a firms marginal revenue exceeds its marginal cost, profit-maximizing rules require the firm to

(a) Increase its output in both perfect and imperfect competition(b) Increase its output in perfect but not necessarily in imperfect competition(c) Increase its output in imperfect but not necessarily in perfect competition(d) Decrease its output, in both perfect and imperfect competition

< Answer >

age 4 of 23


5/23

(e) Increase price, not output, in both perfect and imperfect competition.

(1 mark)

26. The cost function of a particular firm is given as TC = Q3 9Q2 + 800Q. The level of output uptowhich the marginal cost curve is falling will be

(a) 1 unit (b) 2 units (c) 3 units (d) 4 units (e) 5units.

(2 marks)

< Answer >

27. The industry demand function for a product in a duopoly is P = 500 2Q. The reaction functions of the

two firms are as follows:Q

1= 380 2Q

2

Q2

= 200 Q1

Equilibrium price of the product is(a) Rs.100 (b) Rs.180 (c) Rs.200 (d) Rs.380 (e)

Rs.400.

(2 marks)

< Answer >

28. There are two firms, ABC Ltd. and XYZ Ltd. in a market. The reaction functions of ABC Ltd. and

XYZ Ltd. are as follows:

QA= 50 0.5QB

QB = 60 QA

Where, QA is quantity produced by ABC Ltd. and QB is quantity produced by XYZ Ltd. If the marketis transformed into a perfectly competitive market, the output for the industry would be

(a) 40 units (b) 50 units (c) 60 units (d) 70 units (e) 90units.

(2 marks)

< Answer >

29. In an industry there are only six firms. Sales data for the six firms is given below:

The value of Herfindahl Index for the industry is

(a) 0.67 (b) 0.33 (c) 0.59 (d) 1.01 (e)0.97.

(1 mark)

Name of the Firm Sales Volume (units)

Alpha 4,000Beta 16,200

Gamma 20,400Delta 5,000Epsilon 400Kappa 1,000

< Answer >

30. Motor Conversions Ltd. offers its services to both auto dealers (wholesale) and retail customers. Eachservice costs the company Rs.1,000 in variable labor and material expenses. Demand functions for theservice are as follows:

Wholesale : PW

= 1,500 0.5QW

Retail : PR

= 5,000 2QR

If the company doesnot practice price discrimination, the profit maximizing price will be

(a) Rs.1,300 (b) Rs.1,400 (c) Rs.1,500 (d) Rs.1,600 (e)Rs.1,700.

(2 marks)

< Answer >

31. Netizen, an internet service provider finds that it has to incur advertising outlays in a monopolisticmarket. The total revenue function for Netizen is given as

TR = 400 + 40R R 2, R is the unit of advertising.

If the cost of each additional unit of advertising is Rs.4, the optimal budget for advertising is

(a) Rs.50 (b) Rs.65 (c) Rs.62 (d) Rs.72 (e)Rs.80.

(2 marks)

< Answer >

< Answer >

age 5 of 23


6/23

32. If Kamco, a monopolist firm specialized in the supply of agro machinery, produces at the mid point of

its demand curve, the marginal revenue earned by Kamco is

(a) (b) 1 (c) 0 (d) 2 (e)3.

(1 mark)

33. Suppose the price elasticity coefficients of demand for products W, X, Y, and Z are 1.43, 0.67, 1.11,and 0 respectively. A one per cent decrease in price will result in an increase in total revenue in the caseof product (s)

(a) W and Y (b) Y and Z (c) X and Z (d) Z (e)Y.

(1 mark)

< Answer >

34. The price elasticity of demand for rice is estimated to be 0.4 and the income elasticity is 0.8. At anincome of Rs. 20,000 and price of Rs.20, the quantity demanded is 50 million tons (mnt) a year. If theper capita income increases to Rs.20,500, what will be the quantity demanded of rice?

(a) 51 mnt (b) 40 mnt (c) 55 mnt (d) 49 mnt (e)50 mnt.

(2 marks)

< Answer >

35. The price elasticity of demand for a mobile phone handset is found to be 1.5. At present, the firm isselling 300 units. The income effect is half of the substitution effect. If the price of the mobile phone isincreased from Rs.2,000 to Rs.2,500, the substitution effect for the increase in the price will be

(a) 37.5 units (b) 56.0 units (c) 75.0 units(d) 112.5 units (e) 3,00.0 units.

(2 marks)

< Answer >

36. The total utility obtained from cola drink for a consumer is given by the equation, TU =

10X1.5. If the price of Cola drink is given to be Rs.60 per unit, the consumer maximizes his utility byconsuming

(a) 8.00 units of cola (b) 9.00 units of cola (c) 16.00 units ofcola(d) 14.75 units of cola (e) 15.00 units of cola.

(2 marks)

< Answer >

37. For a product, the industry is perfectly competitive with constant costs. If price of the complementarygood of the product decreases, then in the long run

(a) Equilibrium price will remain constant but equilibrium quantity will increase

(b) Equilibrium price will increase but equilibrium quantity will remain the same(c) Both equilibrium quantity and price will increase(d) Equilibrium price will decrease but equilibrium quantity will increase

(e) Equilibrium price will increase but equilibrium quantity will decrease.

(1 mark)

< Answer >

38. A consumer is in equilibrium when the MRS x, Y of two goods is 0.25 (when good X is on the X- axis

and good Y is on the Y- axis). He has a budgeted income of Rs. 200. If he consumes equal quantities ofboth X and Y, the expenditure incurred on good X will be

(a) Rs.40 (b) Rs.50 (c) Rs.55 (d) Rs.60 (e)

Rs.70.(2 marks)

< Answer >

39. Which of the following statements is true with respect to monopolistic competition in the long run?

(a) The market is efficient because there are no entry barriers(b) The market is efficient because the firms produce at the minimum average total cost(c) The market is efficient because there are no economic profits(d) The market is not efficient because the equilibrium output is less than the optimum output

(e) The market is not efficient because the equilibrium output is greater than the optimum output.

(1 mark)

< Answer >

40. Which of the following is true of the relationship between the marginal cost and the average costfunctions?

< Answer >

age 6 of 23


7/23

(a) If marginal cost is greater than average total cost, then average total cost is falling(b) The average total cost curve intersects the marginal cost curve at its minimum(c) The marginal cost curve intersects the average total cost curve at its minimum(d) If marginal cost is less than average total cost, then average total cost is increasing(e) The marginal cost curve intersects the average total cost at its falling part.

(1 mark)

41. The shape of the average fixed cost, a rectangular hyperbola, implies that

I. Average fixed cost is a monotonically decreasing function of the level of output.II. The total fixed cost is constant.

III. The average fixed cost will be asymptotic to both the axes.IV. A decrease in the average fixed cost is compensated by an equi-proportionate increasein output.

(a) Only (I) above (b) Only (II) above(c) Both (I) and (III) above (d) Both (II) and (IV) above(e) (I), (II), (III) and (IV) above.

(1 mark)

< Answer >

42. A textile manufacturer has the cost function given by TC = Q 3 20Q 2 + 240Q. The output at whichaverage cost is minimum will be

(a) 10 units (b) 20 units (c) 35 units (d) 25 units (e)31units.

(2 marks)

< Answer >

43. If the total cost function of a perfectly competitive firm is TC = 100 + 300Q 10Q 2 + Q3, what is theminimum price below which the firm does not supply any goods to the market?

(a) Rs.233.33 (b) Rs.275.00 (c) Rs.3.33(d) Rs.525.00 (e) Rs.366.66.

(2 marks)

< Answer >

44. A firm operating in conditions of perfect competition has the following cost schedule.

If the market price of the product is Rs.4, then equilibrium output for the firm is

(a) 100 units (b) 101 units (c) 102 units(d) 103 units (e) 104 units.

(1 mark)

Quantity(units)

Total Cost (Rs)

100 500101 502

102 505103 509104 514

< Answer >

45. Current demand for apples in a city is 1000 boxes per week. In the city, price elasticity of demand forapples is 1.25 and income elasticity of demand is 2.00. For the next period, if per capita income isexpected to increase by 7% and price of apples is expected to increase by 10%, demand for apples is

expected to be

(a) 875 boxes per week (b) 1,000 boxes per week(c) 1,250 boxes per week (d) 1,140 boxes per week(e) 1,015 boxes per week.

(2 marks)

< Answer >

46. Which of the following statements is not true?

(a) A function shows the relationship between two or more variables(b) Normative economics studies how the economic problems facing society should be solved(c) A market necessarily refers to a meeting place between buyers and sellers(d) Equilibrium refers to a situation which once achieved tends to persist

(e) Microeconomics deals with the allocation of resources of the firm between production ofdifferent goods and services.

(1 mark)

< Answer >

47. GFX India Limited, a leading marketing research company estimated the income elasticity of demand < Answer >

age 7 of 23


8/23

for air conditioner and described it as a luxury good. The income elasticity of demand for airconditioner would be

(a) Greater than one (b) Equal to one (c)Zero(d) Less than one but more than zero (e) Infinity.

(1 mark)

48. Which of the following can result in formation of a natural monopoly?

(a) Government regulation (b) Product differentiation(c) Economies of large scale production (d) Tariff

(e) Licenses.

(1 mark)

< Answer >

49. If an individual seller in a perfectly competitive market wishes to increase his sales revenue, he would

(a) Improve the quality of his product

(b) Decrease the price for his product(c) Increase the quantity offered for sale(d) Advertise the superiority of his product(e) Improve the packaging of the product.

(1 mark)

< Answer >

50. Cartel agreements tend to be unstable because

(a) Cartel agreements tend to lower profits

(b) A firm can increase its profits by cheating on the agreement(c) Agreements become unnecessary as the number of firms in the cartel increases(d) Cutting output and raising prices will benefit each firm in the cartel(e) Cartels are not legally permitted.

(1 mark)

< Answer >

51. NFA India Ltd. finds that the demand function of the product for one of its clients is Q =780 3P + 2Pr + 0.1I, where P is the price of the product; Pr is the price of the rival firms product andI is the per capita disposable income. Presently the value of P is estimated to be Rs.10, Pr to be Rs.20,and I to be Rs.6,000. The income elasticity of demand will be

(a) 0.022 (b) 0.342 (c) 0.432 (d) 0.029 (e)

0.502.

(2 marks)

< Answer >

52. Which of the following is not true?

(a) Indifference curve describes all the possible combinations of two goods which give equalsatisfaction to the consumer

(b) Total utility is the sum of marginal utilities of all units of a good consumed(c) When price of a product increases, demand for its complement increase(d) Utility is a psychological concept and therefore cannot be precisely measured(e) Consumer surplus of a good and its economic value are different.

(1 mark)

< Answer >

53. Suppose that the market equilibrium monthly rent per room in a city is Rs.3,000. At this rent 8,000rooms per year are rented. If a local rent control ordinance establishes a ceiling of Rs.3,500 per room,

which of the following is true?

(a) Shortage of rooms as the quantity of housing demanded increases(b) Shortage of rooms as the quantity of housing supplied decreases(c) The equilibrium remains unaffected(d) Surplus of rooms as the quantity of housing demanded decreases(e) Surplus of rooms as the quantity of housing supplied increases.

(1 mark)

< Answer >

54. For a linear homogeneous production function, which of the following is true?

(a) The distance between the isoquants will be constant(b) There will be increasing returns to scale

(c) There will be decreasing returns to scale(d) There will be varying returns to scale throughout(e) The expansion path will be convex to the origin.

(1 mark)

< Answer >

age 8 of 23


9/23

55. Which of the following represents the marginal rate of technical substitution (MRTS)?

(a) Slope of the isocost curve (b) Slope of the indifference curve(c) Slope of the isoquant (d) Slope of the budget line(e) Slope of the average cost curve.

(1 mark)

< Answer >

56. In the following diagram, the firm is operating in an industry with monopolistic competition. If the firmis operating at point A, which of the following is true?

(a) The seller is operating at the optimum level of output

(b) Attempts should be made to produce at point B

(c) At this point MR =

(d) Long run profit is maximized(e) The seller is earning excess profits.

(1 mark)

p

< Answer >

57. Which of the following statements is true regarding average variable cost curve?

(a) The average variable cost curve is a rectangular hyperbola(b) The average variable cost curve will first increase, reach a maximum and then decrease(c) The average variable cost curve is opposite of the average product curve(d) The average variable cost curve is horizontal

(e) The average variable cost curve reflects the law of increasing returns.

(1 mark)

< Answer >

58. Which of the following statements is true regarding the supply curve of a perfectly competitive firm in

the long run?

(a) The long run supply curve is the whole of the marginal cost curve

(b) The long run supply curve is the marginal cost curve above the average variable cost curve(c) In the long run, the supply curve of a perfectly competitive firm is its average variable cost curve(d) The average revenue curve is the long run supply curve of a perfectly competitive firm(e) In the long run, the marginal cost curve is not the supply curve of a perfectly competitive firm.

(1 mark)

< Answer >

59. For a perfectly competitive industry, the supply and demand functions are estimated as follows:

Qs = 1,000 +2PQd = 3,500 3P

A firm operating in the industry has the total cost function as follows:

TC = 500Q 15Q2 +Q3

The profits earned by the firm at the current equilibrium price will be

(a) Rs.100 (b) Rs.200 (c) Rs.300 (d) Rs.500 (e)

Rs.600.

(2 marks)

< Answer >

60. If a monopolist faces an upward shift in marginal cost curve, then

(a) Price increases and output decreases(b) Both the price and output will increase(c) Price decreases and output increases(d) Both the price and output will decrease(e) Both the price and output will remain constant.

(1 mark)

< Answer >

61. A monopolist practicing third degree price discrimination has segmented his total market for his

product into three sub markets with the following price elasticities:

< Answer >

age 9 of 23


10/23

If the profit maximizing price charged in market 2 is Rs. 50, the profit maximizing prices for markets 1

and 3 respectively are

(a) Rs.90 and Rs.30 (b) Rs.40 and Rs.30 (c) Rs.90 and Rs.40(d) Rs.40 and Rs.50 (e) Rs.90 and Rs.50

(2 marks)

Market Price elasticity

1 1.52 2.53 4.0

62. Market demand for a good under the oligopoly market is estimated to be Qd = 100 P. Firm X is adominant firm in the industry and the supply function of all other firms is Qso = P 20. If the dominantfirm has a constant marginal cost of Rs.20, what will be the market price of the good?

(a) Rs.80 (b) Rs.60 (c) Rs.40 (d) Rs.20 (e)Rs.10.

(2 marks)

< Answer >

63. To a consumer, Arun ice-cream and Kwality ice-cream sold by a local ice-cream vendor are perfectsubstitutes. If he spends all his income on ice-cream, the shape of his indifference curve will be

(a) Downward sloping straight line (b) L-shaped (c) Horizontal(d) Rectangular hyperbola (e) Upward sloping.

(1 mark)

< Answer >

64. ABC Computers wants to increase the quantity demanded of computers by 5 percent. If the priceelasticity of demand is 2.5, ABC Computers must

(a) Increase price by 2 percent (b) Decrease price by 2 percent(c) Decrease price by 0.5 percent (d) Increase price by 0.5 percent(e) Decrease price by 5 percent.

(1 mark)

< Answer >

65. The quantity demanded of rice is given by the linear equation. Qd = a bP. Given that the demand forrice is perfectly price inelastic in the country, the value of the parameter b will be equal to

(a) 0 (b) 1 (c) (d) 2 (e)2.

(1 mark)

< Answer >

66. For a firm, an improvement in state of technology would be indicated by

(a) A movement along the total product curve

(b) An upward shift of the average product curve(c) A downward shift of the total product curve(d) A downward shift of the average product curve(e) A movement along the average product curve.

(1 mark)

< Answer >

67. The production function of a firm is estimated as Q = K1/2 L1/2. The cost of inputs, labor and capital areRs.4 and Rs.8 per unit respectively. If the firm has a budget constraint of Rs.80, the maximum output

produced by the firm is

(a) 10.00 units (b) 7.07 units (c) 14.14 units

(d) 15.15 units (e) 16.00 units.(2 marks)

< Answer >

68. A firm has the production function given by Q = 2K 1/3L2/3. The capital stock is fixed at 27 units. Theprice of output is Rs.6 per unit and the wage rate is Rs.3 per unit. The optimal quantity of labor to behired by the firm is

(a) 256 units (b) 512 units (c) 64 units (d) 24 units (e) 36

units.

(2 marks)

< Answer >

69. If the production function is Q = 20K 0.3 L 0.3, what is the marginal rate of technical substitution oflabor for capital?

< Answer >

age 10 of 23


11/23

(a) 0.3 (b) 0.3 (c) (d) (e)

K L.

(2 marks)

L

K

K

L

L

K

K

L

70. The marginal product of labor for a firm is 50 units. If the firm provides a wage of Rs. 200 per worker,the marginal cost of production for the firm will be

(a) Re.0.25 (b) Rs. 10.00 (c) Rs.3.00 (d) Rs.4.00 (e) Inadequate information.

(1 mark)

< Answer >

71. For a perfectly competitive industry, the long run industry supply curve is estimated asQ = 20,0006,000P. This indicates

I. An increasing cost industry.

II. A decreasing cost industry.

III. A constant cost industry.

IV. An upward shift in the average cost curves of individual firms.

(a) Only (I) above (b) Only (II) above(c) Both (I) and (IV) above (d) Both (II) and (IV) above(e) Both (III) and (IV) above.

(1 mark)

< Answer >

72. The total cost function for ABC corporation is TC = 200 + 4Q + 2Q2. If the firm is a perfectlycompetitive firm and the marginal revenue earned is Rs.24, the profit maximizing output will be

(a) 5 units (b) 4 units (c) 3 units (d) 2 units (e) 6units.

(2 marks)

< Answer >

73. If both income and substitution effects are strong, the demand for the product must be

(a) Relatively price elastic (b) Relatively price inelastic(c) Unit elastic (d) Perfectly inelastic(e) Perfectly elastic.

(1 mark)

< Answer >

74. If the demand function for a good is P = 200 Q, the range of prices over which the demand is inelasticis

(a) Rs.5 to Rs.100 (b) Re.0 to Rs.100(c) Above Rs.100 (d) Above Rs.50 (e) Rs.50 to Rs.200.

(2 marks)

< Answer >

age 11 of 23


12/23

Suggested Answers

Economics-I (121): October 2005

1. Answer : (c)

Reason : Perfectly elastic demand refers to a situation where a small change in price causes aninfinite change in the quantity demanded

< TOP >

2. Answer : (b)

Reason : When the demand is unitary elastic, the total revenue earned must be the same.

Thus 12 5 = 10 X or X = 6

< TOP >

3. Answer : (b)

Reason : (a) When goods A and B are substitutes, decrease in price of product A will lead toleftward shift in the demand curve for product B. This is because, when price ofproduct A decrease consumers tend to substitute good A for good B and demand forproduct B decrease.

(b) When goods A and B are compliments, decrease in price of product A will lead torightward shift in the demand curve for product B. This is because, when price ofproduct A decrease consumers tend to consume more of product A and also product Balong with product A. Hence demand for product B increases.

(c) When goods A and B are unrelated, decrease in price of product A will not have anyimpact on the demand curve for product B.

(d) The given information is inadequate to comment on the nature of the goods(e) The given information is inadequate to comment on the nature of the goods

< TOP>

4. Answer : (c)

Reason : The profit maximizing monopolist produces where marginal cost equals marginal revenue.Revenues are maximized where marginal revenue equals zero. As long as marginal costs

are positive, therefore, the profit maximizing monopolist will produce less than the outputat which the revenue is maximized. So the monopolist will never produce an output greaterthan the output that would maximize revenue.

(a) Is not the answer because the profit maximizing output for a monopolist is not alwaysgreater than the revenue maximizing output

(b) Is not the answer because the profit maximizing output for a monopolist is not alwaysequal to the revenue maximizing output

(c) Is the answer because the profit maximizing output for a monopolist is not alwaysless than the revenue maximizing output

(d) Is not the answer because the profit maximizing output for a monopolist is not alwaysgreater than the competitive output

(e) Is not the answer because the profit maximizing output for a monopolist is not alwaysequal to the competitive output.

< TOP >

5. Answer : (b)

Reason : The kinked demand curve model explains the observed rigidity of price in an oligopolymarket. Each oligopolist believes that if he lowers the price of his product, his rivals willalso lower the prices of their products and that if he raises , they will remain the prices atthe existing levels.

< TOP >

6. Answer : (b)

Reason : From the basic understanding of indifference curve analysis, we know that as the incomeof the consumer changes, prices remaining unchanged, the slope of the new budget line donot change as there is only a parallel shift with respect to the old budget line. Hence thenew budget line has a slope given by Px/Py itself.

< TOP >

7. Answer : (d)

Reason : The marginal product of labour is given by MPL= Q /L

Given capital labor ratio is 4, the MPL = 50 ( 4)1/2 /2 = 50

< TOP >

8. Answer : (a)

Reason : Substituting the value of K, K = 100, into the given production function, we get

200 L0.5 (100)0.5 = 2000 L0.5

To maximize profits, the firm should hire labor until MRPL

= W. Since P = MR = Rs.5, we

have MRPL

= MR x MPL

= 5 x 1000/L0.5

< TOP >

age 12 of 23


13/23

5000/L0.5 = 50

100 = L0.5

Or, L = 10,000.

9. Answer : (a)

Reason : When the inputs used are perfect complements, the isoquants will be L-shaped

< TOP >

10. Answer : (b)

Reason : When tax is imposed, buyer and seller share the tax based on the opposite ratios of theirelasticities. Thus,

Ed = -80P/QEs = 40P/Q

Ratio of Es: Ed = 1: 2

Burden on consumer = 12 x 1/3 = 4

Earlier equilibrium price: 5,800 80P = 1,000 + 40P

4800 = 120P

P = 40

Thus, new price = 40 + 4 = Rs.44.

< TOP >

11. Answer : ( e)

Reason : When a lump sum tax is imposed on a firm

The marginal cost curves and the average variable cost curves are not affected since a lumpsum tax is like a fixed cost

The average fixed cost and the average total cost curves will shift upwards

If the firm was earning just normal profits, the imposition of a lump sum tax will cause theexit of the firm in the long run since in the long run all costs are variable and none is fixed.The equilibrium position of the firm will also be affected.

< TOP >

12. Answer : (b)

Reason : For a perfectly competitive firm, the marginal cost curve above the AVC curve is the

Supply curve of the firm

-50 + 4Q = P

4Q = P +50

Q = 0.25P + 12.5

Since there are 100 firms, Qs = 25P + 1250

Equilibrium price is determined where Qs = Qd

25p + 1250 = 2000 200P

225P = 750

P =

P = 3.33

750

225

< TOP >

13. Answer : (d)

Reason : The monopolist is able to make profits if he charges a high price in the inelastic regionsand low price in the elastic regions. This is because if he increases the price in the in theelastic region, the demand will not fall and if he lowers the price I the elastic region, the

demand will increase more than the fall in price.

< TOP >

14. Answer : (c)

Reason : When price discrimination is permitted,

At equilibrium, MRA

= MC and MRT

= MC

TRA

= (600 QA

)QA

= 600QA

QA

2

MRA

= 600 2QA

Thus, at equilibrium in Andhra Pradesh, MRA

= MC or, 600 2QA

= 100

Or, 2QA

= 500

Or, QA

= 250 and PA

= 600 QA

= 600 250 = 350.

TRT

= (400 QT) Q

T

Or, 400QT QT2

< TOP >

age 13 of 23


14/23

Or, MRT

= 400 2QT

At equilibrium in Tamil Nadu MRT

= MC, 400 2QT

= 100

Or, 2QT

= 300

Or, QT

= 150 and PT

= 400 QT

= 400 150 = 250.

Thus, total equilibrium output for the monopolist is 250 + 150 = 400.

Profit = (PA

QA

+ PT Q

T) - TC = (350 250 + 250 150) (15,000 + 100 400)

= (87,500 + 37,500) () 55,000 = 70,000

15. Answer : (b)Reason : (a) It is not the answer as economies of scale just means advantages of large-scale

production. The reason for tangency of price with average cost curve is that there isfreedom of entry and exit of firms.

(b) It is the answer as freedom of entry ensures that all firms earn only normal profitswhile exit ensures that the loss making firms exit the industry and the others make

normal profits.

(c) It is not the answer as product differentiation is not a reason for the firms attainingnormal profits.

(d) It is not the answer as downward sloping demand curve does not in itself meannormal profits

(e) It is not the answer, as a downward sloping demand curve in itself does not meannormal profits.

Hence the correct answer is (b)

< TOP >

16. Answer : (e)

Reason : The equilibrium condition for a profit maximiser in the labor market is attained when

Wagre rate = marginal revenue product of labor

< TOP >

17. Answer : (b)

Reason : Answer : (b)

exy

= = = 0.5

Two goods are substitutives if exy

> 0

Complements if exy

< 0

Therefore, the answer is (b).

y

x

P%

Q%

%20

%10

< TOP >

18. Answer : (b)

Reason : The cross price elasticity of demand for X is found between the price of Y ranging fromRs 22.5 and Rs. 25.because it is during this range that the price of X and the income of theconsumers remain constant. The cross price elasticity of demand is given by

DQx / DPyPy / Qx = 500 / 2.522.5 / 5500

Which gives 0.818 or 0.82. So (b) is the answer.

< TOP >

19. Answer : (e)

Reason : The supply function can be represented by

Q = a + bP : differentiating w.r.t P we get

Q/ P = b

When price changes from 50 100,P = 50 and Q is 25 (from the question)

So b = 25/50 = 0.5

When P is 50, Q is 25

So, we get 25 = a+(0.550)

Or a = 0

Therefore the supply function is Q = 0.5P. So (e) is the answer

Hence the correct answer is (e).

< TOP >

20. Answer : (b)

Reason : Zero elasticity of demand means demand for drug is perfectly inelastic in country X. Here,when the government imposes a tax of t per unit, the whole of the tax can be easilypassed on to the consumers, demand being perfectly inelastic

(a) is not the answer as buyers bear the whole burden of the tax

< TOP >

age 14 of 23


15/23

(b) is the answer as the buyers bear the whole burden of the tax

(c) is not the answer as the incidence on buyers is t

(d) is not the answer for same reason as above

(e) is not the answer as burden is not equally shared, rather, buyers share the full burden


21. Answer : (a)

Reason : When the demand curve is a rectangular hyperbola, the numerical value of elasticity ofdemand equals unity.

< TOP >

22. Answer : (a)Reason : At the equilibrium, we see that the MRSx,y is equal to the slope of the price line

MRSx, y is given by Y/X = 12-14/10-12 = 1

Since at equilibrium, the MRSx, y is the same as the ratio of the prices, the ratio of pricesare also equal to 1

The ratio of marginal utilities is also equal to the ratio of the prices i.e. one

Hence the correct answer is (a)

< TOP >

23. Answer : (d)

Reason : If this is a case of increasing returns to scale. When both capital and labor are increased by1%, the output increases by 0.92 + 0.12 = 1.04%.

< TOP >

24. Answer : (d)

Reason : Marginal costs are addition to total costs by an additional unit of output. They depend onthe level of output

Hence the correct answer is (d)

< TOP >

25. Answer : (a)Reason : If marginal revenue exceeds marginal cost for any firm, that firm should increase its

output. Because any increase in output increases revenue faster than it increases cost, soprofits go up. The price should fall a bit as quantity climbs, but that effect is alreadyincluded in the construction of marginal revenue, so it does not mitigate against this result.(a) Is the answer because if a firms marginal revenue exceeds its marginal cost, profit-

maximizing rules require that firm to Increase its output in both perfect and imperfectcompetition.

(b) Is not the answer because if a firms marginal revenue exceeds its marginal cost,profit-maximizing rules does not require that firm to increase its output in perfect butnot necessarily in imperfect competition.

(c) Is not the answer because if a firms marginal revenue exceeds its marginal cost,profit-maximizing rules does not require that firm to increase its output in imperfectbut not necessarily in perfect competition

(d) Is not the answer because if a firms marginal revenue exceeds its marginal cost,profit-maximizing rules does not require that firm to decrease its output, in bothperfect and imperfect competition

(e) Is not the answer because if a firms marginal revenue exceeds its marginal cost,profit-maximizing rules does not require that firm to increase price, not output, inboth perfect and imperfect competition.

< TOP >

26. Answer : (c)

Reason : MC = C/Q = 3Q2-18Q+800

(MC)/Q = 6Q 18

By setting the above function equal to zero, we get the minimum MC function6Q 18 = 0 or Q =3

The second order derivative of the MC curve is 2 (MC)/Q2 = 3 which is greater than zero

Hence up to the value of the output level of 3 units, the MC curve is decreasing

< TOP >

27. Answer : (a)

Reason : By solving the reaction functions of the firms, the industry output can be derived.

Q1

= 380 2Q2

(I)

Q2

= 200 Q1

(II)

Putting the equation (II) in (I)

Q1 = 380 2 (200 Q1)

or, Q1 = 380 400 + 2Q1

< TOP >

age 15 of 23


16/23

or, Q1

= 20

or, Q1

= 20.

Q2 = 200 20 = 180.

The equilibrium output for the industry Q = Q1

+ Q2

= 20 + 180 = 200.

P = 500 2(200) = Rs.100.

28. Answer : (e)

Reason : Given, Qa = 50 0.5QB and QB= 60 QA

Thus, QB= 60 (50 0.5 QB)

QB= 60 50 + 0.5 Qb 0.5 QB= 10

QB = 20

When QB = 20, QA

= 50 0.5 (20) = 40

Thus, Qn

= 40 + 20 = 60

Qn = Qp (n/n+1)

Where, Qp = Total output in perfect competition

n = Number of competitive firms in the market

Thus, 60 = Qp

(2/3)

Qp

= 60 3/2 = 90.

< TOP >

29. Answer : (b)

Reason : Herfindahl Index = Sum of Squares of firms share = 0.3262 = 0.33.

Name of thefirm

Marketshare

Market share(%)

Square of MarketShare (%)

Alpha 4000 0.0851 0.0072

Beta 16200 0.3446 0.1188

Gamma 20400 0.4340 0.1883

Delta 5000 0.1063 0.0113

Epsilon 400 0.0085 0.0000

Kappa 1000 0.0212 0.0004

47000 0.3262

< TOP >

30. Answer : (d)Reason : Demand curves faced by Motor Conversions are:

PW

= 1,500 0.5 QW

PR

= 5,000 2 QR

QW = = 3000 2 PW

QR = = 2500 0.5 PR

If price discrimination is not practiced,

Q = QW

+ QR

= 3000 2P + 2500 0.5P

Q = 5500 2.5P

P = = 2200 0.4Q

To maximize profits, MR = MC

MR = = 2200 0.8Q

MC = Rs.1,000 (as each conversion costs Rs.1,000).

2200 0.8Q = 1000

0.8Q = 1200

Q = 1500

W1500 P

0.5

5, 000 PR

2

5500 Q

2.5

2(2200Q 0.4Q )TR PQ

Q Q Q

= =

< TOP >

age 16 of 23


17/23

P = 2200 0.4Q = Rs.1600

31. Answer : (d)

Reason : Marginal revenue from advertising is

40 2R.

The MC of advertising is given as Rs 4

Equating both

40 2R = 4 R = 18

Optimal budget for advertising is 184 = Rs 72.

d. It is the answer.

Hence the correct answer is (d).

< TOP >

32. Answer : (c)

Reason : When a monopolist produces at the mid point of his demand curve, the elasticity ofdemand is unity. When the elasticity of demand is unity, the MR is given by

MR = AR ( e 1/e) which gives MR = AR ( 0 ) or MR = 0

c. It is the answer.

< TOP >

33. Answer : (a)

Reason : If there is a negative relationship between price and total revenue then the price elasticityof demand must be elastic. Therefore as products W and Y are price elastic (Ed>1), a onepercent decrease in the price of these products will increase total revenue for theseproducts.

< TOP >

34. Answer : (a)

Reason : (Q/Y) Y/Q = (x/500) (20000/50) = 0.8

= (x/5) (200/50) = 0.8

= (4/5)x =0.8

x = (0.8) (5/4) = 4/4 = 1

Qd will increase from 50 to 51 mn tons

< TOP >

35. Answer : (c)

Reason : When price increases from Rs. 2000 to Rs. 2500, the quantity demanded decreases by

37.5%. i.e. by 300 37.5/100=112.5 units. This is the price effect. Price effect=Income

effect +substitution effect. As income effect is 0.5 substitution effect, price effect is

Income effect +substitution effect = 0.5

substitution effect + substitution effectI.e. substitution effect (0.5+ 1)

= 1.5 substitution effect

Price effect = 1.5 substitution effect.

Then substitution effect is 112.5/1.5=75

Hence the correct answer is (c)

< TOP >

36. Answer : (c)

Reason : A rational consumer would consume upto the point where the Marginal utility = price

Marginal utility is given by Derivative of total utility i.e. 18X 0.5

Given 15X 0.5 = 60 or x 0.5 = 4 or X = 16

Hence the correct answer is (c)

< TOP >

37. Answer : (a)Reason : If the price of a complement falls, the demand for X will increase, increasing quantity and

increasing price in the short run. Economic profits will induce new firms to enter themarket and the supply curve will shift to the right. Since it is a constant cost industry, thelong-run supply curve will be horizontal and the price comes to its initial price level.

< TOP >

38. Answer : (a)

Reason : Given MRSx,y = 0.25 or Px/py = 0.25 (since the consumer is in equilibrium)

Or 0.25 Py = px

Py = 4 Px

Budget constraint is given by

200 = Px.Qx + Py.Qy

As equal quantities of both are bought Qx = Qy

200 = Px.Qx + 4Px.Qx or 200 = 5Px.Qx

< TOP >

age 17 of 23


18/23

or Px.Qx = 40

All other values are not the answers

Hence the correct answer is (a).

39. Answer : (d)

Reason : A monopolistically competitive industry is characterized by excess supply. Amonopolistic firm can reduce its average cost if it produces a higher output, but it producesan output just equal to average cost curve in the long run because of its downward slopingdemand curve.

a. Although there is relative no entry barriers in monopolistically competitive industry,

this will not result in market efficiency.b. A monopolistically competitive firm produces an output where LMC = LAC, but it

does not produce at minimum average total cost.

c. Presence of normal profits may not result in market efficiency.

d. A monopolistic firm can reduce its average cost if it produces a higher output, but itproduces an output just equal to average cost curve in the long run because of itsdownward sloping demand curve. Hence, the market is not efficient because theequilibrium output is less than the optimum output.

e. In a monopolistically competitive market, equilibrium output is less than the optimumoutput. Hence the statement is not correct.

< TOP >

40. Answer : (c)

Reason : MC intersects both ATC and AVC at their minimum points. When MC > ATC(AVC),

ATC (AVC) must be rising. When MC < ATC (AVC), ATC (AVC) must be falling.Therefore, when MC = ATC (AVC), ATC (AVC) is neither rising nor falling.it is at itsminimum point.

< TOP >

41. Answer : (e)

Reason : The average fixed cost is a rectangular hyperbola implies that

(a) The average fixed cost is a monotonically decreasing function of the level of output

(b) The total fixed cost is constant since the decrease fixed cost is compensated by anequi-proportionate increase in output

(c ) By definition, a rectangular hyperbola will be asymptotic to both the axes

Hence all the options are correct.

< TOP >

42. Answer : (a)

Reason : The average cost is given by TC/Q or Q 2 20Q 240;

MC is given by derivative of TC or 3Q 2 40Q 240.

AC is minimum when AC =MC

or Q 2 20Q 240 = 3Q2 40Q-240

or 2Q = 20

or Q = = 10

Hence the correct answer is (a)

2

20

< TOP >

43. Answer : (b)

Reason : The price below which the firm will be forced to shut down its operations is the minimumprice at which the firm supplies goods to the market. A firm is forced to shut down its

operation, if the price falls below Min. AVCAVC = TVC/Q

= (300Q 10Q2 + Q3)/Q

= 300 10Q + Q2

Min. of AVC = AVC/Q = 010 + 2Q = 0

Or, Q = 5

And, P = 300 10(5) + (5 x 5)

= 300 50 + 25 =275

< TOP >

44. Answer : (d)

Reason : Equilibrium is when the marginal cost is equal to the price

So MC = the price 4 at 103 units of output, it is the answer

Quantity TC MC

< TOP >

age 18 of 23


19/23

100 500 -

101 502 2

102 505 3

103 509 4

104 514 6

Equilibrium output for the firm is achieved when MC = Price given the price of product =Rs4, equilibrium output is 103 units.


45. Answer : (e)

Reason : Qd

= 1000

ep

= 1.25

ey

= 2.00

ed =

1.25 =

% change in Q = 12.5%

ey =

2.00 =

% change in Q = 14.00%

Net effect is = 14.00 12.5 = 1.5%

1000 1.5% = 15

Demand for apple is expected to be = 1000 + 15 = 1015 boxes per week.

%changein Q

% changein P

% changein Q

10

% changein Q

%changein Y

% changein Q

7

< TOP >

46. Answer : (c)

Reason : Market is generally understood to mean a particular place or locality where goods are soldand purchased. However, in economics, by the term market, we do not mean any particular

place or locality in which goods are brought and sold. The idea of a particular locality orgeographical place is not necessary to the concept of the market. What is required for themarket is to exist is the contract between the sellers and buyers so that transaction i.e., saleor purchase of a commodity at an agreed price can take place between them. So, the answeris (c).

< TOP >

47. Answer : (a)

Reason : When the income elasticity is greater than one, the good is said to be luxury.

< TOP >

48. Answer : (c)

Reason: A large economy of scale leading to existence of a single firm in an industry is defined as anatural monopoly. Government regulation, ownership of critical raw materials and licensesare sources of monopoly, but not result in natural monopoly.

< TOP >

49. Answer : (c)

Reason : If an individual seller in a perfectly competitive market wishes to increase his revenue, hemust Increase the quantity offered for sale since that is the only variable he can control

< TOP >

50. Answer : (b)

Reason : Cartels are aimed at increasing profits. But for any individual firm the incentive of hugeprofits by breaking away from or cheating the Cartel and charging a price less than theCartel price make Cartels unstable.

a. Cartels tend to maximize profits by avoiding competition.

b. Cartels agreements tend to be unstable because the member firms wants to maximizetheir profits by cheating on the agreement.

c. When the number of firms increases cartel become unstable, but it does not mean thatthey are unnecessary.

d. It is true that cutting output and raising prices benefit each firm in the cartel. But this

will not lead to instability of cartels.

< TOP >

age 19 of 23


20/23

e. Not all cartels are legally restricted.

51. Answer : (c)

Reason : Income elasticity of demand = Q /I (i / q)

Quality demanded = 780 3P + 2Pr+ 0.1I

= 780 3 10 + 2 20 + 0.1 6,000

= 780 30 + 40 + 600

= 1,390 units

ei= (Q) / (I) I / Q = 0.1 6,000 / 1,390

= 6,00 / 1,390

= 0.4316

= 0.432

< TOP >

52. Answer : (c)

Reason : (a) True. Indifference curve is various combinations of two goods which give the samelevel of total utility

(b) True. Total utility is the sum of marginal utilities of all the goods consumed.

(c) False. When price of a product increases demand for the product decreases. Ascomplimentary goods are consumed together, demand for the compliment alsodecreases.

(d) True. Utility is subjective and varies from individual to individual and from time to

time for the same individual, hence cannot be measured precisely.(e) True. Consumer surplus is the difference between what the consumer is willing to

pay and what he actually pays. Economic value is the market value of a good.

< TOP >

53. Answer : (c)

Reason : Price ceiling inevitably result in shortages when they are set below market equilibriumprice. Because the rent ceiling is more than the market equilibrium rent, it will not haveany impact on the equilibrium rent, quantity of house demanded and supplied.

< TOP >

54. Answer : (a)

Reason : When the production function shows constant returns to scale, the distance between thesuccessive isoquants will remain the same. The expansion path will be an upward slopingstraight line

< TOP >

55. Answer : (c)

Reason : The slope of the isoquant represents the Marginal Rate of Technical Substitution (MRTS)between labor (L) and capital (K). MRTS is equal to the ratio of the marginal productivitiesof two factors.

a. The slope of the isocost curve represents ratio of wages (w) and interest (r).

b. The slope of the indifference curve signifies marginal rate of substitution of goods(MRS).

c. The slope of the isoquant curve signifies the marginal rate of technical substitution(MRTS) between labor and capital.

d. The slope of the budget line represents ratio of price of good X and good Y.

e. The slope of the average cost curve only shows the rate of change in average costcurve with respect change in output.

< TOP >

56. Answer : (d)Reason : Long run profit is maximized because MR=MC and at the same time the plant is operating

at its minimum possible long run average cost. Note: The seller is not operating at thelowest level of LRAC (point B) because the downward sloping demand (AR) curve formonopolistically competitive markets makes this point impossible to achieve. Attempts tooperate at point B would be unprofitable because average revenue (price) is less thanaverage cost at this point. The firm is not earning excess profits because price is equal toaverage cost, (E).(a) Is not the answer because at point A, the seller is not operating at the lowest level of

long run average cost.(b) Is not the answer because at point A, attempts has not been made to produce at point

B

(c) Is not the answer because at point A, MR .

(d) Is the answer because at point A, long run profit is maximized(e) Is not the answer because at point A, the seller is not earning excess profits.

p

< TOP >

57. Answer : (c) < TOP >

age 20 of 23


21/23

Reason : The average variable cost curve is U shaped reflecting the law of diminishing returns.AVC= w / AP where W is the price of the variable factor and AP is the average product ofthe variable factor. Since W is assumed constant, it follows that average variable cost is themirror image of the average product curve.

58. Answer : (e)

Reason : In the long run, a perfectly competitive firm earns only normal profits. Hence, only onepoint of the MC curve can be the equilibrium point in the long run-In the short run, thelocus of the intersection points of MC and MR curves can be the supply curves while it isnot the case in the long run. hence, the MC curve is not the supply curve of a perfectlycompetitive firm.

< TOP >

59. Answer : (d)

Reason : TC = 500Q 15Q2+Q3

MC = 500 30Q + 3Q 2

P = MR = 500

To maximize profits, MR = MC

500 = 500 30Q + 3Q2

3Q = 30 or Q = 10 units

Profits = TR TC

(50010) [(500 10) (15 102) + 103]

= Rs.500

< TOP >

60. Answer : (a)Reason : When a monopolist faces an upward shift in his marginal cost curve, the price of his

product will increase while the quantity demanded will decrease

< TOP >

61. Answer : (c)

Reason : To maximize profits MC =MR1 =MR2 =MR3 where 1 2 and 3 denotes the markets.

MR =P[1-1/e]

Given price in market 2 is 50

MR2 = 50(1-1/2.5) = 30.; since MR1= MR2 =MR3 = 30 we have

For market 1, 30 = P1[1-1/1.5] = 30/0.3 = Rs. 91

For market 3, we have 30 = P3 ( 1-1/4] so P3 = Rs. 40

So, P1 = Rs. 91 and P2 = Rs. 40Hence the correct answer is (c)

30

0.75

< TOP >

62. Answer : (c)

Reason : MC = 20

Qd

= 100 P

Qso

= P 20

Given the market demand curve and the aggregate supply curve of the smaller firms, thedominant firm can calculate its own demand curve.

Supply of the dominant firm = Qs = 100 P (P 20)

= 100 P P + 20

Q = 120 2P.

2P = Q 120

2P = 120 Q

P = 60 0.5Q

TR = 60Q 0.5Q2

MR = 60 Q

When the demand curve of the dominant firm is known, it will set its price by equating MR= MC.

MR = 60 Q

60 Q = 20

Q = 20 60

Q = 40

When Q = 40, P = 60 0.5 (40) = 60 20 = Rs.40.

< TOP >

age 21 of 23


22/23

63. Answer : (a)

Reason : The shape of the indifference curves reveals the degree of substitutability between twogoods. In case of perfect substitutes, as there is perfect degree of substitutability betweengoods, the indifference curve will be linear. For complementary goods goods that cannotbe substituted for each other at all the indifference curve will be L-shaped. Indifferencecurves are convex to origin because the marginal rate of substitution decreases as we moveright.

< TOP >

64. Answer : (b)

Reason : Elasticity of demand = % change in price / % change in quantity demanded. So % changein price = % change in quantity demanded / elasticity of demand = 5/-2.5 = -2, i.e., a 2%

decrease in price

< TOP >

65. Answer : (a)

Reason : From the formula, elasticity is given by the equation

q/pp/q or from the above equation it is given by

( bP)/(a-bP). Perfectly inelastic means the elasticity is zero. So equating the equation tozero gives (-bP/(a-bp) = 0

or bP = 0

Since price cannot be zero, the only possible solution is b equals zero.

< TOP >

66. Answer : (b)

Reason : In this case, the firm has brought about an improvement in the state of technology. Thishas helped to increase its productivity, which is shown by an upward shift of the average or

the total product curve.(a) Is not the answer as technology is a shift factor and is shown by a movement

outwards of the total product curve

(b) Is the answer

(c) Is not the answer as a shift of the total product curve downwards indicates decreaseof productivity

(d) Is not the answer as a shift of the average product curve downwards also indicates thesame situation

(e) Is not the answer as technology is a shift factor and is shown by a movementoutwards of the average product curve


< TOP >

67. Answer : (b)

Reason : The optimum decision rule for the firm would be MPL/MPk = PL/PK

MPL = Q /L = K1/2/2L1/2

MPK = Q /K = L1/2/2K1/2.Price of labor = 2 and price of capital = 4

For optimization = 4 / 8

L =2K

Given the budget constraint, the labor and capital that can be optimally used are

L.PL +K.PK = 80

4L + 8K = 80

4.2K + 8K = 80

16K = 80 or k = 5 and L = 10..

The optimum input of labor is 10 and capital is 5 units

The maximum output that can be attained is K1/2L1/2 = 50 = 7.07 units.

( / 2 ) /( / 2 )k L L K

< TOP >

68. Answer : (b)

Reason : The optimal quantity of labor is achieved when the marginal revenue productivity of labor= its price.

MPL = 2 ( 27)1/32/3 L-1/3 = 4L-1/3

MRPL = MPL.price of the good = 4L-1/3.6 = 24L-1/3

Equating MRPL = W, we get 24L-1/3= 3 or L = 512 units

< TOP >

69. Answer : (d)

Reason : The MRTS is equal to the ratio of the marginal productivities of the twoproducts MP

L/MP

K

< TOP >

age 22 of 23


23/23

< TOP OF THE DOCUMENT >

6K0.3L-0.7/6K-0.7L0.3

K0.3L-0.7/K-0.7L0.3

K/L

70. Answer : (d)

Reason : The marginal cost of production equals the reciprocal of the marginal product of a variablefactor multiplied by the price of that factor here, the marginal cost of production s given

by (1/50) 200 = 4


< TOP >

71. Answer : (b)Reason : When the long run supply curve is downward sloping, this indicates that

(a) The average cost curves of the individual firms have shifted downwards

(b) The external economies outweigh the external diseconomies

(c) It is a decreasing cost industry, meaning the cost of factor prices decline as theindustry output expands.

< TOP >

72. Answer : (a)

Reason : Under a perfectly competitive market, the firm can sell any amount of output as long as itsprice is at the market price.

The profit maximizing output is achieved when the marginal cost = marginal revenue

MC = TC /Q = 4 +4Q

Since MC = price, 4 +4Q =24

Or Q =5 units

< TOP >

73. Answer : (a)

Reason : When price of a product changes the change in quantity demanded consist of two effects:income and substitution effects. If both these effects are positive, they reinforce each otherand the quantity changed will be more. If they work in opposite directions, the quantitychanged will be less. Therefore, if both income and substitution effects are positive,demand for the product tends to be relatively price elastic. Hence the answer is (a).

< TOP >

74. Answer : (b)

Reason : For all straight line demand is elastic in the upper left portion than in the lower right

portion. This is consequence of the arithmetic properties of the elasticity measure. Thedemand becomes inelastic once the elasticity is unitary elastic. The demand is unit elasticwhen MR = 0.

TR = 200Q Q2

MR = 200 2Q

When MR = 0, 200 2Q = 0

Or, Q = 100

When Q =100, P = 200 100 = 100.

Thus, the range of prices where the demand is inelastic is Rs.0 to Rs.100. Note: price cannot benegative.

< TOP >

age 23 of 23

economics i 1005

Documents