Download term end examination, february -2012

EIILM UNIVERSITY, SIKKIM
TERM END EXAMINATION, FEBRUARY -2012
B.A.Additional Economics- (1year)
Micro Economics
Time:-3Hours
M.Marks:60
Attempt any 5 questions. All questions carry equal marks.
1. What is the dification economics & Explain the basic economic problem of an economy?
The economic problem, sometimes called the basic, central or fundamental economic problem, is one of
the fundamental economic theories in the operation of any economy. It asserts that there
is scarcity, or that the finite resources available are insufficient to satisfy all human wants and
needs. The problem then becomes how to determine what is to be produced and how the factors
of production (such as capital and labor) are to be allocated. Economics revolves around methods
and possibilities of solving the economic problem.
In short, the economic problem is the choice one must make, arising out of limited means and unlimited
wants.
While the basic needs of human survival are important in the function of the economy, human wants are
the driving force which stimulates demand for goods and services. In order to curb the economic problem,
economists must classify the nature and different wants of consumers, as well as prioritize wants and
organize production to satisfy as many wants as possible.
One assumption often made in mainstream neoclassical economics (and the methods which attempt to
solve the economic problem) is that humans inherently pursue their self-interest and the market
mechanism best satisfies the various wants different individuals might have. These wants are often
classified into individual wants, which depend on the individual's preferences and purchasing power
parity, and collective wants, those of entire groups of people. Things such as food and clothing can be
classified as either wants or needs, depending on what type and how often a good is asked for. Wants
are effective desires for a particular product, or something which can only be obtained by working for it.
[edit]Choice
The economic problem fundamentally revolves around the idea of choice, which ultimately must answer
the problem. Due to the limited resources available, businesses must determine what to produce first to
satisfy demand. Consumers are considered the biggest influences of this choice, and the goods which
they want must also fit within their budgets and purchasing power parity. Different economic models place
choice in different hands.

Socialism asserts that producers (workers) should have some control over the decisions that affect
their welfare in the workplace and on the governmental level, which cooperatively formulates
economic plans for economic decisions regarding the allocation and use of capital goods. Socialist
systems that utilize the market for this role are termed market socialism.

The idea of State socialism argues that most or all major economic choices (regarding production,
allocation of inputs and distribution of output) should be made through central planning by the
government. Only by constructing a cohesive plan that takes the good of everyone into account, so
the idea states, can the best allocation of resources be achieved. (Also see Planned economy.)

Communism refers to a stage of development where the productive forces are advanced to such a
degree that it solves the economic problem, insofar as needs are concerned. A communist system is
a highly developed form of socialism where productive property is held in common, individual
autonomy from coercive social relations is abolished and the state no longer exists. (Also
seeMarxism.)

Capitalism argues for a system where private businesses (and some state-owned enterprises, in the
case of mixed economies) make economic decisions regarding investment decisions, production
levels and distribution of output, where in the role of the government is to protect the property
rights of individuals and companies, provide the institutional and infrastructural framework for the
development of a market economy and the provision of some government social programs.

In a free-market economy, which exists without the constraints of government wage and price
controls, proponents of market capitalism argue that resources are automatically allocated toward the
things that society collectively values the most. This form of capitalism argues for a laissezfaire approach, wherein the role of the government is to protect the property rights of individuals and
companies so that they can have the confidence to undertake the economic activity (and risks) that
will create the most value.

If a good or service is overvalued (i.e., the price is too high), the surplus will force providers of
the good or service to lower their prices or to re-allocate their capacity to produce something
more worthwhile.

If the supply of a good or service is inadequate, rising prices increase the value and so cause
more production capacity to be directed toward the item. Adam Smith's The Wealth of
Nations has been an extremely influential book for this school of thought.
2. Explain the problem of selection, explain the basic economic problem of an economy?
5 Step Approach for Top Problem Selection
Step 1: The responsible person (“R”) for each functional area (department, division,
line, shift, whatever functional team that person is leading) comes to the selection
meeting prepared with his/her top 3 problems on problem solving sheets.
Step 2: Separate the problems into the world-class priorities of safety, quality,
productivity, human development, cost, and operational excellence
implementation.
Step 3: Discuss the sheets in each stack to select the top problems.
Step 4: Compare the selected top 3 problems with the top 3 problems that are
currently on the balanced scorecard.
Step 5: The “R” person for each priority takes the associated top problem solving
sheets and the remainder of the sheets go back to their problem solving boards.
Functional areas with Responsible Person for that area

Operations – Anthony

Finance – Brad

Human Resources – Cathy

Maintenance – Dennis

Sales – Erica

Engineering – Frank
Anthony comes with the top 3 operations problems (on problem solving sheets), Brad comes with the top 3 finance
problems, (again, each on a problem solving sheet) and so on.
*If you currently only have one problem solving board (steering committee level), sort through the problems so they
are divided in functional areas. If you have a problem solving board in each functional area, each person brings the
top problems from his/her board.
Step 2, Problem Selection: Separate the problems into the world-class priorities
of safety, quality, productivity, human development, cost, and operational
excellence implementation.
problem selection (safety stack)





Once this is completed, you should see 6 stacks of problem solving sheets, one for each priority.
Here’s what the “Productivity” stack might look like:
Operations’ down time problem
Operations’ on-time shipping problem
Finance’s reporting on monthly statements in a timely manner problem
Engineering’s drafts not getting to the floor in time problem
Sales’ customers not getting back to us fast enough for quotes problem
Step 3 Problem Selection: Discuss the sheets in each stack to select the top
problems.
problem selection
At this point, the problem solving sheets are in 6 “stacks”



safety
quality
productivity



human development
cost
OE implementation
Some stacks might have 10 problem solving sheets, some stacks might have 3 problem solving sheets. Each person
then goes through each stack and selects candidates for the top 3 problems.
One way to get consensus might be to use post-it notes to designate your selections. If you don’t have post-it notes
use a check or tick mark in a common location on the problem-solving sheet. You (individually) may select more or
less than 3 problems as having top 3 potential.
Again, each person should do this for each stack.
Here’s an example this may look like in the safety stack at the end of this step:

Fire in the warehouse problem – 9 post-it notes

Chemical burn on employee shoulder – 8 post-it notes

Employee cut finger – 7 post-it notes

2% below target on safety audit – 1 post-it note

Sore back caused by desk chair – 1 post-it note
In this example, it’s now obvious which are the top 3 problems – the sheets with 9, 8, and 7 post-it notes on them.
Step 4, Problem Selection: Compare the selected top 3 problems with the top 3
problems that are currently on the balanced scorecard.
Now you have the top 3 problems that your team just selected. Check those against the top 3 problems that you
selected during your last selection process. How do they compare? Are your “old” top 3’s still valid? Have they been
solved? If they aren’t valid or have been solved, you can take them off the balanced scorecard and replace them with
the new top problems you’ve selected.
Step 5, Problem Selection: The “R” person for each priority takes the associated
top problem solving sheets and the remainder of the sheets go back to their
problem solving boards.
Now that the top problems are selected, the “R” person for each priority (safety, quality, productivity, human
development, cost, and OE implementation) takes those sheets to update the his/her column of the balanced
scorecard. The problem solving sheets that havenot been selected as top problems go back to their functional
problem solving board (a productivity problem in engineering goes back to the engineering problem solving board).
Frequently asked questions about Top 3 Problem selection:
Can I remove a top problem from last month’s monthly balanced scorecard
meeting that hasn’t been solved?
If there is a top problem without a planned and checked solution on the balanced scorecard, think long and hard
before removing it and replacing it with another problem. You should only do this if the problems you are replacing it
with are glaringly of higher priority than the former problem. Even if you do take the unsolved problem from last
month’s BSC off of the scorecard, it still belongs on the problem solving board and should be solved.
3. Utility is an ordinal concept & not a cardinal concept. Discuss?
4. Explain the characteristics of indifference curve. determine consumer equilibrium with
the help of indifference curve?
5. Explain with diagrams the various measures of price elasticity of demand?
Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness,
or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it
gives the percentage change in quantity demanded in response to a one percent change in price (holding
constant all the other determinants of demand, such as income). It was devised byAlfred Marshall.
Price elasticities are almost always negative, although analysts tend to ignore the sign even though this
can lead to ambiguity. Only goods which do not conform to the law of demand, such as Veblenand Giffen
goods, have a positive PED. In general, the demand for a good is said to be inelastic (or relatively
inelastic) when the PED is less than one (in absolute value): that is, changes in price have a relatively
small effect on the quantity of the good demanded. The demand for a good is said to
be elastic (or relatively elastic) when its PED is greater than one (in absolute value): that is, changes in
price have a relatively large effect on the quantity of a good demanded.
Revenue is maximised when price is set so that the PED is exactly one. The PED of a good can also be
used to predict the incidence (or "burden") of a tax on that good. Various research methods are used to
determine price elasticity, including test markets, analysis of historical sales data and conjoint analysis.
PED is a measure of responsiveness of the quantity of a good or service demanded to changes in its
price.[1] The formula for the coefficient of price elasticity of demand for a good is:[2][3][4]
The above formula usually yields a negative value, due to the inverse nature of the relationship
between price and quantity demanded, as described by the "law of demand". [3] For example, if the
price increases by 5% and quantity demanded decreases by 5%, then the elasticity at the initial price
and quantity = −5%/5% = −1. The only classes of goods which have a PED of greater than 0
areVeblen and Giffen goods.[5] Because the PED is negative for the vast majority of goods and
services, however, economists often refer to price elasticity of demand as a positive value (i.e.,
in absolute value terms).[4]
This measure of elasticity is sometimes referred to as the own-price elasticity of demand for a good,
i.e., the elasticity of demand with respect to the good's own price, in order to distinguish it from the
elasticity of demand for that good with respect to the change in the price of some other good, i.e.,
a complementary or substitute good.[1] The latter type of elasticity measure is called a cross-price
elasticity of demand.[6][7]
As the difference between the two prices or quantities increases, the accuracy of the PED given by
the formula above decreases for a combination of two reasons. First, the PED for a good is not
necessarily constant; as explained below, PED can vary at different points along the demand curve,
due to its percentage nature.[8][9] Elasticity is not the same thing as the slope of the demand curve,
which is dependent on the units used for both price and quantity. [10][11] Second, percentage changes
are not symmetric; instead, the percentage change between any two values depends on which one is
chosen as the starting value and which as the ending value. For example, if quantity demanded
increases from 10 units to 15 units, the percentage change is 50%, i.e., (15 − 10) ÷ 10 (converted to
a percentage). But if quantity demanded decreases from 15 units to 10 units, the percentage change
is −33.3%, i.e., (10 − 15) ÷ 15.[12][13]
Two alternative elasticity measures avoid or minimise these shortcomings of the basic elasticity
formula: point-price elasticity and arc elasticity.
[edit]Point-price elasticity
One way to avoid the accuracy problem described above is to minimise the difference between the
starting and ending prices and quantities. This is the approach taken in the definition of pointpriceelasticity, which uses differential calculus to calculate the elasticity for an infinitesimal change in
price and quantity at any given point on the demand curve: [14]
In other words, it is equal to the absolute value of the first derivative of quantity with respect to
price (dQd/dP) multiplied by the point's price (P) divided by its quantity (Q d).[15]
In terms of partial-differential calculus, point-price elasticity of demand can be defined as
follows:[16] let
be the demand of goods
price and wealth, and let
good
as a function of parameters
be the demand for good . The elasticity of demand for
with respect to price pk is
However, the point-price elasticity can be computed only if the formula for the demand
function, Qd = f(P), is known so its derivative with respect to price, dQd / dP, can be
determined.
[edit]Arc elasticity
A second solution to the asymmetry problem of having a PED dependent on which of the
two given points on a demand curve is chosen as the "original" point and which as the "new"
one is to compute the percentage change in P and Q relative to the average of the two
prices and the average of the two quantities, rather than just the change relative to one point
or the other. Loosely speaking, this gives an "average" elasticity for the section of the actual
demand curve—i.e., the arc of the curve—between the two points. As a result, this measure
is known as the arc elasticity, in this case with respect to the price of the good. The arc
elasticity is defined mathematically as:[13][17][18]
This method for computing the price elasticity is also known as the "midpoints formula",
because the average price and average quantity are the coordinates of the midpoint of
the straight line between the two given points.[12][18] However, because this formula
implicitly assumes the section of the demand curve between those points is linear, the
greater the curvature of the actual demand curve is over that range, the worse this
approximation of its elasticity will be.
6. Explain concept of consumers surplus.explain the methods of its measurement used by
Marshall and hicks?
7. What is the production function? Show by a numerical example, its relation with the
combination of the factors production?
In microeconomics and macroeconomics, a production function is a function that specifies the output of
a firm, an industry, or an entire economy for all combinations of inputs. This function is an assumed
technological relationship, based on the current state of engineeringknowledge; it does not represent the
result of economic choices, but rather is an externally given entity that influences economic decisionmaking. Almost all economic theories presuppose a production function, either on the firm level or the
aggregate level. In this sense, the production function is one of the key concepts
of mainstream neoclassical theories. Some non-mainstream economists, however, reject the very
concept of an aggregate production function. In micro-economics, a production function is
a function that specifies the output of a firm for all combinations of inputs. A meta-production
function (sometimes metaproduction function) compares the practice of the existing entities converting
inputs into output to determine the most efficient practice production function of the existing entities,
whether the most efficient feasible practice production or the most efficient actual practice
production.[3]clarification needed In either case, the maximum output of a technologically-determined production
process is amathematical function of one or more inputs. Put another way, given the set of all technically
feasible combinations of output and inputs, only the combinations encompassing a maximum output for a
specified set of inputs would constitute the production function. Alternatively, a production function can be
defined as the specification of the minimum input requirements needed to produce designated quantities
of output, given available technology. It is usually presumed that unique production functions can be
constructed for every production technology.
By assuming that the maximum output technologically possible from a given set of inputs is achieved,
economists using a production function in analysis are abstracting from the engineering and managerial
problems inherently associated with a particular production process. The engineering and managerial
problems of technical efficiency are assumed to be solved, so that analysis can focus on the problems
of allocative efficiency. The firm is assumed to be making allocative choices concerning how much of
each input factor to use and how much output to produce, given the cost (purchase price) of each factor,
the selling price of the output, and the technological determinants represented by the production function.
A decision frame in which one or more inputs are held constant may be used; for example,
(physical) capital may be assumed to be fixed (constant) in the short run, and labour and possibly other
inputs such as raw materials variable, while in the long run, the quantities of both capital and the other
factors that may be chosen by the firm are variable. In the long run, the firm may even have a choice of
technologies, represented by various possible production functions.
The relationship of output to inputs is non-monetary; that is, a production function relates physical inputs
to physical outputs, and prices and costs are not reflected in the function. But the production function is
not a full model of the production process: it deliberately abstracts from inherent aspects of physical
production processes that some would argue are essential, including error, entropy or waste. Moreover,
production functions do not ordinarily model the business processes, either, ignoring the role of
management. (For a primer on the fundamental elements of microeconomic production theory,
see production theory basics).
The primary purpose of the production function is to address allocative efficiency in the use of factor
inputs in production and the resulting distribution of income to those factors. Under certain assumptions,
the production function can be used to derive a marginal product for each factor, which implies an ideal
division of the income generated from output into an income due to each input factor of production.i
[edit]Specifying
the production function
A production function can be expressed in a functional form as the right side of
Q = f(X1,X2,X3,...,Xn)
where:
Q = quantity of output
X1,X2,X3,...,Xn = quantities of factor inputs (such as capital, labour, land or raw materials).
If Q is not a matrix (i.e. a scalar, a vector, or even a diagonal matrix), then this form does not
encompass joint production, which is a production process that has multiple co-products. On the
other hand, if f maps from Rn to Rk then it is a joint production function expressing the determination
of k different types of output based on the joint usage of the specified quantities of the n inputs.
One formulation, unlikely to be relevant in practice, is as a linear function:
Q = a + bX1 + cX2 + dX3 + ...
where a,b,c, and d are parameters that are determined empirically.
Another is as a Cobb-Douglas production function:
The Leontief production function applies to situations in which inputs must be used in fixed
proportions; starting from those proportions, if usage of one input is increased without
another being increased, output will not change. This production function is given by
Other forms include the constant elasticity of substitution production function (CES),
which is a generalized form of the Cobb-Douglas function, and the quadratic production
function. The best form of the equation to use and the values of the parameters
(a,b,c,...) vary from company to company and industry to industry. In a short run
production function at least one of the X's (inputs) is fixed. In the long run all factor
inputs are variable at the discretion of management.
8. Define market and explain the different forms of markets distinguish between perfect and
imperfect market.
A market is one of many varieties of systems, institutions, procedures, social
relations and infrastructures whereby parties engage in exchange. While parties may exchange goods
and services by barter, most markets rely on sellers offering their goods or services (including labor) in
exchange for money from buyers. It can be said that a market is the process in which the prices of goods
and services are established.
For a market to be competitive, there must be more than a single buyer or seller. It has been suggested
that two people may trade, but it takes at least three persons to have a market, so that there is
competition on at least one of its two sides.[1] However, competitive markets rely on much larger numbers
of both buyers and sellers. A market with single seller and multiple buyers is a monopoly. A market with a
single buyer and multiple sellers is a monopsony. These are the extremes of imperfect competition.
Markets vary in form, scale (volume and geographic reach), location, and types of participants, as well as
the types of goods and services traded. Examples include:

Physical retail markets, such as local farmers' markets (which are usually held in town squares or
parking lots on an ongoing or occasional basis), shopping centers and shopping malls

(Non-physical) internet markets (see electronic commerce)

Ad hoc auction markets

Markets for intermediate goods used in production of other goods and services

Labor markets

International currency and commodity markets

Stock markets, for the exchange of shares in corporations

Artificial markets created by regulation to exchange rights for derivatives that have been designed to
ameliorate externalities, such as pollution permits (seecarbon trading)

Illegal markets such as the market for illicit drugs, arms or pirated products
In mainstream economics, the concept of a market is any structure that allows buyers and sellers to
exchange any type of goods, services and information. The exchange of goods or services for money is
a transaction. Market participants consist of all the buyers and sellers of a good who influence its price.
This influence is a major study of economics and has given rise to several theories
and models concerning the basic market forces of supply and demand. There are two roles in
markets, buyers and sellers. The market facilitates trade and enables the distribution and allocation of
resources in a society. Markets allow any tradable item to be evaluated and priced. A market emerges
more or less spontaneously or is constructed deliberately by human interaction in order to enable the
exchange of rights (cf. ownership) of services and goods.
Historically, markets originated in physical marketplaces which would often develop into — or from —
small communities, towns and cities.[
In economics, a perfect market is defined by several conditions, collectively called perfect competition.
Among these conditions are

Perfect market information

No participant with market power to set prices

No barriers to entry or exit

Equal access to production technology
The mathematical theory is called general equilibrium theory. On the assumption of Perfect Competition,
and some technical assumptions about the shapes of supply and demand curves, it is possible to prove
that a market will reach an equilibrium in which supply for every product or service, including labor, equals
demand at the current price. This equilibrium will be a Pareto optimum, meaning that nobody can be
made better off by exchange without making someone else worse off. [1]
Share and foreign exchange markets are commonly said to be the most similar to the perfect market. The
real estate market is an example of a very imperfect market. Note that the conditions for Perfect
Competition mean that a perfect market cannot be unregulated, since these preconditions for market
function cannot at the same time be products of the market, yet must be provided somehow.
Another characteristics of a Perfect Market is normal profits, just enough to induce enough participants to
stay in the market to satisfy customer demand. The least efficient producer may have very small profits,
and be unable, for example, to pay dividends to shareholders, while more efficient producers have larger
profits.
This attribute of perfect markets has profound political and economic implications, as many participants
assume or are taught that the purpose of the market is to enable participants to maximize profits. It is not.
The purpose of the market is to efficiently allocate resources and to maximize the welfare of consumers
and producers alike. The market therefore regards excess profits, or economic rents, as a signal of
inefficiency, that is of market failure, which is to say, not achieving a Pareto optimum.