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Eco (H) – Semester-I
INTRODUCTORY MICRO ECONOMICS
Instructions:
There are seven questions in all. Question no- 1 is compulsory. Attempt any
other four questions:
Duration: 3 Hours
1.
Maximum Marks:75
Answer the following questions in brief:
(i)
3x5=15
Specify utility function and draw indifference curve for Rs 100 note & Rs
500 note
(a) Before demonetization
(b) After demonetization
(ii)
A good harvest may generally lower the income of the farmers. Do you
agree? Why or why not?
(iii)
Is price elasticity of demand constant throughout a downward sloping
straight line demand curve? Explain.
(iv)
Evaluate the following two statements. Do you agree? Why or why
(i)
(ii)
2.
not?
A tax that has no deadweight loss cannot raise any revenue for the
government.
A tax that raise no revenue for the government cannot have any
deadweight loss.
(v)
‘If a natural monopoly is regulated to charge the perfectly competitive
price, it would incur losses.’ Explain.
(vi)
Explain why this statement is true or false: ‘A perfectly competitive firm
will continue to operate in short run as long as total revenue will at least
cover its variable cost.’
(i)
Given the following demand and supply equations:
QS = 2P – 100 (where QS is quantity supplied and P is the price of the
commodity)
QD = 200 – P (where QD is the quantity demanded).
(a)
Solve for the equilibrium price and quantity.
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(b)
Suppose a tax of Rs. 15 per unit is imposed on buyers. Calculate
the :
(1)
Tax revenue
(2)
Deadweight loss.
5
(ii)
Explain why the Production Possibility Curve (PPC) is bowed outward
(concave to the origin). What would be the shape of the PPC if the
opportunity cost of commodity Y in terms of commodity X is constant? 5
(iii)
What is the marginal rate of substitution between two complementary
goods?
3.
5
(i)
Rihana is awake for 100 hours in a week. She is earning Rs. 1200 per
week by working for 60 hours. This year she gets a scholarship of Rs.
500 per week and her company also raises her wage to Rs. 40 per hour.
Analyse the impact of this change in her income on her labour supply.
5
(ii)
State whether each of the following statements is true or false. Explain
your answers, by using diagram?
(a) “All Giffen goods are inferior goods.”
(b) “All inferior goods are Giffen goods”.
(iii)
4.
(i)
5
For the following cases plot the budget constraint before and after the
change.
(a)
Non-wage income = Rs. 100, wage = Rs. 20 per hour, Total time
available = 40 hours; non-wage income changes to zero.
(b)
Total time available = 40 hours a week, wage = Rs. 20 per hour
and government gives a cash subsidy of 25% of earned income;
now the Government gives Rs. 100 per week irrespective of
earnings.
5
The demand curve for a monopoly firm is given by Qd  100  2 P .
Marginal cost (MC) of the firm is constant at Rs. 4 and total fixed cost
is Rs. 30.
(a)
Calculate the profit maximizing price and quantity for the
monopolist.
(b)
Calculate the efficient price.
(c)
Calculate the profits and the deadweight losses if monopolists
maximize its profits.
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(d)
5.
If the monopolist can perfectly price discriminate what are his
profits then? What is consumer surplus with perfect price
discrimination?
5
(ii)
Discuss the impact on labour supply of a labour when wage rises. Can
there be a backward-sloping labour supply curve? Explain using
indifference curves.
5
(iii)
Larry, Curly, and Moe run the only saloon in town. Larry wants to sell as
many drinks as possible without losing money. Curly wants the saloon to
bring in as much revenue as possible. Moe wants to make the largest
possible profits. Using a single diagram of the saloon’s demand curve and
its cost curves, show the price and quantity combinations favored by
each of the three partners. Explain.
5
(a)
…………….. A price taking firm’s short-run total cost function is: TC=
a3
-0.2q2+4q+10………….. find shut-down price.
300
(b)
(i)
5
Define price discrimination. Can perfect price discrimination remove
the dead weight loss associated with a monopoly?
(ii) Show how a perfectly competitive firm may continue to produce in
the short run despite suffering losses.
(c)
5
Consider the relationship between monopoly pricing and price elasticity
of demand.
(i) Explain why a monopolist will never produce a quantity at which the
demand curve is inelastic.
5
6.
(i)
The nation of Ectenia has 20 competitive apple orchards, which sell
apples at the world price of $2. The following equations describe the
production function and the marginal product of labor in each orchard:
Q = 100L – L2
MPL = 100 – 2L
Where Q is the number of apples produced in a day, L is the number of
workers, and MPL is the marginal product of labor.
(a)
What is each orchard’s labor demand as a function of the daily
wage W? What is the market’s labor demand?
(b)
Ectenia has 200 workers who supply their labor inelastically.
Solve for the wage W. How many workers does each orchard hire?
How much profit does each orchard owner make?
(c)
Calculate what happens to the income of workers and orchard
owners if the world price of apples doubles to $4.
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(d)
(ii)
Now suppose the price of apples is back at $2, but a hurricane
destroys half the orchards. Calculate how the hurricane affects
the income of each worker and of each remaining orchard owner.
What happens to the income of Ectenia as a whole?
5
The government imposes price ceiling on the retail price of onion at Rs.
20 per kg. The demand and supply curves for onion are Qd  120  2 P
and Qs  2 P respectively.
(a)
(b)
7.
In the absence of price control what is the equilibrium price and
quantity.
With price ceiling show the quantity traded.
(c)
Do the consumer and producer surplus change with this policy, if
yes then calculate the change.
(d)
Calculate the deadweight loss.
5
(iii)
What are the factors that determine the burden of tax and dead weight
due to the imposition of tax? Show with the help of diagrams the burden
borne by the buyer as well as the seller. Under what conditions is there
no deadweight loss despite the incidence of tax.
5
(i)
For the total cost function : TC  a  bQ c Q2  dQ3 , where TC is total
cost and Q is the output of the commodity produced, determine the
equations for total fixed cost TFC , total variable cost TVC  , average
fixed cost
AFC,
average variables cost AVC  , average total cost
ATC  and marginal cost MC.
(ii)
5
A friend of yours is considering two cell-phone service providers.A
charges $120 per month for the service regardless of the number of
phone calls made. Provider B does not have a fixed service fee but
instead charges $1 per minute for calls. Your friend’s monthly demand
for minutes of calling is given by the equation Q D = 100 – 50P, where P
is the price of a minute.
(a)
With each provider, what is the cost to your friend of an extra
minute on the phone?
(b)
In light of your answer to (a), how many minutes would your
friend talk on the phone with each provider?
(c)
How much would he end up paying each provider every month?
(d)
How much consumer surplus would he obtain with each provider?
(e)
Which provider would you recommend that your friend choose?
Why?
5
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(iii)
This chapter analyzed the welfare effects of a tax on a good. Consider
now the opposite policy. Suppose that the government subsidizes a good:
For each unit of the good sold, the government pays $2 to the buyer.
How does the subsidy affect consumer surplus, producer surplus, tax
revenue, and total surplus? Does a subsidy lead to a deadweight loss?
Explain.
5
All the Best
********
Bliss Point Studies
011-45076221
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Ravindra N. Jha
9811343411