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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. Bliss Point Studies 011-45076221 1 Ravindra N. Jha 9811343411 (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. Bliss Point Studies 011-45076221 2 Ravindra N. Jha 9811343411 (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. Bliss Point Studies 011-45076221 3 Ravindra N. Jha 9811343411 (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 Bliss Point Studies 011-45076221 4 Ravindra N. Jha 9811343411 (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 5 Ravindra N. Jha 9811343411