Microeconomics

End Term Exam

Academic Year: 2021-22
Time: 2 hours

Instruction: Total marks: 50

Section A is multiple choice type question. Select your choice of answer.
Section B is subjective question.
Scientific Calculators are allowed

Section A (Answer all questions) [10 Marks]

1. An individual consumer’s monthly demand for downloadable e-books is given by the
following equation:
Qx = 2 – 0.4Px + 0.0005M + 0.15Py (2)
where Px is the price of downloadable e-books, M is the income, and Py is the price of
hardbound books. The income elasticity of demand for e-books and the cross-price elasticity of
demand for e-books with respect to the price of hardbound books respectively are
a. Income elasticity=1.97, cross price elasticity=1.64
b. Income elasticity=1.64, cross price elasticity=1.97
c. Income elasticity=1.64, cross price elasticity=2.63
d. Income elasticity=2.63, cross price elasticity=1.97
2. Refer to the following graph about a monopolistically competitive firm (1)

When the firm produces output 0G, the firm’s

a. fixed cost equals OAFG.
b. variable cost cannot be determined.
c. profit equals BCDE.
d. total revenue equals BCDE.
3. For a company, the marginal cost function is derived as MC = 1 + Q, and the marginal
revenue function is MR = 10 – 2Q. The equilibrium quantity for the company will be
(1)

a. 9
b. 3
c. 2
d. 1

4. Consider the market for petrol. A significant rise in international price of crude oil is likely to
cause which of the following impact? (1)

a. Increase in price and increase in quantity of petrol

b. Increase in price and decrease in quantity of petrol
c. Decrease in price and increase in quantity of petrol
d. Decrease in price and decrease in quantity of petrol

5. If the government imposes a price ceiling on a certain commodity, then (1)

a. Change in consumer surplus is ambiguous, but producer surplus must fall
b. Both consumer and producer surplus must rise
c. Consumer surplus must rise and producer surplus must fall
d. Change in producer surplus is ambiguous, but consumer surplus must rise

6. The demand for books is: Qd = 120 – P (1)

The supply of books is: Qs = 5P
If P = $15, which of the following is true?
a. There is a surplus equal to 30
b. There is a shortage equal to 30
c. The market is in equilibrium
d. There is a shortage, but it is impossible to determine how large

7. When marginal product falls, then (1)

a. Average variable cost must fall
b. Marginal cost must rise
c. Average product must fall
d. both b and c

8. The production function Q=AL0.3K0.7 exhibits (1)

a. constant returns to scale
b. diminishing returns to scale
c. increasing returns to scale
d. diseconomies of scale
e. both b and d

9. A firm with a given fixed level of capital, decides to increase its output by adding labor.
However, if it experiences a fall in its output instead, what could be the reason for the same?
(1)
a. The marginal productivity of capital has become negative
b. The marginal productivity of labor has become negative
c. The marginal productivity of capital has become zero
d. The marginal productivity of labor has become zero
Section B (Answer all questions) [8*5=40 Marks]

1. No other product in India has witnessed the kind of growth in market demand as the mobile
phones. India is second largest market after China for mobile phones. Mobile phones in India
were formally launched in august 1995. The industry has grown over twenty times in just ten
years, from under 37 million subscribers in the year 2001 to over 846 million subscribers in the
year 2011, and 1.1514 billion at the end of December 2019. This means the subscribers base in
India increased by 31035 percent during last 19 years registering an annual increase of 1633
percent.

The exponential growth over the last few years is primarily driven by affordable tariffs, wider
availability, roll out of Mobile Number Portability, expanding 3G and 4G coverage, evolving
consumption patterns of subscribers, increasing, affordable prices of budget phones and smart
phones, internet availability, availability of credit, Gen Y, and the working age of population,
working women and a conducive regulatory environment.

The intense competition among the mobile phone manufacturers is driving down the price of
mobile phones, which is helping in increased penetration across the country. In India, there are
more than 70 brands selling mobile handsets, and each brand has a variety of handsets for different
segment. This makes the market intensely competitive with every brand having their own brand
loyal customers.

The business of mobile phone assembly is a rare Make-in-India success story. India had two mobile
manufacturing units in 2014. By 2019, there were over 200. The number of mobile handsets
produced shot up from 60 to 290 million in the same period.

a. What kind of market structure has evolved in the market of mobile handsets? Discuss the
characteristics of the market structure. (2)
b. Using the concepts of market demand and supply, explain the fall in the price of mobile
phones. (1)
c. Explain what would be the price level in the long run for a market structure like this. (2)

2. a. Kabir receives utility from consuming food (F) and clothing (C). The marginal utility of
food(MUf) is MUf=C and marginal utlity of clothing(MUc) is MUc=F. The price ratio of
clothing to food is 5. Kabir consumes 16 units of food and 4 units of clothing. Is Kabir
maximizing his utility by consuming this combination of food and clothing? If not, would
increasing the consumption of clothing and decreasing the consumption of food increase Kabir’s
utility? Explain your answer. (3)
b. A consumer must spend all of her income on two goods X and Y. What will happen to the
budget line of the consumer if (2)
(i) Income and prices of both X and Y increases by 2 times
(ii) Income and price of Y doubles, but price of X reduces by 4 times

3. a. Consider the market for petrol cars. If the government imposes a tax on petrol cars and at
the same time the income of the consumers falls, what will happen to the equilibrium price and
quantity of petrol cars? Explain your answer.
(2)
b. Markets don't always efficiently allocate goods and services. Explain three reasons of market
failure with suitable examples. (3)

4. Given are the following equations for lentils:

Qs = 2P and Qd=300-P
a. Government imposes a price ceiling of Rs.50 on lentils. Calculate the consumer and producer
surplus at the ceiled price? (3)
b. Calculate the dead weight loss. (2)

5. A firm has the following demand and supply functions:

Demand: Qd =400-2P
Supply: Qs =3P -50
a. From the above functions, find the equilibrium price and quantity. (2)

b. If government imposes a tax on the suppliers of Rs 10, what would be the new equilibrium
price? (1)
c. What would be the share of tax on the buyer and seller? (2)

6. a. How might a drought that destroys half of all farm crops be good for the farmers? If such a
drought is good for the farmers, why don’t farmers destroy their own crops in the absence of a
drought? (2+1)
b.

Consider the points a and b. Iq1 and Iq2 are two isoquants indicating two different levels of output.
According to the diagram, which Labor Capital combination should the producer choose, a or b?
Explain your answer. (2)

3
7. Given the following Total cost function TC=1500 +15Q-6𝑄 2 +𝑄

a. Determine the total fixed cost for producing 1000 units of output and 500 units of output.
(1)

b. What is average fixed cost at 1000 units of output (1)

c. Determine TVC, AVC and MC at 50 units of output (3)

8. a. Just outside a High-court there are a large number of tea stalls. For the buyers the tea sold in
each stall is exactly the same in taste, quantity and quality. In fact, they are perfect substitutes of
each other. As the tea sellers in that area incur identical costs, they charge a uniform price.
Given below is the information on the cost of production for the tea sellers:
Quantity 0 1 2 3 4 5 6 7 8 9
Total 5 10 14 17 19 22 26 31 37 44
Cost

i) If the market price for each cup of tea is Rs. 5, what will the profit-maximising output for
each tea-seller? What profit or loss do the sellers experience at this price and output? (2)
ii) If the demand conditions in this market change and the market-price falls, given the
current cost of production, what is the lowest price at which each stall can sell tea? (1)
b. Consider the PPF given below. Suppose the economy is currently producing at 30, 000 gallons
of milk and 2,000 cars per year. What is the opportunity cost of producing additional 20,000
gallons of milk? What is the reason for the shape of the PPF in the diagram?
(1+1=2)