Sample Paper – ECON 605 - PAPERSET I

SAMPLE PAPER

ECON 605 (PAPERSET I)

Managerial Economics

[Max Marks: 70]

Note: Attempt Questions from all sections as directed.

Section A - Attempt any two questions out of four. Each question carries 7.50 marks.[15 Marks]

Question No: 1
Explain theorems on price elasticity.

Answer:-
1. Law of Demand:
 Statement: As the price of a good decreases, the quantity demanded
increases, and vice versa.
2. Total Revenue Test:
 Statement: Total revenue rises with price increases for inelastic goods
but falls for elastic goods.
3. Unitary Elasticity:
 Statement: Elasticity equal to -1 indicates unitary elasticity, where
percentage changes in price and quantity demanded are equal.
4. Elasticity and Slope:
 Statement: Demand is more elastic with a flatter demand curve and
less elastic with a steeper one.
5. Time Horizon:
 Statement: Demand is more elastic in the long run as consumers have
more time to adjust to price changes.
6. Luxury vs. Necessity Goods:
 Statement: Luxury goods often have more elastic demand, while
necessity goods have less elastic demand.
7. Cross-Price Elasticity:
 Statement: Measures how the quantity demanded of one good
responds to changes in the price of another; helps identify substitutes
or complements.
 Question No: 2

Compare and contrast the marginal utility approach with the indifference curve approach in
understanding consumer behaviour.

Answer:-

 Both aim to understand consumer behavior and choices.

 Both assume consumers prefer more to less (rationality principle).
 Both acknowledge diminishing marginal utility (additional units provide less
satisfaction).

Differences:

Marginal Utility:

 Focuses on quantitative utility measurement: Assigns numerical values to utility

derived from consuming goods.
 Uses cardinal ranking: Assumes utility differences can be compared quantitatively
(e.g., 10 units of apples = 7 units of oranges).
 More complex math: Relies on calculus to analyze consumer optimization.

Indifference Curve:

 Focuses on ordinal ranking: Identifies preference sets where consumers are

indifferent between different combinations of goods (no numerical utility values).
 Relatively simpler math: Uses graphical analysis of indifference curves and budget
lines.

In a nutshell:

 Marginal utility: "How much more satisfaction does one more unit give?" (Numerical)
 Indifference curve: "Which bundle provides the same level of satisfaction?" (Ordinal)

Strengths and Weaknesses:

 Marginal utility: Powerful for theoretical analysis, but criticized for its reliance on
cardinal utility measurement, which some consider unrealistic.
 Indifference curve: More intuitive and avoids cardinal utility measurement, but may
be less precise in some cases.
 Ultimately, both approaches offer valuable insights into consumer behavior, and the
choice of which to use depends on the specific context and desired level of analysis.

Short recommendation: Use the indifference curve for a simpler, graphical

understanding of consumer choices. Use marginal utility for a more mathematical
and precise analysis, but be aware of the limitations of cardinal utility measurement.

Question No: 3
Highlight the various differences that arise between Perfectly competitive and Imperfectly

competitive market forms.

ANSWER:-

1. Number of Players: Perfect competition has many buyers and sellers, while
imperfect competition can have few or many, often leading to market power for some
players.
2. Product Differentiation: Perfect competition has homogeneous products, while
imperfect competition has differentiated products, creating unique selling
propositions and brand loyalty.
3. Price Control: In perfect competition, price is dictated by supply and demand, with
individual firms having no influence. In imperfect competition, firms have
some degree of price control due to product differentiation or market power.
4. Barriers to Entry and Exit: Perfect competition has low or no barriers, allowing easy
entry and exit. Imperfect competition can have high barriers, often due to economies
of scale, patents, or regulations, limiting competition.
5. Information: Perfect competition has perfect information, meaning all participants
have complete knowledge of prices and products. Imperfect competition can
have asymmetric information, where some have more knowledge than
others, creating potential power imbalances.

In short: Perfect competition is a theoretical ideal with intense competition and

identical products, while imperfect competition reflects the real world with varying
degrees of market power, differentiated products, and barriers to entry.

Question No: 4
How does the producer attain equilibrium under the iso-quant approach?
 Answer:-
A producer attains equilibrium under the iso-quant approach by minimizing the cost
of production while achieving a desired level of output. This involves two key
concepts:

1. Isoquants: These are curves on a graph representing all possible combinations of

two inputs (usually capital and labor) that produce the same level of output. Higher
isoquants represent higher levels of output.

2. Isocosts: These are lines on the same graph representing all possible
combinations of inputs that can be purchased for a given budget. steeper isocosts
represent higher total costs.

The equilibrium point is reached where an isoquant and an isocost line tangent each
other. This point fulfills two conditions:

 Equal output: The desired level of output is achieved (as determined by the chosen
isoquant).
 Minimum cost: The producer is using the least amount of resources (inputs) to
achieve that output level (as determined by the tangency point with the isocost line).

how it works:

 The producer initially chooses an isoquant representing their desired output level.
 They then draw various isocost lines based on different budget constraints.
 The producer analyzes the points where each isocost line touches an isoquant.
 The equilibrium point is the tangent point where the slope of the
isoquant (representing the marginal rate of technical substitution (MRTS) of one
input for the other) is equal to the slope of the isocost line (representing the ratio of
input prices).

At this point, the producer is achieving their desired output while minimizing their
production costs. They are operating efficiently and cannot further reduce costs
without sacrificing output or vice versa.

Section B - Compulsory Questions. Each question carries 7.50 marks.[15

Marks]
 Paragraph No: 1

The law of supply summarizes the effect price changes have on producer behavior. For example, a
business will make more video game systems if the price of those systems increases. The opposite is
true if the price of video game systems decreases. The company might supply 1,000,000 systems if
the price is $200 each, but if the price increases to $300, they might supply 1,500,000 systems. To
further illustrate this concept, consider how gas prices work. When the price of gasoline rises, it
encourages profit-seeking firms to take several actions: expand exploration for oil reserves; drill for
more oil; invest in more pipelines and oil tankers to bring the oil to plants where it can be refined
into gasoline; build new oil refineries; purchase additional pipelines and trucks to ship the gasoline
to gas stations; and open more gas stations or keep existing gas stations open longer hours.
Similarly, when consumers start paying more for cupcakes than for donuts, bakeries will increase
their output of cupcakes and reduce their output of donuts in order to increase their profits. When
your employer pays time and a half for overtime, the number of hours you are willing to supply for
work increases. Therefore the law of supply is one of the most fundamental concepts in economics.
It works with the law of demand to explain how market economies allocate resources and determine
the prices of goods and services. Based on the above case, answer the following questions:

Question No: 1

What are the different factors that affect the supply of a good? Explain with example.

ANSWER:-
. The factors that affect the supply of a good are outlined in the given passage and
include:

1. Price of the Good: An increase in the price of video game systems encourages
producers to supply more (e.g., 1,500,000 systems at $300 each compared to
1,000,000 systems at $200 each).
2. Cost of Production: Implicit in the passage, the cost of exploration, drilling, refining,
transportation, and other production-related expenses for goods like gasoline and
video game systems influence supply.
3. Technology and Innovation: Investments in technology, such as oil exploration and
refining methods, impact the supply of goods.
4. Number of Sellers: The presence of more profit-seeking firms, as seen in the
example of gas prices, can affect the overall supply.
5. Expectations of Future Prices: The anticipation of future price changes influences
producers' decisions, as demonstrated in the case of cupcakes and donuts.
6. Government Policies: Policies such as overtime pay rates can influence the
willingness of individuals to supply labor.

These factors, in conjunction with the law of supply, explain how market economies
allocate resources and determine prices.
 Question No: 2

Explain the impact of a rise in the price of other goods on the supply curve of a commodity.
Distinguish between change in quantity supplied and change in supply

Answer:-

If the price of other goods rises, the supply curve of a specific commodity
may be affected. This is known as the concept of cross-price elasticity of
supply. The impact depends on whether the goods in question are
substitutes or complements.

1. Substitutes: If the goods are substitutes, a rise in the price of one good
may lead to an increase in the supply of the other. For example, if the price
of tea rises, consumers might switch to coffee, prompting producers to
increase coffee production.
2. Complements: If the goods are complements, a rise in the price of one
good may result in a decrease in the supply of the other. For instance, if the
price of video game consoles increases, it might lead to a decrease in the
supply of video games as the demand for the complementing product
declines.

Difference Between Change in Quantity Supplied and Change in

Supply:

1. Change in Quantity Supplied: This refers to a movement along the

existing supply curve caused by a change in the price of the specific
commodity. It represents a direct relationship between price and quantity
supplied, assuming other factors remain constant.
2. Change in Supply: This refers to a shift of the entire supply curve,
indicating a change in the quantity supplied at every price level. It is caused
by factors other than the price of the commodity, such as changes in
production technology, input costs, or expectations. A change in supply is a
broader concept, impacting the entire relationship between price and
quantity supplied.
In summary, a rise in the price of other goods can influence the supply
curve based on whether those goods are substitutes or complements.
Additionally, understanding the distinction between a change in quantity
supplied and a change in supply is crucial for analyzing market dynamics
accurately.

Section C - Compulsory Questions. Each question carries 2.00 marks.[40

Marks]

QUESTIONNO: 1

Cost incurred on fixed factors of production is called

Option: 1

Variable cost

Option: 2

Average cost

Option: 3

Fixed cost

Option: 4

None of the above

QUESTIONNO: 2

Which Market form holds only a single producer

Option: 1

Oligopoly

Option: 2

Monopolistic

Option: 3

Monopoly

Option: 4

None of the above

QUESTIONNO: 3
When taxes fall, the supply curve of the good shifts

Option: 1

To the left

Option: 2

To the right

Option: 3

Upwards

Option: 4

Downwards

QUESTIONNO: 4

The additional revenue earned by selling one additional unit of a good is

called_____________________.

Option: 1

Marginal Cost

Option: 2

Marginal product

Option: 3

Marginal Revenue

Option: 4

Average Revenue

QUESTIONNO: 5

The degree of responsivness of demand of a good with respect to changes in income of the
consumer is called

_______________

Option: 1

Price elasticity of demand

Option: 2

Income elasticity of demand

Option: 3

Cross elasticity of demand

Option: 4

None of the Above

QUESTIONNO: 6

When TP is falling, MP is

Option: 1

Zero

Option: 2

Negative

Option: 3

Rising

Option: 4

Falling

QUESTIONNO: 7

MC intercest Ac at its

Option: 1

Maximum

Option: 2

Minimum

Option: 3

Zero

Option: 4

None of the above

QUESTIONNO: 8

TP increases at a ______________________ rate in the second stage of poduction, under Law of

variable

proportions.
Option: 1

Increasing

Option: 2

Constant

Option: 3

Decreasing

Option: 4

None of the above

QUESTIONNO: 9

Price discrimination is observed under which market form:

Option: 1

Monopoly

Option: 2

Perfect competetion

Option: 3

Oligopoly

Option: 4

None of the above

QUESTIONNO: 10

____________________ is defined as the satisfaction derived when a good is consumed.

Option: 1

Utility

Option: 2

Opportunity cost

Option: 3

Revenue

Option: 4
None of the above

QUESTIONNO: 11

Under perfect competition, the nature of the goods produced is:

Option: 1

Hetrogenous

Option: 2

Homogenous

Option: 3

Differentiated

Option: 4

None of the above

QUESTIONNO: 12

Under oligopoly market form the demand curve is

Option: 1

downward sloping

Option: 2

Upward sloping

Option: 3

Kinked

Option: 4

None of the above

QUESTIONNO: 13

The cost incurred per unit of production is called ____________________________.

Option: 1

Total Cost

Option: 2

Average Cost
Option: 3

Marginal Cost

Option: 4

None of the above

QUESTIONNO: 14

Demand curve of necessary goods are

Option: 1

Perfectly Elastic

Option: 2

Perfectly Inelastic

Option: 3

Unitary Elastic

Option: 4

None of the above

QUESTIONNO: 15

When TP is maximum, MP is

Option: 1

Zero

Option: 2

Rising

Option: 3

Falling

Option: 4

Negative

QUESTIONNO: 16

Total cost is the summation of

Option: 1
Total variable cost and Average Cost

Option: 2

Total fixed cost and Average cost

Option: 3

Total fixed cost and Total Variable cost

Option: 4

None of the above

QUESTIONNO: 17

When a small change in price results in a proportionately larger change in quantity demanded, then
the good is

said to be

Option: 1

Less Elastic

Option: 2

More elastic

Option: 3

Unitary elastic

Option: 4

None of the above

QUESTIONNO: 18

When market price is greater than equilibrium price, then there is _________________________ in
the goods

market

Option: 1

Excess demand

Option: 2

Excess supply

Option: 3
Deficient supply

Option: 4

None of the above

QUESTIONNO: 19

Under which market form do we see few large sellers of a good

Option: 1

Monopoly

Option: 2

Oligopoly

Option: 3

Perfect competition

Option: 4

None of the above

QUESTIONNO: 20

Rightward shift in demand curve results in

Option: 1

Increase in demand

Option: 2

Decrease in demand

Option: 3

Expansion in demand

Option: 4

None of the above

 ANSWER:-

Question 1: 3 (Fixed cost)

Question 2: 3 (Monopoly)

Question 3: 2 (To the right)

Question 4: 3 (Marginal Revenue)

Question 5: 2 (Income elasticity of demand)

Question 6: 4 (Falling)

Question 7: 2 (Minimum)

Question 8: 3 (Decreasing)

Question 9: 1 (Monopoly)

Question 10: 1 (Utility)

Question 11: 2 (Homogenous)

Question 12: 3 (Kinked)

Question 13: 2 (Average Cost)

Question 14: 2 (Perfectly Inelastic)

Question 15: 1 (Zero)

Question 16: 3 (Total fixed cost and Total Variable cost)

Question 17: 2 (More elastic)

Question 18: 1 (Excess demand)

Question 19: 2 (Oligopoly)

Question 20: 1 (Increase in demand)