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Midterm 2017 Solution-I

Midterm 2017 Solution-I

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102 views4 pages

Midterm 2017 Solution-I

Midterm 2017 Solution-I

Uploaded by

kjfwqfkjqfwe
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Microeconomics

Midterm Exam 2017 Solutions


PGDM Batch 18

1. See Midterm 2017 Solutions-II

2. See Midterm 2017 Solutions-II

3. See Midterm 2017 Solutions-II

4. Answers are as follows:

(a) T R = P Q = 3000Q − 40Q2 ; taking derivative w.r.t Q, we get M R = 3000 − 80Q


h i
1
(b) We know M R = P 1 − |e| , hence |e| > 0 ⇒ 3000 − 80Q > 0 ⇒ Q < 37.5 ⇒ P > 1500
(c) To maximize TR, firm should set M R = 0 ⇒ P ∗ = 1500
(d) As long as M C > 0 to maximize profit, the firm has to set M R = M C ⇒ M R > 0 ⇒
|e| > 1 (elastic). Hence proved.

5. Answer the following questions briefly. Draw a diagram wherever necessary.


M Ux 1 Px 5
(a) False. Since M Ux = 1 and M Uy = 3, M Uy = 3 < Py = 14 ; implying marginal utility
per unit of money spent on x is less than marginal utility per unit of money spent on y
and hence consumer consumes only good Y .
(b) Income elasticity E Y is given by

% change in quantity demanded


EY = .
% change in income
−1
Hence, E Y = 100 = −0.01.
M Ux y Px
(c) Answer is (iii). M RSxy = M Uy = x = Py = 75 .
(d) Elasticity of demand is given by

% change in quantity demanded


.
% change in price

For business travelers, ∆Q = −100 and ∆P = 50 and hence elasticity is −0.2 and for
vacationers,∆Q = −200 and hence elasticity is −1. Vacationers have a higher elasticity
of demand (higher absolute value) since they are more price sensitive. They may avail

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other cheaper means of transport when airfare increases but business traveller may not
be able to do so because often they have to travel for important and/or urgent meetings
which are time bound.

6. The answers are as follows


X
(a) The consumption ratio is Y = 4.

(b) The budget constraint is PX X + PY Y = M .


(c) The solution is
4M M
X= ,Y =
4PX + PY 4PX + PY
(d) As M increases consumption of both X and Y will also increase. Hence, both are normal
goods.

2
PART-B: 20 marks
(Instructions: Answer all the questions. Each question carries 2 marks. Write the correct
answer beneath the question number in capitals. Circled or tick-marked answers will
NOT be graded.)

Question no Questions
1
The quantity supplied of a good is the amount that
A. Buyers are willing and able to purchase
B. Sellers are able to produce
C. Buyers and sellers agree will be brought to the market
D. Sellers are willing and able to sell
2
Which of the following events must cause equilibrium price to rise?
A. demand increases and supply decreases
B. demand and supply both decrease
C. demand decreases and supply increases
D. demand and supply both increase

3 Figure 1
Price
Supply 1 Supply 2

A C

Demand 1 Demand 2

Quantity

Refer to figure 1. Which of the following movements would illustrate the effect in the
market for kitchen cabinets of an increase in the price of wood?
A. Point A to Point B
B. Point C to Point B
C. Point C to Point D
D. Point A to Point D

4 Suppose that the supply of aged cheddar cheese is inelastic, and the supply of bread is
elastic. Both goods are considered to be normal goods by a majority of consumers.
Suppose that a large income tax increase decreases the demand for both goods by 10%.
The price elasticity of supply for aged cheddar cheese could be
A. -1
B. 0
C. 0.5
D. 1.5

25
5 If soybean farmers know that the demand for soybeans is price inelastic, in order to
increase their total revenues they should
A. use more fertilizers and weed killers to increase their yields.
B. plant additional acres to increase their output.
C. reduce the number of acres they plant to decrease their output.
D. Both A and B are correct.

6 When Matt has an income of $2,000, he consumes 30 units of good A and 50 units of
good B. After Matt’s income increases to $3,000, he consumes 25 units of good A and
95 units of good B. Which of the following statements is correct?
A. Both goods A and B are normal goods.
B. Both goods A and B are inferior goods.
C. Good A is a normal good, and good B is an inferior good.
D. Good A is an inferior good, and good B is a normal good.

7 Higher education is a normal good. If its price falls,


A. the quantity demanded of higher education will fall.
B. the substitution and income effects work in opposite directions.
C. the income effect is positive.
D. higher education will be a Giffen good.
8 One reason that firms will experience decreasing returns to scale is
A. The law of diminishing marginal returns
B. The specialization of inputs as scale increases
C. There is some fixed input that isn't being taken into consideration
D. Larger firms may be easier to manage effectively

9 If a firm knows that the demand for its product is inelastic, it could generate more
revenue by
A. Lowering the price, because the resulting change in sales would be relatively large
B. Raising the price, because the resulting change in sales would be relatively large
C. Lowering the price, because the resulting change in sales would be relatively small
D. Raising the price, because the resulting change in sales would be relatively small

10 Returns to scale is a ______ concept because ______.


A. Short-run; it's related to the law of diminishing marginal returns
B. Short-run; it deals with varying the level of one input while holding other inputs
constant
C. Long-run; a firm can change its output level only in the long run
D. Long-run; it refers to changes in all of the firm's inputs

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