DEPARTMENTMENT OF ELECTRICAL AND ELECTRONICS ENGINEERING

SIXTH SEMESTER BTECH DEGREE EXAMINATION

COURSE CODE : HUT300
COURSE NAME: INDUSTRIAL ECONOMICS AND FOREIGN TRADE
ANSWER KEY 1

PART A
(Answer all questions, each question carries 3 marks)
1. Economic problems arise in an economy because of the unlimited wants of human being,
limited or scarce means and alternative use of means. Economics is concerned with the
efficient allocation of scarce resources. Any individual, organization or nation has to
make three fundamental types of choices about how to allocate the scarce resources
available to it. Three questions arise from this which is considered as the problems of
economy and they are:
(i) What to produce and how much to produce?
First problem that every economy faces is what goods and services to be
produced with the scarce resources so that maximum wants of the people are
satisfied. When an economy decides about the goods and services it is to produce,
it also decides about the quantity to be produced.
(ii) How to produce?
Having decided what to produce and how much to produce, the next
decision relates to how to produce.
(iii) For whom to produce?
All societies need to decide who will get the output from the country’s
economic activity and how much they will get.
2. Given,
price elasticity of demand =2
percentage change in sale = 50%
percentage change in quantity demanded
ep= percentage change in price

50
2= percentage change in price

50
Percentage change in price =
2
= 25%

3. Given,
Q = 2 L1/2K1/2
 L = 36
Q =60

60 = 2 * (36)1/2 * K1/2
Squaring both sides

602 = 22 * 36 * K
3600
K= = 25
4∗36

4. The firm will produce. Here the price of the product is less than AC. It is still beneficial
for the firm to continue production till price is greater than AVC. Because AC is the sum
of AFC and AVC. Therefore when price is greater than AVC it can cover AVC as well as
a part of AFC.

5. Under predatory pricing the predator, already a dominant firm, sets its prices too low for
a sufficient period of time so that its competitors leave the market and others are deterred
from entering. This kind of predation is done on the expectation that these present losses
will be compensated by future gains. In other words, the firm is on the expectation of
acquiring exploitable market power after the predatory period, and that profits of this
later period will be sufficiently large enough to compensate incurring present losses or
foregoing present profits.

6. Under oligopoly, there is very tight competition between the firms. If the firms try to
increase their market share through price competition, it may result in a price war and
hence the firms will be the losers. Hence they resort to non- price competition to increase
sales. Non-price competition refers to competition between companies that focuses on
benefits, extra services, good workmanship, product quality etc. Non-price competition is
a marketing strategy that typically includes promotional expenditures such as sales staff,
sales promotions, special offers, free gifts, coupons and advertising. In other words, it
means marketing a firm’s brand and quality of products rather than lowering prices.
The following are some examples:
 Loyalty card
 Subsidized delivery
 Advertising
 Coupons and free gifts
7.

8.
9.
10.
 PART – B
(Answer one full question from each module, each question carry 14 marks)

MODULE I

11. a) The following table shows the utility of consumption of apple.

Units consumed TU MU
0 0 0
1 10 10
2 18 8
3 24 6
4 27 3
5 29 2
6 29 0
7 27 -2

Till he had not consumed any apple, his satisfaction level was nil, hence his total utility
derived was zero. The very first apple gives him maximum satisfaction. Total utility is
increasing with each successive apple, marginal utility is declining. The sixth apple gives
him no additional satisfaction and MU for the sixth apple is zero, the total utility derived
From the fifth and sixth apple is the same. Any consumption beyond this point will lead
to a fall in total utility from the seventh apple is minus two, which implies dissatisfaction
out of excess consumption.
According to law of diminishing marginal utility, marginal utility of a good diminishes as
an individual consumes more units of a good. The law states that as the stock of a
commodity increases with the consumer, its marginal utility to the consumer decreases.
Limitations :
 The law assumes that only one type of commodity is consumed at a time.
 The consumer is rational human being and he aims at maximum of satisfaction.
 The consumption is continuous. There is no unduly long time interval between the
consumption of the successive units.

b) Elasticity of demand is defined as th ratio of percentage change in demand to the

percentage change in one of the determinants of demand.
There are three types of elasticity of demand:
(i) Price elasticity of demand
Price elasticity of demand is the ratio of the percentage change in
the quantity demanded of a commodity to a percentage change in its price.
Price elasticity demand,
 ep = percentage change in quantity demanded/percentage change in price
(ii) Income elasticity of demand
Income elasticity of demand is the ratio of the percentage change in
the quantity demanded of a commodity to a percentage change in
consumers income.
Income elasticity demand,
ei = percentage change in quantity demanded/percentage change in income

(iii) Cross elasticity of demand

Cross elasticity of demand measures the rate at which demand
changes in response to change in price of related commodities.
ec = percentage change in demand of X/ percentage change in price of Y
12. (a) Consumer surplus is defined as the difference between the consumers willingness to
pay for a commodity and the actual price paid by them.
Consumer surplus is positive when what the consumer is willing to pay for the
commodity is greater than the actual price.
So, consumer surplus= willingness to pay price – market price
Sellers can sell a product at a higher price than their economic cost to produce a
product. The difference between the economic cost and the market price is the producer
surplus. A graphical illustration of consumer surplus and producer surplus in given in the
figure.

(b) A deadweight loss is a loss in economic efficiency as a result of disequilibrium of supply

and demand. Imposing a tax on the final price prevents people from making the purchases
they are supposed to make. To understand how deadweight loss occurs due to taxation,
observe the supply and demand curves in the figure. Before the tax, the equilibrium price
and quantity are PE and Q1. When the government imposes tax, equilibrium price rises to
PB equilibrium quantity falls to Q2. The tax burden is share by the consumers and
producers. With no tax, producer surplus and consumer surplus are maximized. With the
tax of T per unit, consumer surplus and producer surplus get reduced. The deadweight
loss is the triangular area below the demand curve and above the supply curve between
quantities Q1 and Q2. The government receives revenue from the tax equal to Q2 *T. It can
be seen that as a result of imposition tax, fewer goods are being produced and sold, reduces
producer and consumer surplus and also causes wastage of resources due to reduction in
quantity that could be produced and supplied to the market.

MODULE 2
13. (a) The following are the advantages of large scale production:
(i) Internal Economies : Internal economies arise within the firm because of the
expansion of the size of a particular firm. They are called economies of scale.
(ii) External Economies: External economies arise with the expansion of the
industry. These are generally the result of large scale production and are
associated with the advantages of localization.
(iii) Labour economies: Increased production allows division of labour and it
increases efficiency and productivity of workers.
(iv) Technical economies: As a firm expands it can use the latest technology and
machinery. This increases efficiency and reduces cost of production.
(v) Marketing Economies: These are economies of buying and selling. When a
firm purchase a large quantity of raw materials, it can get the raw materials at
a cheaper rate.
(vi) Financial economies: Big firms are usually regarded as less risky by invester
and hence they will be willing to lend funds to such firms even at a lower rate
of interest.
(vii) Risk minimizing economies: When there is largescale production, risk can be
minimized by diversification of output, diversification of markets etc.

(b) A producer will be in equilibrium when he is able to produce a given quantity of

output with least cost or when he produces maximum output with a given amount of
inputs. In other words, least cost combination of inouts is that combination which cost
least to the firm in producing a certain quantity of output. It is attained at that point
 where the isoquant is tangent to the isocost line. This is shown in the diagram.

In the diagram, producer is in equilibrium at point E, where the highest possible

isoquant is tangent to the isocost line. He is able to produce the maximum output with
the available resources. In other words, output Q2 is produced with the least cost.
At the point of tangency, the slope of the isoquant and the slope of the price line are the
∆K MPL PL
same. Slope of the isoquant is − ∆L = MPK and slope of the isocost line is .
PK
MPL PL
Therefore at the equilibrium point = . This is the condition for producer
MPK PK
equilibrium.
Expansion path is a line connecting optimal input combinations as the scale of
production expands. Expansion path is obtained by joining the point of tangency
between isoquants and isocost lines of a firm. An expansion path is shown in the
diagram.

14. (a) Break even analysis is a method that is used to analyze the relationship between total
cost, total revenue and profit of an organization at different levels of output. Since it
gives profit at different levels of projected sales it is used as an important tool of
managerial decision making. The most important aspect of break even analysis is
identifying the break-even point. It is the point at which total revenue of a firm equals
total cost. In other words it is the point at which there is no profit or loss for the firm.
Break-even chart is the graphical representation of break-even point. It shows the
relationship between cost, volume and profit.
 The total revenue line begins at the origin and rises with a slope equal to the selling price
per unit. The total cost line rises with a slope equal to the variable cost per unit and
intercepts the vertical axis at a point equal to total fixed cost. When the total revenue line
lies below the total cost line, a loss region is defined. Similarly, when the total revenue
line lies above the total cost line, a profit region is defined. The point where the total
revenue and the total cost line intersect is the break-even point.

(b) Given,
Sales = Rs 20000
Variable cost = Rs 8000
Fixed cost = Rs 6000
Sales−variable cost
P/V ratio =
sales

20000−8000
= 20000
= 0.6

Fixed cost 6000

Breakeven point = = 0.6
= Rs 10000
PV ratio

MODULE 3
15. (a)
(b)
16. (a)
(b) Kinked demand curve explains price rigidity under oligopoly on the basis of
following assumptions:
(i) If a firm increases its price others will not follow
(ii) If a firm decreases its price others will also do the same.
Usually in oligopoly firms will not enter into a price war and hence price remains rigid.
If one firm decreases the price others will also reduce price. Hence firm’s demand will
not increase but at the same time it will affect their profitability. On the other hand if the
firm increases the price others will not increase the price and hence it will lose its
customers. Therefore a firm under oligopoly sticks to its price. This kind of behavior in
oligolpoly was explained by the kinked demand curve. The lower part of the demand
curve is less elastic because a firm cannot gain from a price cut. The upper part of the
demand curve is more elastic because there will be a substantial fall in demand if there is
a price hike. Thus in the following diagram we can see that there is kink at point k in the
demand curve. This kink in the demand curve creates a discontinuity in the MR curve. At
the kink MR remain unchanged between S and R.

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