121-1004

Question PaperEconomics-I (121) October 2004

Answer all questions. Each question carries one mark.

1. Which of the following circumstances refers to a mixed economy?

(a) Prices are fixed by the government(b) Government plays the pivotal role in the functioning of the economy(c) Prices are automatically fixed only by the market forces(d) Government exercises its power only in the important sectors, while in the other sectors a free market

economy exists(e) Prices are only fixed by the farmers.

(1 mark)

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2. Scarcity of resources forces economic agents to choose among various alternatives. The problem of choice arises because limited resources with alternative uses are to be utilized to satisfy unlimited human wants. With reference to this, goods are classified into free good and economic good. Which of the following is not an economic good?

(a) Gas cylinder (b) Mineral water (c) Air (d) Teakwood (e) Video cassette.

(1 mark)

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3. GFX India Limited, a leading marketing research company estimated the income elasticity of demand for air conditioner and described it as a luxury good. The income elasticity of demand for air conditioner would be

(a) Greater than one (b) Equal to one (c) Zero(d) Less than one but more than zero (e) Infinity.

(1 mark)

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4. Cynell Pharmaceutical Inc. produces generic drugs to treat a variety of illness. A major product of the company is a generic equivalent of an antibiotics used to treat postoperative infections. The company estimated the demand curve of the product to be perfectly inelastic. Which of the following statements is true, if a sales tax is imposed on the products of Cynell Pharmaceutical Inc.?

(a) The whole tax is borne by the sellers(b) The whole tax is borne by the consumers(c) The tax is borne equally by the sellers and the consumers(d) No change in the tax burden of the consumers(e) The tax is borne less by the sellers than the consumers.

(1 mark)

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5. The cross price elasticity of demand for the products Rolex and Bollix is 10. It implies that Rolex and Bollix are

(a) Substitutes (b) Complements (c) Independent (d) Inferior goods (e) Luxury goods.

(1 mark)

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6. Jupiter Automotive Ltd. manufactures a superior automotive product and provides superior service. Part of this superior service involves better listening to its customer and responding to their suggestions. The company found that the marginal revenue of the automotive product is always positive. This is possible only when the elasticity of demand for the product is

(a) Greater than 1 (b) Less than 1 (c) Unity (d) Zero (e) Infinity.

(1 mark)

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7. Essexx Design Inc. produces very costly and attractive sports watches. At the same time, Sofex Inc.introduced a stylish sports watch in the market. The watches of Essexx Design Inc.and Sofex Inc. are considered to be perfect substitutes. The cross elasticity of demand between these watches is

(a) Infinity (b) Positive, less than infinity(c) Zero (d) Less than zero (e) One.

(1 mark)

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8. The demand curve for coffee will shift towards right. This situation arises, when

(a) The price of coffee decreases(b) The income of people increases(c) The price of substitute goods decreases(d) The price of complementary goods increases(e) Both (c) and (d) above.

(1 mark)

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9. A recent study of the U.S. luxury car market revealed that there is no shift in the supply curve of luxury car. Which of the following does not cause a shift in the supply curve of luxury car?

(a) Improvement in technology(b) Discovery of alternative raw materials(c) Changes in the rate of interest(d) Changes in the input prices of luxury cars(e) Changes in the price of luxury car.

(1 mark)

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10. The situation of market equilibrium occurs when

(a) Demand for good is greater than supply for the goods(b) Quantity demanded for the goods equals quantity supplied for the goods(c) The price, sellers ask for goods is less than the price consumers pay for those goods(d) A shortage exists(e) Demand for the good is less than supply for the good.

(1 mark)

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11. The cell phone users are asked to pay a specified amount of extra roaming fee, while they are going from one state to other states. But a person will continue to use the cell phone up to the point where

(a) Total benefit from using the cell phone is equal to total cost of using the cell phone(b) Average benefit from using the cell phone is equal to average cost of using the cell phone(c) Marginal benefit from using the cell phone is equal to zero(d) Marginal benefit from using the cell phone is equal to marginal cost of using the cell phone(e) Average benefit from using the cell phone is equal to marginal cost of using the cell phone.

(1 mark)

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12. Cigarettes may be one exception to the law of diminishing marginal utility. Which of the following is true with respect to the law of diminishing marginal utility?

(a) The more the consumption, the lesser the marginal utility from every additional unit consumed(b) The more the consumption, the more the marginal utility from every additional unit consumed(c) The lesser the consumption, the lesser the marginal utility from every additional unit consumed(d) The lesser the consumption, no marginal utility from every additional unit consumed(e) The lesser the consumption, the more the total utility from every additional unit consumed.

(1 mark)

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13. The falling part of a total utility curve indicates < Answer >








(a) Increasing marginal utility (b) Decreasing marginal utility(c) Zero marginal utility (d) Negative marginal utility(e) Indeterminate marginal utility.

(1 mark)

14. An indifference curve shows the

(a) Combinations of commodities X and Y with equal quantities(b) Combinations of commodities X and Y with each commodity giving equal satisfaction(c) Combinations of commodities X and Y with each combination giving equal satisfaction(d) Combinations of commodities X and Y with equal price(e) Combinations of commodities X and Y with equal quality.

(1 mark)

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15. Which of the following statements is true?

(a) If 10% decrease in the inputs leads to 15% decrease in the output, increasing returns to scale are said to be in operation

(b) If the output remains constant in spite of 10% reduction in the quantities of inputs, constant returns to scale are said to be in operation

(c) The slope of isoquant is price ratio of the factor inputs(d) Isoquants are concave to the origin(e) The slope of the iso-cost line increases as we move from Y-axis to X-axis.

(1 mark)

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16. Refer to the diagram below.

The isoquant represents

(a) Perfect substitutability between factors X and Y(b) Perfect complementarity between factors X and Y(c) No substitutability between factors X and Y(d) Imperfect substitutability between factors X and Y(e) Imperfect complementarity between factors X and Y.

(1 mark)

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17. The expansion path represents the locus of least cost input combinations for producing various levels of output assuming that

(a) Money outlay remains the same(b) Input prices remain the same(c) State of technology remains the same(d) Both (b) and (c) above(e) (a), (b) and (c) above.

(1 mark)

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18. The marginal rate of technical substitution of X for Y is expressed as

(a) The amount of Y whose loss can just be compensated by a unit gain in X(b) The amount of X whose loss can just be compensated by a unit gain in Y(c) The amount of X which yields marginal production equal to that of one unit of Y(d) The amount of Y which yields marginal production equal to that of one unit of Y(e) The amount of X which yields marginal production equal to that of one unit of X.

(1 mark)

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19. Which of the following is not a factor of production?

(a) Land (b) Labour (c) Wealth (d) Capital (e) Organisation.

(1 mark)

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20. When average product (AP) is at its maximum, which of the following costs will be at its minimum?

(a) Average cost (AC) (b) Average variable cost (AVC)(c) Average fixed cost (AFC) (d) Marginal cost (MC)(e) Total fixed cost (TFC).

(1 mark)

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21. A firm realizes least-cost in production, if it substitutes the factors until their

(a) Prices are equal(b) Marginal physical products are equal(c) Marginal physical products are equal to their factor prices(d) Marginal physical products are equal to zero(e) Marginal physical product to the factor price ratio is equal for all factor inputs.

(1 mark)

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22. Lixan Imaging is a Mumbai based image digitization company, specializing in digitizing visual collections. It has developed a project-based model incorporating best practices into the digitization workflow. The vertical distance between total variable cost and total cost of Lixan Imaging is equal to

(a) Marginal cost (b) Average variable cost(c) Total fixed cost (d) Average fixed cost (e) Average total cost.

(1 mark)

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23. Which of the following curves is a rectangular hyperbola?

(a) Average total cost (b) Average fixed cost(c) Average variable cost (d) Marginal cost (e) Total fixed cost.

(1 mark)

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24. Which of the following is an example of implicit cost?

(a) Interest payments on an outstanding loan of the firm(b) Salaries paid to the firm's managers(c) Salaries paid to the firm's assembly-line workers(d) Transportation and shipping costs on raw materials(e) Rental income foregone on assets owned by the firm which is employed in the business.

(1 mark)

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25. Which of the following is true in case of a long run average cost curve?

I. The curve is U-shaped since economies of scale are followed by diseconomies of scale.II. The curve is dome shaped since diseconomies of scale are followed by economies of scale.

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III. The lowest point of the curve coincides with the lowest point of one of the short-run average cost curves.(a) Only (I) above (b) Both (I) and (II) above(c) Both (I) and (III) above (d) Both (II) and (III) above(e) (I), (II) and (III) above.

(1 mark)

26. The cost functions of a firm are derived from the

(a) Demand curve of the commodity (b) Price of the output(c) Production functions of the firm (d) Marginal utility of the consumer(e) Budget line.

(1 mark)

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27. New India Textiles Inc., is a medium sized manufacturer of blue denim that sells in a perfectly competitive market. When New India Textiles Inc. is in equilibrium in the long run, its output is such that

(a) Costs per unit of output are minimum (b) Total profits are maximum(c) Total costs are minimum (d) Profit per unit of output is maximum(e) Total sales are maximum.

(1 mark)

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28. In perfect competition, the long run equilibrium price is equal to

I. Marginal Revenue.II. Average Cost.III. Marginal Cost.IV. Average Revenue. (a) Both (I) and (III) above (b) (I), (II) and (III) above(c) (I), (III) and (IV) above (d) (II), (III) and (IV) above(e) (I), (II), (III) and (IV) above.

(1 mark)

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29. Which of the following is/are true with respect to a perfectly competitive firm in short run equilibrium?

I. Marginal cost must equal marginal revenue.II. Average cost must equal average revenue.III. Marginal revenue must equal average revenue.IV. Marginal cost must equal average cost. (a) Only (III) above (b) (I) and (III) above(c) (II) and (III) above (d) (I),(II) and (IV) above(e) (I), (II), (III) and (IV) above.

(1 mark)

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30. The horizontal demand curve for a firm is one of the characteristic features of

(a) Oligopoly (b) Monopoly (c) Monopolistic competition (d) Perfect competition (e) Duopoly.

(1 mark)

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31. Which of the following assumptions is/are necessary for a market to be perfectly competitive?

I. Products are homogenous.II. Cost structure of every firm is identical.III. Buyers have no preferences towards any seller.IV. Buyers have perfect knowledge about prices in the market.

(a) Only (I) above (b) Only (II) above

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(c) Both (I) and (III) above (d) (I), (III) and (IV) above(e) (II), (III) and (IV) above.

(1 mark)

32. Dentply Inc. is the only dental supply company that produces artificial teeth, among other products. The quantity cross elasticity of demand of Dentply Inc. with other goods or services is generally

(a) Greater than one (b) Less than one (c) Infinity (d) One (e) Zero.

(1 mark)

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33. Tod Energy started supplying cheaper gas and electricity and emerging as the monopoly supplier. Tod Energy is said to be in equilibrium, where the elasticity of its average revenue curve is

(a) Greater than one (b) Equal to one (c) Less than one (d) Zero (e) Infinity.

(1 mark)

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34. Which of the following can result in formation of a natural monopoly?

(a) Government regulation (b) Product differentiation(c) Economies of large scale production (d) Tariff(e) Licenses.

(1 mark)

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35. A market in which there is only one buyer of a good, service or factor of production is known as

(a) Monopoly (b) Monopsony(c) Monopolistic competition (d) Bilateral monopoly (e) Duopoly.

(1 mark)

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36. Telecommunications firms are facing fierce new competition from another wing of their industry - technology that transmits phone signals across the Internet. Given current technology, little new capital is required, allowing even small firms to be extremely competitive against the larger and formerly dominant telecommunications companies such as AT&T and BellSouth. If AT &T is happened to be a monopolistic competitive firm, which of the following is true?

(a) Products are homogeneous(b) Products are differentiated and no close substitutes are available(c) Products are differentiated but they are close substitutes(d) Products are differentiated yet they are perfect substitutes(e) Products are differentiated but they are complements.

(1 mark)

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37. The fast-food industry in U.S. is a case for monopolistic competition. Which of the following is not a common characteristic of perfect competition and monopolistic competition?

(a) Large number of sellers (b) Free entry and exit(c) Homogenous product (d) Large number of buyers(e) Firms do not consider the reactions of their rivals when choosing their annual sales target.

(1 mark)

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38. In international grain markets, a few dominant sellers can influence the market. The price leaders, such as the U.S. are ‘residual suppliers’ – making up the difference in meeting import demand not met by the smaller exports. Which of the following market has a predominant feature of price leadership?

(a) Perfectly competition (b) Monopoly (c) Oligopoly(d) Monopsony (e) Monopolistic competition.

(1 mark)

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39. NBC is finalizing its purchase of Universal Studios, and the new company, NBC Universal, will be one of the < Answer >









five largest entertainment companies in the world. NBC Universal also can potentially reap significant benefits from the merger. The move is expected to help NBC Universal become much more competitive in the entertainment industry. This refers to a case of oligopoly. Which of the following is not a predominant feature of the oligopolistic market?

(a) Group behavior (b) Few firms supply entire market(c) Interdependence of firms (d) Free entry and exit of firms(e) Some firms have a large share and can influence the price.

(1 mark)

40. Refer to the diagram below.

The kinked demand curve model explains

(a) Price flexibility (b) Price rigidity(c) Quantity flexibility (d) Quantity rigidity (e) Quality flexibility.

(1 mark)

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41. Exquisite Cosmetics Inc.offers a line of perfume products marketed through leading departmental stores. This perfume is composed of a top note, the refreshing, volatile odour perceived immediately; a middle note, or modifier, providing full, solid character; and a base note, also called an end note or basic note, which is the most persistent. The supply and demand functions for a perfume product are as follows:

Qd = 6,000 – 3P

Qs = 3,000 + 4.5P

The Government imposes a sales tax of Rs. 20 per unit of perfume. If the equilibrium price is given as Rs. 400, the proportion of tax that is borne by the producer is

(a) 80% (b) 70% (c) 60% (d) 50% (e) 40%.

(2 marks)

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42.

Current demand for apples in a city is 1000 boxes per week. In the city, price elasticity of demand for apples is –1.25 and income elasticity of demand is 2.00. For the next period, if per capita income is expected to increase by 7% and price of apples is expected to increase by 10%, demand for apples is expected to be

(a) 875 boxes per week (b) 1,000 boxes per week(c) 1,250 boxes per week (d) 1,140 boxes per week(e) 1,015 boxes per week.

(2 marks)

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43. Quality Tea is a leading tea manufacturer in South-India. The supply schedule of tea is given below:

Price(Rs.)

Quantity Supplied(Units)

7 158 30

What is the arc price elasticity of supply?

(a) 4 (b) 5 (c) – 4 (d) – 5 (e) 6.

(1 mark)

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44. Colorful Tile Inc. is a rapidly growing chain of ceramic tile outlets that caters to the do-it-yourself home remodeling market. The demand function of ceramic tiles is given as Qx = 100 + 0.5P. If price of marble tiles increases from Rs.50 to Rs.100, the cross elasticity of demand between ceramic tiles and marble tiles are

(a) 0.40 (b) 0.20 (c) 0.45 (d) 0.35 (e) 0.15.

(1 mark)

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45. A leading producer of Chlor-Alkali products, Sree Ram Chemicals Ltd. is the flagship company of the conglomerate. The company also manufactures castor derivatives and fatty acids. A captive power plant assures uninterrupted and cost-effective power supply to the manufacturing plant. Consistent overseas demand for its products have made the company a recognised export house today.Let the market demand for the product be P = 200 – Qd. Calculate the point elasticity of demand when the price of the product is Rs.75 per kg.

(a) – 0.600 (b) – 1.670 (c) – 0.660 (d) – 0.616 (e) –1.000.

(1 mark)

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46. When the price is Rs.75, demand for a good is 10 units and when the price is Rs.70, demand is 12 units. Assuming that the demand function for the good is linear, the theoretical maximum possible quantity of the good that can be demanded is

(a) 100 units (b) 25 units (c) 5 units (d) 40 units (e) 76 units.

(2 marks)

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47. Godrej entered into a strategic alliance with P&G for inter alia toilet soap business, under which Godrej used to manufacture soaps, which were marketed by a joint venture company. The company has been very aggressive during the year in the toilet soap business and has launched a number of new products in the market in the last two years. It pioneered the concept of a fairness soap through launch of Fairglow soap. New variants like Sandal and Natural in the Godrej No.1 brand also aided high growth. The demand and supply schedule of soaps are given below:

Price(Rs. Per unit)

Demand(Units)

Supply(Units)

10 500 32012 450 36014 400 40016 350 44018 300 48020 250 520

Equilibrium price for soaps is

(a) Rs.10 (b) Rs.12 (c) Rs.14 (d) Rs.16 (e) Rs.18.

(1 mark)

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48. Marginal utilities of goods A and B are 600 and 900, and the price of good B is Rs.120. If the consumer is in equilibrium, the price of good A is

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(a) Rs.60 (b) Rs.70 (c) Rs.80 (d) Rs.90 (e) Data insufficient.

(1 mark)

49. The demand function for a good is Q = 100 – 2P. The consumer surplus when the price is Rs.5 is

(a) Rs.2,400 (b) Rs.3,000 (c) Rs.2,025 (d) Rs.5,100 (e) Rs.4,050.

(1 mark)

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50. The absolute price elasticity of demand of ‘Dollex’, a branded doll, is estimated to be 1.5. At present, the firm is selling 3,000 units. Income effect for Dollex is half that of substitution effect. If management increased the price of the Dollex brand from Rs.20 to Rs.25, the substitution effect for the price increase will be

(a) 1,125 units (b) 750 units (c) 3,000 units (d) 375 units (e) 560 units.

(1 mark)

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51. Most of the times Indians prefer cola to other flavors in soft drinks. Analysts say that this is because cola's flavor is more robust and durable. Orange soda, for example, suffers from flavor fatigue faster than cola. Also, because cola contains caffeine, people may be addicted to the stimulant. The utility function of an Indian consumer is estimated to be

TU = 100 + 0.25Y2, where Y represents cola.

If the price of one unit of Cola is Rs.10, how many units of cola, the consumer would be willing to consume?


(2 marks)

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52. A consumer is indifferent between the combinations A and B.

Combination Good X Good YA 10 14B 12 13

Absolute value of marginal rate of substitution of good X for Y (MRSXY) for the consumer is

(a) 0.50 (b) 1.00 (c) 1.50 (d) 2.00 (e) 2.50.

(1 mark)

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53. A consumer consumes only good X and good Y. The budget constraint of the consumer is Rs.720. The market price of good X and good Y are Rs.4 and Rs.6 respectively. If good X is taken on horizontal axis and good Y on vertical axis, the slope of the budget line of the consumer is

(a) 0.33 (b) 0.67 (c) 0.75 (d) 1.50 (e) 3.00.

(1 mark)

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54. For a consumer in equilibrium, marginal rate of substitution of X for Y (MRSxy) is 3. If price of the good X (Px) is Rs.75, price of good Y (Py) is

(a) Re.0.04 (b) Rs.25.00 (c) Rs.75.00 (d) Rs.150.00 (e) Rs.200.00.

(1 mark)

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55. A firm is confronted with the growing demand for its product. Since, it is operating in the short run, it is not able to increase all its factors of production. In order to meet its growing demand, it is planning to increase its output, by employing more number of workers and keeping capital constant.

The short run production function of a firm is estimated to be

Q = 18L2 – L3

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The output is sold at a price of Rs.8 per unit and the wage rate is Rs.40 per unit of labor. If the firm is a rational entity, it would employ labor in the range of

(a) 0 to 6 units (b) 0 to 9 units (c) 6 to 9 units (d) 6 to 12 units (e) 9 to 12 units.

(2 marks)

56. The Marginal Rate of Productivities of labor and capital in a market are estimated to be

MRPL = 0.5

360

L

MRPK =

240

K

The prevailing wage rate (w) and interest (r) are Rs.40 and Rs.50 respectively. If the firm does want to optimize only the labor, keeping capital at the constant level, the optimum number of workers to be employed by the firm is


(2 marks)

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57. Production function for a firm is Q = 100L – 0.02L2. If 10 units of labor are used, average productivity of labor is

(a) 100.0 units (b) 20.0 units (c) 99.8 units (d) 200.0 units (e) 0.20 unit.

(1 mark)

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58. Which of the following production functions is/are increasing returns to scale?

I. 4K + 2L + 4KL. II. 22

K

L . III. 20K0.5L .(a) Only (I) above (b) Only (III) above(c) Both (I) and (II) above (d) Both (I) and (III) above(e) All (I), (II) and (III) above.

(2 marks)

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59. When 10 units of labor are employed, average productivity of labor (APL) is 6 units. If APL increases to 7 units as a result of increase in labor input by one, marginal productivity of 11th unit of labor is

(a) 1 unit (b) 6 units (c) 7 units (d) 13 units (e) 17 units.

(1 mark)

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60. The only input used by a firm is labor. The market going wage rate is Rs.40. Currently the firm produces 100 units of output. If marginal productivity of labor at this output is 10 units, marginal cost of production for the firm is

(a) Rs.0.25 (b) Rs.0.40 (c) Rs.2.50 (d) Rs.4.00 (e) Rs.40.00

(1 mark)

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61. Mr. Akash, the manager of ‘The Fast Trak Corp.’, a shoe manufacturing company develops a dozens of dramatically different methods of making shoes, which decreases the Fast Trak Corp.’s variable costs of producing shoes. The Fast Trak Corp. faces the following average variable cost function:

AVC = 300 – 10Q + 0.5Q2

Fixed costs are Rs.150. What is the minimum possible average variable cost?

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(2 marks)

62. Superauto Inc., based in India, manufactures a wide range of parts for aircraft manufactures. The company is currently evaluating the merits of building a new plant to fulfill a new contract with the Central government. The alternatives to expansion are to use additional overtime, to reduce other cost, or both. The company will add new capacity only if the economy appears to be expanding. Therefore, forecasting the general pace of long-run economic activity for India is an important input to the decision-making process. Which of the following cost functions is/are significant in the long run for Superauto Inc.?

I. C = 20 + 3Q + 0.25Q2.

II. C = 200Q + 0.5Q2.III. C = 100Q0 + Q – 2Q2

.

IV. C = 10Q + 150Q2.

(a) Only (I) above (b) Only (III) above(c) Both (II) and (III) above (d) Both (II) and (IV) above(e) Both (I) and (III) above.

(2 marks)

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63. Medicity Testing Labs. provides routine testing services for blood banks in Hyderabad. Tests are supervised by skilled technicians using equipment produced by one leading competitor in the medical equipment industry. The long run cost function of Medicity Testing Labs. is

TC = Q3 – 40Q2 – 480Q

Beyond what output do diseconomies of scale exist?


(2 marks)

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64. Total cost of production for a firm to produce 200 units is Rs.12,500 and Rs.13,500 for 250 units. What would be the fixed cost for the firm, if the average variable cost is constant?


(1 mark)

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65. In a perfectly competitive industry, the supply function of a product is represented as S = 5,000 + 400 P and the demand function as D = 10,000 – 600P.

What is the equilibrium price?


(1 mark)

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66. If a producer sells 29 units of a good for Rs.290, the average revenue is

(a) Rs.290.00 (b) Rs.100.00 (c) Rs.29.00 (d) Rs.10.00 (e) Re.0.10.

(1 mark)

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67. A firm in a perfectly competitive industry is producing at its profit-maximizing quantity of 100 units. The market price of the good is Rs.2, and total fixed costs and total variable costs are Rs.50 and Rs.40 respectively. The firm's economic profit is


(1 mark)

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68. In a perfectly competitive market, the equilibrium price is equal to Rs.140. A typical firm in this industry faces a total cost function as TC = 500 + 40Q + 5Q2, the profit maximizing output is

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(1 mark)

69. The following are the demand and cost functions of a firm.

P = 200 + 3QC = 3Q2 –100Q +1,000

If the firm is earning a profit of Rs.10,000, the quantity of output supplied by the firm would be


(1 mark)

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70. Southern Fluid Controls, Inc., (SFC) is a major supplier of reverse osmosis and ultra filtration equipment, which helps industrial and commercial customers achieve improved production processes and a cleaner work environment. The company has recently introduced a new line of ceramic filters that enjoy a huge market share. The demand function is estimated to be Q = 100 – 2P. The total cost function of SFC is given by TC = 50 + 2Q. If SFC produces 12 units, profits made by the firm are


(2 marks)

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71. Sparkler Paper Ltd. (SPL) produces uncoated paper used in a variety of industrial applications. Newsprint, a major product, is sold in a perfectly competitive market. SPL has the following cost functions:

MC = 75 – 20Q + 1.5Q2,AVC = 75 – 10Q + 0.5Q2

The price below which the firm shuts down its operation in the short-run is


(2 marks)

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72. The cost function of Alco & Co. is TC = 2,850 + 3.5Q. If the current market price of the good produced by the firm is 5 per unit, what will be the break-even output for the firm?

(a) 1,600 units (b) 1,200 units (c) 1,550 units (d) 1,750 units (e) 1,900 units.

(1 mark)

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73. A cloth merchant, who supplies cotton cloth in both Andhra Pradesh and Tamil Nadu, has the following demand functions:

Andhra Pradesh : PA = 600 – QA

Tamil Nadu : PT = 400 – QT

The average cost function of the merchant is estimated to be AC =

15,000

Q + 100.If price discrimination is illegal, what is the profit-maximizing price of the merchant?(a) Rs.180 (b) Rs.250 (c) Rs.275 (d) Rs.300 (e) Rs.400.

(2 marks)

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74. During recent years, Sun Macro Systems Inc., has enjoyed substantial economic profits derived from patents covering a wide range of inventions and innovations for high-performance workstations used in a variety of scientific applications. A recent introduction, Ultra80, has proved especially profitable. The demand curve faced by Sun Macro Systems Inc. is P = 300 – Q. The cost function of the firm is C = 150 + 50Q. The maximum possible profit earned by the firm is


(2 marks)

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75. In a monopoly, the price is Rs.20. If the marginal revenue is Rs.10, the value of Lerner Index is

(a) 50.00 (b) 0.20 (c) 0.50 (d) 20.00 (e) 10.00.

(1 mark)

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76. In an oligopoly industry, market shares of four firms are 30%, 30%, 25% and 15% respectively. Four-firm concentration ratio for the industry is

(a) 15 (b) 16 (c) 40 (d) 60 (e) 100.

(1 mark)

< Answer >

77. Demand functions of a monopolist in two effectively segmented markets are:

Qa = 1,000 – 50PaQb = 800 – 25PbTotal cost function of the monopolist is TC = 500 + 10Q.If the monopolist does not practice price discrimination, sales maximizing price is(a) Rs.17 (b) Rs.900 (c) Rs.12 (d) Rs.525 (e) Rs.15.

(2 marks)

< Answer >

78. A monopolist can sell 5 units of a product, when the price is Rs.87.50. If the price is decreased to Rs.75, he can sell 6 units. What is the marginal revenue of the monopolist, if the price decrease is affected?

(a) Rs.15.00 (b) Rs.14.00 (c) Rs.12.50 (d) Rs.17.50 (e) Rs.20.00.

(1 mark)

< Answer >

79. Soft Lens Ltd. has enjoyed rapid growth in sales and high operating profits on its innovative extended-wear soft contact lenses. However, the company faces potentially fierce competition from a host of new competitors. Unless the company is able to thwart such competition, severe down pressure on prices and profit margins is anticipated. The profit function of the company is given by

=

3Q

3 – 5Q2 + 24Q

What is the profit maximizing output for the company?


(2 marks)

< Answer >

80. Gallantry Computer Inc., a producer of high-speed electronic computers with immense storage capacity and computing capability is operating in a monopolistically competitive industry. The demand and total cost functions of the firm are estimated to be

P = 350 –20QTC = 30QThe long run equilibrium output for the firm is(a) 8 units (b) 16 units (c) 32 units (d) 52 units (e) 64 units.

(2 marks)

< Answer >

81. Alpha Co. and Beta Co. are the two firms operating in a duopoly. The cost functions of Alpha Co. and Beta Co. are TCA = 10QA and TCB = 0.5Q2

B . If the demand function for the industry is Q = 200 – 4P, what is the

Cournot’s equilibrium output for the industry?


(2 marks)

< Answer >

82. In an industry, the number of firms is 4. The output would have been 1,500 units if the industry were perfectly < Answer >









competitive. Assuming cost of production as nil, the output under Cournot’s model is

(a) 300 units (b) 600 units (c) 1,875 units (d) 1,200 units (e) 1,500 units.

(1 mark)

END OF SECTION B

Suggested Answers121-1004

1. Answer : (d)

Reason : An economy that relies on both markets and command mechanism is called a mixed economy. Government as well as business firm provides goods and services. In such economies government supplies roads, defense, pensions, and sometimes-even schooling directly to the citizens.

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2. Answer : (c)

Reason : Air is a free good, provided by nature and does not command a price. All the other goods are economics goods, as they are relatively scarce and hence have prices.

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3. Answer : (a)

Reason : When the income elasticity is greater than one, the good is said to be luxury.

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4. Answer : (b)

Reason: If the demand curve is perfectly inelastic, the prices rises by the full amount of the tax and supply remains unchanged. The entire tax is borne by the consumers.

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5. Answer : (a)

Reason : The cross price elasticity of demand shows the nature of relationship between two products.

(a) Cross price elasticity of demand would be positive for substitutes as increase of price of one good increases the demand for other good.

(b) Cross price elasticity of demand would be negative for complementary goods because increase of price of one good decreases the demand for other good. Hence (b) is not the answer.

(c) For independents, the cross-price elasticity of demand would be zero because there is no relationship between the goods. Hence (c) is not the answer.

(d) & (e) goods are classified into inferior and luxury based on the income elasticity of demand and not on the cross price elasticity of demand.

Since the cross-price elasticity of demand of Rolex and Bollix is +10, it implies that Rolex and Bollix are substitutes..

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6. Answer : (a)

Reason : The relationship between average revenue, marginal revenue and elasticity of demand is given by the equation

MR = AR

e 1

e

. So long as elasticity of demand is greater than 1, marginal revenue is always

positive.

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7. Answer : (a)

Reason : The cross-elasticity of demand between two perfect substitutes is infinity.

Here, the smallest possible increase (decrease) in the price of one good causes an infinitely large increase (decrease) in the quantity demanded of other good.

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8. Answer : (b)

Reason : When income increase, the demand curve will shift to the right such that for any given price, more people will buy the product. Changes in product price will not shift the demand curve; rather, consumers will move along the demand curve. A decrease in substitute prices or increase in complementary prices would shift the demand curve to the left such that fewer people buy the product at any given price.

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http://www.icfai.org/suggested/121-1004.htm#Q8%23Q8








9. Answer : (e)

Reason : Changes in the price of luxury car does not cause a corresponding shift in supply curve.

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10. Answer : (b)

Reason : When total quantity demanded in the market equals total quantity supplied, the market is said to be in equilibrium.

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11. Answer : (d)

Reason : A person pursuing any activity would like to maximize the net benefit from that activity. Net benefit is equal to the benefit less the cost.

(a) Is not the answer because net benefit is zero when total benefit is equal to total cost of that activity.

(b) Is not the answer because net benefit is zero when average benefit is equal to average cost of that activity.

(c) Is not the answer because net benefit cannot be maximized if the cost of that activity is positive

(d) Is the answer. As long as the marginal benefit is greater than the marginal cost, total net benefit can be increased by pursuing that activity. If marginal benefit is less than the marginal cost, total net benefit can be increased by decreasing that activity. And net benefit is maximized when marginal benefit is equal to the marginal cost.

(e) Is not the answer because net benefit cannot be maximized.

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12. Answer : (a)

Reason : The law of diminishing marginal utility states that the marginal utility of any good tends to decline as more of the good is consumed over a definite period of time.

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13. Answer : (d)

Reason : When marginal utility becomes negative, it implies that the total utility has start diminishing.

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14. Answer : (c)

Reason : Indifference curve represents all those combination of goods which give satisfaction to the consumer. Since all the combinations on an indifference curve give equal satisfaction to the consumer, he will be indifferent between them, that is it will matter to him which one he gets.

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15. Answer : (a)

Reason : (a) True. When change in output is more than proportionate to the change in inputs, increasing returns to scale are in operation. (b)False. Constant returns to scale are in operation when the change in output is proportionate to the change in inputs. (c)False. The slope of the isoquant is MRTS. (d)False. Isoquants are convex to the origin. (e) False. The slope of isocost line is constant, which is the ratio of the prices of inputs.

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16. Answer : (a)

Reason : Here, the isoquant is a straight line. In this case, there is perfect substitutability between factors X and Y.

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17. Answer : (e)

Reason : The expansion path is the locus of all inputs combinations for which the marginal rate of technical substitution is equal to the price ratio. If there are two factors of production and if their prices are constant , we can get a number of parallel isocost line by varying the cost constraint. Each isocost line will be tangent to one of the isoquants. The locus of all such points of tangencies between the isoquants and the parallel isocost lines is the expansion path for the firm. It assumes that money outlay, input prices and state of technology remain the same.

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18. Answer : (a)

Reason : Marginal rate of technical substitution of X for Y may be defined as the number of units of Y which can be replaced with one unit of X, the level of output remaining unchanged.

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19. Answer : (c)

Reason : Wealth is not a factor of production.

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20. Answer : (b)

Reason : A firm’s cost curves are linked to its product curves. Over the range of rising average product, average variable cost is falling. When average product (AP) is maximum, average variable cost (AVC) is minimum. (a)Average Cost (AC) = AFC + AVC; since AC is combination of AFC and AVC, AC will not be minimum when AP is maximum. (b) Assuming labor as the only variable input and the wage rate being constant, MC is found by dividing the wage rate by MP. Thus, when MP is rising, MC is falling; when MP is diminishing, MC is rising. A similar relationship holds between AP and AVC. (c)Average Fixed Cost (AFC) declines so long as output increases. Hence, there exits no such relationship between AFC and AP. (d)Marginal Cost (MC) will be minimum when Marginal Product (MP) is maximum. (e)TFC is represented by a horizontal straight line because the fixed cost remains the same irrespective of the output. Hence, no relationship exists between TFC and AP.

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21. Answer : (e)

Reason : Least-cost production implies that the producer produces a given level of output where the marginal physical product to the factor price ratio is equal to the factor inputs. a. It is not appropriate in this instance because it is indicating that all factor prices are equal indicates the demand and supply of that factor. b. It is not appropriate in this instance because it indicates the addition to total output by the employment of an additional unit of a factor of production all else equal. c. It is not appropriate in this instance because marginal physical product is the slope of the total output curve and therefore will not indicate the least cost production. d. It is not appropriate in this instance because it is not indicating the least-cost-production. e. It is appropriate in this instance because, it is the change in the total revenue of the firm that results from the employment of one additional unit of a factor of production. Therefore the marginal physical product to factor price ratio equal to the factor inputs indicates the least-cost production. The correct answer is (e).

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22. Answer : (c)

Reason : The total cost curve is deduced from the total fixed cost and the total variable cost. The total cost is represented as the vertical integration of the total fixed cost and total variable cost. So, the vertical distance between TVC and TC is equal to total fixed cost. (a)Is not the answer because the vertical distance between TVC and TC is not equal to marginal cost. (b) Is not the answer because the vertical distance between TVC and TC is not equal to average variable cost (c) Is the answer because the vertical distance between TVC and TC is equal to total fixed cost (d) Is not the answer because the vertical distance between TVC and TC is not equal to average fixed cost.

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23. Answer : (b)

Reason : As the total fixed cost (TFC) is constant, AFC decreases as output increases. Therefore, the AFC is a monotonically decreasing function of the level of output. Since the TFC is constant, the shape of the TFC will be rectangular hyperbola. (a) Is not the answer because average total cost is not a rectangular hyperbola. (b) Is the answer because average fixed cost is a rectangular hyperbola. (c) Is not the answer because average variable cost is a U-shaped curve.

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(d) Is not the answer because marginal cost is not a rectangular hyperbola.(e) Is not the answer because total fixed cost is a horizontal straight line.

24. Answer : (e)

Reason : Implicit costs are opportunity costs which may not involve a cash outgo. Explicit costs are out-of-pocket costs which are visible.Options (a), (b), (c) and (d) are explicit costs as they are visible and involve cash outgo. Option (e) is an example of implicit cost as the opportunity cost of the asset is the rent foregone

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25. Answer : (c)

Long run average cost curve (LAC) (I) and (III) are true and hence the answer is (c).

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26. Answer : (c)

Reason : Cost functions are derived from the production functions, which describes the available efficient methods of production at any particular point of time. Hence the correct answer is (c).

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27. Answer : (a)

Reason: When a competitive firm is in equilibrium in the long run, its output is such that costs per unit of output are minimum. The long run equilibrium condition of a firm is such that price = marginal cost=minimum average cost.

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28. Answer : (e)

Reason : The demnd curve is horizontal to x-axis implies that the producers can produce as much as quantity of output to the given level of price. Therefore, the producer under perfect competition is a price-taker. The long-run equilibrium, all the existing firms get normal profits because of free entry and exit of firms. Hence the equilibrium condition in the long run for a firm would be P = AR = MR = MC.Hence, the correct answer is (e).

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29. Answer : (b)

Reason : A perfectly competitive firm in short run equilibrium only when Marginal cost must equal marginal revenue and marginal revenue must equal average revenue.

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30. Answer : (d)

Reason : Perfect competition is a form of market structure which represents a market without rivalry among the individual firms. When the product is similar and identical, given all other conditions, a perfectly competitive firm can only be a price taker. The price of the good is determined by the market forces. The demand curve is horizontal to x-axis implying that the producers can produce as much as quantity of output to the given level of price.a.Oligopoly is a form of market structure where there are few sellers. The demand curve is indeterminable because of the interdependence between the firms and it depends on the reaction curves of the competitor.b.Monopoly is a form of market structure where there is only one producer of the good. The demand curve is downward sloping implying that the producer is a price-maker. The distinguishing feature of this form of market structure is that the average costs of production continually decline with increased output as a result of which average costs of production will be lowest when a single large firm produces the entire

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output demanded.c.Monopolistic competition is a market structure where there are many firms selling closely related but non-identical goods. The demand curve is downward sloping because of product differentiation.d.The demand curve in the perfect competition is horizontal to x-axis implying that producer can produce as much as the quantity of output for a given level of price.e.The demand curve of a duopolist is indeterminate because of high degree of interdependence between the firms. Hence, the correct answer is (d).

31. Answer : (d)

Reason : I. In a perfectly competitive market, the products produced by all the firms in the industry are homogeneous. The technical characteristics of the product as well as the services associated with its sale and delivery are identical.

II. In a perfectly competitive market cost structure of every firm is not identical. The cost conditions of the industry are reflected in the change in factor prices, as the industry expands. With the expansion of the industry in the long run, cost curves of the firms shift on account of external economies and diseconomies.

III. In a perfectly competitive market, there are large number of buyers and sellers in the industry. No individual seller has any economic or market power to influence the market price in his favor through his own individual behavior or action. Buyers have no preferences towards any seller.

IV. In a perfectly competitive market, buyers have perfect knowledge about prices in the market. The information regarding price is assumed to be available free of costs. (a) Is not the answer because I above is one of the necessary assumption for a market to be perfectly competitive. (b) Is not the answer because II above is one of the necessary assumption for a market to be perfectly competitive. (c) Is not the answer because both I and III above are not all necessary assumptions for a market to be perfectly competitive. (d) Is the answer because both I, III and IV above are all necessary assumptions for a market to be perfectly competitive. (e) Is not the answer because II above is not the assumption of a perfectly competitive market where as III and IV above are necessary assumptions for a market to be perfectly competitive.

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32. Answer : (e)

Reason : In monopoly, the quantity cross elasticity of demand with other goods or services is generally zero because if one firm in another industry changes its price it will have no impact on the quantity sold by the monopolist.

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33. Answer : (a)

Reason : A monopolist is said to be in equilibrium, where the elasticity of his average revenue curve is greater than one.

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34. Answer : (c)

Reason: A large economy of scale leading to existence of a single firm in an industry is defined as a natural monopoly. Government regulation, ownership of critical raw materials and licenses are sources of monopoly, but not result in natural monopoly.

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35. Answer : (b)

Reason : In monopsony, there is only one buyer of a good.

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36. Answer : (c)

Reason : In monopolistic competition products are differentiated but close substitutes because of large number of sellers.

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37. Answer: (c)

Reason : The difference between perfect competition and monopolistic competition is with regard to type of

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product which they produce. Producer under perfect competition produces homogeneous goods while the producer operating under the conditions of monopolistic competition produces differentiated products.Large number of sellers is a common characteristic feature of both perfect competition and monopolistic competition.Free entry and exit is also common characteristic feature of perfect and monopolistic competition.Homogeneous product is the characteristic feature of only perfect competition. Differentiated product is the characteristic feature of monopolistic competition. Hence it is not the common feature of perfect and monopolistic competition.Large number of buyers is also common characteristic feature of both perfect competition and monopolistic competition.Large number of sellers and homogeneous product are the features of perfect competition. Hence the correct answer is (c).

38. Answer : (c)

Reason : Oligopoly market has a predominant feature of price leadership.

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39. Answer : (d)

Reason : Free entry and exit of firms is not a predominant feature of the oligopolistic market.

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40. Answer : (b)

Reason : The kinked demand curve model explains the observed rigidity of price in an oligopoly market. Each oligopolist believes that if he lowers the price of his product, his rivals will also lower the prices of their products and that if he raises , they will remain the prices at the existing levels.

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41. Answer : (e)

Reason : When a sales tax of Rs. 20 per fan is imposed

QS = 3000 + 4.5 (P-20)

= 3000 + 4.5 P – 90 = 2910 + 4.5 P

2910 + 4.5 P = 6000 – 3P

7.5 P = 3090

P = 412

Tax Imposed = Rs. 20

Change in price = 412 – 400 = 12

Proportion of tax borne by customers =

12100

20

= 60%

Proportion of tax borne by producers = 40%.

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42. Answer : (e)

Reason : Qd = 1000

ep = 1.25

ey = 2.00

ed =

%changein Q

%changein P

1.25 =

%changein Q

10

% change in Q = 12.5%

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ey =

%changein Q

%changein Y

2.00 =

% change in Q

7

\ % change in Q = 14.00%

\ Net effect is = 14.00 – 12.5 = 1.5%

1000 1.5% = 15

\ Demand for apple is expected to be = 1000 + 15 = 1015 boxes per week.

43. Answer : (b)

Reason : P1 = 7 Q1 = 15

P2 = 8 Q2 = 30

DP = 1 DQ = 15

Arc EPS =

1 2

1 2

P PQ

P Q Q

D

D

=

15 7 8

1 (15 30)

EPS = 5 (approx.)

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44. Answer : (b)

Reason : Equation = Qx = 100 + 0.5( 50)

Quantity demanded of x =125

At price of Rs.100 : Qx = 100+0.5(100)=150

Substitution or cross elasticity =(¶Qx / ¶Py)(Py/Qx) =(25\50)(50/125)=0.2

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45. Answer : (a)

Reason : The demand curve is Qd = 200 – P

The quantity demanded is Q = 200 – 75 => Q =125

Therefore dQ/dP = -1 (the slope)

Therefore point elasticity of demand = dQ/dPP/Q

Therefore, Ed = -1 (75/125)= - 0.6.

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46. Answer : (d)

Reason : When price is Rs.75, demand is 10 units

When price is Rs.70, demand is 12 units

If the demand is linear, then Q = a + bP

Where, b = Change in quantity demanded/Change in price = (12 – 10)/(70 – 75) = 2/(-5) = -0.4. Thus, Q = a – 0.4P

At Rs.75, 10 = a – 0.4(75)

Or, a = 40

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Thus, demand function = Q = 40 – 0.4P

The maximum quantity can be demanded when the price is zero. Hence, maximum quantity demanded = 40 – 0.4(0) = 40 units.

47. Answer : (c)

Reason : Equilibrium price is determined, when Demand = Supply D = S = 400, when the price is Rs. 14.00

So, the answer is (c).

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48. Answer : (c)

Reason : B

B

A

A

P

MU

P

MU

120

900

P

600

A

\ PA= 5.7

600

= Rs.80.

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49. Answer : (c)

Reason : At P = 5, Q = 90. Consumer surplus = ½ x 90 x (50 – 5) = 2025.

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50. Answer : (b)

Reason : When price increases from Rs.20 to 25 (by 25%), the quantity demanded will decrease by 37.5% i.e. by 3000 x .375 = 1125 units. Price effect = Income effect + Substitution effect. As income effect is 0.5 x substitution effect, price effect = 1.5 x substitution effect = 1125. Thus, substitution effect = 1125/1.5 = 750.

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51. Answer : (a)

Reason : The consumer will consume till MUY = PY

MUY = 10

0.5Y = 10 = 20 units.

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52. Answer : (a)

Reason : MRSxy = 5.0

0.2

1

X

Y

DD

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53. Answer : (b)

Reason : Slope of the budget is equal to Px/Py = 4/6 = 0.6666 = 0.67.

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54. Answer : (b)

Reason : When the consumer is in equilibrium,

xyMRS = y

x

P

P

\ 3= yP

75

Py=25.

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55. Answer : (e) < TOP >










Reason : First stage of production function ends, when APL is highest and second stage ends when MPL = 0. APL is highest when APL = MPL.

Q = 18L2 – L3

APL = Q/L = 18L – L2

MPL = ¶Q/¶L = 36L – 3L2

By equating APL and MPL,

18L – L2 = 36L – 3L2

2L2 = 18L

Or, L = 9

Thus, first stage of production is over the range of labor input 0 to 9.

At the end of the second stage of production function,

MPL = 0

36L – 3L2 = 0

Or, L = 12.

Thus, the second stage of production function is over the range of labor input 9 < L < 12.

A rational firm would operate only in the second stage of production function. This is because of increasing APL in the first stage and negative MPL in the third stage.

56. Answer : (b)

Reason : MRPL = w

360/ L0.5 = 40

L0.5 = 360/40 = 9

L = 9 x 9 = 81. Hence the correct answer is (b).

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57. Answer : (c)

Reason : The production function for a firm Q = 100L – 0.02L2

APL =

2Q 100L 0.02L

L L

= 100 – 0.02L.

When L = 10, APL = 100 – 0.02 (10) = 100 – 0.2 = 99.8.

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58. Answer : (d)

Reason : When K = L = 1, 4K + 2L + 4KL = 10

When K = L = 2, 4K + 2L + 4KL = 28

Hence, the function is increasing returns to scale

When K = L = 1, 2K/L2 = 2

When K = L = 2, 2K/L2 = 1

Hence, the function is decreasing returns to scale

When K = L = 1, 20K0.5L = 20

When K = L = 2, 20K0.5L = 56.56

Hence, the function is increasing returns to scale.

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59. Answer : (e)

Reason : Total product (TPL) = APL x L

When L = 10, TPL = 6 x 10 = 60

L = 11, TPL = 7 x 11 = 77

\MP of 11th unit of labor = 77 – 60 = 17 units

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60. Answer : (d)

Reason : MC= LMP

rateWage

= 10

40

= Rs.4

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61. Answer : (b)

Reason : Minimum possible AVC is where

d(AVC)

dQ =0

But

d(AVC)

dQ = –10 + Q

– 10 + Q = 0

Q = 10

AVC = 300 – 10 (10) + 0.5 (10)2 =Rs. 250.

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62. Answer : (d)

Reason : Since functions (I) and (III) have fixed cost components i.e. 20 and 100Q 0, they are relevant in the short run only. Hence, the correct answer is (d).

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63. Answer : (a)

Reason : AC = Q2 – 40Q – 480

C/dQ = 2Q – 40 or 2Q = 40 or,

Q = 20 units.

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64. Answer : (e)

Reason : Average variable cost = (13,500 – 12,500) / (250 – 200) = 20

Fixed cost = 12500 – 200 20 = 8,500 Or, Fixed cost = 13500 – 250 20 =Rs. 8,500.

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65. Answer : (e)

Reason : In a perfectly competitive industry,

Demand = Supply

10,000 – 600 P = 5000 + 400P;

5000 = 1000P; = Rs. 5.

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66. Answer : (d)

Reason : Average revenue = total revenue/ no. of output sold = 290/29 = Rs.10.

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67. Answer : (d)

Reason : TR = P Q = 2 100 = 200

TC = TFC + TVC=50 + 40 = 90

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\ Economic profit=TR – TC=200 – 90=Rs.110.

68. Answer : (b)

Reason : TC=500+40Q+5Q2

Therefore MC = 40+10Q

MR = P = 140 (given)

The profit maximizing condition, MR = MC

Therefore 140 = 40+10Q

140 – 40 = 10Q

10Q = 100

Q = 10.

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69. Answer : (c)

Reason : Profit = TR – TC

TR = P x Q

TR = (200 + 3Q)Q

TC = 3Q2 -100 Q +1000

Profit = 200Q +3Q2 -3Q2 +100Q –1000=10,000

= 300Q –11000

300Q = 11000Q

= 11000/300 = 36.67 units

= 37 units.

Hence the correct answer is (c).

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70. Answer : (c)

Reason : TR = P Q Or, (50 – 0.5Q) Q Or, 50Q – 0.5Q2

Thus, profit at output 12 units is 50 12 – 0.5 12 12 – 50 – 2 12 = 454.

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71. Answer : (b)

Reason : The minimum price below which the firm shuts down its operation is the minimum average variable cost.

The average variable cost will be equal to price or marginal revenue at the minimum point on average variable cost curve.

\MC = AVC 75 – 20Q + 1.5Q2 = 75 – 10Q + 0.5Q2

1.5Q2 – 0.5Q2 – 20Q + 10Q = 0. Q2 –10Q

= 0 Q(Q–10) = 0 Q=10.

At Q = 10,

AVC = 75 – 10(10) + 0.5 (10)2

= 75 – 100 +50 = Rs.25.

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72. Answer : (e)

Reason : At break-even, TR = TC TR = P x Q = 5Q.

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Thus, 5Q = 2850 + 3.5QOr, 1.5Q = 2850

Or, Q = 2850/1.5 = 1900 units.

73. Answer : (d)

Reason : When price discrimination is not allowed, PA = PT and QA + QT = Q (total output).

It can be written as

QA = 600 – PA = 600 – PT = 400 – PT = 400 – P

Or, Q = QA + QT = 600 – P + 400 – P = 1000 – 2P

Or, P = 500 – 0.5QAt profit maximization, MR = MCMC = ¶TC/¶Q

Where, TC = AC x Q = (15000/Q + 100) Q = 15000 + 100Q

And, MC = 100TR = (500 – 0.5Q) Q = 500Q – 0.5 Q2

Thus, MR = 500 – Q

At equilibrium, MR = MC

500 – Q = 100

Or, Q = 400

Or, P = 500 – 0.5 (400) = 300.

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74. Answer : (e)

Reason : Demand function P = 300 – Q TR = PQ = 300 Q – Q2

MR =

dTR

dQ = 300 – 2Q

Cost function TC = 150 + 50 Q MC =

dTC

dQ = 50

To maximize profit MR = MC

300 – 2 Q = 50

250 = 2 Q

Q = 125

P = 300 – 125 = 175

Profit = TR – TC = (175X125) – (150 + 50 125)

= 21875 – 6400= Rs. 15475.

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75. Answer : (c)

Reason : In monopoly, the learner Index =

P MR

P

(\MR = MC)

When P = 20 and MR = 10, Learner Index =

20 10

20

=

10

20 = 0.50.

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76. Answer : (e)

Reason : The concentration ratio is the percentage of total industry sales made by the four (or sometimes eight) largest firms of an industry.

\ Four-firm concentration ratio = 30 + 30 + 25 + 15 = 100%.

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77. Answer : (c)

Reason : Qa=1,000 – 50Pa

Qb=800 – 25Pb

TC=500 + 10Q.

If the monopolists does not practice price discrimination,

Qa = 1,000 – 50Pa

Qb = 800 – 25Pb

2Q = 1,800 – 75P

or, Q = 900 – 37.5P or, 37.5P = 900 – Q or,

P = 24 – 0.027Q

TR = 24Q – 0.027Q2

MR = 24 – 0.054Q

Sales maximization is possible, when MR = 0

\ 24 – 0.054Q = 0

24 = 0.054Q

Q = 444.44Q

P = 24 – 0.027(444.44)

P = (24 – 12)

= Rs.12.00.

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78. Answer : (c)

Reason : When price is Rs.87.50 and Q = 5 units, the total revenue of the monopolist

= P Q = Rs.87.50 5 = Rs.437.50

When P = Rs.75 and Q = 6 units, TR = Rs.450.00

If the price decrease is affected, the MR = 450 – 437.50 = Rs.12.50.

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79. Answer : (a)

Reason : d/dQ = Q2 – 10Q + 24 = 0

Or, Q = 6 or 4

Since booth the values are positive, we need to check for the second order condition for maximizing profits,

d2/dQ2 = 2Q – 10

If Q = 6, d2/dQ2 > 0

If Q = 4, d2/dQ2 < 0

Therefore, profit maximizing output is 4.

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80. Answer : (b) Reason : Long run equilibrium condition of a firm operating in a monopolistic competition is given by

P = AC; 350 – 20Q = 30

20Q = 320

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Or, Q = 320/20 = 16.

81. Answer : (b)

Reason : Alpha Co. and Beta Co. are the two firms operating in a market.

The cost functions of Alpha Co. and Beta Co. are CA = 10QA and CB = 0.5QB2.

If the demand function of the industry is Q = 200 – 4P, what is the Cournot’s equilibrium output for the industry?

Q = 200 – 4POr, 4P = 200 – Q Or, P = 50 – 0.25Q But, we know that Q = QA + QB

Hence, P = 50 – 0.25QA – 0.25QB

Thus, TRA = P x QA = QA(50 – 0.25QA – 0.25QB)

Thus, TRA = 50QA – 0.25QA2 – 0.25QAQB

Thus, MRA = 50 – 0.5 QA – 0.25QB MRA = MCA 50 – 0.5QA – 0.25QB = 10

Or, 40 – 0.5QA = 0.25QB

Or, 160 – 2QA = QB TRB = P x QB = QB(50 – 0.25QA – 0.25QB) TRB = 50QA – 0.25QB2 – 0.25QAQB

MRB = 50 – 0.5QB – 0.25QA

But, MRB = MCB 50 – 0.5QB – 0.25QA = QB Or, 50 - 0.25QA = 1.5QB

Or, 50 – 0.25QA = 1.5(160 – 2QA)

Or, 50 – 0.25QA = 240 – 3QAOr, 2.75QA = 190

Or, QA = 69 QB = 160 – 2(69) = 22 Q = QA + QB = 69 + 22 = 91 units.

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82. Answer : (d)

Reason : Output in a Cournot’s model, when MC = 0 is

Qn = Qc

n

n 1 Where n = number of firms in the industry

Qc = Output, if the market had been a competitive one.

Q4 = 1500

4

4 1 =1500

4

5 = 1200 units.

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