Question Paper EndSem Exam - ME

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Marks: 60 (Weight in the final grade: 60%) Time: 130 Minutes
Multiple Choice Questions (Marks: 1 x 5 = 5)

1. For a particular good, a 2% increase in price causes a 12 percent decrease in quantity
demanded. Which of the following statements is most likely applicable to this good?
a. There are no close substitutes for this good
b. The good is a luxury
c. The market for the good is broadly defined
d. The relevant time horizon is short
2. In a duopoly situation, the logic of self-interest results in a total output level that
a. equals the output level that would prevail in a competitive market
b. equals the output level that would prevail in a monopoly
c. exceeds the monopoly level of output, but falls short of the competitive output
d. falls short of the monopoly level of output
3. For a monopolist, marginal revenue is
a. positive when the demand effect is greater than the supply effect
b. positive when the monopoly effect is greater than the competitive effect
c. negative when the price effect is greater than the output effect
d. negative when the output effect is greater than the price effect
4. Which of the following expressions is correct?
a. accounting profit = economic profit + implicit costs
b. accounting profit = total revenue - implicit costs
c. economic profit = accounting profit + explicit costs
d. economic profit = total revenue - implicit costs
5. When supply is perfectly elastic, the value of the price elasticity of supply is
a. 0; b. 1; c. greater than 0 & less than 1; d. Infinity
Descriptive and analytical questions
6. (Marks: 2) Why is there a social cost to monopoly power? If the gains to producers from
monopoly power could be redistributed to consumers, would the social cost of monopoly
power be eliminated? Explain briefly.
7. (Marks: 2) Suppose a firm can practice perfect, first-degree price discrimination. What is
the lowest price it will charge, and what will its total output be?
8. (Marks: 2) Suppose the government regulates the prices of mutton and chicken and sets
them below their market-clearing levels. Explain why shortages of these goods will develop
and what factors will determine the sizes of the shortages. Explain briefly.
9. (Marks: 2) How might a drought that destroys half of all farm crops be good for farmers?
If such a drought is good for farmers, why don’t farmers destroy their own crops in the
absence of a drought?
10. (Marks: 5) Prices of selected items in India in 1990 and 2010 are given in the table. CPI
for the respective years is given Items 1990 (₹) 2010 (₹)
in the last row. Compute the Potato per kg. 20 60
growth in prices of these items Pack of Cigarettes 30 120
in real terms in the 10 year Chicken per kg. 40 140
period and find which item Semester Tuition fees in IIT 20,000 50,000
Consumer Price Index (CPI) 130 260
experienced the highest growth
in real terms.
11. (Marks: 2x2=4) A firm has a fixed production costs of $5,000 and a constant marginal
cost of production equal to $500 per unit produced
a) Write down the firm’s total cost function and average cost function
b) If the firm wanted to minimize the average total cost, would it choose to be very large or
very small? Explain
12. (Marks: 2+2+1 = 5) Suppose a firm is currently employing 20 workers, the only variable
input at a wage rate of Rs.60. The average product of the labor is 30, the last worker added 12
units to the total output, and total fixed cost is Rs.3600.
a) Calculate the marginal cost.
b) Calculate the Average Variable Cost.
c) Calculate the average total cost.
13. (Mark: 4) The marginal product of labor in the production of computer chips is 50 chips
per hour. The marginal rate of technical substitution of hours of labor for hours of machine
capital is 1/4. What is the marginal product of capital?
14. (Mark: 3x3=9) Monopolist faces the demand curve P = 11 – Q, where P is measured in
dollars per unit and Q in thousands of units. Monopolist has a constant average cost of $6.
a) Draw the average and marginal revenue curves and the average and marginal cost
curves. What are the monopolist’s profit-maximizing price and quantity? What is the
resulting profit? Calculate firm’s degree of monopoly power using the Lerner index.
b) A government regulatory agency sets a price ceiling of $7 per unit. What quantity will
be produced, and what will the firm’s profit be? What happens to the degree of
monopoly power?
c) What price ceiling yields the largest level of output? What is that level of output?
What is the firm’s degree of monopoly power at this price?
15. (Mark: 1.5x4=6) Each year the United States considers renewal of Most Favored Nation
(MFN) trading status with China. Historically, legislators have made threats of not renewing
MFN status because of human rights abuses in China. The non-renewal of MFN trading
status is likely to involve some retaliatory measures by China in the form of imposing trade
sanctions against US firms. The dollar value of all trade-flow benefits to the United States
and China under different circumstances are given below:
i. If USA doesn't renew MFN status and China retaliates with trade sanctions against
US the value from trade will be $65 billion for the USA and $75 billion for China
ii. If the USA doesn't renew MFN status and China does not retaliate the value from
trade will be $140 billion for the USA and $5 billion for China.
iii. If the USA renews MFN status and China does not imposes trade sanctions against
the US the value from trade will be $130 billion for US & $275 billion for China
iv. If the USA renews MFN status and China imposes trade sanctions against the US the
value from trade will be $35 billion for the USA and $285 billion for China.
a) Draw the Payoff Matrix
b) What is the dominant strategy for China?
c) What is the dominant strategy for United States?
d) Is there a Nash Equilibrium? If so, what is that?
16. (Mark: 1.5x4=6) Two major networks are competing for viewer ratings in the 8:00-9:00
P.M. and 9:00-10:00 P.M. slots on a given weeknight. Each has two shows to fill this time
period and is juggling its lineup. Each can Network 2
choose to put its “bigger” show first or to place First Second
it second in the 9:00-10:00 P.M. slot. The Network First 20 , 30 18 , 18
combination of decisions result in the following 1 Second 15 , 15 30 , 10
“ratings points”:
a) Find the Nash equilibria for this game, assuming that both networks make their
decisions simultaneously
b) If each network is uses a maximin strategy, what will be the resulting equilibrium?
c) What will be the equilibrium if Network 1 makes its selection first? If Network 2 goes
first?
d) Suppose the network managers meet to coordinate schedules and Network 1 promises
to schedule its big show first. Is this promise credible? What would be the likely
outcome?
17. (Mark: 2x4=8) A monopolist can produce at a constant average (and marginal) cost of
AC = MC = $5. It faces a market demand curve given by Q = 53 – P.
a) Calculate the profit, profit-maximizing price and quantity for this monopolist.
b) Suppose a second firm enters the market. Let Q1 be the output of the first firm and Q2
be the output of the second. Market demand is now given by Q1 + Q2 = 53 – P.
Assuming that this second firm has the same costs as the first, write the profits of each
firm as functions of Q1 and Q2.
c) Suppose (as in the Cournot model) that each firm chooses its profit-maximizing level
of output on the assumption that its competitor’s output is fixed. Find each firm’s
“reaction function”.
d) Calculate the Cournot Nash equilibrium (i.e., the values of Q1 and Q2 for which each
firm is doing as well as it can given its competitor’s output). What are the resulting
market price and profits of each firm?

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Multiple Choice Questions (Marks: 1 x 5 = 5)

Descriptive and analytical questions

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