MANAGERIAL ECONOMICS QUESTION BANK
MBA 012


Part I
1. At a local supermarket, the price of Simla apples varies every week. Mr. Mishra, who is a regular buyer
of apples, spends exactly Rs.50 on apples every week, irrespective of the price. For Mr. Mishra, the
price elasticity of demand for apples is
(a) Perfectly elastic
(b) Perfectly inelastic
(c) Unit elastic
(d) Relatively elastic
(e) Relatively inelastic.

2. When the quantity supplied of a commodity exceeds the quantity demanded at a given price, the price
(a) Remains the same
(b) Increases
(c) Decreases
(d) First increases, then decreases
(e) First decreases, then increase.

3. The demand curve is usually
(a) Downward sloping from left to right
(b) Upward sloping from left to right
(c) U-Shaped
(d) Horizontal straight line
(e) Vertical straight line.

4. If the demand equation is given as Qd = 100 – 4P and price is Rs.10, the point elasticity of demand is
(a) –4.00 (b) –0.67 (c) –0.06 (d) –0.10 (e) –0.60.

5. A product priced at Rs.900 has price elasticity of demand equal to 6. What is the marginal revenue?
(a) Rs.700 (b) Rs.750 (c) Rs.800 (d) Rs.850 (e) Rs.900.

6. Which of the following is/are not true regarding consumer surplus?
I. Consumer surplus is helpful to the government in fixing taxes.
II. Consumer surplus helps the monopolists in fixing price of a commodity.
III. In case of imported products which are cheaper than domestic products the consumer surplus is less.
IV. A higher consumer surplus indicates that the economy is stable.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (III) above
(e) Both (II) and (IV) above.

7. Which of the following statements is not true?
(a) The concept of total utility is subjective so it is very difficult to measure it
(b) Beyond the satiety point the marginal utility will be negative
(c) In terms of calculus the marginal utility of a good is the slope of the total utility function
(d) Total utility is the difference between the marginal utilities of current and preceding units of the
product
(e) Marginal utility analysis explains the inverse relationship between the price and quantity
demanded.

8. At the point of tangency between budget constraint and indifference curve, the consumer
(a) Minimizes his budget
(b) Maximizes his budget
(c) Is unaffordable to buy the desired goods
(d) Attains maximum satisfaction at a given budget
(e) Consumes only one good.

9. ‘Diamond- water’ paradox shows the operation of
(a) Law of demand
(b) Law of supply
(c) Law of diminishing marginal utility
(d) Law of variable proportions
(e) Law of equi-marginal utility.

10. Opportunity costs are also known as
(a) Spill-over costs (b) Money costs (c) Alternative costs
(d) External costs (e) Sunk costs.

11. Cost functions are derived from
(a) Production function
(b) Demand function
(c) Supply function
(d) Revenue function
(e) Profit function.

12. If the firm’s total revenue exceeds its economic costs, the residual is called as
(a) Pure profit
(b) Producer surplus
(c) Accounting profit
(d) Normal profit
(e) Abnormal profit.

13. The cost that can be easily attributed to a product or a process is called as <
(a) Fixed cost
(b) Variable cost
(c) Implicit cost
(d) Private cost
(e) Separate cost.

14. Which of the following statements is not true?
(a) Fixed cost is incurred even if the production is zero
(b) Total average cost cannot be zero
(c) Average fixed cost decreases with every increase in output
(d) The average total cost curve is flatter than average variable cost curve
(e) The minimum point of average cost will be to the left of the minimum point of the average
variable cost.

15. Both marginal and average costs are equal to each other when
(a) Marginal cost is minimum
(b) Average cost is minimum
(c) Fixed cost is minimum
(d) Total cost is maximum
(e) Marginal cost is maximum.

16. The total cost function of a firm is given as TC = 500 – 2Q + 3Q2. If the current output is 5 units,
average cost is
(a) Rs.110 (b) Rs.111 (c) Rs.112 (d) Rs.113 (e) Rs.114.

17. Consider the following total cost function of a firm:
TC = 5,000 + 800Q – 9Q2 + 0.25Q3
Which of the following statement is/are true?
I. The average variable cost function is 800 – 9Q + 0.25Q2.
II. Fixed cost is Rs. 5,000.
III. Marginal cost function is 800 – 9Q + 0.25Q2.
IV. Average cost function is 800Q – 9Q2.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Only (IV) above
(e) Both (I) and (II) above.

18. The firm in a perfectly competitive market is a price taker. This is because
(a) The firm has some, but not complete, control over its product price
(b) There are large number of buyers and sellers in the market that any individual firm cannot affect the
market
(c) Each firm produces a homogeneous product
(d) There is easy entry or exit from the market
(e) Of absence of transport cost.

19. In a perfectly competitive market in the long run no firm earns abnormal profit. This is
(a) Due to homogenous products they produce
(b) Because of constant price
(c) Due to existence of large number of buyers
(d) Due to free entry and exit of firms
(e) Because of absence of transport cost.

20. Which of the following statements is not true about monopoly?
(a) There are barriers to entry
(b) A monopolist’s individual demand curve possesses the same general properties as the industry
demand curve for a perfectly competitive market
(c) A monopolist may maximize profit with respect to variations of either output or price
(d) The monopolist must increase the price of every unit in order to sell additional units
(e) The rate decline in the MR of monopolist is twice the rate of decline in price.

21. In a monopoly, price is
(a) Lesser than the marginal revenue
(b) Greater than the average revenue
(c) Greater than the marginal revenue
(d) Equal to the total revenue
(e) Equal to marginal cost.

22. Which of the following is false in the first degree price discrimination under monopoly?
(a) The monopolist will be able to extract the entire consumer’s surplus
(b) The price of each unit will be different
(c) By following the first degree price discrimination, the monopolist earns more than what he could
otherwise earn at a uniform price per unit
(d) The price of the first unit will be less than that of the subsequent units
(e) It is another name for perfect price discrimination.

23. Which of the following represents the possible combinations of two goods that can be produced in a
certain period of time under the condition of given technology and fully employed resources?
(a) Isoquant curve
(b) Production possibility frontier
(c) Laffer curve
(d) Phillips curve
(e) Business cycles.

24. Which of the following price indices is most widely used for determining inflation in India?
(a) Wholesale price index
(b) GDP deflator
(c) Consumer price index
(d) Producer price index
(e) GNP deflator.

25. Who among the following advocates that, economics focuses on the role government plays in
stabilizing the economy by managing aggregate demand?
(a) Keynesian
(b) Monetarist
(c) New classical
(d) Classical
(e) Rational expectations.

26. A continuous decline in prices is referred to as
(a) Inflation
(b) Deflation
(c) Reflation
(d) Hyper-inflation
(e) Stagflation.

27. Recession is defined as
(a) Two or more quarters of increasing inflation
(b) The period after the trough of a business cycle
(c) The period before the peak of the business cycle
(d) Two or more quarters of declining output
(e) Two or more quarters of declining inflation.

28. Which of the following is not true if the central bank imposes a reserve ratio of 100%?
(a) The banking system can no longer affect the supply of money in the economy
(b) Change in the foreign exchange reserves will result in an equal change in the money supply
(c) The lending capacity of banks would narrow down to zero
(d) A rupee deposited in a bank reduces the money supply in the economy by one rupee
(e) Money supply in the economy will be equivalent to the high-powered money.


29. Which of the following chain of events results from an expansionary monetary policy?
(a) Aggregate output increases, the demand for money increases, the interest rate increases, planned
investment decreases, and aggregate output decreases
(b) Money supply increases, the interest rate decreases, planned investment increases, aggregate
output increases, and money demand increases
(c) Money demand increases, the interest rate decreases, planned investment increases, aggregate
output increases, and money demand increases
(d) Money supply increases, the interest rate increases, planned investment increases, aggregate
output increases, and money demand increases
(e) Money supply decreases, interest rate decreases, planned investment decreases, aggregate output
decreases, money demand decreases.

30. Inflation accompanied by a slowing of economic activity is
(a) Known as deflation
(b) A result of a stagnant aggregate supply
(c) A result of fiscal stimulus
(d) Known as stagflation
(e) Known as recession.

31. Refer to the diagram below:


The initial equilibrium position is at point b. Now if demand decreases and further the government imposes a unit tax on the product, the new equilibrium position will be at which point?
(a) a (b) f (c) d (d) e (e) c.

32. In monopolistic competition, the industry will be in equilibrium when for each firm
(a) AR = AC (b) AR = MC (c) MR = MC (d) MR = AC (e) MR < MC.

33. Which of the following is always true of the relationship between average cost and marginal cost?
(a) Average total cost is increasing when marginal cost is increasing
(b) Marginal cost is increasing when average variable cost is higher than marginal cost
(c) Average variable cost is increasing when marginal cost is increasing
(d) Average variable cost is increasing when marginal cost is higher than average variable cost
(e) Average variable cost is constant when marginal cost is constant.

34. In case of perfect complements the indifference curve is
(a) L-shaped (b) Straight line sloping downward (c) Straight line sloping upward
(d) Convex to origin (e) U-Shaped.

35. With increase in output, the average fixed cost
(a) Decreases continuously
(b) First increases then decreases
(c) First decreases then increases
(d) Increases continuously
(e) Remains constant.

36. When the cross price elasticity is less than zero than the goods are considered as
(a) Perfect substitutes
(b) Substitutes
(c) Complements
(d) Independent
(e) Inferior.

37. What is the shape of total fixed cost curve?
(a) Upward sloping straight line
(b) U–shaped
(c) Vertical straight line
(d) Horizontal straight line
(e) Downward sloping straight line.

38. 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) Ownership of critical raw materials
(e) Licenses.

39. Which of the following statements is true?
(a) If 10% decrease in the inputs leads to 5% 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 isocost line increases as we move from Y-axis to X-axis.

40. Refer to the following diagram:


At which point in the given curve a firm operating under perfect competition will be earning negative profits?
(a) E (b) E1 (c) E2 (d) E3 (e) N.
41. Which of the following statements is/are true?
I. When the supply increases, both the price and the quantity will increase.
II. When the supply increases the supply curve shifts towards the left.
III. A shift in the supply curve towards the right results in a fall in the price.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above
(e) Both (I) and (III) above.

42. Which of the following statements are false?
I. Isoquant is a curve drawn on a graph with different factors of production on the two axes.
II. The output is the same on any point of the isoquant curve.
III All parallel isoquant curves represent the same output.
IV. The point where an isocost line is tangential to an isoquant curve is the point where the cost is the least.
V. The point where an isocost line is tangential to an isoquant curve is the point where the cost is the highest.
(a) Both (I) and (V) above
(b) Both (II) and (V) above
(c) Both (III) and (V) above
(d) Both (IV) and (V) above
(e) Both (III) and (IV) above.

43. The demand for essential goods is usually
(a) Relatively elastic (b) Perfectly inelastic (c) Unitary elastic
(d) Relatively inelastic (e) Perfectly elastic.

44. Which of the following is true with reference to shutdown point in a perfect competition?
(a) The total revenue of the firm equals its total costs
(b) At that output level the price covers the average fixed costs of the firm
(c) At that output level the price covers the average variable costs of the firm
(d) At that output level the price covers the total variable costs of the firm
(e) At that output level the losses of the firm cease and its profits begin.

45. Monopolistic competition consists of
(a) Two firms selling differentiated products
(b) A few firms selling an identical product
(c) Many firms selling differentiated products
(d) Many firms selling an identical product
(e) Single firm selling an identical product.

46. When the demand for a product is tied to the purchase of some parent product, its demand is called as
(a) Induced demand (b) Autonomous demand (c) Intermediate demand
(d) Market demand (e) Direct demand.

47. A consumer is indifferent between the combinations A and B.
Combination Good X Good Y
A 17 16
B 19 14
The value of marginal rate of substitution (MRSXY) for the consumer is
(a) – 1
(b) 1
(c) 0.50
(d) – 0.50
(e) Zero.

48. A Giffen commodity is ____________ commodity whose income effect is __________ and ___________ than the substitution effect.
(a) A normal; positive; weaker
(b) A normal; negative; weaker
(c) An inferior; positive; weaker
(d) An inferior; negative; stronger
(e) An inferior; positive; stronger.

49. The production function represents __________ of a firm
(a) Technology
(b) Cost structure
(c) Investments
(d) Plant size
(e) Output.

50. Which of the following statements is false about perfect competition?
(a) The market price is determined by the forces of demand and supply
(b) An individual seller has only an imperceptible influence on the market price
(c)A market is said to be perfect only when perfect competition prevails on both sides of the market i.e.
buyers and sellers
(d) For a individual firm output is the parameter of action
(e) The price in perfect competition is always higher than its marginal revenue.

Part II

1. The average cost function of a firm is given as follows:
.AC =800 + 80 + 4Q
Q
What is total cost for the firm at an output of 20 units?

2. The demand function of a firm is given as P = 1,000 – 50Q and the average variable cost function is
estimated as AVC = 250 + 25Q. At the equilibrium level of output if the average fixed cost is Rs.60,
then what is the total cost at that level of output?

3. Delta Ltd., is operating in a perfectly competitive industry. The total cost function of Delta Ltd., is
estimated to be TC = 1,200 + 600Q – 50Q2 + Q3. Industry supply function is Qs = 200 + 4P. If profit
maximizing output for Delta Ltd., is 150 units, find the total quantity supplied by the industry

4. Alpha Ltd., has a monopoly in producing a product X. The demand function for this product is
estimated as Q = 75 – P. The total cost function is TC = 25Q. What is the profit?

5. The following information is extracted from the National Income Accounts of an economy. All figures
are in millions Rs.
If the national income is 10,000, find the personal disposable income in the economy
Particulars
Depreciation 236
Government expenditure 1,188
Corporate taxes 288
Gross domestic investment 1,278
Transfer payments 278
Personal taxes 810
Net income earned from abroad 44
Undistributed corporate profits 600

6. The following is the information from national accounts of an economy:
Calculate the GDP at factor cost
Particulars in milion Rs.
Factor income paid abroad 42,000
Factor income received from abroad 31,500
Depreciation 42,000
Subsidies 21,000
National income 1,68,000

7. The market supply and demand functions for soap in north India are given as follows:
Qs = 5,000 + 40P
Qd = 15,500 – 60P
The soap industry in the region exhibits all the features of a perfectly competitive market. An individual firm has a
fixed cost of Rs.1,500. Its variable cost function is AVC = 105 – 24Q + Q2. Calculate the profit earned by the firm.

8. The market for a good X consists of three individuals – A, B and C. The demand schedule of the individuals is given below:
Price of the good (Rs.) A B C
200 2 0 4
180 2 0 8
160 4 2 16
140 8 4 24
a) What is the arc price elasticity of demand (absolute value) for the good, when the price decreases from Rs.160 to
Rs.140 per unit?
b) Make the market demand schedule and Plot the market demand curve for good X

9. The total revenue and total cost functions of Super Star Company are as follows:
TR = 640Q – Q2
2
TC = 1,200 +100Q + Q2
What is the profit maximizing output for Super Star Company?

10. For a firm operating in a monopolistic competition demand function is given as follows:
P = 1,000 – Q
If the marginal cost of the firm is constant at Rs.5, find the equilibrium output in the short run.

11. For the linear demand curve P = 50 – 20Q, what is the absolute price elasticity of demand, when the price is Rs.25?

12. The demand function for good A for Mr. Shankar is given as follows:
Qx = 6,750 – 12PA + 4PB + 0.25Y B
Where Y = income of Mr. Shankar which is Rs. 15,000.
PA = price of good A which is Rs.150 per kg.
PB = price of good B which is Rs.90 per kg. B
What is the income elasticity of demand for good A?

13. A firm operating in a perfectly competitive industry has the following cost function:
TC = 500 + 8Q + 0.035Q2
Supply and demand functions for the industry are:
QS = 8,500 + 100P
QD = 14,500 – 300P.
What is the profit maximizing output for the firm?

14. A ball pen manufacturing firm has incurred a fixed cost of Rs.5,250 sells each unit for Rs.50. The average variable cost is Rs.25. What will be the break-even quantity?

15. The cost function of a particular firm is given as follows:
TC = 3,000 + Q3 – 12Q2 + 2,400Q
What is the marginal cost if output is 8 units?

16. The demand and supply functions for a product are:
Qd = 4,200 – 100P
Qs = 3,000 + 20P
If the government imposes a specific tax of Rs.10 per unit, what would be new equilibrium price of the product?

17. Refer to the following table:

What is the price per unit at fifth unit of output?

18. A television manufacturer sells television in a perfectly competitive market. The cost function is TC = 5,000 + 150Q – 20Q2 + Q3
What is the price below which the manufacturer would shut down his operations?


Part III

Q1. “Managerial Economics is the application of economic tools and theories for managerial decision making”. Elaborate.

Q2. Discuss the five fundamental principles of managerial economics. Explain their role in managerial decisions with the help of suitable examples.

Q3. “In today’s competitive environment it is not feasible for firms to pursue profit maximization as business objective”. In the light of the above statement discuss the alternative objectives of the firms.

Q4. What do you understand by ‘market demand’? Explain the major determinants affecting demand for a commodity. Which of these factors can cause a rightward shift in the demand curve?

Q5. Explain the law of demand with an example and give the rationale behind this law.
What are the exceptions to this law?

Q6. Explain the various techniques of demand forecasting. Why is demand forecasting essential for effective business decisions?

Q7. Discuss the various types of elasticity of demand giving the importance of each in decision making.

Q8. Explain consumer’s equilibrium with the help of indifference curves.

Q9. What is production function? Explain its importance for a manager. Discuss the law governing short run production function with the help of an example. Which is the stage of rational production according to this law?

Q10. Discuss the properties of isoproduct curves and explain the law of returns to scale through isoquants. What is the role of economies and diseconomies of scale in the returns to scale?

Q11. When is a producer said to be in equilibrium. Explain the equilibrium condition with the help of Isoquants. (Explain the least cost combination of inputs for producing a desired level of output)

Q12. Explain the relation between Total, Average and Marginal costs. How is the long run average cost curve derived? Why is it U shaped? Can it have any other shape? Explain.
Q13. Differentiate between:
a) Explicit and Implicit Cost d) Accounting and Economic Profit
b) Fixed and Variable Cost e)Monetary and Real Cost
c) Actual and Opportunity Cost

Q14. Explain the price output determination in a perfectly competitive market. Why do firms earn only normal profit in the long run under perfect competition?

Q15. How does a discriminating monopolist determine price and output? What are the conditions for price discrimination to be profitable?

Q16. How is price and output determined under monopolistic competition? Why do selling and advertising costs become important in monopolistic competition?

Q17. How is price and output determined under monopoly? Can a monopolist incur losses?

Q18. Why is price and output indeterminate under oligopoly? Explain the Kinked demand curve model (or price rigidity) in oligopoly.

Q19. Explain the price leadership in oligopoly. How successful is it in real business world?

Q20. Explain the formation of cartels in oligopolistic market structure. Why do cartels break?

Q21. Explain the various pricing strategies adopted by firms in different market forms and various stages of the product life cycle.

Q22. Explain the three methods of measuring national income giving precautions related to each. Is national income a good indicator of welfare?

Q23. Differentiate between the following:
a) GDP at market price and NNP at factor cost
b) National income and Personal income
c) Personal income and Personal disposable income

Q24. What do you understand by Inflation? What are the reasons behind inflation in an economy (or explain types of inflation)? How can it be controlled?

Q25. Explain the various phases of business cycle. Why do they occur? How can economic activity be stabilized?

Q26. Define profit and explain the various theories of profit.
Suggested Answers

PART I


1. Answer : (c)
Reason : Total expenditure on a good will not change when the price of a good changes if demand
is unit elastic. When the demand is unit elastic, the upward pressure on expenditure caused
by the price increase would be equally off-set by the downward pressure on expenditure
resulting from the reduction in the quantity demanded. Thus, expenditure of a consumer
on a good with unitary elastic demand remains the same irrespective of the change in the
price of good. (a) If the demand is perfectly elastic, the proportionate change in quantity
demanded would be far higher than the proportionate change in price. Thus, expenditure
of the consumer increases (decreases) with the fall (increase) in the price of the good
because of higher proportionate change in quantity demanded. (b) If the demand is
perfectly inelastic, the proportionate change in quantity demanded would be far lesser than
the proportionate change in price. Thus, expenditure of the consumer decreases (increases)
with the fall (increase) in the price of the good because of lower proportionate change in
quantity demanded. (c)If the demand is unit elastic, the proportionate change in quantity
demanded would be equal to the proportionate change in price. Thus, expenditure of the
consumer remains the same with the decrease or increase in the price of the good because
of proportionate change in quantity demanded. (d) If the demand is relatively elastic, the
proportionate change in quantity demanded would be higher than the proportionate change
in price. Thus, expenditure of the consumer increases (decreases) with the fall (increase)
in the price of the good because of higher proportionate change in quantity demanded. (e)
If the demand is relatively inelastic, the proportionate change in quantity demanded would
be lesser than the proportionate change in price. Thus, expenditure of the consumer
decreases (increases) with the fall (increase) in the price of the good because of lower
proportionate change in quantity demanded.

2. Answer : (c)
Reason : When the quantity supplied of a commodity exceeds the quantity demanded at a given
price, the price will decrease.

3. Answer : (a)
Reason : Demand curve is usually drawn as downward sloping as we move from left to right as
demand increases with price fall of a commodity

4. Answer : (b)
Reason : P = Rs.10 Qd = 100 – 4 (10)
100 – 40 = 60
dq/dp= – 4(slope)
Ep = – 4 x10 / 60 = - 0.67

5. Answer : (b)
Reason : MR = AR {1-1/e}
MR = = 900 ( 5/6) =Rs. 750.
since AR = price

6. Answer : (c)
Reason : I. Is true. Consumer surplus is useful to the government to fix taxes. It is useful to fix
taxes since the rich or the upper class people have more consumer surplus compared
to the rest. Consumer surplus also reveals the purchasing pattern of the economy. By
observing the nature of the products moving in the market, the government can fix
the taxes through the classification of products.
II. Is true. Consumer surplus helps the monopolists in fixing price of a commodity.
While pricing a commodity, if a monopolist considers consumer surplus, he can
retain the customer for a longer period.
III. Is not true. In case of imported products which are cheaper than domestic
products the consumer surplus is more. This is because he is paying less
for the imported product which is giving him the same level of satisfaction.
IV. Is true. A higher consumer surplus indicates that the economy is stable and vice
versa. A negative consumer surplus indicates that the economy is not functioning
efficiently.

7. Answer : (d)
Reason : The total utility at any point of time is the summation of marginal utilities of current and
preceding units of consumption.

8. Answer : (d)
Reason : The point of tangency between the budget constraint and the indifference curve indicates
that the consumer is in equilibrium. That is consumer attains maximum amount of
satisfaction implying that all the other combinations give him the lesser utility or
unavailability given his budget. Hence the correct answer is (d).

9. Answer : (c)
Reason: ‘Diamond – water’ paradox explains that the more of a commodity we have, the marginal
utility starts diminishing. If the availability of the product is less, marginal utility would be
high.

10. Answer : (c)
Reason : The opportunity cost is the benefit of using resources for the next best alternative uses.(a)
Is not the answer because opportunity costs are not spill-over cost.(b)Is not the answer
because opportunity costs are not money cost(c)Is the answer because opportunity costs
are alternative cost(d)Is not the answer because opportunity costs are not external cost.(e)
Is not the answer because sunk costs are those costs which are incurred in the future as
result of a contractual agreement.

11. Answer : (a)
Reason : Cost functions are derived from production function which describes the available
efficient methods of production at any particular point of time.

12. Answer : (a)
Reason : If the firm’s total revenue exceeds its economic costs, the residual accruing to the
entrepreneur is called as economic or pure profit.

13. Answer : (e)
Reason : The cost that can be easily attributed to a product or a process is called as separate cost.

14. Answer : (e)
Reason : Option (e) is not true. The reason for this is that the marginal cost curve cuts the average
cost curve and the average variable cost curve at their minimum points and as the marginal
cost curve is upward rising curve and the average cost curve being flatter than average
variable cost curve. Hence the minimum point of average cost will be to the right of the
minimum point of the average variable cost.

15. Answer : (b)
Reason : Both marginal and average costs are equal to each other when average cost is minimum.

16. Answer : (d)
Reason : TC = 500 – 2Q + 3Q2
AC = 500/Q – 2 + 3Q
= 500/5 – 2 + 15
= Rs.113.

17. Answer : (e)
Reason : when TC = 5000 + 800Q -9Q2 + 0.25Q3
TVC = 800Q -9Q2 + 0.25Q3 AVC = 800 – 9Q + 0.25Q2
FC = 5000
MC = 800 – 18Q + 0.75Q2
AC = 5000/Q + 800 - 9Q + 0.25Q2

18. Answer : (b)
Reason : A firm is considered a price taker in perfect competition because there are so many
buyers and sellers in the market that any individual firm cannot affect the market.
.
19. Answer : (d)
Reason : In a perfectly competitive market in the long run no firm earns abnormal profit because of
existence of free entry and free exit into the industry. So when ever there is some extra
profit in the industry some new firms will enter into the market and compete away the
extra profit. Thus in the perfect competition the firms will earn only normal profits.

20. Answer : (d)
Reason : The monopolist must decrease the price of every unit in order to sell additional units, that
is why the marginal revenue curve of the monopolists slopes downwards from left to right.

21. Answer : (c)
Reason : Monopoly is a market structure in which there is one seller of the product implying that
the producer has complete control over market supply of the commodity. The monopolist
must decrease the price he receives for every unit in order to sell an additional unit.
Hence, the marginal revenue of the monopolist would be lesser than price. Hence, the
correct answer is (c).

22. Answer : (d)
Reason : First degree price discrimination involves charging the maximum price possible for each
unit of output. It is also called perfect discrimination. The price of the first unit is greater
than the price of the subsequent units.

23. Answer : (b)
Reason : The production possibility curve represents the various combinations of two goods that
can be produced given the resources and level of technological development. It is nothing
but the locus of various combinations of two goods and the production possibility frontier
represents the maximum combinations of two goods.

24. Answer : (a)
Reason : In India, Whole Sale Price index (WPI) is widely used for determining of inflation.
Because the Office of the Economic Advisor to the Government of India publishes
wholesale price indices for individual commodities, commodity groups and the overall
WPI monthly. They are reported in a number of other publications also.

25. Answer : (a)
Reason : Keynesian economics focuses on the role government plays in stabilizing the economy by
managing aggregate demand.

26. Answer : (b)
Reason : A continuous decline in prices is referred to as Deflation.

27. Answer : (d)
Reason : Recession is, technically, defined as decline in output for two or more consecutive
quarters.

28. Answer : (d)
Reason : If the central bank imposes a reserve ratio of 100%, the entire deposits are kept with the
central bank and the money multiplier is not affected. Hence (d) is the false statement.

29. Answer : (b)
Reason : An expansionary monetary policy increases the money supply. This will decrease the
interest rates boosting planned investment and aggregate demand. This will further
increase aggregate output and hence money demand.

30. Answer : (d)
Reason : Slowing of economic activity accompanied by inflation is defined as stagflation.

31. Answer : (a)
Reason : As a result of decline in the price the demand curve will shift to left and as a result of imposition of tax
the supply curve also shifts to left. So the new equilibrium point is ‘a’.

32. Answer : (a)
Reason : In monopolistic competition, industry equilibrium is possible only when each firm is earning only
normal profit, that is, the point where AR = AC.

33. Answer : (d)
Reason : Average variable costs are increasing when marginal costs are higher than average variable costs

34. Answer : (a)
Reason: In case of perfect complements the indifference curve is L – shaped.

35. Answer : (a)
Reason : Fixed cost is a cost which a firm has to incur irrespective of production. Average fixed cost is equal to
fixed cost / no. of units produced. So as output increases the average fixed cost decreases continuously.

36. Answer : (c)
Reason : When the cross price elasticity is less than zero then the goods are considered as complements.

37. Answer : (d)
Reason : Total fixed cost curve is a horizontal straight line.

38. Answer : (c)
Reason : A large economies of scales 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 some of the
sources of monopoly, but not result in natural monopoly.

39. 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.

40. Answer : (c)
Reason : At point E2 the firm will earn negative profits. At this point the total revenue = area OP1E2Q2 while he
total cost = OB1BQ2. hence the loss ( negative profit) = P1BB1BE2.

41. Answer : (c)
Reason : (I) is not true. When the supply increases, the price will increase and the quantity will decrease.
(II) is not true. When the supply increase the supply curve shifts towards the right.
(III) is true. A shift in the supply curve towards the right results in a fall in the price.

42. Answer : (c)
Reason : An isoquant (equal product curve) is the locus of all those combinations of two inputs, which yields a
given level of output. Parallel equal product curves do not represent the same output. The point where
an iso-cost line is tangential to an equal-product curve (isoquant curve) is the profit maximizing point.

43. Answer : (d)
Reason : The demand for essential goods are relatively inelastic.

44. Answer : (c)
Reason : It is advisable for a firm operating under perfect competition to shut down in the shot run when the
price of the product falls below the average variable cost. If the firm is not able to get its variable costs,
a rational firm will not operate in the market.

45. Answer : (c)
Reason : Monopolistic competition consists of many firms selling differentiated products.

46. Answer : (a)
Reason : When the demand for a product is tied to the purchase of some parent product,
its demand is called as induced demand. It can be also termed as derived demand.

47. Answer : (a)
Reason : MRSxy = DY/DX = –2/2 = – 1

48. Answer : (d)
Reason : A Giffen commodity is an inferior commodity whose income effect is negetive
and stronger than the substitution effect.

49. Answer : (a)
Reason : The production function of a firm shows the technical relation which relates
factor inputs and output. Hence the production function represents the technology of a firm.

50. Answer : (e)
Reason : The price in perfect competition is always equal to the marginal revenue
because as the price is given to the firm they have sell every additional unit at the same price.





Part II Answers

1. Answer : AC = 800/Q + 80 + 4Q
TC = 800 + 80Q + 4Q2
TVC = 80Q + 4Q2
At output 20,
TC = 800+80(20) + 4(20)2
= 800+ 1600 + 1600 =Rs.4,000.

2. Answer : Since the firm is operating in short run the equilibrium condition of the firm will be
MR = MC
Given
P =1000 – 50Q
So TR = P x Q
= 1000Q – 50Q2
MR = 1000 – 100Q
Given
AVC = 250 + 25Q
TVC = 250Q +25Q2
MC = dTVC/dQ = 250 + 50Q
At equilibrium MR = MC
= 1000 – 100Q = 250 + 50Q
= 750 = 150Q
= Q = 5
At this level of output the AFC = Rs. 60. So FC = 60 x 5 = Rs.300
VC = 250(5) + 25(5)2 = 1250 + 625 = Rs. 1875
TC = FC + VC
= 300 + 1875 = Rs.2,175

3. Answer : To maximize profits, a perfectly competitive firm produces an output where P = MC
MC = dTC/dQ = 600 – 100Q + 3Q2
P = 600 – 100Q + 3Q2, where Q = 150 units (given)
Hence, P = 600 – 100(150) + 3(150)2 = 53,100
Thus, total industrial production is equal to (200 + 4 x 53,100) = 2,12,600 Units

4. Answer : Demand function of the firm is given as Q = 75 – P
P = 75 – Q
TR = P Q
= 75Q – Q2
MR = 75 – 2Q
TC = 25Q
MC = 25
Profit maximizing output is obtained when MR = MC
= 75 - 2Q = 25
2Q = 50
Q = 25
P = 75 – Q
= 75- 25 = 50
Profit = TR – TC
TR = P Q
= 50 x 25 = 1250
TC = 25Q
= 25 x 25 = 625
profit = 1250 – 625 =Rs.625.

5. Answer : Personal income = national income –undistributed corporate profits –corporate taxes
+transfer payments
= 10000–600–288+278 = 9390
Personal disposable income = personal income – personal taxes
= 9390 –810= 8580.

6. Answer : National income = NNP at factor cost = 168,000
GDP at factor cost = NNP at factor cost + Depreciation - NFIA = 168,000 + 42,000 –
(31500 – 42000) = 220,500.

7. Answer : Given
Qs = 5000 + 40P
Qd = 15,500 – 60P
Market will be in equilibrium at the price where Qd = Qs
15,500 – 60P = 5000 + 40P
10,500 – 100P = 0
P = 105
Since the industry is operating under perfection competition firms are price takers.
.P = AR = MR.
AVC function of the firm is
AVC = 105 – 24Q + Q2
TVC = 105Q – 24 Q2+ Q3
MC = 105 – 48Q + 3Q2
The firm will be in equilibrium at the output where MR =MC
105 = 105 – 48Q + 3Q2
48Q - 3Q2 = 0
16Q – Q2 = 0
Q (16 – Q) = 0
Q = 0, Q =16
Thus the profit maximizing output is 16.
Profit earned by the firm is measured as TR – TC
TR = P × Q
= 105 × 16 = 1680
TC = FC + TVC
= 1500 + 105(16) – 24(16)2+(16)3
= 1132
. Profit = 1680 – 1132 =Rs. 548.

8. Answer:


9. Answer : (e)
Reason : Profit maximizing output is determined where MR = MC.
MR= 640 – Q
MC = 100 + 2Q
.640 – Q =100 + 2Q
– 3Q = – 540
Q = 180 units.

10. Answer : The equilibrium output in the short run is determined where MR=MC
Note that when MC is constant at Rs.5.
So
P = 1000 – Q
TR = 1000Q – Q2
MR = 1000 – 2Q
MR = MC
= 1000 – 2Q = 5
2Q = 995
Q = 497.5 units.

11. Answer:


12. Answer : Income elasticity of demand is given as
dQ/dY x Y/Q

Differentiating the demand function with respect to Y we have
dQ/dY = 0.25
from the demand function we have
QA = 6750 – 12(150) + 4(90) + 0.25(15000)
= 6750 – 1800 + 360 + 3750
= 9060
e y = 0.25 x 15000
9060
= 0.414

13. Answer : QS = 8,500 + 100P
QD = 14,500 – 300P
At equilibrium QS = QD
8,500 + 100P = 14,500 – 300P
400P = 6,000
P = Rs.15
Since the firm is operating in a perfectly competitive industry, the firm is a price taker and the price is
constant at 15.
TC = 500 + 8Q + 0.035Q2
To maximize profits MC = MR
MC = dTC/dQ
= 8 + 0.07 Q
MR = P = 15
8 + 0.07Q = 15
Q = 7
.07
= 100 units.
Profit maximizing output for the firm is 100 units.

14. Answer : Quantity required break even (Qx) = fixed cost / P – AVC
= 5250/50 – 25
= 5250/25 = 210
= 210 units.

15. Answer : MC = 3Q2 – 24Q + 2400
At Q = 8
MC = 192 –192+ 2,400 = Rs.2,400

16. Answer: When tax is imposed, the supply function becomes Qs = 3000 + 20(P – 10)
Thus, at equilibrium, 3000 + 20 (P – 10) = 4200 – 100P
4200 – 3000 + 200 = 120P
Or, P = 1400/120 = Rs. 11.67.

17. Answer : Price of fifth unit of output = TR / output
TR of fifth unit = TR of fourth unit + MR of fifth unit
= 320 (i.e.80 x 4) + 130 = 450
. Price of fifth unit of output = 450/5 = Rs.90.


18. Answer : When price falls below average variable cost (AVC), the firm would close down the operations.
Therefore, the shutdown point is where P is equivalent to the least possible average variable cost.
TC = 5000 + 150Q – 20Q2 + Q3
TVC = 150Q – 20Q2 + Q3
AVC = TVC/Q = 150 – 20Q + Q2
At the lowest level, AVC is equivalent to MC.
MC = 150 – 40Q + 3Q2
.150 – 20Q + Q2 = 150 – 40Q + 3Q2
2Q2 – 20Q = 0
2Q (Q – 10) = 0
. Q 10 or 0
. The AVC is lowest when the output is 10.
At Q = 10,
AVC = 150 – (20 × 10) + 102
= 150 – 200 + 100 = Rs.50.
. If the price falls below Rs.50, the firm will shut down operations.



Answers to PART III

To be based on discussions in class and presentations provided in ppt format on the email ID : mba1sem_iimt@ yahoo.co.in