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MBA
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Part II
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
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?
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.
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?
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?
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 x10 / 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.
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
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.
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:
14. Answer : Quantity required break even (Qx) = fixed cost / P – AVC
= 5250/50 – 25
= 5250/25 = 210
= 210 units.
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.
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.