Indian Institute of Management, Ahmedabad
ECONOMIC ANALYSIS (EA) Date: August 3, 2005 (PGP–I, First Term) Time: 90 minutes
Midterm (Closed Book)
Select the most appropriate one alternative from the ones given under each of the following statements to complete the statement. Write a, b, c or d, etc., in the empty box provided in each statement. No credit for multiple answers. For correct answers 2pts, and for wrong answer (–)1 pt. The best 45 answers will be picked up. Note: – this exam has 10 pages.
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1) Copper being an exhaustible natural resource, the long-run supply curve of its secondary production (i.e., production out of scrapped copper) as compared to its short-run counterpart will in general be:
a. Flatter;
b. Steeper;
c. The same;
d. Can’t say.
Answer:
2) Suppose the supply and demand equations of natural gas are: Qs (supply) = 14 + 2Pg + 0.25Po and Qd (demand) = -5Pg + 3.75Po, where Pg and Po are prices of gas & oil, respectively. If there is a 25% increase in the price of oil from Po=8, then the price of gas, Pg will
a. Rise by 25%;
b. Rise by 50%;
c. Rise by more than 50%;
d. Rise by less than 25%;
e. None of the above.
Answer:
3) From the viewpoint of labor in a developing country, a Minimum Wages Act is always:
a. A welcome move;
b. An un-welcome move;
c. A mixed blessing;
d. None of the above.
Answer:
4) A positive vertical axis intercept of an upward-sloping supply curve of labor:
e. Has no economic justification;
f. Has an economic justification as the reservation price of labor, only if there is no unemployment of labor;
g. Has an economic justification as the reservation price of labor, even if there is unemployment of labor;
h. None of the above.
Answer:
5) As Cournot equilibrium occurs at the point of intersection between the reaction curves of the duopolists (assuming it exists and is stable), return to the same equilibrium point from any initial non-equilibrium point
a. is always ensured by Cournot assumptions;
b. is not ensured by Cournot assumptions;
c. is only momentarily ensured;
d. is only occasionally ensured.
Answer:
6) Assuming that the duopolists are producing a homogeneous good with a market demand curve, given by an equation : P = 500 – 0.5Q, where Q is total output of the two, with Q1 and Q2 being their individual output levels, and their average costs are constant at 100 and c, respectively, a Cournot solution will always ensure simultaneous existence of both the duopolists with positive levels of output,
a. As long as c is less than 300;
b. As long as c=300;
c. Only if c=200;
d. Only if c is larger than 200.
Answer:
7) Free entry and free exit under monopolistic competition will always ensure achievement of
a. the same long run equilibrium as holds under perfectly competitive conditions;
b. a long run equilibrium where the firms will enjoy super-normal profits;
c. a long run equilibrium with overcapacity;
d. none of the above.
Answer:
8) Under decreasing cost conditions, a single monopolist is preferred over several small firms because
a. A single monopolist can tap the benefits of economies of scale more than a large number of small competitive firms;
b. A single monopolist passes on to the consumers the full benefits of economies of scale;
c. A competitive solution doesn’t exist;
d. None of the above.
Answer:
9) The total marginal cost curve of a multi-plant monopolist indicates
a. The sum total of marginal costs across the plants for each level of output;
b. The sum total of outputs from multiple plants corresponding to each marginal cost level;
c. The apportionment of total marginal cost across plants;
d. The average cost of total output.
Answer:
10) The relative tax burden of the consumer vis-à-vis the producer of a specific per unit excise duty on alcohol will be
a. Higher if the tax is collected from the producer rather than the consumers;
b. Higher if the tax is collected from the consumers rather than the producer;
c. The same irrespective of the source of tax collection;
d. None of the above.
Answer:
11) If the incidence of a specific per unit tax is fully absorbed by the producer, it must mean
a. The supply curve is perfectly inelastic;
b. The supply curve is perfectly elastic;
c. The demand curve is perfectly inelastic;
d. None of the above.
Answer:
12) The emergence of a black market in the presence of a price ceiling (say, on essential goods) will
a. Fully eliminate the deadweight loss due to government price intervention;
b. Never eliminate the deadweight loss due to government price intervention;
c. Tend to reduce the deadweight loss;
d. None of the above.
Answer:
13) EU has often converted an importable item into an exportable one through its various support measures. It must mean
a. The domestic equilibrium price under no-trade no-intervention conditions must lie above the world market level;
b. The domestic equilibrium price under no-trade no-intervention conditions must lie below the world market level;
c. Can’t say.
Answer:
14) Unconstrained sales revenue maximization of a firm takes place at a point where
a. MR>0 and price elasticity of demand is greater than unity;
b. MR=0 and price elasticity of demand is unity;
c. MR<0and price elasticity of demand is less than unity
d. None of the above.
Answer:
15) In a model of constrained sales maximization,
a. The profit constraint is arbitrarily fixed anywhere on the profit axis;
b. The profit constraint has to be fixed at the market rate of interest;
c. The profit constraint has to be fixed at the opportunity cost of share
capital investment;
d None of the above.
Answer:
16) Suppose the demand curve for a product (say, fertilizer) is perfectly elastic, while the supply curve (of the Fertilizer Corporation of India) is a usual positively-sloped one. If an unit subsidy is applied on this product, the benefits of the subsidy will be appropriated by
a. The consumer cent per cent;
b. The supplier cent per cent;
c. By both depending on elasticity of supply;
d. None of the above.
Answer:
17) Assuming that a polluter has a right to pollute and therefore the consumer can only pay (at the rate of Pr) for some amount of pollution reduction (say, R), the consumer budget line with fixed money income, M can be expressed as (assuming another good X purchased at price, Px)
a. Px.X = M + Pr.R
b. Px.X = M – Pr.R
c. Px.X – Pr.R = M
d. None of the above.
Answer:
18) Suppose a rancher and a farmer is considering having trade between them. The rancher takes 8 hours to produce 1 pound of potato, whereas the farmer takes 10 hours. On the other hand, the rancher takes 1 hour to produce 1 pound of meat, whereas the farmer takes 20 hours to produce the same 1 pound of meat.
Part I: In this case, the opportunity cost of 1 pound of meat to the rancher would be
a. 1/8 pound of potato
b. 8 pounds of potato
c. ½ pound of potato
d. 2 pounds of potato
Part II: In the post trade situation, the following will happen
a. The rancher will sell meat if he gets at least 1/8 pound of potato per pound of meat.
b. The rancher will sell potato if he gets more than 1/8 pound of meat per pound of potato.
c. The farmer will sell meat if he gets more than ½ pound of potato per pound of meat.
d. None of the above.
Answer:
19) Assuming that a consumer has a right to zero pollution and therefore he can claim compensation (at the rate of Pc) for accepting some amount of pollution (say, C), the consumer budget line with fixed money income, M can be expressed as (assuming another good X purchased at price, Px)
a. Px.X = M + Pc.C
b. Px.X = M – Pc.C
c. Px.X + Pc.C = M
d. None of the above.
Answer:
20) Indifference curves in a consumer’s indifference map:
a. have to be vertically parallel
b. have to be horizontally parallel
c. have to be parallel along a ray to origin
d. have to be non-intersecting, but not necessarily parallel
Answer:
21) If arc price-elasticity of demand for good X is zero, X must be
a. a normal good
b. a luxury good
c. a Giffen good
d. an inferior good
Answer:
22) If all individual demand curves for a snob good x are identical, its market demand curve in relation to individual demand curves:
a. has to be equally price elastic at a given price
b. has to be more price elastic at a given price
c. has to be less price elastic at a given price
d. could be more or less price elastic at a given price
Answer:
23) If the market demand curve of good X is vertical, which of the following is consistent?
a. the good is considered inferior by each of the consumers
b. the good is a Giffen good for each of the consumers
c. the good is considered normal by each of the consumers
d. the good may be a bandwagon good
Answer:
24) Differentiation between ownership and control may not lead to sacrificing the objective of profit maximization if (i) there is an efficient market for managers; (ii) there is an efficient market for corporate takeovers; (iii) there is free entry for firms; (iv) there is free exit for firms. Which of the following is true?
a. only (i) or (ii) or (iii) and (iv).
b. only (i)
c. only (ii)
d. only (iii) or (iv)
Answer:
25) For the three consumers – A, B and C, consuming both the goods X and
Y, the following must hold:
a. (PX / Py) = (MRSA + MRSB + MRSC)
b. (Px / PY) = (MRSA) × (MRSB) × (MRSC)
c. (PX / Py) = MRSA / MRSB = MRSB / MRSC = MRSC / MRSA
d. (PX / PY) = MRSA = MRSB = MRSC
Answer:
26) Price elasticity of a good X is more in India than in USA. Which of the following statements is not consistent with this finding?
a. X has more close substitutes in India than in USA.
b. Proportion of consumer budget spent on X is higher in India than in USA.
c. Incomes of the consumers are substantially less in India than in USA.
d. X is put to more uses in USA than in India.
Answer:
27) A consumer finds two baskets A (X = 20, Y = 30) and B (X=40, Y=10)
yielding the same level of satisfaction. Therefore, the basket
C(X = 30, Y = 20) under normal assumptions about his indifference map
must be such that:
a. C yields the same satisfaction as A
b. C yields higher satisfaction than A
c. C yields lower satisfaction than A
d. C yields higher satisfaction than A, but lower satisfaction than B
Answer:
28) An upward slopping Price Consumption Curve of good X (PCCX) when
non-X is measured on Y-axis implies that good X and non-X are:
a. inferior goods
b. substitute goods
c. complementary goods
d. independent and unrelated goods
Answer:
29) A farmer derives his income from the sale of the surplus produce after his
self-consumption. If the government imposes a flat tax of a fixed sum on
his income, his marketable surplus will:
a. Increase if he considers the commodity inferior
b. Fall if he considers the commodity normal
c. Increase if he considers the commodity normal
d. Not change if he considers the commodity inferior
Answer:
30) Let the objective of the government be to reduce excess burden of taxation on consumers to the extent possible. There is already an excise duty of 10% of price on good Y. Which of the following options to generate more tax revenues should be recommended?
a. Impose a duty of 10% of price on good X
b. Impose an income tax of equivalent amount as 10% duty on X
c. Impose a duty on units of X of equivalent amount as 10% duty on X
d. Impose a flat (head) tax of a fixed amount on everybody.
Answer:
31) When the Income Consumption Curve (ICC) between goods X and Y is an upward sloping straight line from origin, the income elasticity of demand for good X is:
a. Zero
b. + 1
c. –1
d. Infinity
Answer:
32) Let X = 100 K0.6 L0.5 be a production function for product X with K and L as two inputs. It implies
a. increasing returns to scale throughout the range
b. decreasing returns to scale throughout the range
c. constant returns to scale throughout the range
d. Increasing returns when the scale is increased and decreasing returns when the scale is decreased.
Answer:
33) For measuring economies of scale in a firm, which of the following is not assumed?
a. Technology remains the same.
b. Units of the product are homogeneous
c. Learning by doing
d. Factor prices remain the same.
Answer:
34) When average cost (AC) is falling,
a. AVC must be falling
b. AVC > AC
c. AVC could be rising
d. AVC has to be greater than MC.
Answer:
35) The relationship between the long-run marginal cost (LMC) curve and short-run marginal cost (SMC) curves is such that:
a. LMC curve is an envelope to various SMC curves.
b. LMC curve intersects all SMC curves from above.
c. LMC curve intersects all SMC curves from below.
d. LMC curve intersects SMC curves from above when LMC falls and LMC intersects SMC curves from below when LMC rises.
Answer:
36) If a firm in the short run faces the price of its output that is less than the minimum average variable cost, it would decide to shut down. This statement is:
a. always true
b. never true
c. true only if there are no fixed costs
d. true when the cost of restarting the business is zero
Answer:
37) A firm would be in equilibrium maximizing its profits when:
a. its AVC = MC
b. AC = P
c. MR = MC
d. MR = MC and for higher output MC > MR
e. MC = P
Answer:
38) The cost function for product X of a firm is given by
C = 100 + 5X + 4X2
Answer the following based on this cost function:
Part I: The fixed costs are:
a. Rs.100
b. Rs.109
c. Rs.0
d. Can’t say
Answer:
Part II: AVC is:
a. increasing at an increasing rate
b. increasing at a constant rate
c. increasing at a diminishing rate
d. a U – shaped curve
e. decreasing throughout
Answer:
Part III: AC is:
a. increasing at an increasing rate
b. increasing at a constant rate
c. increasing at a diminishing rate
d. a U – shaped curve
e. decreasing throughout
Answer:
Part IV: MC curve in this case
a. never intersect AC curve
b. intersects AVC curve at X = 4
c. intersects AC curve at X = 5
d. intersects AC curve at X = 6
Answer:
39) In a perfectly competitive industry, there is
a. no incentive for a firm to be efficient
b. no incentive for advertising and sales promotion
c. no incentive for technological change
d. enough justification for government taxation
Answer:
40) Producer’s surplus does not include:
a. fixed cost
b. variable cost
c. normal profit
d. economic profit
Answer:
41) The government decides to replace quota on good X by an equivalent
tariff. The deadweight loss in the system would, therefore:
a. increase
b. decrease
c. remain the same
d. become zero
Answer:
42) Which of the following is not true about a profit maximising monopoly?
a. A firm can earn supernormal profit in the long run
b. A firm faces a downward sloping demand curve
c. The industry would have lower price and higher output compared to perfect competition.
d. There would be a deadweight loss in the system.
e. Consumers’ surplus would be less compared to perfect competition.
Answer:
43) A difference between oligopoly and monopolistic competition is that:
a. Advertising is required in monopolistic competition but not
b. required in oligopoly.
c. Oligopoly cannot have product differentiation, but monopolistic competition must have it.
d. Entry barriers are substantial in oligopoly but are non-existent in monopolistic competition.
e. Exit is possible in oligopoly but is ruled out in monopolistic competition.
Answer:
44) Higher the monopoly power,
a. higher is the profit
b. higher is the efficiency
c. higher is the fixed costs
d. lower is the price elasticity of demand
Answer:
45) Stackleberg model of duopoly would result in:
a. higher output and lower price than Cournot equilibrium
b. lower output and lower price than Cournot equilibrium
c. higher output and higher price than Cournot equilibrium
d. lower output and higher price than Cournot equilibrium
Answer:
46) Sales maximisation would result in
a. higher output and higher price than under profit maximisation
b. lower output and lower price than under profit maximisation
c. higher output and lower price than under profit maximisation
d. lower output and higher price than under profit maximisation
Answer: