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Question Paper
Economics - I (MSF1A3): April 2008
• Answer all 81 questions.
• Marks are indicated against each question.

Total Marks : 100

<Answer>
1. The tendency of market prices to direct individuals pursuing their own interests into productive activities that also
promote the economic well being of the society, is referred to as
(a) Price mechanism
(b) Invisible hand principle
(c) Competitive efficiency
(d) Marginal analysis
(e) Allocative efficiency. ( 1 mark)
<Answer>
2. According to general equilibrium analysis who among the following is/are considered as decision making agents?
I. Consumers.
II. Producers.
III. Resource owners.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (II) and (III) above
(e) All (I), (II) and (III) above. ( 1 mark)
<Answer>
3. Which of the following statements is not true?
(a) The quantity desired to be purchased may be different from the quantity actually bought by
the consumer
(b) Quantity demanded is a flow concept
(c) The factors that influence the decision of the consumer to buy, other than price are assumed to
be constant in demand analysis
(d) While plotting the demand curve the price of the commodity is placed on x-axis
(e) There exists an inverse relation between price and quantity demanded. ( 1 mark)
<Answer>
4. There will be an increase in revenue for an increase in price when the price elasticity is
I. Equal to zero.
II. Less than one.
III. Equal to one.
(a) Only (I) above
(b) Only (II) above
(c) Only (III) above
(d) Both (I) and (II) above
(e) All (I), (II) and (III) above. ( 1 mark)
<Answer>
5. An educational institution is considering an increase in course fees of a particular course to enhance its revenue. If
the institute expects that raising course fees would enhance revenue, then
(a) It is ignoring the law of demand
(b) It is assuming that the demand for the course is elastic
(c) It is assuming that the supply of the course is elastic
(d) It is assuming that the demand for the course is inelastic
(e) It is assuming that the supply of the course is inelastic. ( 1 mark)
<Answer>
6. Market research has shown that the cross price elasticity of demand for good X with respect to the price of good Y is
a negative number. This means that
(a) Both the goods have a upward sloping demand curve
(b) The supply curve for X is a horizontal straight line
(c) X and Y are complements
(d) X and Y are substitutes
(e) Both X and Y are normal goods. ( 1 mark)
<Answer>
7. Which of the following is a movement along the supply curve?
(a) A fall in the output of rice because of a rise in the prices of pesticides and fertilizers

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(b) An increase in supply of air travel because of the liberalization of the aviation sector
(c) A rise in the price of sugar leading to an increased production of sugarcane
(d) A rise in the wages for workers in the software industry leading to an increase in the supply of
software professionals
(e) An increase in the supply of computers because of entry of many firms into the industry. ( 1 mark)
<Answer>
8. The supply and demand functions of a commodity are estimated as
Qd = 1,000 – 200P
Qs = 800P – 2,000

At equilibrium, the elasticity of supply for the commodity is

(a) 2
(b) 4
(c) 6
(d) 8
(e) 1. ( 1 mark)
<Answer>
9. Which of the following statements is not true?
(a) The concept of total utility is subjective
(b) The operation of law of diminishing marginal utility is subject to a particular time period
(c) The marginal utility curve slopes downwards from left to right
(d) At satiety point the total utility is minimum
(e) The marginal utility curve can be derived by measuring the slope of the total utility curve at
various points on the total utility curve. ( 1 mark)
<Answer>
10. The shape of indifference curve in case of perfect complements is
(a) L-shaped
(b) Straight line sloping downward
(c) Straight line sloping upward
(d) Convex to origin
(e) U-Shaped. ( 1 mark)
<Answer>
11. For a good to be considered as a ‘luxury good’ the value of its income elasticity of demand should be
(a) Equal to one
(b) Greater than one
(c) Less than one
(d) Zero
(e) Negative. ( 1 mark)
<Answer>
12. The locus of all tangency points between budget lines and the indifference curves is called as the
(a) Income consumption curve
(b) Production consumption curve
(c) Isoquant
(d) Isocost line
(e) Production possibility curve. ( 1 mark)
<Answer>
13. ‘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. ( 1 mark)
<Answer>
14. Given the money income of the consumer as Rs. 700 and the prices of two products M and N on which he spends all
his income. The product M costs him Rs. 20 per unit and per unit price of product N is Rs.35. What would be the
budget constraint?

(a) QM + QN = 700
(b) 20 QM + 35 QN = 700
(c) 20 QM – 35 QN = 700
(d)
(e) (20 + QM) (35 + QN) = 700.
( 1 mark)
<Answer>
15. The shape of marginal product curve is

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(a) Inverted U-shaped

(b) U-shaped
(c) Vertical straight line
(d) Horizontal straight line
(e) Downward sloping straight line. ( 1 mark)
<Answer>
16. Which of the following statements is/ are false?
I. Isoquant is a curve drawn on a graph with different factors of production on the two axes.
II. The output is 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) Only (I) above
(b) Only (II) above
(c) Both (III) and (IV) above
(d) Both (III) and (V) above
(e) (I), (III) and (IV) above. ( 1 mark)
<Answer>
17. According to the law of variable proportions when the units of labor are increased keeping the capital same, the
marginal productivity of labor will
(a) First increase and then decrease
(b) First decrease and then increase
(c) Increase continuously
(d) Decrease continuously
(e) Remain the same. ( 1 mark)
<Answer>
18. At a stage where the total product is maximum, the marginal product will be
(a) Maximum
(b) Minimum
(c) Zero
(d) Equal to total product
(e) Equal to average product. ( 1 mark)
<Answer>
19. Expansion path is the locus of various points where the firm’s expenditure
(a) Increases without any change in the price of inputs
(b) Increases with some change in the price of inputs
(c) Increases with change in the price of outputs
(d) Decreases without any change in the price of inputs
(e) Decreases with change in the price of inputs. ( 1 mark)
<Answer>
20. Which of the following statements is false?
(a) Isoquants are useful only when two variable inputs are used
(b) Isoquants are also called as production indifference curves
(c) Marginal Rate of Substitution (MRS) is expressed through an isoquant
(d) Two isoquants never touch each other
(e) A higher isoquant represent a higher level of output. ( 1 mark)
<Answer>
21. Which of the following curves are not convex to origin?
I. Individual supply curve.
II. Isoquant curve.
III. Isocost curve.
IV. Budget line.
V. Total Product curve.
(a) Both (I) and (II) above
(b) Both (II) and (III) above
(c) (I), (II) and (III) above
(d) (I), (II) and (IV) above
(e) (I), (III), (IV) and (V) above. ( 1 mark)
<Answer>
22. Which of the following statements is not true?
(a) Average product cannot be zero
(b) Average product will always be greater than marginal product
(c) Marginal product is zero when total product is maximum

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(d) For first unit of variable input the marginal product is the same as total product
(e) Marginal product increases only when the total product is increasing at an increasing rate. ( 1 mark)
<Answer>
23. In case of a homogeneous production function, the expansion path will be
(a) A straight line through origin
(b) Vertical straight line
(c) U–shaped
(d) L–shaped
(e) Horizontal straight line. ( 1 mark)
<Answer>
24. The total cost is a function of
(a) The price of input
(b) The number of different inputs used
(c) The output to be produced
(d) The demand of the product
(e) The nature of the product. ( 1 mark)
<Answer>
25. The time cost, if expressed in terms of money is referred as
(a) Implicit cost
(b) Explicit cost
(c) Indirect cost
(d) Economic cost
(e) Variable cost. ( 1 mark)
<Answer>
26. Which of the following statements is true with regard to cost curves in the short run?
(a) The marginal cost curve intersects the average variable cost curve at its lowest point and the average total
cost curve at its highest point
(b) The marginal cost curve intersects the average variable cost curve at its highest point and the average total
cost curve at its lowest point
(c) The marginal cost curve intersects both the average variable cost curve and the average total cost curve at
their lowest points
(d) The marginal cost curve intersects both the average variable cost curve and the average total cost curve at
their highest points
(e) The marginal cost curve never intersects the average variable cost curve and the average total cost curve. ( 1 mark)
<Answer>
27. Which of the following statements is not true?
(a) The long run average cost is determined by economies of scales
(b) When increase in production of one product leads to decrease in cost of production of another
product, it is termed as economies of scope
(c) Pecuniary economies of scale accrue to a firm when the firm gets discount due to large scale
operation
(d) Economies of scales are classified into internal and external economies of scales
(e) Real economies of scale can be achieved through the increase in the quantity of inputs. ( 1 mark)
<Answer>
28. Which of the following is/are referred as technological change(s)?
I. Innovation of new products.
II. Improvement in the existing product.
III. Reduction in the cost of production.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (II) above
(d) Both (I) and (III) above
(e) All (I), (II) and (III) above. ( 1 mark)
<Answer>
29. If the firm’s total revenue exceeds its economic costs, the residual is considered as
(a) Pure profit
(b) Producer surplus
(c) Accounting profit
(d) Consumer surplus
(e) Marginal revenue. ( 1 mark)
<Answer>
30. Which of the following statements is incorrect?
(a) Fixed cost is incurred even if the production is zero
(b) Total average cost cannot be zero
(c) Average cost is minimum when it is equal to marginal cost

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(d) The average total cost curve is flatter than average variable cost curve
(e) The minimum point of average cost curve will be to the left of the minimum point of the
average variable cost curve. ( 1 mark)
<Answer>
31. The ‘reserve capacity economies’ comes under
(a) Production economies
(b) Labor economies
(c) Technical economies
(d) Managerial economies
(e) Marketing economies. ( 1 mark)
<Answer>
32. Which of the following costs can be easily attributed to a product or a process?
(a) Fixed cost
(b) Variable cost
(c) Implicit cost
(d) Private cost
(e) Separate cost. ( 1 mark)
<Answer>
33. Which of the following statements is false about perfect competition?
(a) It is a kind of market structure where no particular firm can influence the price
(b) There is free flow of information
(c) The technical characteristics of the products produced by various firms are identical
(d) The demand curve of an individual firm is infinitely inelastic
(e) The level of market price is determined by the forces of demand and supply. ( 1 mark)
<Answer>
34. In a perfectly competitive market, firms earn only normal profit in the long-run. 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. ( 1 mark)
<Answer>
35. In perfect competition, the slope of average revenue curve is
(a) Twice the slope of marginal revenue curve
(b) Half the slope of marginal revenue curve
(c) Zero
(d) Infinity
(e) One. ( 1 mark)
<Answer>
36. Under perfect competition, the supply of an individual firm becomes zero, if the price is
(a) Below the average variable cost
(b) Above the average variable cost
(c) Above the marginal cost
(d) Equal to marginal cost
(e) Equal to average variable cost. ( 1 mark)
<Answer>
37. Under perfect competition which of the following will happen when a specific sales tax is imposed?
(a) The MC curve will shift upward to left and the amount of goods produced at the prevailing
price will reduce
(b) The MC curve will shift downward to right and the amount of goods produced at the
prevailing price will reduce
(c) The MC curve will shift upward to left and the amount of goods produced at the prevailing
price will increase
(d) The MC curve will shift downward to right and the amount of goods produced at the
prevailing price will increase
(e) The MC curve will shift downward to right and the amount of goods produced at the
prevailing price will remain the same. ( 1 mark)
<Answer>
38. Which of the following is/are (an) assumption(s) of the kinked demand curve model?
I. There are few firms in the oligopolistic industry.
II. Each firm produces a product which is close substitute for the other firm’s product.
III. Product qualities vary and firms incur a huge amount on advertising expenditure.
(a) Only (I) above
(b) Only (II) above

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(c) Only (III) above

(d) Both (I) and (II) above
(e) Both (II) and (III) above. ( 1 mark)
<Answer>
39. Which of the following statements is true?
(a) In perfect competition there is no difference between a firm and an industry
(b) In monopoly a supply curve does not exist
(c) In oligopoly the AR curve is a horizontal straight line
(d) In monopolistic competition products are homogenous
(e) In monopsony there are large number of buyers and large number of sellers. ( 1 mark)
<Answer>
40. According to Lerner, the difference between which two factors indicates the deviation from perfect competition to
monopoly?
(a) Price and marginal cost
(b) Price and average cost
(c) Average cost and marginal cost
(d) Price and total revenue
(e) Average cost and total revenue. ( 1 mark)
<Answer>
41. Which of the following statements is false?
(a) The demand curve of a monopolist slopes downwards from left to right
(b) There is no supply curve for a monopolist
(c) In the short-run a monopolist may earn negative profits
(d) If the MC curve of the monopolist is positively sloped then the increase in price will be
greater than the specific tax imposed
(e) A monopolist can practice price discrimination only when the two markets are perfectly
separated. ( 1 mark)
<Answer>
42. In Monopoly profits are maximum when
(a) Marginal cost equals average revenue
(b) Marginal cost equals marginal revenue
(c) Marginal cost equals average cost
(d) Marginal cost is not equal to marginal revenue
(e) Marginal cost is not equal to average cost. ( 1 mark)
<Answer>
43. A monopolist is said to be in equilibrium when the elasticity of his average revenue curve is
(a) Greater than one
(b) Equal to one
(c) Less than one
(d) Zero
(e) Infinity. ( 1 mark)
<Answer>
44. The demand function for a product is estimated as P = 40 – 4Q. If the current market price is Rs.8, what is the price
elasticity of demand?
(a) – 0.333
(b) – 0.250
(c) – 1.321
(d) 1.321
(e) 1.891. ( 1 mark)
<Answer>
45. The demand and supply functions of a commodity are given as follows:
Qs = 200P – 250
Qd = 750 – 50P.

The equilibrium output for the product is

(a) 450 units
(b) 550 units
(c) 650 units
(d) 400 units
(e) 300 units. ( 1 mark)
<Answer>
46. The demand function for a commodity is estimated to be Qd = 6,00,000 – 20P.The theoretical highest price that can
prevail in the market is
(a) Rs. 90,000
(b) Rs. 30,000

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(c) Rs. 10,000

(d) Rs. 20,000
(e) Rs. 40,000. ( 1 mark)
<Answer>
47. The demand schedule of a perishable good is given below:
Price Quantity demanded
(Rs.) (Units)
8 40
10 60

What is the arc price elasticity of demand?

(a) 0.72
(b) 0.62
(c) 0.52
(d) 0.42
(e) 1.80. ( 1 mark)
<Answer>
48. For a product, the demand function is given as Qd =140 – 2P. If the product is sold at a price of Rs. 60, the marginal
revenue earned from the sale of the product is
(a) Rs. 5
(b) Rs. 25
(c) Rs. 50
(d) Rs. 65
(e) Rs. 45. ( 1 mark)
<Answer>
49. An increase in the sales tax increases the price of a commodity from Rs.3 to Rs.4. If the quantity demanded
decreases from 10 to 5 units, the absolute value of arc price elasticity of demand of the commodity is
(a) 2.33
(b) 2.50
(c) 5.00
(d) 3.00
(e) 3.33. ( 1 mark)
<Answer>
50. Demand and supply functions for a product are given as
Qd = 10,000 – 4P
QS = 3,000 + 6P.

If the government imposes a sales tax of Rs.200 per unit, the price increases by
(a) Rs. 100
(b) Rs. 110
(c) Rs. 120
(d) Rs. 130
(e) Rs. 140. ( 2 marks)
<Answer>
51. The marginal utility function of a consumer is estimated to be
MU = 0.70m.
How many units of good m the consumer would be willing to consume if the price of the good m is Rs. 28?
(a) 10 units
(b) 20 units
(c) 30 units
(d) 40 units
(e) 50 units. ( 2 marks)
<Answer>
52. A consumer is indifferent between the combinations X and Y.

Combination Good A (units) Good B (units)

X 10 10
Y 12 14

The value of Marginal Rate of Substitution (MRSBA) for the consumer is

(a) 0.50

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(b) 1.00
(c) 1.50
(d) 2.00
(e) 0.05. ( 1 mark)
<Answer>
53. For a consumer in equilibrium, Marginal Rate of Substitution of good A for good B (MRSAB) is 5. If price of the
good A (PA) is Rs.95, price of good B (PB) is

(a) Rs. 17
(b) Rs. 19
(c) Rs. 6
(d) Rs. 14
(e) Rs. 15. ( 1 mark)
<Answer>
54. The total utility obtained from the consumption of ice cream for a consumer is given by the equation, TU = X2.5. If
the price of ice cream is given to be Rs. 67.5 per unit, the consumer maximizes his utility by consuming how many
units of ice cream?
(a) 5 units
(b) 7 units
(c) 9 units
(d) 11 units
(e) 12 units. ( 2 marks)
<Answer>
55. Marginal utilities of goods A and B are 500 utils and 1,000 utils respectively. The price of good B is Rs.200. If the
consumer is in equilibrium, the price of good A is
(a) Rs. 60
(b) Rs. 70
(c) Rs. 80
(d) Rs. 90
(e) Rs.100. ( 2 marks)
<Answer>
56. The production function for XYZ Ltd. is estimated as TP = 80L2 – L3. The maximum possible average product of
labor is
(a) 1,200 units
(b) 1,300 units
(c) 1,400 units
(d) 1,500 units
(e) 1,600 units. ( 1 mark)
<Answer>
57. The production function of Singh and co. is given as TPL = 30L – 1.5L2. The number of labor after which marginal
product becomes negative is
(a) 8 units
(b) 9 units
(c) 10 units
(d) 11 units
(e) 12 units. ( 2 marks)
<Answer>
58. The following are the marginal productivity functions of labor and capital for a firm:
MPK = 0.75 , MPL = 0.75 .

If the wage paid to the laborers is Rs.8 per unit and the cost of capital is Rs.5 per unit, the cost minimizing proportion
of L to K is
(a) L= K
(b) L= K
(c) L = (5 + 8) K
(d) L = (5 – 8) K
(e) L = (8 × 5) K. ( 2 marks)
<Answer>
59. The short run production function of a firm is estimated to be
Q = 36L2 – L3.
If the firm is a rational entity, it would employ labor in the range of
(a) 0 to 12 units
(b) 0 to 18 units
(c) 12 to 18 units

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(d) 12 to 24 units
(e) 18 to 24 units. ( 2 marks)
<Answer>
60. Which of the following can be considered as long run cost function(s)?
I. C = 20 + 3Q + 0.25Q2.
II. C = 200Q + 0.5Q2.
III. C = 100 + 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. ( 1 mark)
<Answer>
61. The total cost function of ABC Ltd. is given as TC = 20Q – 0.30Q2 + 0.01Q3. What is the output at which marginal
cost is minimum?
(a) 5 units
(b) 4 units
(c) 6 units
(d) 8 units
(e) 10 units. ( 1 mark)
<Answer>
62. The fixed cost of a firm is Rs. 250 and the variable cost is estimated as
VC = 20Q + Q2. What is the total cost incurred by the firm when output is 10 units?
(a) Rs. 550
(b) Rs. 650
(c) Rs. 450
(d) Rs. 750
(e) Rs. 600. ( 1 mark)
<Answer>
63. The long run total cost function of a firm is TC = Q3 – 80Q2 + 1,900Q.What is the minimum possible long run
average cost?
(a) Rs. 170
(b) Rs. 180
(c) Rs. 190
(d) Rs. 200
(e) Rs. 300. ( 2 marks)
<Answer>
64. The total cost function for Suman Ltd. is given as TC = 200 + 8Q + 2Q2. The firm is a perfectly competitive firm and
is selling the product at Rs.48. If the output produced and sold by the firm is 10 units, the profit earned by Suman
Ltd. is
(a) Zero
(b) Rs. 10
(c) Rs. 20
(d) Rs. 25
(e) Rs. 30. ( 2 marks)
<Answer>
65. For a firm, variable cost at various levels of output are given below:
Quantity (units) Variable cost (Rs.)
1 5
2 5
3 10
4 15
5 20
6 25

What is the total cost incurred to produce 5th unit of output, if the total fixed cost is Rs. 20?
(a) Rs. 10
(b) Rs. 20
(c) Rs. 30
(d) Rs. 40
(e) Rs. 50. ( 1 mark)
<Answer>

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66. The marginal revenue of a firm is Rs. 2 and the marginal cost is estimated as MC= 82 – Q. What is the profit
maximizing output?
(a) 250 units
(b) 50 units
(c) 40 units
(d) 80 units
(e) 100 units. ( 1 mark)
<Answer>
67. The average cost function of a firm is given as follows:
.What is total cost for the firm at an output of 10 units?
(a) Rs. 1,800
(b) Rs. 1,900
(c) Rs. 1,700
(d) Rs. 1,600
(e) Rs. 2,000. ( 2 marks)
<Answer>
68. Total cost function of a firm is TC = 500 + 5Q. If price of the product sold by the firm is Rs.7 per unit, the break-
even sales revenue is
(a) Rs. 100
(b) Rs. 250
(c) Rs. 700
(d) Rs.1,250
(e) Rs.1,750. ( 1 mark)
<Answer>
69. If total cost function for a firm is TC = 36Q – 0.60Q2 + 0.020Q3, the minimum possible average cost is
(a) Rs.63.00
(b) Rs.36.50
(c) Rs.31.50
(d) Rs.60.00
(e) Rs.48.50. ( 1 mark)
<Answer>
70. The demand function of a firm is estimated as P = 1,000 – 50Q and the average variable cost function of the firm is
given 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 (assume short run)?
(a) Rs. 2,175
(b) Rs. 2,165
(c) Rs. 2,155
(d) Rs. 2,075
(e) Rs. 2,265. ( 2 marks)
<Answer>
71. A firm operating in a perfectly competitive market has an average variable cost function AVC = 800 – 80Q + 8Q2.
What is the price below which the firm has to shut-down its operations in the short run?
(a) Rs. 200
(b) Rs. 350
(c) Rs. 400
(d) Rs. 550
(e) Rs. 600. ( 2 marks)
<Answer>
72. The demand function for a firm operating in perfect competition is given as P = 40 – 4Q. What is the average
revenue if it sells 4 units of output?
(a) Rs. 24
(b) Rs. 25
(c) Rs. 26
(d) Rs. 27
(e) Rs. 28. ( 1 mark)
<Answer>
73. The Long-run Average Cost function of a firm operating under perfect competition is estimated to be
LAC = 50 – 625Q + 25Q2.
If the current market price of the good produced by the firm is Rs.20, the long run equilibrium output of the firm is
(a) 10.5 units
(b) 11.5 units
(c) 12.0 units
(d) 12.5 units
(e) 15.0 units. ( 2 marks)

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74. There are 200 individual firms in a perfectly competitive industry with identical cost functions. The demand function <Answer>
for the industry is estimated to be Qd = 3,000 – 200P and the total cost function of a firm is TC = 200 – 50Q + 2Q2,
equilibrium price of the product is
(a) Rs. 5
(b) Rs. 3
(c) Rs. 2
(d) Rs. 4
(e) Rs. 6. ( 2 marks)
<Answer>
75. The long run average cost function of a firm under perfect competition is estimated LAC = 100 – 20Q + 2Q2. If this
is a constant cost industry and the industry demand function is P = 100 – 0.1Q, how many firms are there in the
industry when the industry is at equilibrium?
(a) 50
(b) 80
(c) 100
(d) 120
(e) 140. ( 2 marks)
<Answer>
76. A monopolist has a marginal revenue function, MR = 1,200 – 40Q. The marginal cost of the firm is Rs.160. What is
the profit maximizing output of the firm?
(a) 19 units
(b) 22 units
(c) 26 units
(d) 29 units
(e) 34 units. ( 1 mark)
<Answer>
77. Demand and cost functions of a monopolist are
P = 800 – 10Q
TC = 300Q + 2.5Q2.
Profit maximizing price for the monopolist is
(a) Rs.350
(b) Rs.400
(c) Rs.600
(d) Rs.650
(e) Rs.700. ( 2 marks)
<Answer>
78. The following is the sales data of various firms operating in an industry.
Firm Sales (in Rs. crore)

I. A 3,000

II. B 2,200

III. C 1,570

IV. D 4,720

V. E 1,248

VI. F 1,008

VII. G 3,132

VIII. H 1,422

The 4-firm and 6-firm concentration ratios of the industry are respectively
(a) 0.66 and 0.74
(b) 0.71 and 0.88
(c) 0.78 and 0.83
(d) 0.66 and 0.87
(e) 0.59 and 0.74. ( 1 mark)
<Answer>
79. A monopolistically competitive firm has the following short run cost and revenue functions
TC = 5,000 + 30Q – 20Q2 + Q3
TR = 30Q – 2Q2

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If the firm is maximizing profits at the current level of output, what would be the total cost of the firm?
(a) Rs.2,944
(b) Rs.3,824
(c) Rs.4,062
(d) Rs.4,208
(e) Rs.5,878. ( 2 marks)
<Answer>
80. Two firms, A Ltd., and B Ltd., are duopolists producing a similar product and facing identical demand functions
PA = 100 – QA

where QA is total quantity sold by A and PA is price per unit.

Total cost functions of A and B Ltd. are:

TCA = 100 + 20QA
TCB = 200 + 30QB.

If A Ltd., is enjoying price leadership through low-cost, the amount of profit sacrificed by B Ltd. to avoid a price war
is
(a) Rs.1,025
(b) Rs. 25
(c) Rs.2,400
(d) Rs. 125
(e) Rs.2,275. ( 2 marks)
<Answer>
81. In a country a firm Super Ltd., enjoys monopoly power in producing and supplying a product ‘Ultra’. The fixed cost
of the firm is Rs.200 and its average variable cost is constant at Rs.30 per unit. Super Ltd. sells goods in Northern
region and Southern region. The estimated demand functions for the good in Northern region is given as
PN = 40 – 2.5QN and in Southern region it is estimated as PS = 120 – 10QS.

If price discrimination is not practiced, the output produced by Super Ltd. to maximize sales revenue is
(a) 8 units
(b) 10 units
(c) 12 units
(d) 14 units
(e) 16 units. ( 2 marks)

END OF QUESTION PAPER

Suggested Answers
Economics - I (MSF1A3): April 2008

Answer Reason
1. b The tendency of market prices to direct individuals pursuing their own interests into < TOP
productive activities that also promote the economic well being of the society, is referred to >
Invisible hand principle
2. e According to general equilibrium analysis Decision making agents are < TOP
>
• Consumers.
• Producers.
• Resource owners.
3. d While plotting the demand curve the price of the commodity is placed on y-axis. < TOP
>

4. d There will an increase in revenue when for an increase in price when the price elasticity is < TOP
either zero or less than one. >

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5. D If the institute believes that raising course fees will enhance revenue, it can happen only if the < TOP
demand for the course is inelastic. This implies that as a result of an increase in price, the >
demand for the course do not fall, which helps in increasing revenue.
6. c If the cross price elasticity of demand is negative it means that the goods are complements, e. < TOP
g. an increase in the price of X will shift the demand curve for Y to the left. >

7. d A movement along the supply curve is caused by change in the price and resultant change in < TOP
the quantity supplied. When price of labor (wages) increase, supply of labor increases. All >
other options lead to a shift in the supply curve.
8. c At equilibrium, Qs = Qd < TOP
>
1000 – 200P = 800P – 2000
3000 = 1000P
P = 3.
When P = 3, Qs = 400
Elasticity of supply =
9. d At satiety point the total utility is maximum. < TOP
>

10. a In case of perfect complements the indifference curve is L – shaped. < TOP
>

11. b A good is considered as a luxury good if it’s income elasticity is greater than one. < TOP
>

12. a The locus of points of tangency between budget line and the indifference curves is called as < TOP
the income consumption curve. >

13. c ‘Diamond – water’ paradox explains that the more of a commodity we have, the marginal < TOP
utility starts diminishing. If the availability of the product is less, marginal utility would be >
high.
14. b Based on the given data the budget constraint can be written as < TOP
>
20 QM + 35 QN = 700

15. a The marginal product of a factor increases first and after reaching a certain level it starts < TOP
falling. So due to this the marginal product curve assume an inverted U- shaped. >

16. c An isoquant (equal product curve) is the locus of all those combinations of two inputs, which < TOP
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.
17. A The law of variable proportions states that “ as we increase the number of units of one input < TOP
and keep the other inputs same, the marginal productivity of the variable input increases >
initially and then decrease.
18. c At a stage where the total product is maximum, the marginal product will be Zero. < TOP
>

19. a Expansion path is the locus of different points where the firm’s expenditure increases without < TOP
any change in the price of inputs. >

20. c It is Marginal Rate of Technical Substitution (MRTS) which is expressed through an < TOP
isoquant. Whereas Marginal Rate of Substitution (MRS) is expressed through an indifference >
curve.
21. e Only isoquant curve is convex to origin. < TOP
>
Supply curve slopes upweel from left to right.
Isocost curve slopes downwards from left to right.
Budget line slopes downwards from left to right.
Total product curve is inverted u shape.
22. b The average product will be greater than marginal product only after the point when both of < TOP
them are equal. Before this point the marginal product will greater than average product. >

23. a If the production function is homogeneous then the expansion path will be a straight line < TOP
through origin. >

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24. c The cost function shows that the total cost is depended on the output to be produced. < TOP
>

25. a The time cost when expressed in terms of money is referred as implicit cost. < TOP
>

26. c The marginal cost curve intersects both the average variable cost curve and the short run < TOP
average total cost curve at their lowest points >

27. e (a) is true hence it is not the correct answer < TOP
>
(b) is true hence it is not the correct answer
(c) is true hence it is not the correct answer
(d) is true hence it is not the correct answer
(e) is not true because real economies of scale can be achieved through the reduction
in the quantity of inputs. Hence it is the correct answer.
28. e A technological change involves: < TOP
>
• Innovation of new products.
• Improvement in the existing product.
• Reduction in the cost of production.
29. a If the firm’s total revenue exceeds its economic costs, the residual accruing to the < TOP
entrepreneur is called as economic or pure profit. >

30. e Option (e) is not true. The reason for this is that the marginal cost curve cuts the average cost < TOP
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.
31. c The ‘reserve capacity economies’ are part of Technical economies. < TOP
>

32. e Separate cost can be easily attributed to a product or a process. < TOP
>

33. d In perfect competition the demand curve of a individual is infinitely elastic, that means that < TOP
the individual can sell any amount of output at prevailing price. >

34. d In a perfectly competitive market in the long run no firm earns abnormal profit because of < TOP
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.
35. c In perfect competition the marginal revenue is equal to price which is constant. Hence the < TOP
slope of marginal revenue curve is zero. >

36. a In perfect competition the supply of an individual firm is equal to zero if the price is below < TOP
average variable cost. >

37. a In perfect competition when a specific sales tax is imposed then the MC curve will shift < TOP
upward to left and the amount produced at the prevailing price will reduce. >

38. d • Is an assumption of kinked demand hypothesis. < TOP

>
• Is an assumption of kinked demand hypothesis.
• Is not an assumption of kinked demand hypothesis. According to kinked demand
model Product qualities are constant, advertising expenditure are zero.
39. b (a) Not true. There exists a difference between a firm and an industry < TOP
>
(b) True. For a monopolist supply curve does not exists
(c) Not true. Horizontal AR curve is a feature of perfect competition. For an
oligopolist the AR curve is a downward sloping line
(d) Not true. In monopolistic competition products are differentiated
(e) Not true. In monopsony there is only one buyer buying from many seller.
40. a According to Lerner the difference between price and marginal cost indicates the deviation < TOP
from perfect competition to monopoly. >

41. d If the MC curve of the monopolist is positively sloped then the increase in price will be < TOP
lesser than the specific tax imposed >

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42. b To maximize profit the first order condition requires that the MR should equal to MC. A < TOP
monopolist can maximize profits by equating MR with MC. >

43. a A monopolist is said to be in equilibrium where the elasticity of his average revenue curve is < TOP
greater than one. >

44. b Price elasticity of demand = ∂Q/∂P × P/Q < TOP

>
Given P = 8
Demand function: P = 40 – 4Q
Or, 4Q = 40 – P
Or, Q = 10 – 0.25P
Or Q = 10 – 0.25(8)
= 10 – 2 = 8
Thus, ∂Q/∂P × P/Q = -0.25 × 8/8 = -0.250
45. b Qs = 200P – 250 < TOP
>
Qd = 750 – 50P
Equilibrium price is determined when Qs = Qd.

∴ 200P – 250 = 750 – 50P

or, 250P = 1000
or, P = 4
When P = 4, Qs = 200(4) – 250 = 800 – 250 = 550 units.

46. b The theoretical highest price that can prevail in the market is when the quantity demanded is < TOP
zero. >

6,00,000 – 20 P = 0
6,00,000 = 20 P
P= = Rs. 30,000.
47. e P1 = 8 Q1 = 40 < TOP
>
P2 = 10 Q2 = 60

∆P = 2 ∆Q = 20
Arc EPd = =
EPd = 1.80

48. c Qd = 140 – 2P < TOP

>
Qd =140 – 2(60)
Qd =140 – 120
= 20
P = 70 –0.5 Q
TR = 70Q –0.5 Q2
MR = 70 – 1Q
When Q = 20,MR = 70 –1(20) = 70–20 = Rs.50.
49. a Arc price elasticity of demand = ∆Q/∆P × (P 0+ P1/Q0+Q1) = ( –5/1) × (7/15) = 2.33. < TOP
>

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50. c Qd = 10,000 – 4P < TOP

>
Qs = 3,000 + 6P
Equilibrium price is determined where,
Qs = Qd
3,000 + 6P = 10,000 – 4P
6P + 4P = 10,000 – 3,000
10P = 7000
P = 700.
If the govt. imposes a sales tax of Rs.200 per unit
Qs = 3,000 + 6 (P – 200)
= 3,000 + 6P – 1200
= 1800 + 6P.
∴Equilibrium price is determined, when Qs = Qd

∴ 1800 + 6P = 10,000 – 4P
6P + 4P = 10,000 – 1800
10P = 8200
P = 820
∴ Change in Price = 820 – 700 = Rs.120 (Hence the price will increase by Rs. 120)
51. d The consumer will consume till MU = P < TOP
>
MU = 0.7m
0.7m = 28
m = 40 units.
52. a MRSBA = < TOP
>

53. b When the consumer is in equilibrium, < TOP

>
=
∴5 =
Pb = Rs.19

54. c A rational consumer would consume upto the point where the Marginal utility = price < TOP
>
Marginal utility is given by Derivative of total utility i.e. X 2.5
Given 2.5X 1.5 =67.5 or x 1.5 = 27 or X = 9 units
55. e ∴ PA = = Rs.100. < TOP
>

56. e AP = TP/L = 80L – L2 < TOP

>
Maximum AP: ∂AP/∂L = 0
80 – 2L = 0
Or, L = 40
At L = 40, AP = 80(40) – 40 x 40 = 1,600 units.
57. c TPL = 30L – 1.5L2 < TOP
>
MPL = 30 – 3L
Marginal returns become negative, once MPL equals zero. Thus,
30 – 3L = 0
Or, L = 10.
58. b Efficient allocation of L & K: < TOP
>
MPL/w = MPK/r

0.75K0.75/(L0.25 × 8) = 0.75L0.75/(K0.25 × 5)
5K = 8L
Or, L = 5/8K.

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59. e First stage of production function ends when APL is highest and second stage ends when < TOP
>
MPL = 0. APL is highest when APL = MPL.

Q = 36L2 – L3
APL = Q/L = 36L – L2

MPL = ∂Q/∂L = 72L – 3L2

By equating APL and MPL,

36L – L2 = 72L – 3L2

2L2 = 36L
Or, L = 18
Thus, first stage of production is over the range of labor input 0 to 18.
At the end of the second stage of production function,
MPL = 0

72L – 3L2 = 0
Or, L = 24.
Thus, the second stage of production function is over the range of labor input 18 < L < 24.
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.

60. d Since functions (I) and (III) have fixed cost components i.e. 20 and 100, they are relevant in < TOP
the short run only. And function such as C = 200Q + 0.5Q2 and >

C = 10Q + 150Q2 are examples of long run cost function because there is no fixed cost
components exist in these two functions.
61. e TC = 20Q – 0.30 Q2 + 0.01Q3 < TOP
>
MC = = 20 – 0.6 Q + 0.03Q2
MC is minimum when =0
= -0.6 + 0.06 Q = 0
0.06 Q = 0.6
Q = 10.
62. a Total cost = Fixed cost + variable cost < TOP
>
When Q = 10, VC = 20(10) + 102
= 200 + 100 = 300
∴ TC = 250 + 300 = Rs.550
63. e LTC = Q3 – 80Q2 + 1900Q < TOP
>
LAC = = Q2 – 80Q + 1900
LAC will be minimum, where
Or,
or, 2Q – 80 = 0
or, 2Q = 80
or, Q =
When Q = 40, LAC = (40)2 – 80 (40) + 1900
= 1600 – 3200 + 1900
= Rs.300.
64. a The total revenue = Price × quantity. < TOP
>
Then it becomes 48Q.Profits = total revenue – total costs
Profits = 48Q – 200 – 8Q – 2Q2
= 40Q – 2Q2 – 200
Profit at the output of 10 units =
40 (10) – 2 (10)2 – 200 = 400 – 200 – 200 = 400 – 400 = 0.
65. d TC = FC + VC = 20 + 20 = Rs. 40. < TOP
>

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66. d The MC = 82 – Q < TOP

>
∴ Profit maximizing output for the firm is determined where,
MR = MC
or, 2 = 82 – Q
or, Q = 82 – 2 = 80 units.
67. e AC = 800/Q + 80 + 4Q < TOP
>
TC = 800 + 80Q + 4Q2
TVC = 80Q + 4Q2
At output 10,
TC = 800+80(10) + 4(10)2 = 800+ 800 + 400 =Rs.2,000 .
68. e TC = 500 + 5Q < TOP
>
VC = 5Q; FC = 500
AVC = =5
BEP = = = 250
∴ BE Sales revenue = 250 × 7 = Rs.1750.
69. c AC = TC/Q = 36 – 0.60Q + 0.020Q 2 < TOP
>
AC is minimum when AC/ Q = 0
= – 0.60 + 0.040Q = 0
0.040Q = 0.60
Q = 15
At Q = 15, AC = 36 – 0.60(15) + 0.020(15) 2 = 36 – 9 + 4.5 = Rs.31.50
70. a Since the firm is operating in short run the equilibrium condition of the firm will be MR = MC < TOP
>
Given
P =1000 – 50Q
So TR = P × Q = 1000Q – 50Q2
MR = 500 – 100Q
Given
AVC = 250 + 25Q
VC = 250Q +25Q2
MC = 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
71. e A firm will shut down its operations if the price is less than average variable cost. Since < TOP
under perfect competition, price is also equal to marginal revenue, the firm will continue >
operations in the short run so long as price is at least equal to average variable cost. Thus the
minimum price, which the firm will shut down, is the minimum average variable cost.
AVC = 800 – 80Q + 8Q2
Minimum average variable cost: AVC/ Q = 0
Thus, -80 + 16Q = 0
Or, 16Q = 80
Q=5
When the firm is producing 5 units, then
AVC = 800 – 80(5) + 8(25) = 600.
Thus, if price falls below Rs.600, The firm has to shut down its operations.

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72. a In perfect competition the price is equal to average revenue so < TOP
>
AR = 40 – 4 Q
Q=4
AR = 40 – 16 = Rs. 24
73. d The firm operating in a perfectly competitive industry earns only normal profits in the long < TOP
run because of free entry and exit of the firms. The firm operating at its minimum average >
cost can only prevail in the market. Thus, the equilibrium condition in the long run is when
the firm is operating at Min. LAC.
If LAC = 50 - 625Q + 25Q2 LTC = 50Q - 625Q2 + 25Q3
LMC = = 50 – 1250Q + 75Q2
LAC is minimum, when LMC =LAC
Thus, 50 - 1250Q + 75Q2 = 50 - 625Q + 25Q2
Or, 625Q = 50Q2
Or, 50Q = 625
Or, Q = 12.5 units.
74. c For a firm operating in a perfectly competitive industry, the MC curve above the AVC curve < TOP
is the supply curve of the firm. >

MC = ∂TC/∂Q = - 50 + 4Q = P
Or, 4Q = P + 50
Or, Q = 0.25P + 12.5
There are 200 firms, hence Qs = 200x Q = 50P + 2500
Equilibrium price is where, Qs = Qd
3000 – 200P = 50P + 2500
Or, 250P = 500
Or, P = Rs.2.
75. c LAC=100 – 20Q + 2Q2 < TOP
>
P=100 – 0.1Q
In the long run, all firms operate at the lowest of their average cost curves.
So,
Or, – 20 + 4Q = 0
Or, 4Q = 20
Or, Q = 5. (Firm’s output)
At Q = 5,LAC=100 – 20 (5) + 2 (5)2=100 – 100 + 50=50
At equilibrium,
LAC = P
When P = 50, 50 = 100 – 0.1Q
or, –0.1Q = –50
or, Q = 500 (Industry’s output)
∴ No. of firms = = = 100.
76. c A monopolist maximizes its profits when MR = MC. < TOP
>
MR = 1,200 – 40Q
MR = MC
1200 – 40Q = 160
40Q = 1040
Q = 26 units.

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77. c Demand function of the monopolist are given as < TOP

>
P = 800 – 10Q
TC = 300Q + 2.5Q2
TR = P × q = 800Q – 10Q2
∴MR = 800 – 20Q.
∴ Profit maximizing output for the monopolist can be determined, where,
MR = MC
MC = = 300 + 5Q
∴ MR = MC
800 – 20Q = 300 + 5Q
– 25Q = – 500
Q = 20
∴ P = 800 – 10 (20) = 800 – 200 = Rs.600.
78. B Total sales: 3000 + 2200 + 1570 + 4720 + 1248 + 1008 + 3132 + 1422 = 18300 < TOP
>
4-firm concentration ratio = (4720 + 3132 + 3000 + 2200)/18300
= 13052/18300 =0.71
6-firm concentration ratio = (4720 + 3132 + 3000 + 2200 + 1570 + 1422)/18300
= 16044/18300= 0.88.
79. d The profit maximizing output is where MC = MR < TOP
>
30 – 40Q + 3Q2 = 30 – 4Q
Or, 3Q2= 36Q
Or, Q = 12
At output of 12 units, total cost = 5000 + 30(12) – 20(12)2 + (12)3
= 5000 + 360 – 2880 + 1728 = Rs.4208.
80. b To avoid price war, Beta Ltd. should charge same price as charged by the leader, Alpha Ltd. < TOP
Alpha charges a price where it maximizes its profits. >

It is possible when MRA = MCA.

PA = 100 – QA
When Beta charges same price, it sells the same quantity of output as Alpha i.e. QA = QB.
Thus, PA = 100 – QA

Or, TRA = (100 – QA)QA = 100QA – QA2

Thus, MRA = 100 – 2QA
At equilibrium, 100 – 2QA = 20
Or, QA = 80/2 = 40
Or, PA = 100 – 40 = 60.
Thus, price charged by Beta is also Rs.60
Thus, total revenue of Beta = 60 x 40 = 2400
And, total cost = 200 + 30(40) = 1400
Profits = 2400 – 1400 = 1000.
The profit maximizing output for Beta is where MRB = MCB
TRB = (100 – QB)QB = 100QB –
MRB = 100 – 2QB
At equilibrium, 100 – 2QB = 30
Or, QB = 70/2 = 35
And, PB = 100 – 35 = 65.
Total revenue of beta at price Rs.65 = 65 x 35 = 2275
Total cost = 200 + 30 (35) = 1250

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Profits = 2275 – 1250 = 1025

Hence, profits sacrificed = 1025 – 1000 = Rs.25.
81. d When price discrimination is not practiced by the monopolist, PN = PS. < TOP
>
PN = 40 – 2.5QN
2.5QN = 40 – PN
QN = 16 – 0.4PN
PS = 120 – 10QS
10QS = 120 – PS
QS= 12 – 0.1PS
Total output sold by the monopolist = Q = QS + QN
Thus, Q = 16 – 0.4PN + 12 – 0.1PS
Q = 28 – 0.5P
TR = P x Q = P(28 – 0.5P) = 28P – 0.5P2
Maximum TR: TR/ Q = 0
28 – P = 0
Or, P = 28
When P = 28, Q = 28 – 0.5(28) = 14 units.

< TOP OF THE DOCUMENT >

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