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!.I.T.New Delhi. Dept. of Humanities &Social Sciences

MODERN MICROECONOMICS HUL2121 Minor 1 30thAugust 2008
Time: 1 hour
Max.Marks: 20
PART 1
Pick the correct answer and give reasons for your choice. (6 marks)
1. Which one of the following would not lead to an increase in demand for
/~ skiing holidays?
A) A fall in the cost of ski clothes.
.
8) A fall in the cost of hospital treatment in alpine resorts (you may assume that
the decreased cost is reflected in insurance policies).
C) An increase in incomes.
D) A fall in the price of skiing holidays.
2. Which of the followingmay lead to a decrease
. in the
- supply of books?
A) A fall in the price of books.
8) A fall in the price of paper.
C) A rise in demand for newspapers.
D) The introduction of tax incentives to authors.

3. Whichof the followingoccurs when technologicalimprovementsoccur, makinga

good easier to produce?
I A movementalonga demand curve.
II A shiftof the supplycurve.
III A movementalong a supplycurve.

A) I and II
8) IIand IIr
C) I only
D) IIIonly

4. Good Y has a cross elasticity of demand with respect to Good X of 0.5. 100 units
of Good Yare demanded when Good X costs Rs. 50. A rise in the price of Good X to
RS.75 willlead to a change in the demand for Good Y to:
A)150 units.
8)125 units.
C) 75 units.
D) 50 units.

5. The imposition of legislation that forbids landlords to increase rents will:

A improve the efficiencyof the private rental market.
8 lead to lower rents and thus more people willlive in rented houses.
C lead to higher rents and thus fewer people willlive in rented houses.
0 lead to lower rents and fewer people livingin rented houses.

6. Ifthe quantityof GoodX is represented on the verticalaxis and the quantityof Good
Y is represented on the horizontalaxis,then:
A a 10% rise in the priceof both goods willcause the budget line to make a parallel
shift to the right.
8 A rise in the price of Good X and a fall in the price of Good Y will cause the
budget line to become steeper.
 C A change in tastes in favour of Good Y willcause the budget line to make a
parallelshiftto the right.
D A 20% rise in the price of Good X and a 10% rise in the price of Good Y will
cause the budget lineto becomeless steep.

PART2

1. You are deciding how to spend next Saturday afternoon. You have four
mutuallyexclusive choices, whichwillgive you the followingunits of pleasure:
~ Drivingin a car rally +70
PlayingSquash +40
WatchingTelevision +25
Going$hopping +15

(i) What is the opportunity cost of driving in a car rally?

(ii) What is the opportunity cost of going shopping? (1 mark)

2.haw diagrams to illustratethe effectof an indirecttax placed on producerswhen:

v -(i) demand is (a) perfectly inelastic and (b) perfectly elastic
(ii)supply is (a) perfectly inelastic and (b) perfectly elastic
~ L (2 marks)
JThe price of Good A is £3 and the price of Good B is £10. The marginal utilityfrom
the last unit of Good A is 30 and the marginal utilityfrom the last unit of Good B is 50.
(i) Is the consumer in a utility-maximisingequilibrium position?
(ii) Ifnot, what changes in consumption would a rational consumer make to
increase total utility? (1 mark)

4. State which of the followingis TRUE or FALSE according to the Figure below.
(i) bananas are an inferiorgood .

(ii) the cross price elasticity of demand for apples with respect to the
price of bananas is negative.
. Suppose that the price of banana is increased while everything else remains.
constant.

Apples
A

a)

q'b qb B' B Bananas

1 ~ t\'
\~ (1 mark)
 5. Complete the followingtable to summarize the effects of a price rise on
the quantitydemanded of the differenttypes of goods.

Price. rise of... Substitution effect Income effect Overall effect

.
. Normal good
\nfenOf but non-G\ffen good
. Giffen good
(3 marks)

PART 3

1. Consider a market for Bicycleswhere the supplycurve is givenby:

as =200P -12,500
The government decides to give a subsidy of Rs. 45 per bicycle,which is paid
to the suppliers.Thus, the suppliers receive (P + 45), after the subsidy is
granted. So, after the subsidy is introduced,the quantitythe suppliers are
happy to supplyto consumers at price P willbe as much as they used to be
happy to supplyat price (P+45).The demand curve is given by:
aD =100,000 -250P

a) What is the initialequilibrium Price and Quantity?

b) What is the Price and Quantity after the grant of subsidy?
c) How much does it cost the government in giving this subsidy?
d) Show this with the help of a diagram.
e) What happens if this subsidy is instead given to the consumers?
f) With the same demand curve, calculate the price elasticity, if price rises
from RS.100 to Rs.100.01? Willrevenue rise or fall? (6marks)