ECONOMIC ANALYSIS (EA) 2005 (PGPI, Fi st !

e ") #0 "i$utes

Date: August 3, !i"e:

Midterm (Closed Book)

Name: Section: 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 exa has 1! pages. """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""" 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. $latter% b. #teeper$ c. The same% d. Can&t say. Suppose the supply and demand e'uations of natural gas are# (s !supply" ) *+ , -.g , /.-0.o and (d !demand" ) 0.g , 1.20.o, where .g and .o are prices of gas 3 oil, respectively. 4f there is a -05 increase in the price of oil from .o)6, then the price of gas, .g will a. 7ise by -05% b. %ise b& 5!'$ c. 7ise by more than 0/5% d. 7ise by less than -05% e. None of the above. $rom the viewpoint of labor in a developing country, a 8inimum Wages 9ct is always# a. 9 welcome move% b. 9n un welcome move% c. ( ixed b)essing% d. None of the above.

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9 positive vertical axis intercept of an upward sloping supply curve of labor# e. :as no economic ;ustification% f. :as an economic ;ustification as the reservation price of labor, only if there is no unemployment of labor% g. *as an econo ic +,stification as the reser-ation price of )abor, e-en if there is ,ne p)o& ent of )abor$ h. None of the above. 9s Cournot e'uilibrium occurs at the point of intersection between the reaction curves of the duopolists !assuming it exists and is stable", return to the same e'uilibrium point from any initial non e'uilibrium point a. is always ensured by Cournot assumptions% b. is not ens,red b& .o,rnot ass, ptions$ c. is only momentarily ensured% d. is only occasionally ensured. 9ssuming that the duopolists are producing a homogeneous good with a market demand curve, given by an e'uation # . ) 0// = /.0(, where ( is total output of the two, with (* and (- being their individual output levels, and their average costs are constant at *// and c, respectively, a Cournot solution will always ensure simultaneous existence of both the duopolists with positive levels of output, a. (s )ong as c is )ess than /!!$ b. 9s long as c)1//% c. >nly if c)-//% d. >nly if c is larger than -//. $ree entry and free exit under monopolistic competition will always ensure achievement of a. b. c. d. the same long run e'uilibrium as holds under perfectly competitive conditions% a long run e'uilibrium where the firms will en;oy super normal profits% a )ong r,n e0,i)ibri, with o-ercapacit&$ none of the above.

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?nder decreasing cost conditions, a single monopolist is preferred over several small firms because a. b. c. d. ( sing)e onopo)ist can tap the benefits of econo ies of sca)e ore than a )arge n, ber of s a)) co petiti-e fir s$ 9 single monopolist passes on to the consumers the full benefits of economies of scale% 9 competitive solution doesn&t exist% None of the above.

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The total marginal cost curve of a multi plant monopolist indicates a. b. c. d. The sum total of marginal costs across the plants for each level of output% 1he s, tota) of o,tp,ts fro ,)tip)e p)ants corresponding to each argina) cost )e-e)$ The apportionment of total marginal cost across plants% The average cost of total output.

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The relative tax burden of the consumer vis A vis the producer of a specific per unit excise duty on alcohol will be a. b. c. d. :igher if the tax is collected from the producer rather than the consumers% :igher if the tax is collected from the consumers rather than the producer% 1he sa e irrespecti-e of the so,rce of tax co))ection$ None of the above.

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4f the incidence of a specific per unit tax is fully absorbed by the producer, it must mean a. 1he s,pp)& c,r-e is perfect)& ine)astic$ b. The supply curve is perfectly elastic% c. The demand curve is perfectly inelastic% d. None of the above. The emergence of a black market in the presence of a price ceiling !say, on essential goods" will a. b. c. d. $ully eliminate the deadweight loss due to government price intervention% Never eliminate the deadweight loss due to government price intervention% 1end to red,ce the deadweight )oss$ None of the above.

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B? has often converted an importable item into an exportable one through its various support measures. 4t must mean a. b. c. 1he do estic e0,i)ibri, price ,nder no-trade no-inter-ention conditions ,st )ie abo-e the wor)d ar2et )e-e)$ The domestic e'uilibrium price under no trade no intervention conditions must lie below the world market level% Can&t say.

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?nconstrained sales revenue maximiCation of a firm takes place at a point where a. 87D/ and price elasticity of demand is greater than unity% b. 3%4! and price e)asticit& of de and is ,nit&$ c. 87E/and price elasticity of demand is less than unity d. None of the above. 4n a model of constrained sales maximiCation, 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. 1he profit constraint has to be fixed at the opport,nit& cost of share capita) in-est ent$ d None of the above. Suppose the demand curve for a product !say, fertiliCer" is perfectly elastic, while the supply curve !of the $ertiliCer Corporation of 4ndia" is a usual positively sloped one. 4f an unit subsidy is applied on this product, the benefits of the subsidy will be appropriated by a. The consumer cent per cent% b. 1he s,pp)ier cent per cent$ c. Fy both depending on elasticity of supply% d. None of the above. 9ssuming that a polluter has a right to pollute and therefore the consumer can only pay !at the rate of .r" for some amount of pollution reduction !say, 7", the consumer budget line with fixed money income, 8 can be expressed as !assuming another good G purchased at price, .x" a. .x.G ) 8 , .r.7 b. 5x.6 4 3 5r.% c. .x.G = .r.7 ) 8 d. None of the above.

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Suppose a rancher and a farmer is considering having trade between them. The rancher takes 6 hours to produce * pound of potato, whereas the farmer takes */ hours. >n the other hand, the rancher takes * hour to produce * pound of meat, whereas the farmer takes -/ hours to produce the same * pound of meat. Part I: 4n this case, the opportunity cost of * pound of meat to the rancher would be a. 178 po,nd of potato b. 6 pounds of potato c. H pound of potato d. - pounds of potato Part II: 4n the post trade situation, the following will happen a. b. c. d. 1he rancher wi)) se)) eat if he gets at )east 178 po,nd of potato per po,nd of eat. The rancher will sell potato if he gets more than *I6 pound of meat per pound of potato. The farmer will sell meat if he gets more than H pound of potato per pound of meat. None of the above.

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9ssuming that a consumer has a right to Cero pollution and therefore he can claim compensation !at the rate of .c" for accepting some amount of pollution !say, C", the consumer budget line with fixed money income, 8 can be expressed as !assuming another good G purchased at price, .x" a. 5x.6 4 3 9 5c.. b. .x.G ) 8 = .c.C c. .x.G , .c.C ) 8 d. None of the above. 4ndifference curves in a consumer&s indifference map# a. have to be vertically parallel b. have to be horiContally parallel c. have to be parallel along a ray to origin d. ha-e to be non-intersecting, b,t not necessari)& para))e) 4f arc price elasticity of demand for good G is Cero, G must be a. a normal good b. a luxury good c. a Jiffen good d. an inferior good

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4f 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 e'ually price elastic at a given price b. has to be more price elastic at a given price c. has to be )ess price e)astic at a gi-en price d. could be more or less price elastic at a given price 4f the market demand curve of good G is vertical, which of the following is consistentK a. the good is considered inferior b& each of the cons, ers b. the good is a Jiffen 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 Lifferentiation between ownership and control may not lead to sacrificing the ob;ective of profit maximiCation 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 trueK a. on)& (i) or (ii) or (iii) and (i-). b. only !i" c. only !ii" d. only !iii" or !iv" $or the three consumers = 9, F and C, consuming both the goods G and M, the following must hold# a. !.G I .y" ) !87S9 , 87SF , 87SC" b. !.x I .M" ) !87S9" !87SF" !87SC" c. !.G I .y" ) 87S9 I 87SF ) 87SF I 87SC ) 87SC I 87S9 d. (56 7 5:) 4 3%#( 4 3%#; 4 3%#. .rice elasticity of a good G is more in 4ndia than in ?S9. Which of the following statements is not consistent with this findingK a. G has more close substitutes in 4ndia than in ?S9. b. .roportion of consumer budget spent on G is higher in 4ndia than in ?S9. c. 4ncomes of the consumers are substantially less in 4ndia than in ?S9. d. 6 is p,t to ore ,ses in <#( than in =ndia.

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9 consumer finds two baskets 9 !G ) -/, M ) 1/" and F !G)+/, M)*/" yielding the same level of satisfaction. Therefore, the basket C!G ) 1/, M ) -/" under normal assumptions about his indifference map must be such that# a. C yields the same satisfaction as 9 b. . &ie)ds higher satisfaction than ( c. C yields lower satisfaction than 9 d. C yields higher satisfaction than 9, but lower satisfaction than F 9n upward slopping .rice Consumption Curve of good G !.CC G" when non G is measured on M axis implies that good G and non G are# a. inferior goods b. substitute goods c. co p)e entar& goods d. independent and unrelated goods 9 farmer derives his income from the sale of the surplus produce after his self consumption. 4f the government imposes a flat tax of a fixed sum on his income, his marketable surplus will# a. 4ncrease if he considers the commodity inferior b. $all if he considers the commodity normal c. =ncrease if he considers the co odit& nor a) d. Not change if he considers the commodity inferior Net the ob;ective of the government be to reduce excess burden of taxation on consumers to the extent possible. There is already an excise duty of */5 of price on good M. Which of the following options to generate more tax revenues should be recommendedK a. = pose a d,t& of 1!' of price on good 6 b. 4mpose an income tax of e'uivalent amount as */5 duty on G c. 4mpose a duty on units of G of e'uivalent amount as */5 duty on G d. 4mpose a flat !head" tax of a fixed amount on everybody. When the 4ncome Consumption Curve !4CC" between goods G and M is an upward sloping straight line from origin, the income elasticity of demand for good G is# a. Oero b. 91 c. =* d. 4nfinity

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Net G ) *// P/.< N/.0 be a production function for product G with P and N as two inputs. 4t implies a. increasing ret,rns to sca)e thro,gho,t the range b. decreasing returns to scale throughout the range c. constant returns to scale throughout the range d. 4ncreasing returns when the scale is increased and decreasing returns when the scale is decreased. $or measuring economies of scale in a firm, which of the following is not assumedK a. Technology remains the same. b. ?nits of the product are homogeneous c. >earning b& doing d. $actor prices remain the same. When average cost !9C" is falling, a. 9QC must be falling b. 9QC D 9C c. (?. co,)d be rising d. 9QC has to be greater than 8C. The relationship between the long run marginal cost !N8C" curve and short run marginal cost !S8C" curves is such that# a% N8C curve is an envelope to various S8C curves. b. >3. c,r-e intersects a)) #3. c,r-es fro abo-e. &% N8C curve intersects all S8C curves from below. d. N8C curve intersects S8C curves from above when N8C falls and N8C intersects S8C curves from below when N8C rises. 4f 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. tr,e when the cost of restarting the b,siness is @ero 9 firm would be in e'uilibrium maximiCing its profits when# a. its 9QC ) 8C b. 9C ) . c. 87 ) 8C d. 3% 4 3. and for higher o,tp,t 3. A 3% e. 8C ) .

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The cost function for product G of a firm is given by C ) *// , 0G , +G9nswer the following based on this cost function# Part I: The fixed costs are# a. %s.1!! b. 7s.*/@ c. 7s./ d. Can&t say Part II: 9QC is# a. increasing at an increasing rate b. increasing at a constant rate c. increasing at a diminishing rate d. a ? = shaped curve e. decreasing throughout Part III: 9C is# a. increasing at an increasing rate b. increasing at a constant rate c. increasing at a diminishing rate d. a < shaped c,r-e e. decreasing throughout Part IV: 8C curve in this case a. never intersect 9C curve b. intersects 9QC curve at G ) + c. intersects (. c,r-e at 6 4 5 d. intersects 9C curve at G ) <

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4n a perfectly competitive industry, there is a. no incentive for a firm to be efficient b. no incenti-e for ad-ertising and sa)es pro otion c. no incentive for technological change d. enough ;ustification for government taxation .roducer&s surplus does not include# a. fixed cost b. -ariab)e cost c. normal profit d. economic profit

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The government decides to replace 'uota on good G by an e'uivalent tariff. The deadweight loss in the system would, therefore# a. increase b. decrease c. re ain the sa e d. become Cero Which of the following is not true about a profit maximising monopolyK a. 9 firm can earn supernormal profit in the long run b. 9 firm faces a downward sloping demand curve c. 1he ind,str& wo,)d ha-e )ower price and higher o,tp,t co pared to perfect co petition. d. There would be a deadweight loss in the system. e. Consumers& surplus would be less compared to perfect competition. 9 difference between oligopoly and monopolistic competition is that# a. 9dvertising is re'uired in monopolistic competition but not b. re'uired in oligopoly. c. >ligopoly cannot have product differentiation, but monopolistic competition must have it. d. Bntr& barriers are s,bstantia) in o)igopo)& b,t are non-existent in onopo)istic co petition. e. Bxit is possible in oligopoly but is ruled out in monopolistic competition. :igher the monopoly power, a. higher is the profit b. higher is the efficiency c. higher is the fixed costs d. )ower is the price e)asticit& of de and Stackleberg model of duopoly would result in# a. higher o,tp,t and )ower price than .o,rnot e0,i)ibri, b. lower output and lower price than Cournot e'uilibrium c. higher output and higher price than Cournot e'uilibrium d. lower output and higher price than Cournot e'uilibrium 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 o,tp,t and )ower price than ,nder profit axi isation d. lower output and higher price than under profit maximisation ------------- X -------------

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