Micro-Economics Question Paper PDF

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Microeconomics Mid term question paper...

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INDIAN INSTITUTE OF MANAGEMENT JAMMU Mid-Term Examination Program: MBA (Batch 2020-22), Term I (Academic Year 2020-21) Exam Type: Open Book Course: Microeconomics

Max Marks: 50 (25%)

Date: 07/September/2020

Duration: 2 Hours

1. The production capacity of an economy is not permanently fixed. If the resource base increases or technology advances, then the economy will experience economic growth, causing the production possibilities curve to shift outward. Economic growth is the ability of an economy to produce greater levels of output, represented by an outward shift of its production possibilities curve. There are two sources of economic growth: change in resources or technological change. An increase in resources such as more factories, more natural resources, and even a baby boom will shift the production possibilities curve outward. With additional labour or factories, the capacity to produce will increase. With additional resources, the production possibilities curve will move outward, as additional products can be produced. Technological change can also shift the curve outward by producing more from the same resources. Some sources of technological change are invention or innovation. Computer chips, satellites, internet, entrepreneur creations are all technological changes.

Henry Ford is an example of an entrepreneur that produced technological change. He pioneered an assembly line for making cars. His organization of resources expanded the production possibilities curve. Diagrammatically explain the shift in production

possibility cure of Henry Ford assuming that he was using labour and capital as factors of production. (10 Marks) 2. Sushmita and Mahima have gone to the market in the Sunday afternoon. Sushmita has an income of $200 that she allocates among two goods Red onions (R) and White onions (W). a) Red onions costs $4 per kilogram and white onions $2 kilogram. Draw her budget constraint and interpret it. (3 marks) b) Her utility function is given by the equation 𝑼(𝑹, 𝑾) = 𝟒𝑹 + 𝟐𝑾. What combination of Red Onions and White Onions should she buy to maximize her utility? Support your answers with the diagram (3 marks) c) When she entered into the market, she saw that there was a shortage of red onions and due to that the price of red onions had risen to $8. What would happen to her utility maximization and the demand for red and white onions? Support your answers with the diagram (4 marks) 3. The Law of Demand is the principle that there is an inverse relationship between the price of a good and the quantity buyers are willing to purchase in a defined period, ceteris paribus. Ceteris paribus, means everything else held equal. Simply, it means at a sale, consumers will buy more when the price of the merchandise is cut. The demand schedule for soda is given in the table below. This shows how many small sodas are purchased at possible prices. As the price of soda declines, the quantity demanded increases. As the price of the soda increases, the quantity demanded decreases. This inverse relationship between price and quantity demanded conforms to the law of demand: the principle that there is an inverse relationship between the price of a good and the quantity buyers are willing to purchase.

Discuss the nature of the demand curve for small soda and calculate point elasticity of demand using any of the price and quantity demand combinations from the above table. (10 Marks) 4. Suppose that you are the consultant to an agricultural cooperative that is deciding whether members should cut their production of cotton in half next year. The cooperative wants your advice as to whether this action will increase members’ revenues. Knowing that cotton (C) and soybeans (S) both compete for agricultural land in Punjab, India, you estimate the demand for cotton to be 𝑪𝒅 = 𝟑. 𝟓 − 𝟏. 𝟎𝑷𝒄 + 𝟎. 𝟐𝟓𝑷𝑺 + 𝟎. 𝟓𝟎𝑰 where 𝑪𝒅 is the demand for cotton, PC is the price of cotton, PS the price of soybeans, and I income. a. Should you support or oppose the plan? (3 Marks) b. Is there any additional needed information that would help you to provide a definitive answer? (7 Marks) 5. Sam and Barb are friends from the past one decade. They both derive utility from the hours of leisure (L) they consume. In order to maximize utility, they need to allocate the 24 hours in the day between leisure hours and work hours. Assume that all hours not spent working are leisure hours. We observe the following information about the choices that the two individuals make: Sam Leisure (hours)

Barb Leisure (hours)

8

16

14

9

15

14

10

14

15

11

14

16

Price of Leisure

Graphically illustrate Sam’s leisure demand curve and Barb’s leisure demand curve. Place price on the vertical axis and leisure on the horizontal axis. How can you explain the difference in their leisure demand curves? (10 Marks)...