PGDM 2014-16

IIM Ranchi

QUIZ #1

INDIAN INSTITUTE OF MANAGEMENT RANCHI

MICROECONOMICS
Term I, AY 2014-15
QUIZ #1
Total Marks: 20

Time: 15 minutes

Instructions (read carefully!)

This is a closed-book examination.

Please circle the best alternative.
Mark your answers with a pen.
There shall be no clarification of doubts. Please do not approach the invigilators for clarification. If you feel
the question is incorrect, use your own assumption and answer the question.
There is negative marking. Each correct answer carries 1 mark. For each incorrect answer, 0.5 marks shall
be deducted.
If you violate examination rules, including using unfair means and practices, your quiz paper shall be
cancelled, and you shall have to face disciplinary action.

MULTIPLE CHOICE QUESTIONS

Circle the best alternative
1. Which of the following is a positive statement?
a. driving speeds should be lowered so that fewer accidents will occur
b. when per capita income falls, fewer meals are consumed at restaurants
c. the minimum wage is too low; college students deserve a raise
d. cigarette sales should be made illegal in order to reduce the incidence of cancer
2. Which of the following is (are) true?
a. Accounting costs generally understate economic costs
b. Accounting profits generally overstate economic profits
c. In the absence of any opportunity costs, accounting profits equal economic profits
d. All of the statements associated with this question are correct
3. Sudhir is considering attending a concert with a ticket price of Rs. 350. He estimates that the cost of driving
to the concert and parking there will total an additional Rs. 200. In order to attend the concert, Sudhir will have
to take time off from his part-time job. He estimates that he will lose 5 hours at work, at a wage of Rs. 60 per
hour. Sudhir's opportunity cost of attending the concert equals
a. Rs. 350
b. Rs. 550
c. Rs. 300
d. Rs. 650
e. Rs. 850
4. P&G is a major soap producer. All of the following, except one, would shift its supply curve of liquid soap
inward. Which is the exception?
a. an increase in the price of bar soap
b. an increase in the price of a key ingredient of liquid soap
c. environmental regulations force P&G to use a more costly technology to produce liquid soap
d. a decrease in the price of liquid soap
e. an increase in the wage rate for factory workers who produce liquid soap

PGDM 2014-16

IIM Ranchi

QUIZ #1

5. A good is said to be a normal good when

a. decreases in income lead to an increase in demand for the good
b. decreases in income lead to a decrease in demand for the good
c. increases in income lead to a decrease in demand for the good
d. increases in price lead to a decrease in the quantity demanded of the good
e. increases in price lead to a decrease in demand for the good
6. Under a price ceiling, the full economic price is
a. the dollar price paid to the firm
b. the opportunity cost of not being able to buy a good when a consumer needs it
c. lower than the free-market price
d. higher than the free-market price
7. Sudhir spends all of his income on warm-up suits and running shoes. The price of a warm-up suit is four
times as large as the price per pair of shoes. Then, in order to maximize total utility, Sudhir should
a. buy four times as many warm-up suits as pairs of running shoes
b. buy four times as many pairs of running shoes as warm-up suits
c. divide his income equally between warm-up suits and running shoes
d. buy both items until the marginal utility of a pair of running shoes is four times the marginal utility of a warmup suit
e. buy both items until the marginal utility of a warm-up suit is four times the marginal utility of a pair of
running shoes
8. The income effect of a lower price for good A
a. invariably leads a consumer to buy more of good A, because the combination of unchanged money income
and lower price raises that consumer's real income or purchasing power
b. invariably leads a consumer to buy less of good A because the combination of unchanged money income
and lower price encourages that consumer to buy more of other goods
c. may lead to a larger, smaller, or even an unchanged quantity of good A demanded; it all depends on the
nature of the good itself
d. creates a change in the good's relative price and, therefore, causes the consumer to substitute good A in
place of other goods
e. causes a parallel outward shift of the budget line, enabling the consumer to buy more of all goods than
before
9. If the price of good X (measured on the horizontal axis of a budget line diagram) increases at the same time
that the price of good Y (measured on the vertical axis) decreases, the budget line
a. will become flatter
b. will become steeper
c. could become either steeper or flatter, depending on the sizes of the price changes
d. will rotate about its original point of intersection with the horizontal axis
e. will shift outward, but not in a parallel fashion
10. When a binding price ceiling is imposed on a market to benefit buyers
a. every buyer in the market benefits.
b. every buyer and seller in the market benefits.
c. some buyers will not be able to buy any amount of the good.
d. every buyer who wants to buy the good will be able to do so, but only if he waits in long lines.

PGDM 2014-16

IIM Ranchi

QUIZ #1

11. A manufacturer produces 400 units when the market price of $10 per unit and produces 600 units when the
market price is $12 per unit. Using the midpoint method, for this range of prices, the price elasticity of supply is
about
a. 2.0.
b. 2.2.
c. 200.
d. 0.45.
12. In a 1956 Supreme Court case in the United States, economists for E.I. DuPont (an American chemical
company) discovered that the cross price elasticity between its cellophane and the prices of similar wrapping
materials was large and positive. This evidence suggested
i.
DuPonts control of cellophane could not be construed as being monopolistic because the other goods
in question were strong substitutes and therefore in competition with each other.
ii.
The demand of cellophane was price elastic.
iii.
Cellophane was an inferior good.
a. 1 only.
b. 2 only.
c. 1 and 2 only.
d. 2 and 3 only.
e. 1, 2, and 3.
13. If a consumer is always indifferent between an additional one grapefruit or an additional two oranges, then
when oranges are on the horizontal axis the indifference curves
a. will be straight lines with a slope of -1/2.
b. will be straight lines with a slope of -1.
c. will be straight lines with a slope of +1/2.
d. will be right angles whose corners occur on a ray from the origin with a slope of +2.
e. none of the above
14. Ice cream can be frozen. In the short run the magnitude of the own price elasticity of demand for ice cream
a. is higher than in the long run.
b. is lower than in the short run.
c. is the same as in the long run.
d. does not depend on the fact that ice cream can be frozen.
15. Use the following statements to answer this question:
i. Even though people need water to survive, the price of water is less than the price of diamonds because water
is in greater supply than diamonds.
ii. Suppose that the demand for corn is highly price inelastic. If every corn farmers harvesting technologies
become more efficient, the total revenue received by all corn farmers would fall.
a. I and II are true.
b. I is true, and II is false.
c. II is true, and I is false.
d. I and II are false.
16. General Motors estimates that domestic demand for its newest product will be: Qdomestic = 30,000 - 0.5P.
Export demand will be Qexport = 25,000 - 0.5P. The total market demand curve for this product will be a
a. straight line with a slope of -0.5.
b. straight line with a slope of -1.0.
c. kinked line with the kink at Q = 25,000.
d. kinked line with the kink at P = 50,000.
e. none of the above

PGDM 2014-16

IIM Ranchi

QUIZ #1

17. Microsoft wants to calculate the effect of a worldwide 5% price cut on its sales of Excel to clients in
different countries. Microsoft sells Excel at different prices in U.S., Japan and Europe. Before the price cut U.S.
sales were twice sales in Japan and Europe. If the price of elasticity of demand in the U.S., Japan and Europe
are -3, -4, and -2 respectively, the worldwide sales rise by
a. 10%.
b. 15%.
c. 20%.
d. 25%.
e. none of the above
18. Suppose your manufacturing firm is not a price-taking seller (i.e., has some control over your product price)
and sells machinery to domestic buyers as well as foreign buyers. The domestic demand for your product is
inelastic but the foreign demand is elastic, and the machinery is bulky so that the high transport costs prevent
resale among the buyers. You could charge both groups of buyers the same price for the machinery, but you
know that you could increase total sales revenue by charging the domestic buyers a __________ price and
charging the foreign customers a __________ price.
a. higher, higher
b. higher, lower
c. lower, higher
d. lower, lower
19. A firm will have constant profits of $100,000 per year for the next four years and the interest rate is six
percent. Assuming these profits are realized at the end of each year, what is the present value these future
profits?
a. $325,816
b. $376,741
c. $346,511
d. $400,000
d

0.5

0.25

0.12

20. Suppose the demand function is given by Qx = 8Px Py

M H where the notations have their usual
connotations. Then the cross-price elasticity between goods x and y is
a. 4.00
b. 0.25
c. 0.50
d. 8.33