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Date:

Indian Institute of Technology Kharagpur

FN/AN

Time: 3 hrs

Full Marks: 50

Subject: Economics

Autumn End-Sem. Exam, 2012

No of Students: 399
Subject No: HS 20001

1. a) What do you mean by fixed and variable inputs? Discuss the law of diminishing
marginal returns and the basic characteristics of the three stages of production in
short-run.
2+4
b) Elaborate increasing and decreasing returns to scale. What are the basic characteristics
of Cobb-Douglas production function? Mathematically show the relationship between
short-run marginal cost (SMC) curve and short-run average cost (SAC) curve.
2+2+2
c) The production function for the Sony India is Q = I OL05/(J 5Af5 , where Q is the
number of camcorder produced per week, L is the amount of labor used per week, K is
the capital used per week, and M is the quantity of raw materials used per week.
'

i) Does this production function exhibit diminishing marginal returns?

ii) Does this production function exhibit decreasing returns to scale?
iii) Does the average product of labor depend on the amount of the other inputs used?
Explain.
4

2.

Describe both non-discounting and discounting methods of capital budgeting with

merits and demerits. Which method, according to you, is superior and why?
4

3.

Consider a capital investment of Rs 25,000 Cr on a project, which yields annual net

cash inflows of Rs 12,000, Rs 10,000 and Rs 8,000 respectively during its three-year
lifespan. What is the internal rate of return (IRR) of the project? If the rate of interest is
8%, what is the NPV of this project? Interpret the results of both the methods. If the
rate of interest is expected to be 15%, is the project worth-taking? Justify your answer.
5

4.

The market supply and demand curves for a product are given respectively by
Qs = 3000 + 200P
Qd = 13500- 500P
and
The industry supplying the product is perfectly competitive. An individual firm has
total fixed cost of $150 per period. Its average variable cost function is
2

AVC = 15-2Q+ Q
10
Find out the profit maximizing rate of output and amount of profit for the firm?

OR

Suppose a monopoly firm's demand and cost functions are given as

p = 20 -0.5Q
C = 0.04Q3 - 1.94Q2 + 32.96Q respectively
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Determine the maximum profit and the corresponding price and quantity for the
monopolist.
3
5.

Compare and contrast Perfect Competition with Monopoly in terms of(i) Size of firms,
(ii) Entry conditions, (iii) Price and Quantity, (iv) Closing-down point, (v) Demand
curves of the firms, (vi) Equilibrium situations in both short- and long-run. Draw
appropriate diagrams and interpret the comparison algebraically wherever necessary.
5

6. a) Write whether each statement is true or false.

i) The planning commission of India was established in 1951.

ii) The difference between GOP and GNP is factor payments.
iii) National Income in India is estimated by Central Statistical Organization.
iv) Selective disinvestment of public sector was included first time in India in VIII 1h
Five-year plan.
v) Relative poverty refers to a situation where a person is below poverty line.
vi) One of the features of a mixed economy is totalitarian planning.
vii) The new economic policy launched in 1991 aimed at structural adjustment and
stabilization.
viii) GNP is the sum total of Consumption, Gross Investment, Government Spending,
and Net Exports.
b) Answer any two ofthe following

4.5+4.5

i) Describe the trend in the growth of National income m India and discuss the
difficulties and limitations in estimating it.
ii) Can National income estimate the growth, welfare, and sustainability factor, and
make international comparison of the economic performances amongst the
countries? Justify your answer.
iii) Distinguish between the following pairs in one sentence only.
a)

Direct and indirect tax.

b)

Deficit budget and deficit financing.

c)

Transferred earnings and transferred payments.

d)

Personal income and per capita income.

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