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Date: _ _FN/AN

Time: 3 hrs

Full Marks: 50

Subject: Economics

Subject No: HS2000 1

1. a) Define production and differentiate fixed input from variable input. Discuss the law of

diminishing marginal returns in the context of a production function with one variable

input. Prove that the exponents a and j3 in a Cobb-Douglas Production Function

represent the elasticities of output relating to respective inputs.

2+2+2

b) Show the relationship between Short-run Average Cost (SAC) and Short-run Marginal

Cost (SMC) and prove that SMC curve passes through the SAC curve at its minimum

point. If the total cost function of an inkjet printer is Cij = 5000 + 1.8q and the total

cost function of a laser printer is C1 = 8000 + 1.5q, where q represents the total number

of pages printed, which one should a firm buy and why?

2+2

c) Write short notes on (any three) of the following:

2x3

ii. Ridge line and Economic region of production

iv. Private and Social costs

2. a) How is investment multiplier derived? An economy has the following consumption and

investment demand functions respectively:

C=25 +0.6Y

1=5 +0.2Y

Find the equilibrium incotne and the value of the multiplier (Treat multiplier as the

reciprocal of marginal demand propensities). If autonomous investment increases by 20,

present the operation of multiplier under the assumption that (i) investment is once-over type

and (ii) investment is permanent. Present the multiplier process with the help of tables and

algebraic expressions.

6

b) A company is planning to undertake a capital project and it has made the following

estimates. The total capital requirement is Rs 25 crore of which Rs 7 crore goes towards

working capital, Rs 8 crore towards reorganization of the activities and the remaining amount

is spent on the plant and machinery. The life ofthe project is five years. Its first year's gross

revenue is Rs 12 crore. It is expected to increase by 25% annually over the previous year's

revenues during second. and third years, and then will decrease by 10% annually over the

previous year's revenues for the last two years. The company will spend 25% of the revenue

on variable factors and Rs 5 crore annually on land, administration and rent. The company is

expected to pay a profit tax of 30% annually. It uses a flat depreciation rate. The salvage

value is estimated to be Rs 2.5 Cr and there is no recovery of working capital. Derive the net

cash flows over the life of the project. Also derive the present value of the net cash flows

5

assuming that the interest rate is 10%. Is the project worth-considering?

I

c) Compare perfect competition with monopoly according to (ii) Entry conditions, (iii) Price

and Quantity, (iv) Shut down point, (v) Demand curves of the firms, (vi) Equilibrium

situations in long-run. Draw the appropriate diagrams and interpret the companson

algebraically wherever necessary.

A perfectly competitive firm has the following average variable cost function:

AVC=4-2Q

It is found that the total fixed cost incurred by the firm is $200. The price per unit of the

output produced by the firm is fixed at $24. What will be the profit maximising output of the

firm in the short-run? How much profit/loss will the firm earn/incur?

6

3. a) Have we radically transformed ourselves from a protective regime to a liberal State?

Examine in detail the policy reforms in the context of New Economic Policy of 1991

onwards, and compare briefly with the pre-reform period.

Or

Define National Income and state the different methods of its estimation. Also state the

problems and fallacies of such estimation. Is it true that National Income can estimate the

growth, welfare and sustainability of a country? Also describe the trend in National Income

10

in India.

b) Distinguish between any seven of the following:

i)

GNP and GDP

ii) . GDP and NDP

iii)

NI (at mp) and NI (at fc)

iv)

NI (at fc) and PI

v)

PI and DPI

vi)

PI and per capita Income

vii) BoT and BoP

viii) IPR 1948 and IPR 1956

ix)

Real Income and Nominal Income

x)

Direct and Indirect taxes

) X

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