Name:

Roll Number:
Managerial Economics- Term 1, 2015
Midterm

Instructions
1. Answer all Questions. Please make sure your answers are lucidly
written and well explained
2. There is no negative marking for Multiple Choice Questions
3. Maximum points 100 points
4. Time available 150 minutes

MULTIPLE CHOICE QUESTIONS

Each Multiple Choice question is worth 2 points.

1. An individual demand curve can be derived from which of the following curves?
a.
b.
c.
d.
e.

price-consumption
price-income
income-substitution
income-consumption
Engel curve

2. Additional units of an input must be hired to ensure optimal choice of inputs

a. The average product of factors is zero
b. Till the production function sees diminishing marginal returns
c. Marginal product of the factor is zero
d. The ratio of marginal product of the factors is equal to ratio of price of
inputs
3. Price Consumption curve of two goods that are perfect substitutes (substitutable at the rate
of 1:1) and PX/PY = 2, is
a.
b.
c.
d.
e.
4.

Upward sloping curve

Only X axis
Horizontal line with positive intercept
Only Y Axis
None of the above

The endpoints (horizontal and vertical intercepts) of the budget line:

a.
b.
c.
d.
e.

measure its slope.

measure the rate at which one good can be substituted for another.
measure the rate at which a consumer is willing to trade one good for
another.
represent the quantity of each good that could be purchased if all of
the budget were allocated to that good.
indicate the highest level of satisfaction the consumer can achieve.

5. Consider a supply curve of the form: Q = c + dP. If d equals zero then supply is:
b.

a. completely inelastic.
inelastic, but not completely inelastic.
c. elastic, but not infinitely elastic.
d. infinitely elastic

6. When a good is price inelastic, consumer expenditures on the good

a.
b.
c.
d.
7.

increase when price increases.

decrease when price increases.
do not change when price increases.
are not related to price elasticity of demand.

An individual prefers more vegetables but is indifferent between the quantity of music
consumed. Indifference curve for this person between Vegetables (X axis) and Music (Y
axis), is
a.

An upward sloping curve

b.

A standard downward sloping convex curve

c.

A horizontal curve

d.

A vertical curve

8. Which of the following inputs are variable in the long run?

a.
b.
c.
d.

labor.
capital and equipment.
plant size.
all of these.

9. If a consumer must spend her entire income on some combination of two commodities and
chooses to spend it all on just one of the commodities then:
a.
b.
c.
d.

the other commodity is an economic bad.

the other commodity must have zero marginal utility.
the other commodity generates less utility per dollar spent on the good.
the two commodities must always be perfect substitutes.

10. When the average product is decreasing, marginal product

a.
b.
c.
d.
e.

equals average product.

is increasing.
exceeds average product.
is decreasing.
is less than average product.

11. According to the law of diminishing returns

a.
b.
c.
d.
e.

the total product of an input will eventually be negative.

the total product of an input will eventually decline.
the marginal product of an input will eventually be negative.
the marginal product of an input will eventually decline.
none of the above.

12.

If we take the production function and hold the level of output constant, allowing the
amounts of capital and labor to vary, the curve that is traced out is called:
a.
b.
c.
d.
e.

the total product.

an isoquant.
the average product.
the marginal product.
none of the above.

13. If X and Y are perfect substitutes, which of the following assumptions about indifference
curves is not satisfied?
a.
b.
c.
d.
e.
14.

An isocost line reveals the

a.
b.
c.
d.

15

completeness.
transitivity.
more is preferred to less.
diminishing MRS.
none of the above

costs of inputs needed to produce along an isoquant.

costs of inputs needed to produce along an expansion path.
input combinations that can be purchased with a given outlay of funds.
output combinations that can be produced with a given outlay of funds.

Which of the following would cause a shift to the right of the supply curve for
gasoline?
I.

A large increase in the price of public transportation.

II. A large decrease in the price of automobiles.

III. A large reduction in the costs of producing gasoline.
a.
b.
c.
d.

I only.
II only.
III only.
II and III only.

16. The curve in the diagram is called

a.
b.
c.
d.
e.

the income-consumption curve.

the long-run total cost curve.
the expansion path.
the price-consumption curve.
none of the above.

17. Which of the following statements correctly uses the concept of opportunity cost in
decision making?
I. "Because my secretary's time has already been paid for, my cost of taking
on an additional project is lower than it otherwise would be."
II. "Since NASA is running under budget this year, the cost of another space
shuttle launch is lower than it otherwise would be."
a.
b.
c.
d.
18.

I is true, and II is false.

I is false, and II is true.
I and II are both true.
I and II are both false.

Which of the following assertions, if proven true in a court of law, would help ArcherDaniels Midland, a maker of corn syrup, in its attempt to acquire another corn syrup
producer, the Clinton Corn Processing Company?
a. Archer-Daniels-Midland is a dominant producer of corn syrup.
b. There are no good substitutes for corn syrup for any of its major uses.
c. Archer-Daniels-Midland and the Clinton Corn Processing Company
together hold only a small share of the market for sweeteners including
corn syrup and sugar.
d. Archer-Daniels-Midland produces many other different agricultural
products, in addition to corn syrup.

19. In 1992, the Occupational Safety and Health Authority passed the Bloodborne Pathogens
Standard (BBP), which regulates dental office procedures. This regulation is designed to
minimize the transmission of infectious disease from patient to dental worker. The effect of
this regulation was both to increase the cost of providing dental care and to ease the fear of
going to the dentist as the risk of contracting an infectious disease.
Under what circumstances will the equilibrium level of output of dental care remain the
same?
a.
b.
c.
d.

20.

If supply shifts more than demand.

If demand shifts more than supply.
If both demand and supply shift by the same magnitude.
If supply and demand shift in the same direction.

Consider the following three market baskets:

A
B
C

Capital
5
15
10

Labour
8
6
7

If baskets A and B are on the same isoquant curve and if isoquant exhibit
diminishing MRTS:
a.
b.
c.
d.

C gives higher quantity than A and B.

A and B give higher quantity than C.
C is on the same isoquant curve as A and B.
There is not enough information to determine how A, B and C are
related

Long Answer Questions

1. (30 Points) You know you have a problem if your sales trail even
developing markets. You know you have a serious problem if your growth
in volumes is barely 1% from a year ago.
That's the case with Coca-Cola India whose growth in the critical April-June
quarter came crashing down from 20% a year ago. It was the worst
performance of the Indian unit of the world's largest beverage maker in
five years.
New Game Plan
The India units of Coca-Cola and PepsiCo are critical bastions of growth for
their American parents, but are now confronted with the threat of a
slowdown in volumes. Executives of both companies have been forced to
recast their strategy through a combination of price cuts, differential
pricing (exactly the same product being sold at different prices to
different consumers), trade discounts, restructuring of distribution
networks and stepping up capacities at bottling plants.
Faced with slowdown threat, Coca Cola & Pepsico experiment with
strategies to push volumes growth, The Economics Times, June 2013

You have been hired by Coca Cola to devise their best differential pricing
strategy.
(a) (20 points) Assume Coca Cola segments the market into two
groups- Group A and B. (You can motivate these groups by keeping
in mind one of your market segmentation mentioned in (a) ).
Assume that consumers in Group A and B have preferences
UA(x, C) = C0.2x0.8
UB(x, C) = C0.7 x0.3
Where x: is quantity of product x and C is the quantity of 200 ml
Coca Cola.
If the average income in Group A is Rs 80,000 per month and that of
Group B is Rs 40,000 per month and price of x is Re 1. Find the
aggregate demand curve for Coca Cola. Assume group size of A is
100 and that of B is 50.
(b) (10 points) Assume that Coca Cola has dropped the idea of
differential pricing but is mindful of the segmented market.
Starting this month, all Coca-Cola's beverages in 200 ml bottles
will be sold at a flat Rs 10, down from Rs 15, a top trade official told
ET Magazine. "It's heavy discounting and at the cost of profitability.
The company is pushing volumes almost as if in panic," he says.
Faced with slowdown threat, Coca Cola & Pepsico experiment with
strategies to push volumes growth The Economics Times, June 2013

How did revenue change for Coca Cola based on your analysis in
(b)? What can you say about its arc elasticity in this range for
the aggregate demand curve?

2. (40 points) A can of Coke contains Carbonated water, Sugar (sucrose

or high-fructose corn syrup depending on country of origin), Caffeine,
Phosphoric acid, Caramel color (E150d)
Natural flavorings. Take these inputs as Variable Inputs (L). Each can of
Coke also requires use of machines and factory establishments. Consider
these inputs as Fixed Inputs (K). Assume w= 0.25 and r=1. Assume
that the production function of Coca Cola is
F(K,L) = K0.5L0.5
(i)
(ii)
(iii)
(iv)
(v)

(10 points) Within 5 years, machines and factory

establishments can be increased and all inputs are variable. Find
the cost function for this period.
(5 points) What is the expansion path for this period?
(10 points) Assume that for 1 year machines and factory
establishments can not be increased. For the year 2013, let K=4.
Find the expansion path for this period.
(5 points) Find the short run cost function.
(10 points) Assume that r = 1, how does the slope of long run
expansion path change with increase in wage rate?