Name: SEC. Roll No: Indian Institute of Management Ahmedabad Microeconomics (ME) Date: 30% July, 2015 Duration: 1 hour 45 minutes (PGP-1, First Term) Midterm Exam Instr ase read carefully): This exam consists of two parts: Part A and Part B, Part A consists of 6 questions (1-6), Part B consists of 14 questions (7-20). In Part A you need to pick the most appropriate one alternative from the ones given for each of the questions. Questions with multiple answers are deemed wrong. Right answer gets 3 points and wrong answer gets -1, Unanswered questions get 0.Write your answer in boxes. In Part B, you mostly need to fill the blank space with the appropriate answer. Marks are assigned to each question, no answer gets 0 points. NO PARTIAL CREDIT WILL BE PROVIDED. ‘This is a closed book exam. No cellphones and laptops allowed. Any form of cheating will be strictly punished. PartA 1.A firm expands its output over time. In the long run if average costs fall we can attribute it to: a) Economies of scale b) Learning effects ©) Increasing marginal product of labourd) Botha) and b) e) Both b) and c) | f) Botha) and c} 8) a),b) and c) h) None of the above 2. In the short run (we can increase output by only increasing labour employed) if the average variable cost of production is falling and wages are constant, the following must be true a) Total product is increasing CL] b) Marginal product of labour is increasing ©) Botha) and b) d) None of the above 3. If cost-output elasticity for a firm is positive, what can we infer? b) Long-run marginal cost is higher than the long run average cost c) Botha) and b) d) None of the above a) The firm is enjoying economies of scale a 4, Read the two statements and pick the most appropriate option Statement I: Because a firm continues to produce if price is below average fixed cost but above average variable cost, we can assume that in the short run, the firm treats fixed costs as sunk costs. Statement II. In a perfectly competitive market, firms take market price as given, which implies that market demand curve is infinitely elastic a) Only Statement lis true b) Only Statement If is true | ©) Statements I and Il are both true d) Statements I and I] are both false 5. Read the two statements and pick the most appropriate option Statement I: Ibis possible that in a perfectly competitive market, some firms enjoy economic rent on scarce factors of production, which is reflected in positive economic profits.Statement Il: In a perfectly competitive market, itis important that all firms make zero economic profits in the short run, because economic costs include opportunity costs. a) Only Statement lis true b) Only Statement Il is true | ¢) Statements | and Il are both true d) Statements I and Il are both false 6. Read the two statements and pick the most appropriate option Statement I: In the long run, it is possible that a firm experiences constant returns to scale and it enjoys economies of scale. Statement II: It is not necessary that when the firm is operating at the minimum of its long run average cost, that it will be also be at the minimum ofits short run average cost a) Only Statement | is true b) Only Statement II is true ¢) Statements | and Il are both true ) Statements | and Il are both false Part B [. Read the following and answer questions 7-9 Assume that a firm's total cost function for a particular product is given by: 8+ 2q? ‘The market for the product is perfectly competitive, and the demand is given by: P= 40- Qa. All firms in this market have identical cost functions, 7. What will the price be in the long run? How much will each firm produce in this market in the long run? ‘The price for each firm in the long run is: (3) The quantity each firm will produce is: @ 8. How many firms will there be in this market in the long run? The number of firms in the long run i @)9, What is each firm’s producer surplus? Each firm's producer surplus is: @ IL Read the following and answer questions 10-15 In the state of Gujarat, sale and consumption of alcohol is illegal, so people trade in a black market. Alcohol demand is given by Qu=12-P, and the alcohol supply is given by: Q=2P 10. Find the equilibrium price and quantity in the black market. ‘The equilibrium price is @ The equilibrium quantity is w 11. The government becomes aware of the black market and reinforces the police so that half of the alcohol supply would be seized and destroyed. Under this circumstance, what is the new equilibrium price and quantity? ‘The equilibrium price is @ ‘The equilibrium quantity is @) 12, How does producer surplus change between 9 and 10? ‘The change in producer surplus from question 9 to 10 is: @ 13. Suppose that the government changes the policy and legalizes alcohol dealings. Now alcohol is traded in an open market. However, for every unit of alcohol bought, the buyer has to pay tax'T to the government. T is equal to the pre-tax price P (as in Q.10). What is the after-tax price paid by buyers? What is the total quantity sold on the market? The after-tax price paid by the buyers is: (2 The total quantity sold on the market is: @ 14, What is the share of tax borne by the alcohol suppliers? 2) ‘The share of the tax borne by the alcohol suppliers i15. Compare Questions 11 and 13. Which policy creates a bigger dead-weight loss? Which policy does the government prefer? The policy that creates a bigger dead-weight loss is in (Question 11/Question 13/neither) @ The policy that the government prefers is in Question. (Question 11/Question 13/neither) @ IL. Read the following and answer questions 16-18 Assume that cost of hi is Rs, 300 per day. 1g a worker is Rs.500 per day and that of renting a machine 16. Ifa firm has the following production function q=L?K? and in order to produce a particular level of output, it uses 1500 units of labour, how many units of capital will it use? Does this production function exhibit increasing, decreasing or constant returns to scale? ‘The number of units of capital used by this firm is: (3) This production function exhibits returns to scale (1) 17. Ifa firm has the following production function q=7L + 3K and in order to produce a particular level of output, it uses 1500 units of labour, how many units of capital will it use? Does this production function exhibit increasing, decreasing or constant returns to scale? ‘The number of units of capital used by this firm is: @ This production function exhibits returns to scale (1) 18. If firm has the following production function q=min (L,3K) and in order to produce a particular level of output, it uses 1500 units of labour, how many units of capital will it use? Does this production function exhibit increasing, decreasing or constant returns to scale? ‘The number of units of capital used by this firm is: (3)This production function exhibits returns to scale (1) IV, Read the following and answer questions 19-20 Based on an empirical estimation exercise, | get the following demand function Log Q= 1.2- 0.52 logP- 1.3 logl Where Q is quantity demanded (monthly), P is the own price of the product and I in income of the consumers. 19. Read the two statements and pick the most appropriate option Statement |. The elasticity of this demand function is -0.52, and this is an inferior good. Statement Il. Because the elasticity of income is negative and the absolute value is higher than that of the absolute value of price elasticity, this must be a Giffen good. a) Only Statement lis true b) Only Statement Il is true cc) Statements I and IT are both true d) Statements | and Il are both false (3 if correct, -1 if wrong) 20. If income of a consumer falls from and average of Rs. 50,000 per month to Rs. 40,000 per month and price of the good increases by Rs. 200 to Rs. 240, what shoul be the expected increase in quantity demanded? a ‘The expected increase in quantity demanded is: percent (2)