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IIM-K, 20112-13
Microeconomics Name______________________________________ Section____

Midterm Examination Roll No. PGP/16/______________

Time: 120 minutes. Maximum points: 50.
Please PRINT your name, section and roll number.
Answer all questions.
Each multiple-choice question has one best answer.
The point value of each question and part is mentioned in parentheses on
the right margin. There may not be any partial award of part points.
Clearly show your reasoning and calculations for all non multiple-choice
questions.
In the answer book, any part of any question must start from the left margin.
Anything not started from the left margin shall not be graded.
This is a closed-book examination. No notes, no calculators, no neighbors.
Good luck!



1. The effect of the September 11 attacks on the World Trade Center on the market for
office space in downtown Manhattan was that both the equilibrium price and the
equilibrium quantity fell. What is the most likely explanation for this?

a. Supply and demand both shifted left, and the magnitude of the supply shift
was greater.
b. Supply shifted left, demand shifted right, and the magnitude of the supply
shift was greater.
c. Supply and demand both shifted left, and the magnitude of the demand shift
was greater.
d. Supply shifted left, demand shifted right, and the magnitude of the demand
shift was greater.
[1]

2. Assume that average product for six workers is fifteen. If the marginal product of the
seventh worker is eighteen,

a. average product is rising.
b. marginal product is falling.
c. average product is falling.
d. marginal product is rising.
[1]



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3. You operate a car detailing business with a fixed amount of machinery (capital), but
you have recently altered the number of workers that you employ per hour. Three
employees can generate an average product of 4 cars per person in each hour, and five
employees can generate an average product of 3 cars per person in each hour. What is
the marginal product of labor as you increase the labor from three to five employees?

a. MP = 1.5 cars
b. MP = 3 cars
c. MP = 15 cars
d. MP = -1 cars
[1]

4. A firm employs 100 workers at a wage rate of $10 per hour, and 50 units of capital at
a rate of $21 per hour. The marginal product of labor is 3, and the marginal product of
capital is 5. The firm

a. could reduce the cost of producing its current output level by employing more
labor and less capital.
b. could increase its output at no extra cost by employing more capital and less
labor.
c. is producing its current output level at the minimum cost.
d. could reduce the cost of producing its current output level by employing more
capital and less labor.
[1]

5. Consider the following three market baskets:

Cheese Crackers
A 5 8
B 15 6
C 10 7

If baskets A and B are on the same indifference curve and if indifference curves exhibit
diminishing MRS:

a. C is on the same indifference curve as A and B.
b. C is preferred to both A and B.
c. A and B are both preferred to C.
d. There is not enough information to determine preferences for C relative to the
other goods.
[1]





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6. Which of the following production functions exhibits constant returns to scale?
a. q = KL
0.5

b. q = K + L
c. q = KL
d. q = log(KL)
[1]

7. Farmer Jones bought his farm for $75,000 in 1975. Today the farm is worth
$500,000, and the interest rate is 10 percent. ABC Corporation has offered to buy the
farm today for $500,000 and XYZ Corporation has offered to buy the farm for
$530,000 one year from now. Farmer Jones could earn net profit of $15,000 (over and
above all of his expenses) if he farms the land this year. What should he do?

a. Accept either offer as they are equivalent.
b. Reject both offers.
c. Farm the land for another year and sell to XYZ Corporation.
d. Sell to ABC Corporation.
[1]

8. Evelyn Lips' preferences are depicted by the set of indifference curves in the diagram
below. Her budget line is also shown in the diagram. Use the information in the
diagram to answer the following questions.


a. Which of the basic assumptions of consumer preferences are violated by E. Lips'
indifference curves? Explain.

b. The price of food is $5 per unit. What is E. Lips' income and what is the price of
clothing?

c. Show the market basket of food and clothing that maximizes E. Lips' satisfaction.
Explain (briefly) why.
[1 + 2 + 3 = 6]
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9. A competitive firm has the following cost function:
C(q) = q
3
! 8q
2
+ 30q + 5.

a. Derive the supply curve of the firm in the short run. [The supply curve must
clearly show the complete relationship between price and quantity in the short
run.]
b. If the industry consists of 100 identical firms as above, derive the supply
curve of the industry in the short run.
[4 + 3 = 7]

10. A firm's demand curve is given by P = 500 - 2Q. The firm's current price is $300
and the firm sells 100 units of output per week.

a. Calculate the firm's marginal revenue at the current price and quantity
using the expression for marginal revenue that utilizes the price elasticity
of demand.
b. Assuming that the firm's marginal cost is zero, is the firm maximizing
profit?
[3 + 1 = 4]

11. Suppose that a firm has a following production function Q = 6L + 2K. Suppose that
the price of labor is Rs. 5 per unit and that the price of capital services is Rs. 2 per
unit. The firm needs a minimum of one unit of labor or capital to produce any output
level. Find the lowest cost of producing 200 units of output.
[4]

12. Suppose you are in charge of a toll bridge that costs essentially nothing to operate.
The demand for bridge crossings Q is given by
!
P = 15 "
1
2
Q.
a. How many people would cross the bridge if there were no toll?
b. What is the loss of consumer surplus associated with a bridge toll of Rs. 5?
c. The toll bridge operator is considering an increase in the toll to Rs. 10. At this new
higher price, how many people would cross the bridge? Would the toll bridge revenue
increase or decrease? What does your answer tell you about the elasticity of demand?
d. Find the lost consumer surplus associated with the increase in the price of the toll
from $5 to $10.
[1 + 2 + 2 + 1 = 6]






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13. The market for study desks is characterized by perfect competition. Firms and
consumers are price-takers and in the long run there is free entry and exit of firms in
this industry. All firms are identical in terms of their technological capabilities. Thus
the cost function as given below for a representative firm can be assumed to be the
cost function faced by each firm in the industry. The total cost (in the short run as
well as long run) for the representative firm is given by the following equation:

TC = 2q
2
+ 5q + 50

Suppose that the market demand is given by:

P = 1025 - 2Q

[Note: Q represents market values and q represents firm values. The two are different.]

a. What is the long run equilibrium price in this market?

b. When this industry is in long run equilibrium, how many firms are in the
industry?

c. Now suppose that the number of students increases such that the market
demand curve for study desks shifts out and is given by P = 1525 2Q. In the
short run will a representative firm in this industry earn negative economic
profits, positive economic profits, or zero economic profits?

d. In the long run will a representative firm in this industry earn negative
economic profits, positive economic profits, or zero economic profits?

e. What will be the new long run equilibrium price in this industry?

f. At the new long run equilibrium, what will be the output of each
representative firm in the industry?

g. At the new long run equilibrium, how many firms will be in the industry?

Now, consider another scenario where technology advancement changes the cost
functions of each representative firm. The market demand is still the original one (before
the increase in the number of students). The new cost function (in the short run as well as
long run) is:

TC = q
2
+ 5q + 36.

h. What will be the new long run equilibrium price?

i. In the long run, given this technological advancement, how many firms will
there be in the industry?
[3 + 2 + 1 + 1 + 1 + 1 + 2 + 2 + 2 = 16]