Sample Paper – ECON 605 - PAPERSET I

SAMPLE PAPER
ECON 605 (PAPERSET I)
Managerial Economics

[Max Marks: 70]

Note: Attempt Questions from all sections as directed.

Section A - Attempt any two questions out of four. Each question carries 7.50 marks.[15 Marks]

Question No: 1

Explain theorems on price elasticity.

Price elasticity theorems provide insights into how changes in price affect the quantity
demanded or supplied of a good or service. Here are three important theorems related
to price elasticity:

1. Theorem of Price Elasticity of Demand:

 This theorem states that if the price of a good decreases (increases), the
quantity demanded of that good will increase (decrease), assuming all
other factors remain constant.
 In other words, the price elasticity of demand is negative; as price goes up,
quantity demanded goes down, and vice versa.
 𝐸𝑑=
Mathematically, it can be represented as:
% change in quantity demanded% change in priceEd=% change in price%
change in quantity demanded

 Where 𝐸𝑑Ed represents the price elasticity of demand.

 2. Theorem of Perfectly Elastic Demand:

 This theorem describes a situation where the quantity demanded of a good

changes infinitely in response to any change in price.
 In a perfectly elastic demand curve, consumers are extremely sensitive to
price changes, to the extent that even a slight increase in price will lead to
a complete loss of demand for the good.
 Mathematically, the price elasticity of demand is equal to infinity ( 𝐸𝑑=∞Ed
=∞).

3. Theorem of Perfectly Inelastic Demand:

 This theorem describes a situation where the quantity demanded of a good

remains constant regardless of changes in price.
 In a perfectly inelastic demand curve, consumers are completely insensitive
to changes in price; they will continue to buy the same quantity of the
good regardless of its price.
 Mathematically, the price elasticity of demand is equal to zero ( 𝐸𝑑=0Ed
=0).

These theorems help economists and businesses understand how consumers respond to
changes in price and make predictions about the effects of price changes on demand.
They also provide insights into market behavior and help in making pricing decisions

Question No: 2

Compare and contrast the marginal utility approach with the indifference curve approach in
understanding consumer behaviour.

The marginal utility approach and the indifference curve approach are two key theories
used to understand consumer behavior in economics. Let's compare and contrast these
two approaches:

1. Marginal Utility Approach:

Option: 3

 Definition: The marginal utility approach focuses on how consumers

allocate their limited budgets among different goods and services to
maximize their satisfaction or utility.

 Key Concepts:

 Total Utility: The total satisfaction or utility that a consumer derives

from consuming a particular good or service.
 Marginal Utility: The additional satisfaction or utility gained from
consuming one more unit of a good or service.
 Law of Diminishing Marginal Utility: This law states that as a
consumer consumes more units of a good, the marginal utility
derived from each additional unit decreases.

 Decision Rule: According to the marginal utility approach, a consumer will

allocate their income among different goods in such a way that the
marginal utility per dollar spent is equal across all goods. This is known as
the principle of equal marginal utility per dollar.

2. Indifference Curve Approach:

 Definition: The indifference curve approach focuses on representing a

consumer's preferences among different combinations of goods and
services through indifference curves.

 Key Concepts:

 Indifference Curves: Indifference curves represent combinations of

two goods that provide the consumer with the same level of
satisfaction or utility.
 Marginal Rate of Substitution (MRS): The rate at which a
consumer is willing to trade off one good for another while
remaining on the same level of utility.
 Diminishing Marginal Rate of Substitution: Similar to the law of
diminishing marginal utility, this concept states that as a consumer
substitutes one good for another, the marginal rate of substitution
decreases.
  Decision Rule: The consumer will choose the combination of goods that
lies on the highest possible indifference curve and is affordable given their
budget constraint.

Comparison:

 Focus:

 Marginal Utility Approach: Focuses on the change in utility from consuming

one more unit of a good.
 Indifference Curve Approach: Focuses on the combinations of goods that
provide the same level of utility.

 Graphical Representation:

 Marginal Utility Approach: Graphs show total utility and marginal utility.
 Indifference Curve Approach: Graphs show indifference curves representing
different levels of utility.

 Utility Maximization:

 Marginal Utility Approach: Consumers maximize utility by equalizing the

marginal utility per dollar spent across all goods.
 Indifference Curve Approach: Consumers maximize utility by choosing the
combination of goods on the highest indifference curve.

 Assumptions:

 Marginal Utility Approach: Assumes utility can be measured and quantified.

 Indifference Curve Approach: Assumes consumers have consistent
preferences and utility is ordinal (order-based) rather than cardinal
(number-based).

 Applicability:

 Marginal Utility Approach: More suitable for analyzing individual

consumption decisions.
 Indifference Curve Approach: Useful for analyzing consumer choices
involving multiple goods.
Option: 3

In summary, while both approaches provide insights into consumer behavior, they differ
in their focus, graphical representation, decision rules, and underlying assumptions. The
marginal utility approach emphasizes the change in utility from consuming one more
unit of a good, while the indifference curve approach focuses on representing consumer
preferences among different combinations of goods

Question No: 3

Highlight the various differences that arise between Perfectly competitive and Imperfectly
competitive market forms.

Certainly! Here are the key differences between perfectly competitive and imperfectly
competitive market forms:

1. Number of Sellers:

 Perfectly Competitive Market: There are many small sellers or firms in a

perfectly competitive market.
 Imperfectly Competitive Market: There may be few or many sellers, but the
market is characterized by the presence of large firms or a few dominant
firms.

2. Product Differentiation:

 Perfectly Competitive Market: Firms sell homogeneous or identical

products with no differentiation.
 Imperfectly Competitive Market: Firms may sell differentiated products,
leading to brand loyalty or product differentiation.

3. Entry and Exit:

 Perfectly Competitive Market: Firms can enter or exit the market freely
without facing barriers.
 Imperfectly Competitive Market: Entry and exit may be restricted due to
high barriers to entry such as high startup costs, legal restrictions, or
control over resources.

4. Price Determination:
  Perfectly Competitive Market: Prices are determined by the forces of supply
and demand in the market.
 Imperfectly Competitive Market: Prices may be set by individual firms
based on their market power and ability to influence market conditions.

5. Market Power:

 Perfectly Competitive Market: No single firm has market power; each firm is
a price taker and cannot influence the market price.
 Imperfectly Competitive Market: Firms may have market power and can
influence prices by controlling supply, demand, or through advertising and
branding.

6. Profit Maximization:

 Perfectly Competitive Market: Firms in a perfectly competitive market aim

to maximize profits by producing at the point where marginal cost equals
marginal revenue.
 Imperfectly Competitive Market: Firms may maximize profits by setting
prices above marginal cost, as they have some degree of market power.

7. Information Transparency:

 Perfectly Competitive Market: Information is readily available and

transparent to all market participants.
 Imperfectly Competitive Market: Information may be asymmetric, with
firms possessing more information than consumers, allowing firms to
exploit this information advantage.

8. Long-Run Equilibrium:

 Perfectly Competitive Market: In the long run, firms earn zero economic
profit due to free entry and exit, and prices equal average total costs.
 Imperfectly Competitive Market: Firms may earn economic profit in the
long run due to barriers to entry and the ability to set prices above average
total costs.
Option: 3

These differences highlight the contrasting characteristics and outcomes of perfectly

competitive and imperfectly competitive markets, impacting the behavior of firms, prices,
and market outcomes.

Question No: 4

How does the producer attain equilibrium under the iso-quant approach?

In the isoquant approach, producers attain equilibrium by optimizing their production

process to maximize output given a certain level of inputs. Here's how producers achieve
equilibrium under the isoquant approach:

1. Understanding Isoquants:

 An isoquant represents all possible combinations of inputs that yield the

same level of output.
 Each isoquant curve corresponds to a specific level of output, and higher
isoquants represent higher levels of output.

2. Producer's Objective:

 The producer's objective is to choose the combination of inputs that

maximizes output while minimizing costs.

3. Marginal Rate of Technical Substitution (MRTS):

 The MRTS represents the rate at which one input can be substituted for
another while keeping output constant.
 It is the slope of the isoquant curve and is calculated as the ratio of the
marginal product of one input to the marginal product of the other input.

4. Equilibrium Condition:

 The producer achieves equilibrium when the MRTS equals the ratio of input
prices (the input price ratio).
 Mathematically, MRTS = Price of Input 1 / Price of Input 2.

5. Optimal Input Combination:

  At equilibrium, the producer chooses the input combination where the
MRTS equals the input price ratio.
 This point represents the most cost-effective way to produce a given level
of output.

6. Movement Along Isoquants:

 If the input prices change, the producer will adjust the input combination
to maintain equilibrium.
 A decrease in the price of one input relative to the other will lead to an
increase in the quantity of the cheaper input used, and vice versa.

7. Shifts in Isoquants:

 Changes in technology or the production process can lead to shifts in

isoquant curves.
 An increase in the level of technology or efficiency will shift isoquants
outward, allowing the producer to achieve higher levels of output with the
same inputs.

In summary, producers attain equilibrium under the isoquant approach by selecting the
input combination where the marginal rate of technical substitution equals the input
price ratio. This ensures that the producer maximizes output while minimizing costs,
leading to efficient production

Section B - Compulsory Questions. Each question carries 7.50 marks.[15 Marks]

Paragraph No: 1

The law of supply summarizes the effect price changes have on producer behavior. For example, a business will
make more video game systems if the price of those systems increases. The opposite is true if the price of video
game systems decreases. The company might supply 1,000,000 systems if the price is $200 each, but if the price
increases to $300, they might supply 1,500,000 systems.
To further illustrate this concept, consider how gas prices work. When the price of gasoline rises, it encourages
profit-seeking firms to take several actions: expand exploration for oil reserves; drill for more oil; invest in more
pipelines and oil tankers to bring the oil to plants where it can be refined into gasoline; build new oil refineries;
Option: 3

purchase additional pipelines and trucks to ship the gasoline to gas stations; and open more gas stations or keep
existing gas stations open longer hours. Similarly, when consumers start paying more for cupcakes than for donuts,
bakeries will increase their output of cupcakes and reduce their output of donuts in order to increase their profits.
When your employer pays time and a half for overtime, the number of hours you are willing to supply for work
increases.
Therefore the law of supply is one of the most fundamental concepts in economics. It works with the law of
demand to explain how market economies allocate resources and determine the prices of goods and services.
Based on the above case, answer the following questions:

Question No: 1

What are the different factors that affect the supply of a good? Explain with examples.

Question No: 2

Explain the impact of a rise in the price of other goods on the supply curve of a commodity.
Distinguish between change in quantity supplied and change in supply.

Section C - Compulsory Questions. Each question carries 2.00 marks.[40 Marks]

QuestionNo: 1

Cost incurred on fixed factors of production is called

Option: 1

Variable cost
Option: 2

Average cost
Fixed cost
Option: 4

None of the above

QuestionNo: 2

Which Market form holds only a single producer

Option: 1

Oligopoly
Option: 2

Monopolistic
Option: 3

Monopoly
Option: 4

None of the above

QuestionNo: 3

When taxes fall, the supply curve of the good shifts

Option: 1

To the left
Option: 2

To the right
Option: 3

Upwards
Option: 4

Downwards

QuestionNo: 4

The additional revenue earned by selling one additional unit of a good is called_____________________.
Option: 1

Marginal Cost
Option: 2

Marginal product
Option: 3

Marginal Revenue
Option: 4

Average Revenue

QuestionNo: 5

The degree of responsivness of demand of a good with respect to changes in income of the consumer is called
_______________
Option: 1

Price elasticity of demand

Option: 2

Income elasticity of demand

Option: 3

Cross elasticity of demand

Option: 4

None of the Above

QuestionNo: 6

When TP is falling, MP is
Option: 1

Zero
Option: 2

Negative
Option: 3

Rising
Option: 4

Falling

QuestionNo: 7

MC intercest Ac at its
Option: 1

Maximum
Option: 2
Option: 3

Minimum
Zero
Option: 4

None of the above

QuestionNo: 8

TP increases at a ______________________ rate in the second stage of poduction, under Law of variable
proportions.
Option: 1

Increasing
Option: 2

Constant
Option: 3

Decreasing
Option: 4

None of the above

QuestionNo: 9

Price discrimination is observed under which market form:

Option: 1

Monopoly
Option: 2

Perfect competetion
Option: 3

Oligopoly
Option: 4

None of the above

QuestionNo: 10

____________________ is defined as the satisfaction derived when a good is consumed.

Option: 1

Utility
Option: 3

Option: 2

Opportunity cost
Revenue
Option: 4

None of the above

QuestionNo: 11

Under perfect competition, the nature of the goods produced is:

Option: 1

Hetrogenous
Option: 2

Homogenous
Option: 3

Differentiated
Option: 4

None of the above

QuestionNo: 12

Under oligopoly market form the demand curve is

Option: 1

downward sloping
Option: 2

Upward sloping
Option: 3

Kinked
Option: 4

None of the above

QuestionNo: 13

The cost incurred per unit of production is called ____________________________.

Option: 1

Total Cost
Option: 3

Option: 2

Average Cost
Option: 3
Marginal Cost
Option: 4

None of the above

QuestionNo: 14

Demand curve of necessary goods are

Option: 1

Perfectly Elastic
Option: 2

Perfectly Inelastic
Option: 3

Unitary Elastic
Option: 4

None of the above

QuestionNo: 15

When TP is maximum, MP is
Option: 1

Zero
Option: 2

Rising
Option: 3

Falling
Option: 4

Negative

QuestionNo: 16

Total cost is the summation of

Option: 1

Total variable cost and Average Cost

Option: 2

Total fixed cost and Average cost

Option: 3

Total fixed cost and Total Variable cost Option: 4

None of the above

QuestionNo: 17

When a small change in price results in a proportionately larger change in quantity demanded, then the good is
said to be
Option: 1

Less Elastic
Option: 2

More elastic
Option: 3

Unitary elastic
Option: 4

None of the above

QuestionNo: 18

When market price is greater than equilibrium price, then there is _________________________ in the goods
market
Option: 1

Excess demand
Option: 2

Excess supply
Option: 3

Deficient supply
Option: 4

None of the above

QuestionNo: 19

Under which market form do we see few large sellers of a good

Option: 1

Monopoly
Option: 2

Oligopoly
Option: 3

Perfect competition
Option: 4

None of the above

QuestionNo: 20

Rightward shift in demand curve results in

Option: 1

Increase in demand
Option: 2

Decrease in demand
Option: 3

Expansion in demand
Option: 4

None of the above