Indian Institute of Technology Indore

School of Humanities and Social Sciences

Fundamentals of Economics (HS 108)

Mid-Semester Examination
Duration: 2hours Maximum Marks: 30 Marks
Time:10.00 am-12.00 pm Date: April 20, 2022

Note: It is advised to all students to write their name and roll number on the first page of the
answer sheet. Please merge all answer sheets in a single PDF file before submitting your answer
sheet.

Question I: Write the correct answer in the answer sheet. (1X10=10 Marks)

1) Assume that the market price is below the market clearing level. We would expect:
A. a surplus to accumulate.
B. downward pressure on the current market price.
C. upward pressure on the current market price.
D. lower production during the next time period.

2) If indifference curves are concave to the origin, which assumption of preferences is

violated?
A. Transitivity.
B. More is preferred to less.
C. Diminishing marginal rate of substitution.
D. Completeness.

3) An individual consumes only two goods Food (F) and Clothing (C). Which of the
following expressions represents the utility maximizing market basket?
A. MRSFC is at maximum.
B. PF PC = money income.
C. MRSFC = PF PC .
D. MRSFC = money income.

4) A vertical demand curve is

A. completely inelastic.
B. infinitely elastic.
C. highly (but not infinitely) elastic.
D. highly (but not completely) inelastic.

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 5) Which of the following represents the price elasticity of demand?
 Q   P   Q   P 
A.      B.   +  
 P   Q   P   Q 

 Q   P   Q   P 
C.      D.   -  
 P   Q   P   Q 

6) In the long run, new firms can enter an industry and so the supply elasticity tends to be
A. more elastic than in the short run.
B. less elastic than in the short run.
C. perfectly elastic.
D. perfectly inelastic.

7) The slope of an indifference curve reveals:

A. that preferences are complete.
B. the marginal rate of substitution of one good for another good.
C. the ratio of market prices.
D. that preferences are transitive.
E. none of the above.

8) A Giffen good
A. is always the same as an inferior good.
B. is the special subset of inferior goods in which the substitution effect dominates the income
effect.
C. is the special subset of inferior goods in which the income effect dominates the substitution
effect.
D. must have a downward sloping demand curve.

9) The area below the demand curve and above the price line measures
A. consumer surplus.
B. economic profit.
C. elasticity of demand.
D. the total value obtained from consuming the good or service.

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10) A firm maximizes profit by operating at the level of output where

A. average revenue equals average cost.

B. average revenue equals average variable cost.
C. total costs are minimized.
D. marginal revenue equals marginal cost.
E. marginal revenue exceeds marginal cost by the greatest amount.

Question II: Differentiate between the following (Any four). (2X4=8 Marks)

(Explain with Diagram and Examples)

1. Cross price elasticity of demand for perfect substitute goods and perfect complementary
goods.
2. Demand curve and supply Curve
3. Bandwagon effect and snob effect.
4. Marginal Rate of Substitution (MRS) and Marginal Rate of Technical Substitution (MRTS).
5. Consumer Surplus and Producer Surplus.

Question III: Answer the following (any four). (3X4=12 Marks)

1. The demand for a barrel of petrol in 2020 was given by the equation QD = 3550 − 266P .
At a price of $3.46 per barrel, what is the price elasticity of demand? If the price of petrol falls to
$3.27 per barrel, what happens to the revenue generated from the sale of petrol?

2) The U.S. Department of Agriculture is interested in analyzing the domestic market for corn.
The USDAʹs staff economists estimate the following equations for the demand and supply
curves:

Qd = 1,600 − 125P

Qs = 440 + 165P

Quantities are measured in millions of bushels; prices are measured in dollars per bushel.

a. Calculate the equilibrium price and quantity that will prevail under a completely free market.
b. Calculate the price elasticities of supply and demand at the equilibrium values.
c. The government currently has a $4.50 bushel support price in place. What impact will this
support price have on the market? Will the government be forced to purchase corn under a
program that requires them to buy up any surpluses? If so, how much?

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3) Hulk goes to the gym 20 times a month. His income is $1,000 per month and his visits to the
gym cost $4 per visit.

a. Draw Hulkʹs budget line for visits to the gym and all other goods, show the consumption
bundle that maximizes his satisfaction, and draw the indifference curve through that point.
b. Recently, a new health club opened which offers identical facilities but which charges a flat
fee of $60 per month plus $1 per visit. Draw Hulkʹs budget line if he were to join this new club.
c. Would Hulk continue to work out at the gym or would he join the new health club. Why?

4) Jane lives in a dormitory that offers soft drinks and chips for sale in vending machines. Her
utility function is U = 3SC (where S is the number of soft drinks per week and C the number of
bags of chips per week), so her marginal utility of S is 3C and her marginal utility of C is 3S.
Soft drinks are priced at $0.50 each, chips $0.25 per bag.

a. Write an expression for Janeʹs marginal rate of substitution between soft drinks and chips.
b. Use the expression generated in part (a) to determine Janeʹs optimal mix of soft drinks and
chips.
c. If Jane has $5.00 per week to spend on chips and soft drinks, how many of each should she
purchase per week?

5) An individual consumes products X and Y and spends $25 per time period. The prices of the
two goods are $3 per unit for X and $2 per unit for Y. The consumer in this case has a utility
function expressed as:

U ( X , Y ) = 0.5 XY

MU X = 0.5Y

MU Y = 0.5 X

a. Express the budget equation mathematically.

b. Determine the values of X and Y that will maximize utility in the consumption of X and Y.
c. Determine the total utility that will be generated per unit of time for this individual.

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6) Complete the following table:

Output Total Variable Fixed Marginal Average Avg. Avg. Fixed

Cost Cost cost Cost Cost Var. Cost Cost
0 50
1 60
2 75
3 100
4 150
5 225
6 400

7) Conigan Box Company produces cardboard boxes that are sold in bundles of 1000 boxes. The
market is highly competitive, with boxes currently selling for $100 per thousand. Coniganʹs total
and marginal cost curves are:

TC = 3,000,00 + 0.001Q 2

MC = 0.002Q

where Q is measured in thousand box bundles per year.

a. Calculate Coniganʹs profit maximizing quantity. Is the firm earning a profit?

b. Analyze Coniganʹs position in terms of the shutdown condition. Should Conigan operate or
shut down in the short run?