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Ch. I

Introduction to Micro Economics

SHORT QUESTIONS

(1) State the three basic questions of resource allocation in a society.

(2) Explain the idea of optimization.

(3) Discuss the problem of scarcity and choice. 2006

(4) Mention the idea of business decision making.

(5) State the basic dilemma between resources and wants.

(6) How does the idea of opportunity cost arise?

(7) What is a Production Possibility Curve (PPC)? What is its significance?

(8) Mention the circular flow of income with respect to product and factor

markets.

(9) Discuss the role of price mechanism. 2008

(10) Mention the properties of a PPC.

(11) State the various aims of the firm.

(12) What is opportunity cost? 2010

(3)

LONG QUESTIONS

(1) a) State the fundamental problems of the economy ?

b) Explain these problems in detail and their solutions.

(2) a) Explain the concept of a PPC ?

b) How can the PPC be used to address the three central problems

of the society?

(3) a) Explain the idea of price mechanism.

b) Trace out the significance of such a mechanism.

(4) a) ‘Problems of scarcity and choice are interrelated’ – Justify.

b) How would the concept of opportunity cost arise ?

(5) a) Mention the significance of a PPC.

b) State, in detail, the properties of PPC.

(6) Explain the price mechanism “by considering the interaction

between firms and households”.

(7) How are the fundamental problems solved by the price mechanism ?

(8) Explain how the price mechanism functions in a market oriented

economy.

(9) Discuss the various goals which a firm might follow. 2007, 2008

(10) Discuss – want & scarcity. 2007

(11) Discuss price system as an economic mechanism 2009

(4)

Ch. 2

Basics of demand and supply

SHORT QUESTIONS

(13) Define demand and state its difference with desire.

(14) State the law of demand.

(15) By considering linear demand curve, interpret the intercept and slope.

(16) Explain the idea of ‘direct’ and ‘indirect’ demand function.

(17) What is the crucial assumption that helps us to derive the market

demand curve ?

(18) Distinguish between changes in quantity demanded and change in

demand.

(19) Explain the idea of shift in demand.

(20) State the differences between changes in quantity demanded and

change in demand.

(21) Explain the idea of price elasticity of demand. Why does the formula

have a negative sign ?

(22) Why is the elasticity formula, free of units ?

(23) Draw the demand curves when (i) ed > 1, (ii) ed > 1.

(24) Find out the slope of the demand curve when the demand curve is (i)

vertical (ii) perfectly horizontal

(25) Define income elasticity and use it to comment on the nature of various

goods.

(5)

(26) Explain as what would happen to the demand for kerosene stoves if

(i) Price of LPG cylinders rise

(ii) Price of Kerosene oil rises

(27) What are the two properties of demand curve ?

(28) Define supply. How is a supply equation specified?

(29) State two reasons as to why the supply curve is upward rising.

(30) Define the concept of equilibrium with respect to demand and supply

curves.

(31) Explain the idea of elasticity of supply (es)

(32) Explain the idea of consumer’s surplus and producer’s surplus.

(33) Discuss the concept of ‘Paradox of value’.

(34) Define tariff. Explain the idea when tariff is imposed as

a) Specific tax b) Advalorem Tax

(35) Explain the idea of quota.

(36) Define a tax. How would you explain subsidy?

(37) Briefly explain the idea of price control and price support.

(38) Explain which is more price elastic – cooking gas or Maggi Instant

Noodles ? 2006

(39) If excise tax on cars is expected to fall what will happen to the current

market demand for cars? 2006

(6)

(40) For a giffen good, the demand curve is positively sloped. True or false?

Justify 2006

(41) The slope of the demand curve and the price elasticity of demand are

identical concepts. True or false? Justify 2007

(42) All giffen goods are interior but all inferior goods are not giffen.

Explain 2007

(43) Shaw that two goods cannot be inferior in a two commodity world. 2007

(44) What type of a demand curve world have a constant price elasticity of

demand? 2007

(45) ‘The demand curve is negatively sloped due to diminishing marginal

utility”. Justify. 2008

(46) Discuss the role of price mechanism 2008, 2009

(47) Show ed varies from zero to infinity along a linear demand curve 2009

(48) What will be the impact on the supply curve if

(i) Tax is imposed on a good.

(ii) Subsidy is imposed on a good 2009

(49) If there is a simultaneous change in demand and supply, show by using

diagram under which price will increase but quantity sold remains

unchanged. 2010

(7)

LONG QUESTIONS

(12) a) Define demand.

b) State the law of demand.

c) Briefly state the reasons for the downward sloping demand

curve.

(13) a) Discuss as to how an individual demand curve can be derived?

b) How can one derive the market demand? Explain the idea by

using the desirable assumptions.

(14) Explain the idea of shift in demand. What are the factors affecting the

shift in demand?

(15) Draw a graph of your demand curve for vacation days on a beach in

the Caribbean. What other conditions would affect your demand?

How?

(16) Wages of bus drivers increase. At the same time, incomes of

consumers generally increase. In the market for bus rides, we should

expect to see curves shift. The supply curve will --- and the demand

curve will ---.

a. shift up – shift to the left e. shift up – remain unchanged

b. shift up – shift to the right f. shift down – remain unchanged

c. shift down – shift to the left g. remain unchanged – shift left

d. shift down – shift to the right h. remain unchanged – shift right

(8)

(17) Translate the following newspaper headlines in to statements about

supply and demand.

a) Sweets Cost More Due to Sugar Price Rise

b) Pork Prices Rise as Farmers Cut output of pork

c) Profits From Popcorn Attract More Farmers

(18) a) In December, the price of Christmas trees rises and the quantity of

trees sold rises. Is this a violation of the law of demand?

b) A national newspaper reported: "Increased retail demand for

roasted and ground coffee because of lower prices... has contributed

to a higher price for coffee." What's wrong with this reasoning?

(19) Which of the following factors will cause the demand curve for labor

to shift to the right?

(a) the demand for the product by labor declines.

(b) the prices of substitute inputs falls.

(c) the productivity of labor increases.

(d) the wage rate declines.

(e) None of the above.

(20) Discuss the possible cases as to when we can expect the exceptions to

law of demand.

(21) a) Define price elasticity of demand.

b) Discuss the are method of calculating it ?

(9)

(22)Discuss as why the price elasticity of demand varies along with straight

line demand curve.

(23) a) Define income elasticity.

b) Discuss as to how we can classify goods according to the various

values.

(24)a) Discuss the various factors affecting elasticity

b) Mention the uses of the idea of elasticity

(25)a) Distinguish between a demand curve and demand equation ?

b) What is the contradiction between the two ?

c) How is this contradiction resolved ?

(26)a) Explain the idea of Substitution Effect (SE) and Income Effect (IE).

b) How can the law of demand be explained with the help of SE and

IE ?

(27) A supply and demand schedule are given. In this context

a) Explain the concept of equilibrium.

b) Analyse the stability concept of equilibrium by considering ‘price’

as the adjusting variable.

c) Explain the significance of the market equilibrium.

(28) Let a supply and a demand curve be given. In this regard, discuss the

possible effects when

a) Only supply rises, demand remains unchanged.

(10)

b) Only demand rises, supply remains unchanged.

c) Both demand and supply rise.

d) Beef supplies are sharply reduced because of drought in the beef-

raising states, and consumers turn to pork as a substitute for beef.

How would you illustrate this change in the beef-market in supply-

and-demand terms?

(29)a) Explain the idea of consumer surplus.

b) Discuss the concept with the help of a graphical excise.

(30)a) Discuss the idea of producer surplus.

b) Explain the idea with the help of a graphical exercise.

(31) With the help of consumer surplus, resolve the water – diamond

paradox.

(32) Discuss in details, the various uses of consumer’s surplus.

(33) a) Explain the idea of tariff.

b) How is it different from quota ?

c) Explain the logic as to why a tariff is imposed ?

(34) a) Explain in detail, the effects of tariff.

b) Show that welfare declines for a tariff imposing country.

c) What is the economic interpretation of net loss ?

(11)

(35)a) Explain, in detail, the effects of quota

b) Show that quota and tariff are more or less same except for the

revenue effect.

(36)a) Explain as under what conditions, tariff and quota are equivalent

b) Show that the domestic producers producing importable goods

prefer quota to tariff.

(37)a) Distinguish between a tax and subsidy.

b) Analyse the effects following the imposition of a tax.

(38)Compare the tax burden of the buyer and seller when

a) Supply curve is relatively elastic

b) Supply curve is relatively inelastic

c) Demand curve is relatively elastic

d) Demand curve is relatively inelastic

(39)a) Define Excess burden of a tax

b) Calculate the excess burden of a tax

c) What are the methods to lower excess burden ?

(40)a) Define maximum price legislation.

b) Explain the idea by using a suitable diagram.

c) Trace out the welfare effects of such an exercise.

(41)a) Explain the idea of minimum price legislation.

(12)

b) Discuss the idea by considering the labour market.

c) Calculate the welfare effects of such an exercise.

(42)a) If a specific tax is imposed show that for the buyer the price rises, for

the seller the price falls.

b) Consider a competitive market for wheat. What would be the

impact of a price support programme (price floor) on the quantity

demanded and supplied. Do you think that price support is

responsible for over – production ?

c) In the same market if the govt. decides to pursue a price contact

policy, what would be the impact on quantity of wheat produced and

the associated welfare impacts ? 2006, 2009

(43)a) Examine economic effects of tariff.

b) Discuss the conditions under which quota is equivalent to tariff.

2007

(44)a) Distinguish between market equilibrium and changes in market

equilibrium.

b) Under what cases will change in market equilibrium lead to

increase in both price and quantity ? 2007

(45)a) Shaw that the price elasticity of demand will vary between zero to

infinity for a straight line demand curve.

(13)

b) Consider two parallel demand curves. Comment on the price

elasticity of demand of the demand curves at the same price. 2007

(46)a) Distinguish between tariffs & quotas.

b) Discuss economic effects of a tariff. 2008

(47)Discuss price control & its effects 2008

(48)Show how the share of the tax paid by the buyers depends in price

elasticity of demand & supply 2009

(49)How would you measure ed at a point on the linear demand curve ?

2010

(50)Discuss incidence of taxation 2010

(51)Discuss economic efficiency of market Equilibrium

NUMERICAL QUESTIONS

(1) At price 14, two units are demanded. The slope of the demand curve

is – 3. Find the equation of the demand curve.

(2) Along the demand curve, total revenue is always a constant. Show

that ed = 1

(3) Let the initial price be 8, and quantity demanded is 6. As price rise to

10, the quantity demanded falls to 4. Find ed.

(4) Find the slope of an assumed linear demand curve for theater tickets,

(14)

when persons purchase 1,000 at Rs. 5.00 per ticket and 200 at

Rs.15.00 per ticket.

(5) Let the demand curve be given as q = Ap-αmρ where A, α,β are

constants. Find price elasticity and income elasticity.

(6) A market has two consumers where they demand q1and q2, such that

q = q1 + q2.

a) Find out the price elasticity of market demand.

b) What happens if there are ‘n’ consumers ?

(7) The demand curve is given as p = 24 – 3q For what output range

would demand he elastic ?

(8) Show that an isoelastic demand curve is never linear.

(9) Show that in a two commodity world, two goods cannot be inferior at

the same time.

(10) A consumer spends 80% of his income on good x, rest on good y. If

income elasticity of y is 2.5, find that of x.

(11) From the given table, comment whether the goods are substitutes or

complements.

px qx Py

5 10 12

5 6 5

(15)

(12) Let AB, AC be the two non-parallel

demand curves where the price

level is given as p. Compare the ed

values at x, y.

(13) Let AB, CD be the two non-parallel

demand curves where the price

level is given as p. Compare the ed

values at x, y.

(14) AB and CD are two demand curves

intersecting at x. The point x lies on

both the demand curves. Which

demand curve would have a higher

elasticity value at x ?

(15) Show that the sum of own price elasticity of demand, cross elasticity

and income elasticity is equal of zero.

(16) a) Show that |ed| = 1 X p slope of demand curve

c) The demand curve is given as p = 10 – q and the supply curve as

p = 6 + q. Find ed and es at equilibrium.

P

A

p x y

q

B C

P

C

A

x

q

D B

(16)

(17) The demand curve is given as p = 20 – 2q. Calculate consumer’s

surplus when 3 units are demanded.

(18) If the demand and supply curve for computers are:

D = 100 - 6P, S = 28 + 3P where P is the price of computers, what is

the quantity of computers bought and sold at equilibrium

(19) The quantity demanded of Good Z depends upon the price of Z

(Pz), monthly income (Y), and the price of a related Good W

(Pw). Demand for Good Z (Qz) is given by equation 1 below: Qz

= 150 - 8Pz + 2Y - 15Pw

Find the demand equation for Good Z in terms of the price for Z

(Pz), when Y is Rs.50 and Pw = Rs.6.

(20) Given the following data:

WIDGETS P = 80 - Q (Demand)

P = 20 + 2Q (Supply)

Now suppliers must pay a tax of $6 per unit. Find the new

equilibrium price-inclusive price and quantity.

(21) The market demand for good x is

Qx = 70 – 3.5Px – 0.6M + 4Pz where

Qx is the number of units of x demanded;

Px is the price of good x, M is income, Pz is

the price of a related good Z.

a) Is X normal or inferior good ? Explain.

b) Are X & Z substitutes or complements ?

c) If Px = 10, M = 30, Pz = 6, find price, income

& cross elasticities. 2006

(17)

(22) Let demand curve be p = 10 – 2q. Find ed

when 3 units are produced 2007

(23) The demand curve is q = 50 – 0.5p.

If the price is Rs.50, find ed. 2008

(24) Given Qd = 100 – 2p, Qs = 4 + 4p

Find equilibrium price & quantity. 2009

(25) The demand function is q = 30 – 4p – p2

Find ed at p = 3. 2010

(26) The demand function is given as

Q = 100 – 10P + 0.5Y where P = 7 and

Y (income) = 50.

a) At P = 7, what is ed ?

b) At Y = 50, what is income elasticity ? 2010

(27) The demand & supply of one – room apartments

are : Qd = 100 – 0.04p

Qs = 40 + 0.02p.

Determine the rental price (p) and the number

of apartments rented. 2010

(28) Suppose the market supply and demand curves for wheat are as

follows (prices are in dollars, quantities in millions of

bushels):

(18)

Ps = .02 Q, Pd = 3 - .01 Q

The government is considering two possible price support policies, A

or B.

A: The government buys enough wheat so that a market price of

Rs.2.20 is maintained. Wheat bought by the government is stored,

destroyed, or given away abroad.

How much wheat does the government buy, how much is domestically

consumed, and what is the cost to the government of this policy?

B: The government subsidizes wheat by $x per bushel and buys no

wheat itself. Calculate the subsidy needed if farmers are to receive Rs.

2.20 per bushel in the new equilibrium. Under this policy how much

wheat will consumers buy? How much will the government have to pay

out?

(29) The demand function is estimated as follows for a book publishing

company :

Qx=12000 – 5000Px + 5I + 500Pc , where Px = 5, I = 10000, Pc=6

(a) Determine what effect a price increase would have on total revenue

(b) Explain how sales of books would change in the period of rising

incomes

(c) Assess the probable impact if competing publishers raise their price

(Pc)

(30) The price elasticity for rice is -0.4 and income elasticity is 0.8. At a

price of Rs 20 per kg and income of Rs 20000, the demand for rice is

50000 per year.

(a) Is the rice an inferior, necessity or luxury good?

(b) If income increases to 20500, what will be the quantity demanded

for rice?

(19)

(c) If the price of rice increases to Rs 22 per Kg, what will be the

quantity demanded?

(31) The demand function for a steel company is given by :

Qx = 50000 – 1000Px + 0.1 I + 100Pa

(a) How much steel will be demanded at P=Rs 40, I = 20000, Pa=30?

(b) Compute price elasticity and cross price elasticity of demand

(c) If the objective is to maintain the quantity of steel demanded as

computed in (a), what reduction in steel prices would be necessary

to compensate for Rs 5 reduction in the price of aluminum?

(20)

Ch. 3

Production

SHORT QUESTIONS

(50) Define a Production function. What is its significance ?

(51) What are the properties of a standard production function?

(52) How does a long-run production function differ from a short-run

production function?

(53) Distinguish between short-run and long-run in production

(54) Explain : a) Variable factors; and b) Fixed factors.

(55) How can inputs be changed into output ?

(56) Define (i) Average Product (ii) Marginal product.

(57) Explain the Idea of Total Product Curve.

(58) What do you mean by point of inflexion ?

(59) State the law of variable proportions ?

(60) State and explain the law of increasing returns to a variable input.

(61) If the law of variable proportions is true, how can food be provided to a

population that is continuously rising ?

(62) Explain the idea of an Isoquant(IQ).

(63) What is the difference between a production function and an isoquant?

(64) Discuss the concept of Marginal Rate of Technical Substitution (MRTS).

(65) Why do we consider that the Isoquant does not touch either axis?

(66) Explain the idea of an iso-cost line.

(67) What do you mean by factor prices?

(21)

(68) Explain the idea of produce’s equilibrium.

(69) What is the relationship between MRTSLK and w/r in equilibrium?

(70) What do you mean by returns to scale ?

(71) Discuss the idea of a homogeneous production function and state how

the concept of returns to scale can be explained with that idea.

(72) When APL falls, MPL must be below it. True or false ? Justify 2006

(73) The average and marginal products are equal when average product

maximum 2007

(74) If w = r and MPL > MPK, is the firm operating efficiently ? Why or why

not ? 2007

(75) In the law of variable proportions, which stage will the producer select

for production ? 2007

(76) Explain the meaning of Constant Returns to Scale. 2008

(77) The Marginal product curve intersects the average product curve at its

maximum point. Explain 2009

(78) Explain the idea of IRS 2009

(79) Illustrate neutral technological progress 2009

(80) Illustrate the concept of labour – saving technological progress with an

example. 2010

(81) How is a dynamic setup related to technological changes ?

(22)

LONG QUESTIONS

(52)a) Explain the idea of production function.

b) What are the properties of a production function?

(53)a) Explain the idea of APL and MPL.

b) By using the total product curve, explain the economic

significance of APL and MPL

(54)a) State the law of variable proportions by mentioning the desirable

assumptions.

b) Discuss the graphical exercise of this law

c) What is the significance of the law?

or

Explain the three stages of production associated with the law of variable

proportions or law of returns to a variable factor. Why will a firm always

locate its input-output decision in the region of generalised diminishing

returns?

or

Explain the concepts of total product, average product and marginal

product to a variable factor. Discuss the relationship between them during

the three stages of production.

(55)a) Discuss how you would derive an Isoquant (IQ).

b) What are the properties of such an IQ?

(56)Discuss in detail the concept of declining MRTS on an Isoquant.

(23)

(57)Derive the isocost line of a producer where he use two inputs – capital

and labour.

(58)“The maximization of output subject to a given cost and minimization of

cost subject to a given output will give the same result”. Explain from the

standpoint of profit maximization objective.

(59)If a firm is compelled to purchase more than the desired amount of labour

at a fixed wage-rental ratio but is not subject to any restriction on the use of

capital, what can you say about the relation between MRTSLK and w/r?

(60)What is a homogeneous production function? Explain the significance of

the degree of homogeneity of a production function in determining the

returns to scale operating in the production process.

(61)What will be the shape of the expansion path for a homogeneous

production function? Explain.

(62)Discuss the properties of a Homogenous production function.

(63)Show that output maximization and cost minimization for a firm would give

us the same answer 2007

(64)Discuss the relationship between APL and MPL 2009

(65)Explain the various concepts of returns to scale with the help of an

expansion path. 2006

(24)

(66)a) Define expansion path.

b) A firm uses two inputs & a homogeneous production function.

Show that the expansion path is a linear line through the

origin. 2008, 2010

(67)Explain the difference between diminishing returns to a variable input

and diminishing returns to scale. 2006

(68)Trace out the difference between returns to scale and returns to the

variable factor. 2007

(69)Discuss the concept of diminishing marginal rate of technical substitution

and convexity of isoquants 2010

(25)

NUMERICAL QUESTIONS

(32)Show that APL = MPL when MPL is maximum.

(33)Let the production function be q = 100 + L2 + L3.

Find the APL & MPL values at L = 5.

(34)Let the production function be q = 30L2 – 2L3. Find

a) Maximum APL

b) MPL when APL is maximum.

c) Maximum output.

d) The value of L for which MPL is maximum.

(35)The production function is given as

Q = - L3 + L2 + 6L

3

Beyond which point, diminishing returns to labour exist ?

(36)The production function is given as q = 200 – K2 – L2 where w -= 2, r = 3.

The total cost is as 39. Find maximum output.

(37)The production function is given as q = KL, where w = 4, r = 3.

If the target output is 1200 units, find minimum cost.

(38)The production function is given as

Q = 2L2 - 32Lx + 30x2 where L is labour and x is the units of land

cultivated. Determine the various stages of production if 2 units of

land are cultivated.

(26)

(39)Determine the degree of the homogeneous function and state if these are

IRS, CRS, DRS

a) q = K2 + L2 b) q = K L c) q = √K2 + L2

K + L

e) q = (K2 + L2)1/3

(40) Consider the production function q = AK2L2 – BK3L3, where ‘q’ represents

the level of output, K and L represent the quantities of the two inputs, A

and B are constants. Assuming that K is constant, derive the AP and MP

curves of L. Show that MP reaches maximum before AP and that when AP

is maximum, AP = MP.

(41) The production function is

q = K0.8 L0.4, w = 8, r = 16 and C = C,

Find equilibrium values of K, L.

2006

(42) The production function is

q = K0.3 L0.7,

(i) Derive APL, MPL functions.

(ii) Show that APL, MPL will decline as L rises 2007

(43)If q = 15L2 – L3, find APL, MPL at L = 5 2008

(44) Consider the production functions

a) q = 6KL

b) q = 6K ½ L ½

What find of RTS are the production functions subject to ? Also find

out the degree of homogeneity in each case. 2009

(45) For a firm, w = Rs.200, r = Rs 1000, MPL = 20,

(27)

MPK = 60. Is the firm operating optimally ?

What adjustment is necessary to achieve optimality ? 2009

(46)Gain q = K 0.5 L0.5, r = Rs 4, w = Rs 8 and C = Rs 400.

a) Derive equation of isocost line

b) Find optimum levels of K & L employed. 2010

c) Determine the maximum level of output produced.

(47) A farmhouse uses the inputs of fertilizer, labour and land to grow

rice. Assume that labour and land are the fixed factors. The

relationship between the amount of fertilizer and the amount of rice

produced is given by the following table:

Tons of fertilizer Kilogram of rice

0 0

1 300

2 800

3 1500

4 2000

5 2300

6 2400

7 2300

8 2100

a) Calculate the average product of fertilizer when 3 tons are used.

b) What is the marginal product of 7th ton of fertilizer?

c) Does this production schedule exhibit i) diminishing total returns? ii)

diminishing average returns? and iii) diminishing marginal returns?

(48) The following cubic equation is a long-run production function for a

firm:

Q = -0.002K3L3 + 6K2L2.

Suppose the firm employs 10 units of capital.

a. What are the equations for the total product, average product, and

marginal product of labor curves?

(28)

b. At what level of labor usage does the marginal product of labor begin to

diminish?]

c. Calculate the marginal product and average product of labor when 10

units of labor are being employed.

Now suppose the firm doubles capital usage to 20 units.

d. What are the equations for the total product, average product, and

marginal product of labor curves?

e. What happened to the average and marginal product of labor curves

when capital usage increased from 10 to 20 units?

f. Calculate the marginal and average products of labor for 10 units of labor

now that capital usage is 20 units. Compare the results to part c. Did the

increase in capital usage affect marginal and average product as

expected.

(49) Consider the production function Q = 100K0.2L0.5. If K=1, determine the

marginal product of labor for the following values of L : 1, 4, 9 and 16.

Does this production function exhibits diminishing returns to labor?

Describe the nature of returns to scale for this production function.

(50) A firm uses capital (K) and labour (L) to produce output (Q). At the

current level of production, r = Rs.1000 per unit, w = Rs.200 per unit.

MPK = 60 and MPL = 20.

a. Is the firm operating optimally?

b. What changes (if any) are to be made to achieve optimality? Draw the

isoquants and the isocost line to illustrate your answer.

(51) The marginal product of labor in the production of computer chips is 50

chips per hour. The marginal rate of technical substitution of hours of

labor for hours of capital is ¼. What is the marginal product of capital?

(52) Consider the Cobb- Douglas production function Q = 36K0.5L1.0.

(29)

a. Find the marginal product functions.

b. Write the equation for MRTSLK.

(53) The production function is given as : Q = ALaKb, where a>0 and b>0.

a. The marginal product of labor (MPL) is ….

b. The marginal product of capital (MPK) is ….

c. The marginal rate of technical substitution (MRTSLK) is ….

d. Show that the isoquants for this production function are convex.

e. Derive the equation for the long- run expansion path.

f. If the price of labor be w and the price of capital be r, find the efficient

usage functions of labor and capital.

(54) The production function for a firm is Q = 24L.5K.5. In the short-run, the firm

has a fixed amount of capital, K =121. The price of labor is Rs.10 per unit,

and the price of capital is Rs.20 per unit.

a. How would the short-run production function of the firm be written?

b. Find the marginal product of labor (MPL). Show that the marginal

product of labor diminishes for all levels of labor usage.

c. Write the equation for the expansion path.

d. Derive the efficient input-usage functions for labor and capital.

(55) The production function is given as Q = K1/2L1/2, PK = Rs.4, PL = Rs.8 and

C = Rs.400, determine the maximum level of output subject to the cost

constraint. Also derive the equation of the expansion path.

(56) The production function is of the form : q = 8 K1/2 + 20L1/2 and if PK = Rs.1

and PL = Rs. 5, derive the equation of the expansion path.

(57) Do the following functions exhibit increasing, constant or decreasing

returns to scale? What happens to the marginal product of each

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individual factor as that factor is increased and the other factor is held

constant?

a. q = 3L + 2K

b. q = (2L + 2K)1/2

c. q = 3LK2

d. q = L1/2 K1/2

e. q = 4L1/2 + 4K.

(58) Given Q=100 K 0.5 L 0.5

(a) Given K=100 and L=25, compute marginal products of K and L

(b) If the price of capital is Rs 20 per unit, what was the wage rate?

(59) Given the production function, Q = 30 K 0.7 L 0.5 and r=20, w=30

Determine the equation of expansion path.

(60) The production function is given by , Q= 20 K 0.5 L 0.5

(a) Compute marginal products of K and L

(b) If r=5 and w=4, determine the expansion path

(c) The firm is producing 200 units of output using L= 4 and K=25. Is this

an efficient input combination?

(d) Comment on the returns to scale

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Ch. 4

SHORT QUESTIONS

(82) Define cost. How would you explain economic cost?

(83) Explain the idea of TFC. Give 2 examples.

(84) Mention two examples of TVC and explain the same.

(85) Why does the TVC curve start from the origin?

(86) Explain why short run MC is equal to the slope of both the TC and TVC

curves.

(87) Show that the total cost curve depends positively on output.

(88) Why is the TC curve concavo- convex?

(89) If the long run total cost curve is linear, what do the corresponding

marginal and average cost curves look like?

(90) Does the TC curve always start from the origin?

(91) Define AFC, AVC.

(92) Show that AVC = w , MC = w .

APL MPL

(93) Why can’t the AFC curve touch either axis ?

(94) Explain why AFC curve is downward sloping ?

(95) Why does AFC curve has the shape of a rectangular hyperbola ?

(96) Discuss as to why AVC curve is U shaped.

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(97) Explain why AC and AFC come closer and closer to each other as

output rises but they never meet ?

(98) Define marginal cost. Show that it is the mirror image of the MPL curve.

(99) Show that if MC > AC, the AC would rise.

(100) Show that MC equals AC when AC is minimum.

(101) Explain the idea of long run total cost (LRTC) ?

(102) Why is the LAC called a planning curve ?

(103) Distinguish between private and social costs by stating an example.

(104) Justify the shape of LRTC.

(105) Why does LRTC start from origin ?

(106) Explain the idea of economies of scope ?

(107) State the measure of economies of scope and explain its significance.

(108) Explain the idea of the learning curve and state its significance.

(109) Explain briefly as to why a learning curve is useful to the firms.

(110) ‘All products show learning curve effect’. True or false ? Justify.

(111) State whether existence of excess capacity is necessary for exhibiting

economies of scope.

(112) Explain the idea of economies of scope in purchasing and mention its

significance.

(113) State the measure of economies of scale and scope in advertising and

state its use.

(114) What is the use of economies of scale & scope in R. & D ?

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(115) Define cost reduction strategies. How is it different from cost control

methods ?

(116) State the elements needed for a successful cost reduction strategy.

(117) Mention four advantages and disadvantages of cost reduction strategies.

(118) Explain the idea of BE analysis.

(119) State the significance of contribution margin.

(120) Trace out how can the BE output can be expressed in terms of sales.

(121) State the concept and significance of operating leverage.

(122) If a firm’s long run average cost curve (LAC) is horizontal, what can you

say about the long run marginal curve (LMC) ? 2006

(123) MC cuts AC at its minimum. True or False ? Explain. 2006

(124) If APL is dome – shaped, the AVC is U shaped. Explain 2006

(125) Show MC = w . 2007

MPL

(126) MC intersects AC at is maximum. Explain 2008, 2009

(127) Distinguish between private & social costs of education 2009

(128) What does operating leverage reflect ? 2010

(129) Draw AFC & mention its properties 2010

(130) Suppose a new car factory had come up in a backward region.

What kind of positive externalities would you expect ? 2010

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LONG QUESTIONS

(70) Explain idea of short run costs.

b) Explain the concept of TFC, TVC.

c) Why does TFC have a positive vertical intercept ?

(71) Derive the short run total cost curve of a firm.

b) Explain why it is concavo-convex.

c) What would be the value of TC if no output is produced ?

(72) Explain the idea of AFC & AVC.

b) How would you derive the AFC curve ?

c) What are the properties of AFC curve ?

(73) Discuss the idea of AVC.

b) How would you derive the AVC curve ?

(74) Discuss the derivation of the short run AC curve.

b) Why do AC and AVC come closer and closer to each other ?

(75)Explain the reason as to why the AC curve is U shaped by considering

the various returns to factor.

(76) Define MC

b) How would you derive MC through a graphical exercise ?

(77) Discuss the relation between AC and MC.

b) Show that AC is equal to MC when AC is minimum.

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(78) Discuss the relation between MC and AVC.

b) Show that MC = AVC when AVC is minimum.

(79) Distinguish between short run and long run with respect to the costs

of a firm.

b) Discuss the method to derive long run total cost.

(80) Trace out the method of deriving the long run average cost curve.

b) Where would a rational producer select his point of operation

with respect to LAC?

(81)Explain the shape of LAC by using the various concepts of RTS.

(82)How is the law of diminishing marginal returns related to the shape of the

short run marginal cost curve?

(83)How do the external economies and diseconomies of scale affect the

firm’s long run marginal cost curve?

(84)Discuss the basic idea behind economies of scope.

(85)‘The learning curve reflects the efficiency gains resulting from the

cumulative total of all output produced till date’ – Elucidate.

(86)a) Discuss the concept of economies of scale & scope.

b) Analyse this concept

(i) in purchasing (ii) in advertising (iii) in R & D.

(87)a) Define cost reduction strategies.

b) Analyse the basic concept of cost reduction strategies.

c) What are the factors that affect cost reduction ?

(88)a) Distinguish between cost reduction and cost control strategies.

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b) What are the advantages and disadvantages of cost reduction ?

(89)Discuss in detail the concept of operating leverage.

(90) Define the idea of BE.

b) Analyse the concept by taking linear TR, TC schedules.

(91) Determine BE output with the help of a linear break even analysis.

b) Show that as variable cost rise, the breakeven output will also

rise. 2006, 2007, 2008

(92)Explain why LAC is U shaped 2006

(93)Discuss – a) Learning Curve b) Economies of scope c) Cost reduction

strategies. 2006

(94)Derive the relationship between AC & MC 2007

(95)a) Explain how AC is derived from TC in short run.

b) Explain the relation between AC & MC (both graphically &

mathematically) 2009

(96)Discuss – a) Learning Curve b) Economies of scope c) Economies of scale

& scope in advertising 2009

(97)a) Why does MC consist of variable cost only ?

b) Why are all costs variable in long run ?

c) Derive the LAC from the short run average cost curves. 2010

(98)Discuss – a) BE analysis b) Learning Curve 2010

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NUMERICAL QUESTIONS

(61)AFC is given as 10 Find the slope of AFC when 10 units are produced.

q

(62)Let TC = 36 + q2. Find minimum AC.

(63)For a cubic cost function given as

TC = a + bq – dq2 + kq3, where a, b, d, k are positive constants, show

that MC reaches its minimum before AVC.

(64)Maruti produces 10,000 cars per month, its long run total cost is

Rs.150,000,000. If it produces 10,500 cars per month, its long run total cost is

Rs.227,500,000. Does Maruti exhibit economies or diseconomies of scale ?

2006

(65)The fixed cost is Rs.10,000, the price per unit is Rs.100, the variable cost

per unit is Rs.75. Find BE output.

(66)A firm employs 20 workers (labour is the only variable input) at wage rate

Rs.60. The average product of labour is 30. The firm has produced 12 units of

additional output from the last worker employed. The total fixed cost is

Rs.3600/-

a) What is the value of MC?

b) What is the value of AVC?

c) How much output is produced?

d) What is the value of AC? 2009

(67)Calculate BE output if

Variable cost per unit = Rs.12, fixed cost = Rs.60000, selling price per

unit = Rs.18. 2009

(68)If C = q2 + 5q + 36 then show at minimum AC we have MC = AC.

(69)Show that AC/MC can be interpreted as output elasticity of cost.

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(70)If LRTC = 7q + 2q2 – q3, find the optimum output of the firm.

(71)A firm's total cost function is given by the equation:

TC = 4000 + 5Q + 10Q2

(a) Write an expression for each of the following cost concepts:

a. Total Fixed Cost

b. Average Fixed Cost

c. Total Variable Cost

d. Average Variable Cost

e. Average Total Cost

f. Marginal Cost

(b) Determine the quantity that minimizes average total cost. Demonstrate

that the predicted relationship between marginal cost and average cost

holds.

(72) The estimated cost function is given by, TC= 200 – 2Q + 0.05Q2

(a) Determine AC, MC functions.

(b) At what level of output AC is at its minimum?

(73) The estimated cost function is given by , TC=1000 +200Q -9Q2 +0.25Q3

(a) Compute TVC,AFC,AC,MC

(b) At what level of output AC is at its minimum?

(c) Prove that MC=AVCminimum

(74) Given TR=50Q ; TC= 10000 + 30Q

Determine breakeven level of output.