Managerial Economics

Indian School of Business

Practice Midterm

Duration of the exam: 60 minutes

Problem 1

Explain how each of the following events would influence the market in the short run. Assume standard
demand and supply curves, i.e., a downward sloping demand curve and an upward sloping supply curve.
For all the parts below, assume that the markets are competitive and that only the event being described has
changed i.e. do not make any additional assumptions than what is mentioned in the question.

a. A major war breaks out due to which several civilians join the army and are deployed at the front.
What is the effect on the labour market?

Demand curve
Increases
Decreases
No change
Ambiguous

Supply curve
Increases
Decreases
No change
Ambiguous

Equilibrium price
Increases
Decreases
No change
Ambiguous

Equilibrium quantity
Increases
Decreases
No change
Ambiguous

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b. In August 2019, thousands of restaurants delisted themselves from Zomato’s platform as part of a
#logout campaign What is the effect on market for food deliveries on Zomato’s platform? (Zomato
is an Indian restaurant aggregator and food delivery service provider.)

Demand curve
Increases
Decreases
No change
Ambiguous

Supply curve
Increases
Decreases
No change
Ambiguous

Equilibrium price
Increases
Decreases
No change
Ambiguous

Equilibrium quantity
Increases
Decreases
No change
Ambiguous

c. An increase in the price of movie tickets. What is the effect on the market for movie theatre
popcorn?

Demand curve
Increases
Decreases
No change
Ambiguous

Supply curve
Increases
Decreases
No change
Ambiguous

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 Equilibrium price
Increases
Decreases
No change
Ambiguous

Equilibrium quantity
Increases
Decreases
No change
Ambiguous

d. A new technology that makes it cheaper to extract juice from oranges. What is the effect in the
market for orange juice?

Demand curve
Increases
Decreases
No change
Ambiguous

Supply curve
Increases
Decreases
No change
Ambiguous

Equilibrium price
Increases
Decreases
No change
Ambiguous

Equilibrium quantity
Increases
Decreases
No change
Ambiguous

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e. An increase in the proportion of twins relative to singletons among newborns. What is the effect
on the market for baby clothes?

Demand curve
Increases
Decreases
No change
Ambiguous

Supply curve
Increases
Decreases
No change
Ambiguous

Equilibrium price
Increases
Decreases
No change
Ambiguous

Equilibrium quantity
Increases
Decreases
No change
Ambiguous

f. A prediction by the Indian Meteorological Department that the monsoon is going to be “below
normal”. What is the effect in the market for food grains?

Demand curve
Increases
Decreases
No change
Ambiguous

Supply curve
Increases
Decreases
No change
Ambiguous

Equilibrium price

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 Increases
Decreases
No change
Ambiguous

Equilibrium quantity
Increases
Decreases
No change
Ambiguous

Problem 2

JustPizza! is a profit maximizing firm in a perfectly competitive market, where a pizza sells for Rs. 500.
JustPizza!’s cost curves are:
TC = 75,000 + q^2 (Note: q^2 should be read and written as q square)
MC = 2q
where q is the number of pizzas sold every day by JustPizza!

a. JustPizza! profit maximizing quantity is

b. Is the firm earning a profit?

c. Should JustPizza! operate or shut down in the shortrun?

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Problem 3

The market for supplying flowers outside the Jagannath temple in Puri is perfectly competitive. All firms
(a firm is a stall) sell flowers in small bamboo baskets. Each existing firm and every potential entrant are
identical and they face the same long run average cost and long run marginal cost curves. The minimum
level of long run average cost is Rs. 5 per bamboo basket, and occurs when a firm sells 200 bamboo baskets
of flowers each day. The market demand curve for a basket of flowers is Q = 28,005 – P, where P is the
market price in Rupees per basket.

a. What is the long run equilibrium price per basket of flowers in the market?
Rs 10
Rs. 5
Rs 20
Rs 15

b. How many baskets does each firm sell at this price?

c. How many firms will be in the market at the long-run equilibrium?

Problem 4

A firm operating in the perfectly competitive market of spectacles has hired you to estimate the supply and
demand curves for spectacles. You have been informed that the price elasticity of supply is 1.7 and the
price elasticity of demand is -0.85. The current equilibrium quantity is 1206 units and current price of
spectacles is $41. Given this:

a. Estimate the linear demand curve at the current price and quantity. Assume that the demand curve takes
the form Qd = a – bP. You may round off the parameters (a and b) of the demand curve to the nearest whole
number.
Qd=2231+25P
Qd= 2231-25P
Qd= 1205-5P
Qd= 1205+5P

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b. Estimate the linear supply curve at the current price and quantity. Assume that the supply curve takes the
form Qs = c + dP. You may round off the parameters (c and d) of the supply curve to the nearest whole
number
Qs=-844+50P
Qs=-844-50P
Qs=-1206+41P
Qs=1206+41P

c. The government is considering imposing a $1 tax per unit on spectacle sellers to raise revenue to fund a
vision correction program for low-income families. Some sellers are upset that the tax is levied on them
and they argue that under the current market conditions they would have a pay a larger percentage of the
burden of tax? Based on the information provided in the question above, do you agree with this assessment?
Calculate the economic incidence of the tax on buyers and sellers.
Incidence of the tax on buyers is 0.33, seller 0.66
Incidence of the tax on buyers is 0.66, seller 0.33
Equal incidence on both
Whole incidence on the buyer

Problem 5

Asian News International (ANI), an Indian news agency, has monopoly in the market of syndicated news
video feeds, especially archival footage. ANI has hired you to assist them in setting the price that they
should charge television channels for their archival footage. The managers recognize that there are two
distinct demand curves for archival footage. One demand curve applies to national media TV channels and
the other applies to regional media TV channels. The two demand curves are:
P1= 9.6 - 0.08Q1
P2 = 4 - 0.05Q2

where P1 = price charged to national TV channels, P2 = price charged to regional media channels, Q1 =
duration of archival footage for national TV channels, and Q2 = duration of archival footage for regional
TV channels. Assume that the archives require only a fixed cost to be maintained, so that the managers
consider marginal cost to be zero.

a. If ANI decides to price discriminate, what should the profit maximizing price and quantity be in each
market?
Q1=40, P1=4.8, Q2=60, P2=2
Q1=60, P1=2, Q2=40, P2=4.8
Q1=60, P1=4.8, Q2=40, P2=2
Q1=60, P1=4.8, Q2=60, P2=2

b. What is the elasticity of demand at the quantities and prices calculated in part (a) of this question for each
market?
E1=E2=1
E1=E2=-1

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E1=E2=0
E1=E2=-0.5

c. Are these elasticities consistent with your understanding of profit maximization and the relationship
between marginal revenue and elasticity?
Yes, it is consistent
No, not consistent
Can't ascertain

d. Would your answer to part (a) change if the marginal cost was not zero and instead you were informed
that marginal cost of ‘producing’ archival footage was Rs 4?
Yes, answer would change
No, answer would not change

e. Compared to the case of the monopolist charging an uniform price, what would be the effect of a price
discriminating monopolist on total welfare/social surplus? Would it increase, decrease or not change?
Decrease
Increase
No change

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