Indian Institute of Management Ahmedabad

Microeconomics (ME), 1stTerm Wednesday, 2 August 2023

PGP1/FABM1/FPM1 Time: 2.30 pm to 4.00
pm

Midterm
(Sections A and E)

Read the following instructions

1. This quiz has 24multiple choice questions (MCQs). Please go through all possible
options carefully before selecting the most appropriate one alternative. Enter the
selected alternative A, B, C or D, etc. in capital letters only in the box provided
at the appropriate question number in the Answer Space below. No marks will be
given for a question with multiple answers.
2. IF YOU WISH TO CHANGE AN ANSWER, STRIKE–THROUGH THE OLD
ONE AND ENTER THE NEW. DO NOT OVERWRITE.
3. This is a closed-book exam. Calculators allowed but no laptops and cellphones.
4. Submit the first sheet containing your name/roll number and the answer space.
You may take the rest of the pages with you.
5. Please note that your answer-sheet will be scanned for our records.
6. Total Score = 5 times (# of correct answers) plus (# of questions not attempted)
plus 0 times (# incorrect answers).
7. Only an absolute blank box in the Answer Space will be considered as
question “not attempted”

# of Correct MCQ # of Incorrect # of MCQs Not Total Score

Answers MCQ Answers Attempted

ANSWER SPACE

1. 2. 3. 4. 5.

6. 7. 8. 9. 10.

11. 12. 13. 14. 15.

16. 17. 18. 19. 20.

21. 22. 23. 24.

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1. Read statements I and II and choose the correct alternative below:

I. Law of Demand states that ceteris paribus (i.e., other things remaining
the same), price of a product and the quantity demanded of that
product are inversely related.

II. Law of Supply states that ceteris paribus (i.e., other things remaining
the same), price of a product and the quantity supplied of that product
are directly related.

A) Only I is true
B) Only II is true
C) Both I and II are true
D) Both I and II are false

2. Read statements I and II and choose the correct alternative below:

I. If price equals average cost (AC), an entrepreneur will not earn normal
profit.

II. A farmer has no choice but to keep producing even if price barely
covers average variable cost (AVC) because in the short-run all fixed
costsare
sunk cost.

A) Only I is true
B) Only II is true
C) Both I and II are true
D) Both I and II are false

3. The U-shaped long-run average cost curve (LAC) is a depiction of

the phenomenon that prior to reaching the minimum efficient scale (MES),

A) A firm enjoys increasing returns to scale

B) A firm enjoys volume discounts on purchase of factors of production
C) A firm enjoys better work-coordination among factors of
production D) Any or all of the above

4. Which of the following is a correct statement?

A) High cross price elasticity of demand between two goods means that they
are good complements
B) A natural monopoly is a phenomenon, where marginal cost (MC) of a
firm keeps continuously decreasing in relation to the market demand
curve.
C) IIMA expanding its MBA programme from about 388 students to 800
students will be an issue related to economics of scale, and, IIMA
expanding the number of different programmes (MBA, FABM, PGPX,
Ph.D., Exec. Ed., etc) will be an issue related to economies of scope.
D) All of the above

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 Refer to the text below and answer the following 2 questions:

Consider a production function Q = L1/2 + K1/2, where Q is output and L and K are
labour and capital inputs respectively.

5. Which of the following is a correct statement?

A) The production function exhibits diminishing marginal product of L

B) The production function exhibits increasing marginal product of L
C) The production function exhibits constant marginal product of L
D) Cannot say anything about the nature of marginal product of L

6. Which of the following is a correct statement?

A) The production function exhibits increasing returns to scale

B) The production function exhibits decreasing returns to
scale
C) The production function exhibits constant returns to scale
D) Cannot say anything about the nature of returns to scale

Refer to the text below and answer the following 2 questions:

Consider a production function Q = aL +bK, where Q is output, L and K are labour

and capital inputs respectively, and a and b are positive constants.

7. Which of the following is a correct statement?

A) The production function exhibits diminishing marginal product of L

B) The production function exhibits increasing marginal product of
L C) The production function exhibits constant marginal product of
L
D) Cannot say anything about the nature of marginal product of L

8. Which of the following is a correct statement?

A) The production function exhibits increasing returns to scale

B) The production function exhibits decreasing returns to
scale C) The production function exhibits constant returns to
scale
D) Cannot say anything about the nature of returns to scale

Refer to the text below and answer the following 4 questions:

Bayblade, a version of wooden top is a popular toy among kids. By virtue

of a patent, the firm is a monopolist. It faces annual demand for its patented
bayblade given by Q = 64 – P. Cost structure for bayblade is C(Q) = 8Q.

9. What is the firm’s marginal revenue at Q = 6?

A) 32
B) 4
8 C)
52
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D) 58
E) 60

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10. If the firm wants to maximize revenue, at what price would it sell a
bayblade?

A) 22
B) 32
C) 38
D) 42
E) 48

11. Shareholders of the firm inform CEO that he/she better

maximize profits! What would be the profit maximizing price for the
bayblade?

A) 28
B) 29
C) 32
D) 36
E) 42

12. If the patent on bayblade expires and many firms could produce the
top in a perfectly competitive market with the same cost structure as that
of bayblade, how much is the dead-weight-loss due to the monopoly
firm.

A) 332
B) 336
C) 392
D) 400
E) 440

Refer to the text below and answer the following 2 questions:

Every month, Maithili drinks X glasses of pineapple juice and Y glasses of

watermelon juice at the Juse Bar. The utility is given by U (X,Y) = 10 XY. The price
of a glass of pineapple juice is ₹50 and the price of a glass of watermelon juice
is
₹100. The total budget Maithili has for consumption of juices is ₹ 1000.

13. How many glasses of pineapple juice she guzzles per month?

A) 2
B) 4
C) 5
D) 8
E) 10

14. In equilibrium, if Maithili consumes 5 glasses of watermelon per month,

what is the marginal utility of money (Rupee) in equilibrium?

A) 1
B) 2
C) 3
5
D) 4

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 E) 5
15. Read statements I and II and choose the correct alternative below:

I. In a perfectly competitive market, market demand is downward

sloping but the demand curve faced by in an individual firm is a
horizontal straight line.

II. For a monopolist, the market demand curve is the marginal revenue
(MR) curve.

A) Only I is true
B) Only II is true
C) Both I and II are true
D) Both I and II are false

16. Prasad A joins IIM Ahmedabad’s two-year FABM programme after his
graduation. During the two years, alternatively, Prasad could have done one of
the following full-time activities:

1) Join a rural NGO

2) Study M.Sc. Agriculture
3) Start a agri-business start-up firm

Which of the following is the opportunity cost of enrolling at IIM

Ahmedabad?

A) Tuition fee at IIMA

B) Whichever among 1), 2), 3) was most valuable to him
C) Only 2)
D) A sum total of 1), 2), and 3)

Refer to the text below and answer the following 2 questions:

A manager at the electric-vehicle manufacturer estimated demand function for their

two-wheeler Surya. The estimation was based on the past data on number of Surya
sold (Q), price of Surya (P), and income (M) of buyers. Among many functional
forms tried by the manager, the following functional form seemed to fit the data best:

Log Q = 300 – 1.5 log P – 0.1 log M.

17. What kind of product Surya is?

A) A necessity
B) A luxury good
C) A normal good
D) An inferior
good
E) None of the above

18. Ceteris paribus (other things remaining the same), which of the
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following would have to be ensured if firm wants to maximize revenue?

A) Do not change the existing price of Surya

B) Increase price of Surya
C) Keep lowering the price of Surya
D) Lower cost of production of Surya

19. You are given a market condition where demand (DD) is downward sloping
however, supply curve (SS) takes a peculiar shape as described below. Which
of the following statements is correct?

A) Both n and m are stable equilibria for any small change in price
B) Both n and m are unstable equilibria for any small change in price
C) Only n is a stable equilibrium for any small change in price
D) Only m is a stable equilibrium for any small change in
price

20. Read statements I and II and choose the correct alternative below:

I. Law of Diminishing Marginal Product is applicable in the short-run

due to existence of a fixed factor.

II. Economies of Scale occur due to existence of fixed cost being spread
across large units of output in the long run.

A) Only I is true
B) Only II is true
C) Both I and II are true
D) Both I and II are false

Refer to the text below and answer the following 4 questions.

Very recently, Indian government put a ban on exports of non-basmati rice

(henceforth, just rice). This was done, for excessive rains had damaged standing
crops significantly and this was contributing to price inflation domestically. The

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total

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demand for rice (domestic + exports) is given by the equation Qt = 2500 – 9P, where
Q is the quantity of rice and P the price. The domestic supply prior to excessive rains
damaging the rice crop is given by the equation Qs = 8P.

21. Given the total demand and domestic supply, how much is the producers’ (rice
farmers’) surplus prior to excessive rains damaging their crop?

A) 80,100
B) 82,300
C) 86,500
D) 88,900
E) 90,200
F) 95,000

22. With the excessive rains damaging the standing crop, the new domestic supply
was given by the equation Qs = 4P. With fall in supply, price of rice had gone
up. Since price had gone up, did farmers benefit in terms ofproducers’
surplus?

A) Producer’s surplus went up

B) Producers’ surplus went
down
C) Producers’surplus remained same
D) Cannot say anything about the change in producers’surplus

23. Assume that domestic demand is given by the equation Qd = 1500 – 4P. If the
price had risen to P = 200, what would be the consumers’ surplus in India?

A) 60,000
B) 61,250
C) 62,850
D) 64,100
E) 65,000
F) 65,900

24. With rice in domestic price of rice, government now bans exports with the
hope that domestic consumers will benefit. With the ban, the market is left with
domestic demand of Qd = 1500 – 4P, and, domestic supply of Qs = 4P. By
how much domestic consumers benefit due to the ban on exports. Compare new
situation with the situation where price was 200.

A) 5100
B) 5800
C) 6630
D) 7000
E) 7500
F) 9063

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