Economics Evaluation Test1

8/4/2019 Economics Evaluation Test1

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EVALUATION COMPONENT I 1/8/2011

ASHISH SHRIVASTAVA

11BSP0194

Section E

Duration :1hr 30 min

( Marks = 20)

1.Given the budget of the consumer as Rs 19,Px=5,Py=3,Pz=1 where does the consumer

reach his equilibrium and why?

Quantity

1

2

3

4

5

Marginal Utilities/Price

MUX/Px

6

5

4

3

1

MUy/Py

6

5

3

2

1.33

MUz/Pz

8

7

5

4

3

ANSWER Given That

Px = 5 , Py = 3 , Pz =1 Total utility = 19

Consumer will reach Equilibrium when

MUx/Px = MUy/Py = MUz/Pz

When consumer will buy 2 quantity of X , 2 quantity of Y and 3 quantity of Z ; Then ,

Total Utility = (2*5)+(2*3)+(3*1) = 19

2. What do the digs. In panel A &B indicate?

Answer

No diagram is there so unable to answer this question.


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3. In a year the number of cars sold decreased by 20%. During the year prices of cars

increased by 5%, per capita income declined by 2% and price of petrol increased by

10%. Income elasticity of demand for cars is estimated to be + 1.5 and cross price

elasticity of petrol and cars is estimated to be 0.30. Determine Impact of increase in

price of petrol on demand for cars

Answer - Income elasticity for cars is +1.5 :

When , Income Elasticity is positive and greater than one (Ey >1) then commodity is

luxury (like-car)

Cross Price Elasticity of petrol and car is -0.30 :-

When Cross price elasticity is negative (Ec = negative) then commodities are

complimentary (like - car and petrol)

Impact of increase in price of petrol on demand for cars -

If price of petrol increases then demand of car decreases because there is a negative

cross elasticity.

4. The demand function faced by Rolex watch company is estimated to be

Q=40000-2Pt-2I +4Pc

Currently Pt. I, Pc are 350, 10000 and 400 respectively

would you recommend a price rise to maximize revenue . Justify?

Answer

Given that ,

Pt = 350, I = 10000, Pc = 400 So,

Q = 40000-(2*350)-(2*10000)+(4*400)

Q = 20900

Ept = (dq/dPt)*(Pt/q)

= -2*(350/20900)

= -0.03

This indicates that Ep


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Therefore , Total revenue increases as Price increases.

This shows that as price rises the total revenue rises but it would not reach to

maximum revenue because this can happen only if Ep =1.

5. If .. is equal to then the tax is shared equally by producers and

consumers.

Answer

Ed = Es (elasticity of demand = elasticity of supply)

6.If ep =1 then the shape of the demand curve is .

Answer

In this case, proportionate change in price leads to equal proportionate change in

demand. Hence, Elasticity is equal to unitary. It is possible to come across unitary elastic

demand but it is a rare phenomenon.

D

Price 5 %

5% D 5%/5% = 1 Ep = 1

demand

7. The demand function is given

Qd =600-50p

If P= 10 . Price elasticity is................

Answer

Given that ,

Qd = 600-(50*10)

Qd = 100

Price Elasticity Ep= (dq/dp)*(p/d)

Dq/dp = -50

Ep = -50*(10/100)

Ep = -5

Price Elasticity Ep = -5

8. Given the above demand function define what is autonomous demand.

Answer


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Autonomous demand is that demand which is free from price. In the above demand

function autonomous demand is 600.

9. Inferior goods have an income elasticity which is

ey>1

ey>0

ey


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D1

D Shift in demand curve due to Increase in expected income.

Price

D1

D

demand

13. Among passengers of air travel for the leisure class the Marginal revenue is likely to

be Positive T or F. Give reasons

Answer

This is True. Reason behind that is for leisure class E >1 therefore MR > 0 So ,

Marginal Revenue is positive.

14. In the world oil market the supply and demand equations are given below

Short run demand for oil D= 30.5 -0.03P

Short run competitive supply of oil S= 20.0 +0.04P

If OPEC supplies 14bb/year what is the equilibrium price

Answer

At Equilibrium,

Demand(D) = supply(S)

30.5 -0.03P = 20.0 +0.04P

P = 150

If OPEC supplies 14bb/year Then,

Qs = 20.0+14+0.04P

D= 30.5-0.03P

At Equlibrium,

Demand(D) = supply(S)

30.5 -0.03P = 20.0 +14+0.04P

P = -50 Or 50


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So When OPEC supplies 14bb/year then the Equilibrium price is 50.

15. In a demand equation

Qd = - 2P

Slope is

a) -2b) 2c) 1d) e) None of the above

Answer

Given that ,

Qd = - 2P

dq/dp = -2

Slope = dp/dq = -1/2

Answer is E None of the above.

16. Big Bs increasing car collection is an evidence that

a) law of demand holds good

b) law of diminishing marginal utility holds good

c) consumer surplus operates

d) It is an exception to the law of diminishing marginal utility

e) None of the above

Answer

(d) It is an exception to the law of diminishing marginal utility. Following are the

reasons behind that

y There is no definite time period or time gap between purchasing of cars given.y There isnt any proper order of purchasing of cars given.y Taste & income, Persons background(Big B is a celebrity) are the some other reasons

behind exceptions of law of diminishing marginal utility.


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17. Diamond water paradox highlights the importance of the concept of

a) Elasticity

b)Demand

c)Slope

d) Total Utility

e) Marginal Utility

Answer

e) Marginal Utility

y Because Diamond are less available so we consume less unit of it. So,according to the law of Diminishing marginal utility, marginal utility is high for

diamond.

y Because water are sufficient available so we consume more unit of it. So,according to the law of Diminishing marginal utility, marginal utility is low for

water.

18) The cross elasticity of demand between Sony LCD and LED TVS was

estimated to be 0.9. Comment on their nature. .

Answer

If cross elasticity is positive then they are good substitutes.

Cross elasticity is 0.9, it represents a high cross elasticity. So, in this

case both Sony LCD and LED TVS are perfect substitutes.

19) Small car segment in India comprises of players like Maruti , Hyundai, Tata

Motors etc . The demand for such cars is likely to be

a) Relatively inelastic

b) Unit elastic

c) Relatively elastic

d) Perfectly inelastic

e) Perfectly elastic


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Graph

D

P1

Price

P

D

Q1 Q demand

If Ep >1 Then It is a Relatively Elastic Demand. So , a slight change in price leads to more

than proportionate change in demand.

22) Demand curve for gold in India in response to a rise in price expectations.

Answer

D D1

Price

D1

D

demand

For gold in India if there is a expectation in rise of price then Demand curve will

show a forward shift to the right of original demand curve.

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