B.COM (Hons.), Semester-I, March 2021 Question Paper

Paper Code- 12275101

Introductory Microeconomics

---

Instructions for Candidates:

1.Write your Roll No. on the top immediately on receipt of this question paper.
2.There are six questions in this question paper. Answer any four questions.
3.All questions carry equal (18.75) mark
4.Answers may be written either in English or Hindi; but the same medium should be used throughout the paper.

1. (a.) Classify the following statements into Positiveand Normativestatements with reasons for your classification.(5)
i. The government should emphasisemore onpoverty reduction than on economic growth.
ii. People would prefer a policy that lowered the level of unemployment toone that brought inflation down.
iii. Higher taxes discourage work effort.
iv. A rapid growth rate of money is the cause of inflation.
v. Government should raise the tax on tobaccoas to discourage people from smoking.

(b.) Kelen andChris produce rice and wheat. In an hour, Kelen can produce 1 unit of wheat or one unit of rice, while Chriscan produce 2 units of wheatand 3 units of rice.They each work 10 hours a day.(8.75)
i. Who has an absolute advantage in producing wheat? Who has an absolute advantage in producing rice? Explain.
ii. Who has comparative advantage in producing wheat? Who has Comparative advantage in producingrice?Draw a production possibilities frontier for Kelen andChris assuming that each spends same number of hours each day as the other in producing wheat and rice.

(c.) Calculate TFC, if AC and AVC are $22 and $18 respectively at output of 10 unit.(5)

2. (a.) Calculate the price elasticity of demand using the mid-pointMethod from the following information.

Price	20	30	40
quntity	90	60	45

Wouldyour resultbe differentif insteadyou consider the total revenue approach to calculate the price elasticity of demand?(5.75)

(b.) Show that a minimum wage set above the market clearing wage rate causes excess supply of labour. Why would a government impose minimum wage despite knowing its effect on unemployment?(6)

(c.) What is effect on producer surplus if tastechanges in favor of organic food. Explain it diagrammatically.Will it affect producer surplus in the market for organic food?(7)

3. (a.) During the Covid-19 pandemic,the Ayurvedic medicines have an inelastic demand and electronic devices have an elastic demand. Imagine that technological advancement doublesthe supply of both products (i.e. quantity supplied at each price is twice as it was earlier)
i. What will be the equilibrium price and quantity in each market?
ii. Which product experiences a largerchange in price and which product experienceslarger change in quantity.(9)

(b.) Do you agree with this statement, MC curve crosses the ATC curve at its minimum?Why?(4)

(c.) How does an increase in interest rate affects household savings? Explain with the help of an example with graph. (5.75)

4. (a.) Suppose government imposes $2 tax on each liter of petrol purchased and all petrol vehicle users requirepayingthe same.
i. Draw a demand and supply diagram of the market for petrol without the tax. Show the price paid by consumers, price received by producers and the quantity of petrol sold. Whatis the difference between price paidby consumers and received by producers?
ii. Drawa demand and supply diagram of the market for the petrol with the tax. Show the price paid by consumers and received by producers and the quantity of petrol sold.Whatis the difference between the price paidby consumersand received by producers?Hasthe quantity of petrol sold increased or decreased?(6, 6)

(b.) What is the Deadweight loss of taxation?Howdoes the deadweight loss change with the change in size of the tax? Give reasons.(6.75)

5. (a.) “Government should regulate mergers between firms”Give reason in favor and against this statement. (4.75)

(b.) Draw the diagram with demand and supply curves for an importing country. What is the consumer surplus and producer surplus before trade is allowed? What will be the consumer and producer surplus with free trade? Explain the change in total surplus.(7)

(c.) A company is considering constructing a Flyover bridge over the busiest road toavoid the traffic. The bridge would cost $2million to build. The following table shows the company’s anticipated demand over the lifetime of the bridge:

Priceper Crossing ($)	No. of Crossings in Thousand
8	o
7	100
6	200
5	300
4	400
3	500
2	600
1	700
0	800

i. If the company builds the flyover bridge, what would be its profit maximizing price? Would that be the efficient output? Give reason.
ii. If the company is interested in maximizing profit, should it build the flyover bridge? What would be its profit or loss?If the government were to build the bridge, what price should it charge?(7)

6. (a.) Draw a consumer budget constraint and indifference curves for Pepsi and Pizza. Find out the optimal consumption choice when consumer has income of $2000 and the price of Pepsiis $5 per bottle and the price of per pizza is $10.What is the marginalrate of substitution at this optimum?(6)

(b.) Piyush spends his entire income between food grainsandbooks (both of which are normal goods) Pandemiccauses a large increase in the prices of food grainsin India.
i. Show the effect of Pandemic on Piyush’s budget constraint.
ii. Showthe effect of Pandemic onPiyush’s optimal consumption bundle assuming that substitution effect outweighs the income effect for books.iii.Show the effect of Pandemic on Piyush’s optimal consumption bundleassuming that income effect outweighs the substitution effect for books.(6)

(c.) Suppose that labor is the only input used by perfectly competitive firm. The firm’s production function is as follows:

Days of Labour	Output
0	0
1	7
2	13
3	19
4	25
5	28
6	29
7	29

i. Calculate the marginal product for each additional worker.
ii. Each unit of output sells for $10.Calculate the value of the marginal product of each worker.
iii. Compute the demand schedule and firms demand curve showing the number of workers hired for all wages from 0 to $100 a day. (6.75)