BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE, PILANI Instructions: 4, Each correct answer carries 2 marks. Incorrect answer carries a penalty through negative marking of 0. 5 marks. Course No SECOND SEMESTER 2013- 14 Comprehensive Examinations Part — A (Closed Book) : ECON C212 / ECON F211 Course Title: Principles of Economics Maximum Marks: 60.00 Answer Sheet Question | Answer | Question | Answer | Question | Answer 1 B 11 A 21 D 2 B 12 c 22 A 3 c 13 B 23 B 4 A 14 B 24 B 5 A 15 B 25 c 6 B 16 D 26 A 7 A 17 c 27 B 8 A 18 D 28 c 9 c 19 B 29 c 10 D 20 D 30 BBIRLA INSTITUTE OF TECHNOLOGY & SCIENCE, PILANI SECOND SEMESTER 2013-2014 Comprehensive Examination (Open Book) Course No. : ECON C212/ ECON F211 Max. Marks: 75.00 Course Title: Principles of Econo! Weightage 25% SOLUTIONAND MARKING SCHEME 1. (a) Set MR = MC to determine the profit-maximizing activity level. $6 + $1 or 4Q = 48 or Q = 12 54 - $1.5(12) or P= $36 Note: All values of Q, P and 2 are correct you will get 3 marks (b) From the demand curve note that: Q = 36 - 0.67P, which, at the profit-maximizing activity level, implies a point price elasticity of eP = dQ/dP x (P/Q) =(-0.67) x (361 12) =(-2) [1 mark] (©) The high-price/low-output equilibrium point is identified by the point of tangency between the firm's demand and average cost curves which occurs after a shift in demand due to competitor entry. ‘Therefore, in equilibrium the new firm demand and average cost curves have the same slope. To determine the slope of the average cost curve note that: AC = TC/Q = 200/Q +6 +0.5Q Slope of average cost curve = DAC/dQ = - 200/Q'+ 0.5 and Slope of demand curve = -1.5 And in equilibrium, Slope of average cost curve = Slope of new demand curve = 200/9° + 0.5 = -1,5 or, Q=10 and P = AC = $200(10-1) + $6 + $0.5(10) or P = AC =P xQ- TC =31(10) - 200 -6(10) - $0.5(102) = $0 Note: All values of Q, P and 2 are correct you will get 3 marks (@) SR perfectly competitive equilib MC, Q= 19.2 and Total economic loss = - 15.68 Note: Both values of Q and x are correct you will get 2 marks (e) LR perfectly competitive equilibrium: P= average costs, and solve for Q= 20 P= AC = $200(20-1) + $6 + $0.5(20) or P = $26 P xQ-TC = $26(20) - $200 - $6(20) - $0.5(202) or a = $0 Note: All values of Q, P and are correct you will get 3 marks .C and average total costs are minimized, the point of minimum, (8) Excess capacity: Quantity at which AC is minimised - LR eqm quantity of monopolistic competitive firm = 20 - 10=10 [1 mark] Dead weight loss: {1/2 (31 - 26) (10)} + {1/2 (26 - 24) (10)} = 25 + 10= 35 [mark] Q2. To find the optimal level of output, we need to find the kink or the point of intersection of the demand curves and set Q: = Q = Q. or i= P2=P. This gives Q=30 and P= 6 At Q=30, ATC =4, So the total profit is 60. Note: All values of Q, P and x are correct you get 3marks MR, = 5and MR; =3. and the value of MC =4.5 Note: All values are correct you will get 3 marksQ3. (a) Pay-off Matrix Indian Airlines (Cut Fares Do not Cut fares Cut fares HO $200 Indigo $400 $800 Do not Cut fares $800 5600 $200 $200 Note: Mention Indian Airlines at the top and all entries are correct, you will get 2 marks, ) In this game of pricing strategy, the dominant strategy infer that irrespective of what other does, it pays both Air India and Indigo to go for “Price Cut by 50%" which will maximize their profit. In this game, “Cut the fare by 50%" is a dominant strategy for both firms Note: answer with justification, 2 mark (©) The Nash equilibrium is present here, The Nash equilibrium strategy for both firms is to choose “Cut the fare by 50%" and hence maximize the joint profit of both the firms to 4004400 = 800, Note: answer with justification, 1 mark (d) This game is an example of the prisoners" dilemma. In this game both players have a dominant strategy that leads to an outcome that does not maximize the collective payoffs of the players in the game (4004400) = 800. If both players chose the “do not cut the fare” strategy, then both players would increase their profits and the collective payoff would be maximized (600+ 600) = 1200, Note: answer with justification, 1 mark Q4. Value of the property upon retirement: PV=Rs. 90,000 ,i=7% , n=8 FV = PV (FVIF) = 90,000 (1.718) = Rs.154,620 or 154636.75 (2 marks} value of the apartment_upon retirement: PV =Rs. 200,000 ,i=5% , 0 FV = PV (FVIF) = 200,000 (1.477) = Rs. 295,400 or 295,491.08 [2 marks] additional money needed upon retirement Rs,295,400 — Rs.154,620 = Rs.140.780. or 295,491.08 — 154636.75 = 140854.33 (2 marks] amount of money needed to deposit today: 70672.7 or 70690 [2 marks} Qs. pix Qt [pix [prxQ3 [p2xqr [p2xo2 [p2x03 [P3xQ1 [P3xQ2 [P3xQ3 A [ers [osa [i476 [475 76 na [38 ox [912 B [288 [252 [is 476 [34 i224 [1071 [765 ce [sie [aa [29 28 109.2 | 182 1.4 [153.6 | 256 pd [3s [oss |i26 | 58.8 756 | 100.8 [385 49.5 | 66 cpp [215.4 [205.5 [4206 [2335 [3084 [4308 [3013 [371 489.7 a) cpp |21s4__[295.5 [4206 [2335 [3084 [430.8 [301.3 [371 489.7 Note: All the nine GDP values correct, you will get 6 marks, any one is incorrect, I mark is deducted. [6](b) Rate of growth of output. Let year I be the base year.( Base year P1). Real GDP in Year 1, 2 and 3 are 215.4, 295.5 and 420.6 respectively. Real GDP has increased by 37.19% from Year | to 2. Real GDP has increased by 42.33% from Year 20 3. Let year 2 be the base year.( Base year P2). Real GDP in Year 1, 2 and 3 are 233.5, 308.4 and 430.8 respectively. Real GDP has increased by 32.08 % from Year | to 2. Real GDP has increased by 39.69 % from Year 2 to 3 Let year 3 be the base year.( Base year P3). Real GDP in Year 1, 2 and 3 are 301.3, 371 and 489.7 respectively. Real GDP has increased by 23.13 % from Year | to 2. Real GDP has increased by 31.99 % from Year 2 to 3. Hence, growth rate are sensitive to the choice of the base year Note: All the 6 growth rates correct, you will get 6 marks, any 1 is incorrect, 1 mark is deducted. Q6.(a) e@ |! 2s T7s]° J7 ]8 J° Jo lh eye yeys Pram ft | 1 a 2P2p Pp yh iihs iis > | TAC |I55|/13|03 | |9 [ss [8 [a2 [so [io [a jis [ie [isl ‘Note: All the entries are correct you will get 3 marks (b) Qe y' yy + 7s]y° ]7 qs yj? Jo ln je ye ye ys LTC [155 | 26 [339 |40 |45| 49.8] 56 | 655 | 80.1 | 100 | 1243 | 156 | 208 | 245 | 285 Note: All the entries are correct you will get 3 marks ©) 3unit—plant 1, 9 unit in plant 4, 13 in plant 5 RI 4) Plant 3 with output at 7 attain the optimal level of output, corresponding value of LAC =8 and LTC=56 [2] Qt. Expenditure Approach | Component Amount Component D Personal | a) Durable Goods 400 + 450 + | GNP = 25700 Consumption 2000 Expenditure 8180 mark) T)Non durable gous | $00 + 3000 = 3350 ©) Services 1500 22540 (mark) 2 Gross Private | a) Residential Purpose | 3300 ‘Statistical discrepancy ~ 850 Domestic investment 2200 (mark) | by ‘Nonresidential | 3500+ 3900 | National Income = 21600 purpose (mark) ‘©) Changes in business | 1500 ‘Amount of national income not | - 1500) inventories going to household a Goverment a) Central 3500 Personal income 19490 expenditure = 9300 mark Dy State 2350 Personal income =2500 2) Local 1350 Disposable personal income | 16990 D Net Exports 3) Exports 4550 Personal consumption | -B150 expenditure Ty impors 3525 Personal inlovest payments 50) = 28.675 | Transfer payments tothe | - 525 (2 marks) | households Receipt of Taclor income +3265 i we from the rest ofthe world (1 mark) Payment of factor income ~6150 (3250/28673) to the rest ofthe world 100 = 11.33% GNP = 25790 (mark) (mark)Qs. a, RBI Commercial Banks ‘Assets Liabilities Securities | 1500_[ Reserves | 1000 Assets Liabilities Gold 700__| Currency | 1200. Reserves | 1000 | Deposits | 6250 Total 2200 2200 Toan Total 250) Note: All the entries and Total Assets and liabilities are present (1 mark) bb, RRR=(1000)*100/6250=16% , MM=1/RRR=6.25, hence when banks borrow 150, deposits will increase by 6.25*150=938 and Toans will also increase by the same amount (mark) Assets Liabilities Securities [1500 | Reserves | 1150 Assets, Liabilities Gaia 700 | Currency] 1200 Reserves | 1150 | Deposits Tiss or se lam 188 [Loan om RT [180 Total 2350 2a Note: All the entries and Total Assets and liabilities are present (2 mark) IM; (before)= Deposits+ Curreney=625041200=7450 M,(alter}= Deposits Currency=7188+1200=8388 (1 mark) ¢. New Deposit = 7188-25 bof 7188 = 7188-1797 = 5391 [Now the new RRR to support deposits of $391 = 150/539. New Loan= 6188-1797 = 4391 RBI ‘Assets Assets ‘Securities | 1500 T150_[ Reserves | 1150 3301 Gold 700 1200 [Loan [4397 150 Toanto 8 | 150 Sa Ss41 Total 2350) 2350) Note: All the entries and Total Assets and Habilities are present (2 mark) Me= Deposits+ Currency=5391+1200=6591 ( dec