Indian Institute of Management

End-Term Examination, PGPWE, Term-I, 2020-21

Managerial Economics

Total Marks = 55 Maximum Score = 50 Total Duration = 3 Hours

Instructions:
1. This is a closed book examination. ANSWER ALL QUESTIONS. All questions (e.g., from
Question 1 to Question 11) carry equal marks.
2. Suppose you have scored X marks in the examination. If X≤50, it will be interpreted that you
have scored X out of 50. If X>50, it will be interpreted that you have scored 50 out of 50.
3. Use of scientific calculator is allowed.
4. Please write all the formulas that you use and explain every notation clearly.
5. In case the software does not allow you to use subscripts and superscripts, you may then use
the following conventions:
a. Please write (X^Y) to convey “X to the power Y”. Note that if you use this convention
then, e^x conveys “e to the power x”.
b. Write X(1) to convey X with subscript 1 (e.g., X1) and X^(1) to convey “X with
superscript 1” (e.g, X1).
6. Please note that no graph will be needed in any question!

Wish you all the best of luck!

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1. Suppose the demand curve for a product is given by

Q = 10.0 – ((100.0+X)/100) P + PS
where Q is quantity, P is the price of the product and PS is the price of a substitute good. Note that
here X is the number formed by the last two digits of your roll number. Currently, the price of
the substitute good is at 20.0, e.g., PS = 20.0. What are the own price elasticity of demand and cross-
price elasticity of demand at P = 10.0?
2+3 = 5

2. Wheat is produced according to the production function Q = 10.0 KYL1–Y where Q is output, K is
capital and L is labor. Note that here Y is the number formed by the last two digits of your
roll number divided by 100. Compute: (i) marginal product of capital and, (ii) marginal product
of labor at K=10 and L=10 and show that both the marginal products are decreasing. Does this
production function exhibit increasing, decreasing or constant returns to scale?
1+1+1+1+1 = 5

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3. A lamp manufacturer faces a horizontal demand curve. The firm’s total costs are given by the
equation: C(Q) = 10 + 150 Q – 20 Q2 + Q3 where Q is output. Below what price should the firm
shut down operations?
5

4. The total cost function for a monopolist is given by C(Q) = 500 + 20.0 Q2 and the inverse demand
function is given by P = 400 –20Q. What are the profit maximizing price (P) and quantity (Q) for
the monopolist? How much profit will the monopolist earn?
2+2+1 = 5

5. Describe the features of a monopolistically competitive market.

5

6. Explain why information asymmetry problem could be serious in case of a product like car, but
may not be so in case of a product like fish.
5

7. Two major networks are competing for viewer ratings in the 8:00 –9:00 p.m. and 9:00–10:00 p.m.
slots on a given weeknight. Each has two shows to fill this time period and is juggling its lineup.
Each can choose to put its bigger show first or to place it second in the 9:00–10:00 p.m. slot. The
combination of decisions leads to the following “ratings points” results:

Network 2
STRATEGY
PAIRS 1st 2nd
Net
w 1st 20, 30 18, 18
or
k
1 2nd 15, 15 30,10

Note: 1st and 2nd are strategies that could be adopted by both players. The first number in each cell
reflects the pay-off for Player 1.

(a) Find all the Nash equilibria for this game, assuming both the networks make their decisions at the
same time. Explain in a line or two why they are Nash equilibria.
(b) Does any player in this game have a dominant strategy? If so which player and which strategy?
(c) What will be the equilibrium if Network 1 makes its selection first? Alternatively, if Network 2
goes first?
(1+1) + 1 + (1+1) = 5

8. Suppose the equations of demand curve and supply curve for a product are respectively Q = 2-P
and Q=P. Calculate (a) the equilibrium price and quantity, and (b) the consumer and the producer
surplus.
1+(2+2) =5

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9. Suppose in an oligopoly, the market inverse demand curve is P=30–Q where P is price, Q=Q1+Q2
is the agrregate output produced and Q1 and Q2 are the outputs produced by Firm 1 and Firm 2
respectively. Both firms have a marginal cost of Rs.3/-, e.g., MC1 = MC2 = Rs. 3.
a. Derive the reaction functions of Firm 1 and Firm 2.
b. What will be the market price and the total output in a Cournot equilibrium?
c. Will the Cournot equilibrium be different from the Nash equilibrium here. Argue why or
why not!
(1+1) + (1+1) + 1 = 5

10. Answer the following questions (11a and 11b)

a. Which of the following utility functions (of X and Y) are consistent with convex
indifference curves and which ones are not:
i. U(X,Y) = 2X+5Y
ii. U(X,Y) = Min(X,Y)
b. Let Simi’s utility function for food (F) and clothing (C ) be U(F, C) = FC and Guddu’s
utility function be U(F,C) = log(F) + log(C ). Are the indifference maps of Simi and
Guddu same?
(1+1) + 3 = 5

11. Define non-rival and non-exclusive properties of a public good. Explain whether these properties
hold for street lighting.
(2+2)+1 = 5

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