Microeconomics Quiz I (PRM 41)

Name: Roll Number:

Section: Time: 90 minutes

Maximum Marks: 100

Please Note: The space left after every question is indicative of the writing space beyond which your
responses should not exceed. Please read all the parts carefully and respond based on your understanding
of economic principles discussed in the classroom and narratives available in the quiz questions.

Q1. During the post demonetization phase, gold prices increased by 15%, while the demand for gold also
increased by 30%. It appears that the law of demand is not followed in the gold market. Please provide
your understanding of this phenomenon based on material presented in the class? Draw the gold demand
curve and graphically show and explain the increase in demand for gold in response to increase in gold
prices. (20 Marks)

Q2. Two countries Mexico and USA are ‘prospective’ trade partners. Their officials are planning to meet
at the sides of one of the multilateral trade meetings in Cancun and discuss trading opportunities. Mexico
is a fast growing economy and can produce a truck load of corn by giving up 10 units of international
quality generic smart phones. USA is a mature economy with receding share of agricultural output in their
GDP. It can produce a truckload of corn at the cost of 25 units of international quality generic smart
phones. Corn is an inferior good in USA. (40 Marks)

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a) Prepare a table to show opportunity cost of producing corn and smart phones by both the
countries

b) Is there an opportunity for trade? If yes, then who will undertake which production activity and
why?

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c) Identify the price range in which the smartphone is likely to be traded and clearly explain that
why the final price of smart phone will be an acceptable price of trade to both the countries.

d) On which side of the bandwidth, the price of smartphone is likely to move and why, under the
circumstances presented below:
I. Corn is an inferior good in USA but not in Mexico

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 II. Corn is an inferior good in Mexico as well as in USA.

Q3. MGNREGS was initiated in 2006 with the intent to provide 100 days of guaranteed employment to
rural poor Indian households. It was observed that the program uptake rate was determined by the
distance of the household in villages from the MGNREGS enrollment center. The prospective program
beneficiaries on an average had to travel 23 Kilometers to reach the enrollment center and in the process
they lost on an average one-day worth of their wages. The MGNREGS households also did not get to
choose their working partners on MGNREGS works and had to work with households of different caste
and religion. Participation in MGNREGS also signaled to the other households of the village about the
poor economic status of participating households. These were identified as some of the constraints that
households faced in MGNREGS participation.

A recent consulting report from PwC informed that MGNREGS participation was positively influenced
by presence of women Self-help groups (SHGs) in the villages because of their ability to mobilize rural
households and convince them about the benefits of the program and overcome the constraints that are
mentioned in the above paragraph. In other words, ceteris paribus, rural households located in villages
with a strong presence of SHGs are more likely to participate in MGNREGS than otherwise. (40 Marks)

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a) Draw and briefly explain the appropriate demand curve and label the axis clearly.

b) Identify and briefly describe the full cost of program participation in MGNREGS for Indian rural
households.

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c) Identify and explain the income type effect that was observed during the implementation of
MGRNEGS

d) The demand curve that was derived in part (a) undergoes a change under the SHG effect. Please
represent this change graphically and clear explain it.