BM Delhi Mid Term Examination

Attempt all Questions

Maximum Marks 30

1. The space given to Mr. Agarwal, the owner of Shaligram Store was limited; he had just
enough space to keep a maximum of 12 cartons of goods. One carton of sugar has had
to be bought for Rs. 1000, a carton of Parle biscuits for Rs. 1000 and finally a carton of
Old Spice Aftershave for Rs. 7000. The commission (the retailer’s net profit) on a
carton of sugar is Rs. 100, a carton of Parle biscuits is Rs. 400 and a carton of Old Spice
Aftershave is Rs. 2100. It is possible for Mr Agarwal to sell 10 cartons of sugar, 3
cartons of Parle biscuits and 2 cartons of Old Spice Aftershave in a year. Mr Agarwal
has a cash constraint of Rs. 20000, but he can borrow from the external markets at an
interest rate of 15% in a year and can earn an interest rate of 12% in a year, were he to
save his money in a bank. Which items should Mr. Agarwal stock in his shop and how
should he invest his money to have the maximum earnings, and what will be his
maximum earnings.
You must mention all the steps to get full marks (6 marks)
2. Country A and Country B are both endowed with 100 hours of labor. Country A can
make 1 unit of good x with one hour of labor and 4 units of good y with a one hour
labor. Country B can make 4 units of good X with a unit of labor and 2 units of good Y
with a unit of labor. If country A and country B are some distance apart and decide to
specialize and trade, they will have to transport their goods to the other country at their
own expense. Country A needs to spend 20 hours to transport any amount of good to
country B, and country B needs to spend 20 hours to transport any amount of good to
country A (the transportation costs are fixed and does not vary with the quantity
exported). After specialization and trade, country A is willing to give up120 units of
what it produces. a. What does county A specialize in, and what is the least amount of
the other commodity should it demand from country B, to ensure that it is worthwhile
to specialize and trade? b. If country B wants to consume at least 100 units of X, will
trade be possible between the two countries?
You must mention all the steps to get full marks (6 marks)
3. A person is endowed with 50 units of money, 50 units of bread and 50 units of wine.
The price of bread is 1 per unit and wine is 1 per unit. The physical units of bread and
wine, he/she is endowed with cannot be exchanged in the market for either of the two
commodities. The person feels bread and wine are perfect substitutes, and is willing to
give up two units of wine for one unit of bread. Draw the diagram budget line with
bread on the x axis and wine on the y axis and represent the optimum point of
consumption with the budget line and indifference curves.
You must mention all the steps to get full marks (6 marks)

4. A person is endowed with 300 units of money, and can buy two commodities x and y,
the price of both x and y are one per unit. The person will like to consume x and y only
in the ratio 1:2, any additional units of x and y give him no additional satisfaction. Find
out the person’s optimum consumption bundle, if the price of x were to increase to 2
per unit, find out the substitution effect and the income effect associated with this price
change.
You must mention all the steps to get full marks (6 marks)

5. In week 1 an individual has an endowment income of 25 units of x1 and 25 units of x2,

but he trades in the market and finally consumes 12.5 units of x1 and 37.5 units of x2.
In week 2, he chooses to consume 25/3 units to x1 and 75 units of x2 given the same
endowment income of week 1. Argue using weak axiom of revealed preference,
whether the bundles mentioned in the question can be ranked.
You must mention all the steps to get full marks (6 marks)