NATIONAL INSTITUTE OF TECHNOLOGY, ROURKELA

MID SEMESTER EXAMINATION 2022

SESSION: Spring
Subject Code: HS-1349 Dept. Code: HS
Subject Name: Industry and Development Full Marks: 30
Duration of Examination: 2 hours

Figures at the right-hand margin indicate marks

All parts of a question should be answered in one place

Q. N. Section A Marks
Answer any FOUR 4x4=16

1. What is marginal cost? Explain graphically the relationship between marginal cost (MC),
average cost (AC) and total cost (TC).
2. What are economies and diseconomies of scale? Derive the long run average cost (LRAC)
curve from short run average cost (SRAC) curves of firms.
3. With the aid of labelled diagrams, explain the impact of entry of new firms on the
equilibrium conditions in a perfectly competitive market? Are these markets economically
efficient?
4. Illustrate using graphs the following scenarios in a monopolistically competitive market:
a. Economic profit
b. Economic loss
c. Break-even
d. Shut down
5. What is price discrimination? Discuss how price elasticity affects price discrimination with
suitable real-life examples.
6. What is Bertrand Paradox in oligopoly? Discuss the factors that lead to this paradox. How
can firms come out of this paradox?
Section B Marks
Answer any TWO 2x7=14

1. A monopolist serves a market with an aggregate demand function given by Q = 38 – 3P.

This market can be partitioned into submarkets 1 and 2 with submarket demand functions
given by Q1 = 24 – 2P1 and Q2 = 14 – P2. The monopolist’s cost function is given by C(Q)
= 2Q.
a) What price will prevail in the market under no price discrimination?
b) What prices will the monopolist set if she decides to practice third-degree price
discrimination?
c) Does price discrimination lead to higher economic welfare under these conditions?
2. The market for dental care has S number of consumers.
Each consumer has demand D(p) = 200 – 2p. Firms have to invest fixed cost F to enter the
market and then pay C(q) = q2 to produce q units.
a) Compute the inverse demand curve p(Q).
b) Plot p(Q) for S = 1, S = 5 and S = 100. Show and explain what happens to p(Q) when
the number of consumers in the market increases?
c) What should be the value of S such that a monopolist may earn positive economic
profits?
3. The inverse market demand is given by P = 36 – Q, where P is price and Q = q1 + q2. The
cost function for firm 1 is given by C(q1) = 12q1 and the cost function for firm 2 is given
by C(q2) = 12q2.
a) If each firm acts to maximize its profits taking its rival’s output as given, compute the
reaction functions for firm 1 and firm 2.
b) Determine the equilibrium level of output in the market and the price
c) Calculate the profits for each firm.