UCHUT346 – Economics for Engineers
Module-wise Solved Answers (Modules 1–4) — KTU 2024 Scheme
MODULE 1 — BASIC ECONOMIC CONCEPTS
Q1. Explain the Production Possibility Curve (PPC) and its implications.
The Production Possibility Curve (PPC) shows the maximum possible output combinations of two goods that an
economy can produce using available resources and technology. Key points: - Points on the curve are efficient;
inside are inefficient; outside are unattainable with current resources. - The PPC is usually concave to the origin
reflecting increasing opportunity cost. - Movements along the curve show trade-offs; an outward shift indicates
economic growth (improved resources/technology). Implications: scarcity, choice, opportunity cost, efficiency, and
economic growth.
Q2. Define Total Utility and Marginal Utility. State the Law of Diminishing Marginal Utility.
Total Utility (TU) is the total satisfaction obtained from consuming a given quantity of a good. Marginal Utility (MU)
is the additional satisfaction from consuming one more unit: MU = ∆TU / ∆Q. Law of Diminishing Marginal Utility: as
a person consumes additional units of a good, MU eventually declines, holding other factors constant. This
explains downward sloping demand as consumers pay less for additional units.
Q3. Explain the Law of Demand with diagram.
Law of Demand: other things equal, quantity demanded of a good falls when its price rises, and vice versa.
Reasons: substitution effect, income effect, diminishing MU.
Q4. What is Price Elasticity of Demand? Give methods to calculate it.
Price Elasticity of Demand (PED) measures responsiveness of quantity demanded to a change in price: PED = (%
change in Q) / (% change in P). Methods: Point elasticity (using calculus), Arc elasticity (midpoint formula),
Percentage change method. Interpretation: PED>1 elastic, =1 unitary, <1 inelastic.
MODULE 2 — COST & MARKET STRUCTURES
Q1. Explain various cost concepts (AFC, AVC, AC, MC) and show relationships.
AFC (Average Fixed Cost) = Fixed Cost / Q. AVC (Average Variable Cost) = Variable Cost / Q. AC (Average Cost)
= AFC + AVC. MC (Marginal Cost) = ∆TC / ∆Q. Relationships: MC intersects AVC and AC at their minimum points.
AFC declines as Q increases. In short-run, MC first falls (increasing returns) then rises (diminishing returns).
Q2. Define Break-even Point (BEP) and show how to compute.
Break-even Point is the output level where Total Revenue = Total Cost (no profit, no loss). Formula: BEP (units) =
Fixed Cost / (Price per unit - Variable cost per unit). The chart shows intersection of TR and TC at BEP.
Q3. Compare market structures: Perfect Competition vs Monopoly (table).
Feature Perfect Competition Monopoly
Number of firms Many One
Type of product Homogeneous Unique
Price control Price taker Price maker
Barriers to entry None High
Long-run profit Normal profit Possible supernormal profit
MODULE 3 — MONEY, BANKING & INFLATION
Q1. Explain the functions of money and types of money.
Functions: medium of exchange, unit of account, store of value, standard of deferred payments. Types: Commodity
money (has intrinsic value), Fiat money (no intrinsic value, government declared), Commercial bank money
(deposits), Electronic money.
Q2. What is credit creation by commercial banks? Explain with formula.
Credit creation: When banks accept deposits and keep a fraction (reserve ratio) and lend out the rest, money
supply increases. Simple money multiplier = 1 / reserve ratio (if no currency leakage). Example: reserve ratio 10%
→ multiplier = 10. A deposit of 1000 can ultimately create 10,000 of deposits.
Q3. Define Inflation and explain cost-push and demand-pull inflation.
Inflation is a sustained increase in general price level. Demand-pull: excess aggregate demand over supply (too
much money chasing too few goods). Cost-push: rising production costs (wages, raw materials) push prices up.
Control: Monetary policy (raising interest rates), fiscal policy (reducing govt. deficit), supply-side measures.
MODULE 4 — FINANCIAL ACCOUNTING & PROJECT EVALUATION
Q1. Format of a simple Profit & Loss Account and Balance Sheet (brief).
Profit & Loss Account (Income Statement): Lists revenues and expenses during a period to determine net profit or
loss. Balance Sheet: Shows Assets = Liabilities + Owner's Equity at a point in time. Assets include current and
fixed; liabilities include current and long-term.
Q2. Explain Straight-Line and Diminishing Balance methods of depreciation with example.
Straight-line (SLM): Depreciation = (Cost - Salvage value) / Useful life. Equal charge each year. Diminishing
balance (DB): Depreciation = Book value × Rate. Higher charge in early years, declines later. Example: Cost
10000, salvage 1000, life 5 years. SLM depreciation = (10000-1000)/5 = 1800 per year.
Q3. Project appraisal: Explain NPV and Payback Period with a simple numerical example.
NPV (Net Present Value): Sum of discounted cash inflows minus initial investment. A positive NPV indicates project
is acceptable at chosen discount rate. Example: Investment 1000, cash inflows 400 annually for 3 years, discount
rate 10%. PV = 400/1.1 + 400/1.1^2 + 400/1.1^3 = 363.64 + 330.58 + 300.53 = 994.75. NPV = 994.75 - 1000 =
-5.25 (reject at 10%). Payback Period: Time to recover initial investment. With above inflows, full recovery between
year 2 and 3: after 2 years recovered 800; remaining 200 recovered in year 3 → payback ≈ 2 + 200/400 = 2.5
years.
End of Module-wise Solved Answers.
