This question paper contains 16 printed pages.] Your Roll No. oo. ceeeees 6321 B.A. (Hons.) / I B R). ECONOMICS ~ Paper 01 (Principles of Economics) , (Admissions of 2005 and onwards) “Time : 3 Hours : Maximum Marks : 75 (Write your Roll No. on the top inunediately on receipt of this question paper.) The question paper consists of two sections. oo Attempt both sections. ga wena 8 at arpa ¢ 1 @at aif Note: (i) Answers may be written either in English or in Hindi; but' the’ same medium should be used throughout the paper. . (ii) The maximum marks printed on the question paper are applicable for. the students of the regular colleges (Cat. ‘A’). These marks will, however, be scaled up proportionately in respect of the students of the NCWEB at the time of awards for compilation of result, 6321 1 P.T.0.feo: Gy 3a WR-Ua aT gat sitet ar feet feat we amt 4 aire, afd aut aad ana war a eta afer Gi) yeaa W aifra guia Brat sas aot (A?) & faerie & fore arqaiea & 1 ae 4 at, NCWEB ® faenteal & dae f sar ule & dacs & fon Aged afetoaa Wa ISAs SNH BTA ages aT. SECTION A WISH Atterhpt Q. 1 as a compulsory question: and attempt. two more questions fromthe rest. Te. Saree et a ad ater Sie i L. _ Attempt any five questions 5. (a) The Government has decided that the-free- market price of cheese. is. too- low and imposes .a binding price:floor-in-the cheese market, Show the effect of this policy: on. _ the: cheése market: Farmers complain that the price floor has reduced’ their total revenue, Is it possiblé ? Explain. . (>) Bill Gates is donating -huge amounts from his wealth to’ charity. An economist’s argument doing rounds is that he wants his children to work harder and not deaden their talents. Using leisure consumption choices, illustrate how inheritance of such kind may stop children from working all together Which effect works in such cases ? 6321 2 x3(c) Suppose a competitive firm uses labour and capiial to produce output. The price of labour is fixed at 3 and price’ of ‘capital .is 20. At a certain point in prodiiction, the. marginal product of labour is: 100 ‘and the marginal product of capital is 200. Explain. why.this is not a point of equilibrium: for. the firm. What should .the /firm+do -to reach equilibrium in, production, ?. Show diagrammatically. (d) - Consider an economy in which 10% of all new Cars’ produced are lemons i.e. they are defective. A naive consumer who wants to buy a used car believesithat the quality distribution of used ‘cars is same as that of new .cars. -Good used cars are worth 100,000 rupees to their owners but demons are worth only 60,000 tupecs. What will be the expected value of the used car to the consumer ? (ce) Suppose the demand and supply curves’ for unskilled labour in a labour market are ag shown in the adjoining figure. By how. much will the imposition of a minimum wage of 70 rupees per hour reduce total economic surplus ? 100 S Wage (7 / hour) 23a we J D O 3.000 $000 10,000 L @ersen-hours / day) 6321 3 P.T.O.6321 (f What does the domestic price that prevails in a nation without imternational trade tell us about its comparative advantage ? How will be the producers of a commodity affected, if the nation becomes the importer of a commodity after international trade opens ? apts Ot ota ae wife (*) () areata tren fear t fr ote a yA aT aaa aga =u et aie ae Wik & apm 4 area Bat BAT ATL wT at FS arene Te ga aie ser wre vefera aif | oer fernrad aed & fer aaa Fae 3 sae eet TTT a Ber fears | aa ae Waa & 2 cane apie fart Tem art ayer Fa and wen a enhel aa ta é | abel ar ae ad ara at ana @ fe ag ont aeat & afer often arn area & at STH wferaatt at are at area 3 wrecera wua st veel or waht aed aetna wife fr ga mer at aeimit acai a mag or TTY thew wach & atte tet Refeat Fara ae WATT HE Uap TI me cifag Pr war afer acd ary site Gott apr TAT Be eMC sweet Fore apt hea 5 ite ‘et et sina 20 8 1 genet & ema fag a anit ry sere 100 & aie asia tt sere 200 8 |) een afte fr Beg are ae eh fee ager fag wae 1 senea Wo dqea ah Fer wep gaa oh fee a a an en ene 4 ama Giant velra aahaT |(a) tet arteraea oe fran ating frat a Ae Aare St Te BT A A 10% sarees S sala a set eo Ge RET soe st RH a ar Tora fare sat ware & Stet fe Ag aR am far | atest Gert Hr sah fete & fear @ 1,00,000 at @ iq arena ae dae Z 60,000 we 1 saan & few yet ae aT en ? (S) UR etre fp an alt oft ae amar F area afte ch fem arr 4 feu me Pas 4 weft € 1% 70 Bla de at pra oad a arfintoey a Her outer aires feaat a at aT 9 Wage (% / hour) van BS oa oO Oo ka Qo O 3.000 5,000 10,000 L (Person-hours / day) (@) Rey aha, a sientele ora a aie Te 8 wafer & ad sed perenne ant & at & aa aera Bel See UT eT Ma ei ale Ty, aete aI & ye EF & ae Tey HI SATAN aA SATE F 7 2. (a) Suppose we want to compare the demand curve of a commodity derived using both substitution elfect and income effect of a price increase with a demand curve that ’ considers only the substitution effect of price increase. Which demand curve will be less elastic ? Will it depend on whether the commodity is normal .or inferior for the —_. consuimer ? Explain. . 6 6321 5 P.T.O.6321 (b) (cy Let the utility function of a-consumer-be u = min -{2x, 3y}. Let the: consumer consume 3k-of x-and:2k.of y,: ‘where. k .is- a constant. What. is the utility enjoyed: by ‘the consumer ? Will the utility change if-3k of.x° and, 2k +.1 of y is consumed ? What about "3k +1 of-x and. 2k of y.2:What can you say ‘about nature of goods x,and -y. and the shape ¢ of indifference curve ? © Consider ‘the «market® for cigarettes in an economy. ‘The’ ‘equation ‘of the demand curve is P = 300 — Q? and the equation of . As the supply curve is P = 4° s Quantities Q are measured in thousand packs and price P, is measured in rupees.. (i) - Find the equilibrium ‘price. and “quantity -and ‘the ~“total: ° reveriue: ‘received by. the sellers.” _fii) - Suppose the Government-imposes: a tax. of %-30: per pack on-consumers.: Find the equation of the new. demand curve, price paid by the buyers, price received by sellers. and equilibrium quantity after the tax. (iii) Suppose instead of the tax, the Government imposes a quantity restriction at.120 thousand packs .and allows firms to charge a price according to.the buyers willingness-to pay at this level of consumption. In what ways will this policy be different from the tax policy mentioned in (it) above from the point of view of producers and consumers ? 6(a): arr ofa fir aan a anit - wer wee: a =min (2x, 3y} . Wasi ait x at 3k sie-y. ar 2k-sra.F ater & ret k Peres Sea FN TANT. BT TT 2 A AE TANT Feet TOT BE 2 AT Sk y BT Qk 1 STANT A era Pa a LST Sy BH 2h aa HT 2 xa y awe & Tei sr ae ae - Waet ah a A ST, ae ae a SP. (A), feat arborea fame: ar ariene, rae ire ne an, sare P= 300 —Q? ate fear ai nitinen ps © oh amt gare tac drunk aed € ate weer P oe (i) Reger see ate sa ha fee te ser ae Use Aa BT : Gi) ~ ay alfa fas aver sriieensil oc oft the F 30 we cmt Fl ae cin ae at Bala Seat gra et as aha, fasar “ara ona at mg shia site wt He oven Beqers TTT BT SAT | (ii) A Re fe ae & ane aa 1,20,000 tei ae aaa ter oat F aft wat oat Gad & ee Fa Uy haat at ST H aA HT Ta HA eee fee weer ae Ae Gar (ii) A aang 7 aaa O genes aie gouleaait & genta 8 frat? 6321. - 7 P.T.0.ws 6321 (a) (b) © (*) Consider a perfectly competitive industry _ that exhibits external economies of scale. Suppose that over the next ten years, demand for that industry’s product increases rapidly. Describe in detail, the adjustments likely to follow an_ initial equilibrium till another one is reached. A biotechnology firm develops a new variety of genetically modified cotton and is granted a ten year patent to grow and sell it. After the patent expires, any producer can grow and sclt it. The marginal cost of producing the new variety is constant and assume it is same for all producers. (@) Show the equilibrium in the market for this variety of GM cotton before and after the patent expires, assuming demand does not change. , (ii) What is the welfare cost of the patent borne by the society ? (iii) Assume now, that, the demand curve becomes mote elastic by the time the patent expires. Will the equilibrium: price and quantity be any different from your answers in part (i} above ? Discuss the various attributes of an investinent opportunity — that ‘you will consider before investing your money in it. ia: wire ta sa ox Rare atfay sit arer AM at srleenal a vefita aa t 1 a ait fe amet ga ad tt sa sehr & gene & fag ain dat @ as wet & | arifixes agent & Trad waist wr ena quay shaw ae ae fr gad dqer Pera a at one |(&) oo 2 SR eH eer DUT wl Ag pee faceiad wad & atte aa ad fa za anh att de & few ade ar for aoe at ara gh Be we ate th gure ea a aq aed ¢ 13g fee at srs at at dina and fer & ae om afi fie ae at sare SRT ase (i) GM ware at ge Peer & fag de at nay 4 (ii) ateredl grt fae ay Bee a HEAT (ii) Fe 4A ax ufem fe ain am tee A aaa ard eh cer after citer at art ¢ 1 SR (i) Fae HN a en tae alae ait art A ats afax at sre 2 (7) ° Prater & arerae at fais fastecnail at fear coifony Fora ame Oe ary Se are a Fase ae a ye ferare et 4. (a) In the d@ntext of imperfect information, discuss what is the incentive problem. Describe three ways in which market economies provide solution for this problem. 4 (b) Suppose the-demand for cars by consumers in an economy is given by Pe = 6,000 —2QP and the supply of cars by domestic producers is given by Po = 205. Where P,. is the price of cars in dollars and Q” and Q> are respectively the annual quantity of cars demanded and supplied respectively. — 6321 9 P.T.O.6321 : (&) (i) Assuming-there. sno foreign trade, - find the equilibrium Price « and: - quantity. iy “Assume. the: economy: opens. to trade. “Ifthe world~price .of:cars*is- 2,000: 3. (dollars), find the annual. production, ‘consumption arid imports of cars. - (iii) What happens-if. the.world price .is 2000 -§ (dollars) and, the government . imposes’ a- tariff of .1500.$ (dollars) ; -perimportedcar? (iv) ’.What happens ‘ifthe’ tariff i is: reduced * sto, 500.$ . (dollars) . and -world-. price. cremains the-same.? Calculate. the. dead ~weight loss of this, tari tf , For thé following ‘cases*plot-the “budget’ > Gbnsthaint before arid’after the change: oO. ‘Non Wage. - income. - = + +1.00,.- “wage = "7% 40-p -pet. “hut, Total time:. “available = 40. hours’; “Non; wage “ ; income. changes: to. zero.- . diy Non wage -income: a? 10, 000, _ wage = % 40'per hour, Total time = 50 hours; Available time incréases to. 60 liours. Gi) Non wage income = 0, wage = % 500 per hour, Total time = 40 hours: * 1000° is - donated to charity - irrespective of earnings. apt qua & det a fader. aifac fe or wre ee 7 de Ua ate ar av aire fad amit arlaaent ya wren a few TTA WR Att 10@) wa afore Be onereren #-sasbaenoil gra art / m7) 6321 al dnt Seb ERT eT P.. = 6,000 = 2Q° sit utq sereat ara at . Pp = 208 “rat, at ah dor tating Fate QP ae OS sana, rd a ara aA aT ate oF E (iy ae ae fe. ay fateh caro set F, «. Pqer ahra sie ara ard sir | Gi) at difae fer arleren ar & fac gent € 1a a at fava A sire 2000 $ 2 at &ri' at warn sere, Bet Be arena set BARAT Gii) er ate & afk fora A oe at sine 2000°$ & att acareuht orem at ng FIC TT 1500 $ at ype oT aah “Gy « AR Yeh Bi TAHT 500.'S, at fear ae ait fava Of ina état ze-at ear fea + ett ga yee d-qarert ae at ToT ali) ne fratefiad sat & for ufteda a gd sit ae t HAE IAAT wt eis Hie: G) Ax wrt sit = % 100, wad = F 20 Wet der, Ber sare waa = 40 ade ay TAG ST SeeTRL BET et a Ft (i) Aeaagd arr = F 10,000 WAR = & 40. wit tel, eet WAa-= 50 de: BTR aT wernt 60 Fe we a ae Git) 7 TAgh ara = 0, wagl = z 500 wicteal, eH AAT = 40 He, F 1000 aah} art & ar ren STS arrett et ata at | 1 . _ PTO.SECTION B wus a Attempt Q. 5 as a compulsory question and attempt two more questions from the rest. wel 5 aad & 1 ao yea AS ats at wes aia 5. Attempt any three questions : 3x4 (a) Give reasons why GDP concept though highly useful as a measure of economic activity, has limitations « as a measure of ; welfare. (b) The multiplier effect of a change in Government Spending on aggregate output in the long run is zero. De you agree ? Explain. (c) The Federal Government under President George Bush sent out millions of 300 dollar cheques to. individual tax payers in August 2001 as one time tax rebate against’ the backdrop of recession that started in March. Lay out a simple Keynesian framework model of planned aggregate expenditure to show how a tax rebate of 300 dollars will affect equilibrium level of real ‘GDP. Assume for simplification that everything else is constant. (d) State whether the following statements are true or false, Give reasons. ; (i) Aggregate demand management policies that bring down prices will eventually bring down interest rates as well., (ii) If the velocity of circulation of money falls, ceteris paribus, the price level will increase. 6321 126321 aie a att rea aia . (A) rer ame fe GDP deer at, vale ag aires Tiafaty at ara a er fh arise soar - ¢ Sea ary awe Fh eta aE 7 (a) aaa A wae soe at a RTE HT TOTS HTS RH he AT SAT gH arr G Bena £7 waren saw 1 ) dents ait ae & aed dele are a armed 2001 F safaa ae areal at 300 gleav & aret ee Si a ae gE wt & free ew ard ard oe ea a a ahaa Se ae a wet ach ars az Tet FAR ait feerer far araias Gop & aaert Bax Bl 300 Siew at He a ae Eee wet warfare att | atetat & far aa cia fe ah ara abt fer ti (a) sect ing Pr Grote se are a aa | ero Sif - (i) Barer AM oe sifaal, sit andl at oA wut, sida samed at al ae ar ad et (i) afe get & afearers an a ae stan Pat, ate ora ard lar @, aint mr az SIT | (a) ° In a particular economy, total cash held by the public is 10,000 rupees , bank reserves are 2000 rupees and the desired reserve- deposit ratio is 0.2. (i) | What is the money supply ? 13 P.T.O.6321 {b) (*) (ay (a) (5) (ii) How is the money supply. affected if the central. bank prints 5,000 rupees and uses this to buy Government Bonds from the public ? Assume that the public does not wish to change: the amount of cash it holds,” _ Classical - Macroeconomic Theory ‘ultimately concludes ‘that monetary ‘policy generates only‘ price level effects. Explain the above statement. ; Ue ae arioqaen sae & ora He aa Z 16,000 @, dam et omefina ofA. %2000 ait caffe omaha ST eran 0.2 #4 (jy War at afar eg? (ii) ale Heer Sew F 5,000 H Ale wrod & alk wat & earl ais wet & fag eae wart at & at ger at ofr Sa wotaa _ 0 wee a ATT Bt gee el Ure & waral at seat aad & 1 soar sera wet earET RAT “Exchange rate flexibility increases the effectiveness of monetary policy and diminishes the effectiveness of fiscal policy in regulating the economy.” Explain the statement with reference to a country in which there is a perceived need to stimulate the economy to reduce unemployment. Financial investors in bonds will increase their holdings of money if they begin to . expect an increase in money supply by the Central Bank. True/False ? Explain. 14(®) “Para. at a sae sities fa 3 merece a aan e atte asta aif at one a, arehoreren-& Framer a, apm wer aah 8 Fa ae aga 2a et | emer aie fe tad dam a aed a far apleraen Self se at orereapen Sea ort & 1 (@) ‘ail fea -em ad awe ond any at. Seret aie a ae aren Re pE ae She ae aay, ae er yf aah aha 1 Beyaay, mare Sa 8 (a) The demand for monéy, Mp, it an economy | is given by My =-10,000, ~ 10,000 r +.y, Where: weds the interest’ rate - and:y,;is the - ‘National. lncome’? (i Find .the. equilibrium interest*rate. if , . money: supply is 7 10,000 ‘crores. and ‘National Income .is.% 55000 crores. (ii): Whai ' “happens to the equilibrium “interest rate if National Income rises to 27, ,500 crores and money. supply is unchanged. : (iii) If the Central Bank wants to keep the interest rate at the same value as in (i), by how much should it change the money supply, given the new level of National Income. 3 6321 15 P.T.O.(b) Distinguish between cost push and demand pull inflation. The spike in crude oil prices, rising costs of metals. and minerals, unseasonal rains destroying food crops and acceleration in the pace of per capita income growth of lower income groups are being cited as some of the key factors in pushing inflation in India in recent past. Illustrate this situation using tools of aggregate demand and aggregate supply. 6 (%) apferren 4 ger at ttt M, eae ae Bitte: My = 10,000 - 10,000 r + y. RRA e Bast az e aie y wey ara & ). af yer git % 10,000 ets sik ata ara % 5,000 arts & at caer SH Be area AAT (i) qe wars ae aan afta sien F ale TET aT as HCE 7,500 HAE sie AE Ufa sraftatadt tect & 1 (iii) ale dee de ora ee at Sat Ba TET arect & sat Sex (i) F at Sa ABT Yl wt aT were Ree aT aT (3) arorrtiraa aie Hinifiea cplia 4 sat Tae "arte act at aiyat F agiad, raat aft wafial at act gf arma, athes ant era erre- wae sr aS eat ate Fret anaes are ofa cafaa ote at nfa A ahs ant fret feat area ante at sare aret Goer er wat I, aafen ait siz wafea ofr scHCT aT rT ace ga ferfa an freae @ faa wife 6321 16 1,500 -