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Roll No:

Version A

Indian Institute of Management Ahmedabad

Microeconomics (ME) Wednesday, 13 July 2016

Time: 2.45 pm to 3.15 pm (PGP-1/FABM-1, First Term)

Quiz # 1

Read the following instructions

1. There are 11 questions to be answered. You may get Version A or B of the quiz.
2. For multiple choice questions, please go through all possible options carefully before
selecting the most appropriate one alternative. Write a, b, c or d, etc., in the empty
box provided for each of the questions. No marks will be given for a question with
multiple answers.
3. For questions seeking specific answers, fill-in your answers in the box provided for
that question.
4. This is a closed-book quiz. No cellphones and laptops are allowed.
5. Marking scheme for the quiz is provided below:

Score = 3 times (# of correct answers) minus (# of incorrect answers)

Correct Incorrect Not Score

Answers Answers Attempted

1. The relation among income elasticities of demand for goods in the consumption
basket of an individual shows that

a) All items in the basket cannot be luxury goods

b) All items in the basket cannot be essential goods (necessities)
c) All items in the basket cannot be inferior goods
d) Weighted sum of the income elasticities of all items must add up to 1
e) All of the above

2. Assume that the welfare of an economy can be described by the standard family
of indifference curves. You are told that the value of Laspeyres price index is
 higher than the value of expenditure index for this economy at this time. Which
of the following must be true?

a) Welfare of the economy has gone up

b) Welfare of the economy has gone down
c) Welfare of the economy has remained same since only prices have risen
d) Cannot say with certainty whether or not welfare has gone up or down

3. Consider the trade-off between work and leisure dictated by wage rate. Assume
that child rearing and time spent with family is a leisure activity. You are told
that there is an inverse relation between wage rate and number of children.
Which of the following must be true?

a) Children could be a normal good or an inferior good

b) Children must be an inferior a good
c) Children must be a Giffen good
d) Children must be a normal good
e) Children are a luxury good

4. In Xanadu, while the demand for the native workforce is downward sloping,
supply of native workforce is backward bending. The market demand and market
supply for native workforce is depicted below. Which of the following must be
true?

Wage S b

a
D
Workforce
0

a) Only “a” is a stable equilibrium

b) Only “b” is a stable equilibrium
c) Both “a” and “b” are stable equilibriums
d) “b” is a stable equilibrium for price fall
e) a) and d)

5. The law of equi-marginal utility states that utility will be maximized by a

consumer when ratio of marginal utility to price is same for all items in the

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 consumption basket. This equilibrium ratio is termed as marginal utility of
money (m). Which of the following must be true?

a) If m is a constant, price elasticity of demand for each of the items in the

consumption basket will be -m.
b) If m is a constant, price elasticity of demand for each of the items in the
consumption basket will be -1
c) If m is constant, cross-price elasticity of demand for each item in the
consumption basket will be -1
d) b) and c)

Read the text below for the next 6 questions:

You have just completed a meso-level demand forecasting exercise for electricity
consumption by households in a region. The equation for the demand forecast is
given by Q = 100 – 1/3 P + 2 G + 0.5 I, where Q is quantity of electricity
consumed in thousand units, P is the tariff rate per unit, G is a related good, and I
is the per-capita GDP of households in the region. Current values of I and G are
100 and 15 respectively. Answer the following questions.

6. Government can neither fathom consumer indifference curves nor measure their
satisfaction levels. However, it wants to promote consumer welfare. If
government forces firms to charge a tariff (P) of only 30 paise per unit, how much
is the welfare of consumers in money terms?

7. What is the mod value of price elasticity of demand for electricity?

8. What is the mod value of the cross-price price elasticity of demand for electricity?

9. What can you say about the nature of the related good G?

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10. At a tariff rate of 30 paisa per unit, electricity firms were making losses. They
wanted to renegotiate the tariff rate with the government. If the firms raise the
tariff rate, consumers’ expenditure may go up. However, what is the tariff rate
beyond which consumers will start spending less instead of more on electricity?

11. Assume that government continues to force firms to charge 30 paisa per unit for
the next 5 years. Over these years, per capita income (I) of the households in the
region is likely to go up by 40 per cent and the price of related good (G) is likely
to double. What is your forecast for the demand for electricity after 5 years?

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