Name:

Roll No.
IIT Mandi
Principles of Economics HS202_2 20-21 odd semester
Ex.1
Section A

1 mark for each mcq. 33 x 1 = 33 marks. Ans. in the space provided.

1. If a firm raises its price by a very small percentage and total revenue remains
constant, then
a. The price elasticity of demand is one.
b. Marginal revenue is equal to zero.
c. Quantity demanded has decreased by the same percentage.
d. All of the above are correct. All facts.

2. If the price of a good increases, then

a. The demand for complementary goods will increase.
b. The quantity demanded of the good will increase.
c. The demand for substitute goods will increase. By definition
d. The demand for substitute goods will decrease.

3. If the price of a good increases while the quantity of goods exchanged on the
market increases, then the most likely explanation is that there has been
a. An increase in demand. Draw diagram.
b. A decrease in demand.
c. An increase in supply.
a. A decrease in supply.

4. The long-run elasticity of supply is greater than the short-run elasticity of supply
because
a. in the long run, the stock of machines and buildings can adjust;
b. in the long run new firms can enter and existing firms can exit the industry;
c. in the long run customers can discover substitutes;
d. a and b;
e. all of the above.

5. The demand function for cereal is q = 138 – 9p and the supply function
is q = 10 +7p. The government decides to support the price of cereal at a price
floor of Rs. 18 per unit by buying cereal and destroying all that it has purchased.
How many units must the government destroy?
a. 160 (no correct answer, everybody gets 2 marks, at p = 18, there is negative
demand, which cannot be correct. The correct answer should have been 136.
b. 170
c. 79
d. 169

6. If a good is inferior, then

a. The income elasticity of demand will be negative. By definition
b. The income elasticity of demand will be zero.
c. The income elasticity of demand will be positive.
d. A decrease in income will cause demand to decrease.
7. The price elasticity of demand for a good will tend to be more elastic if
a. the good is broadly defined (e.g., the demand for toothpaste as opposed to the
demand for Colgate toothpaste.)
b. the good has relatively few substitutes.
c. A long period of time is required to fully adjust to a price change in the good.
d. None of the above are true. By definition.

8. The demand for small business computers in the U.S. is given by x = 200 – 10p
where x is annual sales measured in thousands of computers and p is the price
measured in thousands of dollars. Japanese firms supply a big share of these
computers. They measure prices in Yen where 120 Yen equals one Dollar. The
price of one computer is $10,000. Let EU be the price elasticity of demand at this
price as calculated by U.S. firms who measure price in dollars and let EJ be the
price elasticity of demand at the same $10,000 price, but measured in Yen by the
Japanese firms. Which of the following are the values of EU and EJ respectively?
a. –1 and –150.
b. –1 and –1. Elasticity does not depend on units.
c. –2 and –2.
d. –2 and –300.
e. –2 and –0.0133.

9. The demand for football tickets at each game is 100,000 – 10000p. If the capacity
of the stadium is 60,000 seats, what is the revenue maximising price per ticket?
a. 5; Solve
b. 4;
c. 10;
d. 2.50;
e. 15.

10. Rent control

(a) creates a shortage of rental housing By definition
(b) leads to a larger shortage in the long run. Elasticity is higher in the longer run
(c) lowers rents for renters who have apartments.
(d) only (a) and (b).
(e) all of the above.

11. Shristhi consumes positive quantities of both jam and juice. The price of jam is 5
Rupees per unit and the price of juice is 10 Rupees per unit. Her marginal utility
of jam is 10 and her marginal utility of juice is 5.
a. Without changing her total expenditure, she could increase her utility by
consuming more jam and less juice. MUjam/MUjuice = pjam/pjuice
b. Without changing her total expenditures, she could increase her utility by
consuming more juice and less jam
c. Without changing her total expenditures on jam and juice, she could increase
her utility.
d. This question cannot be answered without knowing her current consumption
bundle.
 e. She should spend more money on both jam and juice.

12. Coke and Pepsi are perfect substitutes for Jinesh, and the slope of his indifference
curves is -1. One day he bought two cans of Coke and 20 cans of Pepsi. (The
cans of both drinks are the same size.)
a. Coke is less expensive than Pepsi.
b. Coke is more expensive than Pepsi.
c. Coke and Pepsi cost the same. Indifference curves and isocosts coincide.
d. Jinesh prefers Pepsi to Coke.
e. None of the above.

13. If in a world of two commodities, X and Y, X costs three times as much as Y,

utility maximization would mean:
a. the consumer must purchase three times as much Y as X
b. the consumer would purchase less of commodity X than commodity Y
c. commodity X must provide at three times as much utility as commodity Y
d. the marginal utility of commodity X must be greater than that of commodity Y
Similar to 11.

14. When a good’s price changes the total change in quantity demanded is equal to
a. the change due to the pure substitution effect; its relative price has changed.
b. the change due to income effect; real income has changed.
c. the change due to the utility maximizing effect.
d. both a) and b). By definition
e. none of the above.

15. Ravinder consumes only apples and bananas and bananas are an inferior good for
him. The price of apple increases, but there is an increase in his income that keeps
him on the same indifference curve as before. (Ravinder has convex preferences,
and he prefers more to less of either good.)
a. After the change, Ravinder will buy more bananas and less apples.
Application of 14.
b. After the change, Ravinder will buy less bananas and more apples.
c. After the change, Ravinder will buy more of both goods.
d. After the change, Ravinder will buy less of both goods.

16. The slope of an indifference curve called the marginal rate of substitution
is:
a. the implicit price of one good in terms of the other good
b. equal to the ratio of the marginal utility of the goods.
c. equal to the ratio of the prices of the goods.
d. a and b
 Clothing
(units per
week)
C1 A
17. Suppose thatC2 a consumer regards two types of soap as perfect
C
substitutes for C
one
3 another. The price consumption path generated by
changing the price of one typeBof soap is
a. always upward sloping
b. always horizontal
c. always vertical
Food
d. overlaps the axis corresponding to the cheaper soapper
(units
week)
Figure 4.2
A consumer's original utility maximizing market basket of goods is shown in
Figure below as point A. Following a price change, the consumer's utility
maximizing market basket changes is at point B.
 18. Refer to the figure above. The substitution effect of the price change in
clothing on the quantity of clothing purchased is:
a. the change from C3 to C1.
b. the change from C3 to C2.
c. the change from C2 to C1.
d. the change from C1 to C2.

19. Based on the figure above, clothing is:

a. a normal good.
b. an inferior good, but not a Giffen good.
c. a Giffen good.
d. none of the above.

20. Alamelu derives utility from consuming tea and samosa. Presently,
the marginal utility she receives from tea is 16 units, and the marginal
utility she receives from samosa is 8 units. Instead of consuming this
bundle, Alamelu should:
a. buy more tea and less samosa.
b. buy more samosa and less tea.
c. buy more tea and samosa.
d. none of the above is necessarily correct.

21. The fact that Alamelu spends no money on travel:

a. implies that she does not derive any satisfaction from travel.
b. implies that she is at a corner solution.
c. implies that her MRS does not equal the price ratio.
d. any of the above are possible
(Perish the thought that she may be a Railway employee, or a pass holder of
sorts (Member of Parliament) or a chronic without ticket person).

22. Airlines Downhill have decreased the fares on both (a) economy
class and (b) business class by 10 percent. The volume of sales in the
business class has gone by 20 percent. The elasticity of demand for the
business class is given by
a. -2
b. -1/2
c. -1
d. Cannot say
 23. Which of the following describes the Giffen good case? When the
price of the good
a. rises, the income effect is opposite to and greater than the
substitution effect, and consumption falls.
b. falls, the income effect is in the same direction as the
substitution effect, and consumption rises.
c. falls, the income effect is in the opposite direction to the
substitution effect, and consumption falls.
d. falls, the income effect is in opposite direction to the
substitution effect and consumption rises.

24. The demand curve is given as Q = 100 – 2P. The maximum Total
Revenue earned from such a demand is
a. Rs. 1,250
b. Rs. 50,000
c. Rs.5,000
d. Rs. 2,500

25. A 3 good economy has a utility function XYZ=465. Initial price index was
100. After 3 years, price of X increased by 3%, Y by 5% and Z by 6%. The
Laspayers’ index would be
a. 105
b. 165
c. 103
d. Cannot say

26. Suppose that the demand for apples (Qa) is given as: Qa = 120 - 4P. The
point price elasticity of demand if the price of apples is Rs.10 is

a) 0
b) 0.5
c) -0.5
d) -1
27. The Times of India reported that the toll on the NICE Corridor was raised
from Rs.20 to Rs.30. Following the toll increase, traffic fell by 5 percent.
Based on this information, Mr K. the Chairman of the Road's finance auditing
committee warned that the toll increase could cause toll revenues to decrease
by Rs.2.8 million per year.

a) this statement is consistent with economic theory

b) We do not know the initial revenue; so we cannot comment
c) The statement is inconsistent with economic theory
d) The revenue is likely to fall, but not by that much.

28. A rightward shift of the demand curve for computer programmers will
result in a

a. shift in the supply curve for programs and an increase in the price of
computer programs
b. movement along the supply curve for computer programs
c. movement along the supply curve for computer programmers and a
shift in the supply curve for computer programs
d. movement along the supply curve for programmers and a decrease in
the price of computer programs.

29. Suppose that the demand for lawn fertilizer can be expressed as Q D =
5000 – 120P and that the supply of lawn fertilizer can be expressed as Q S =
1000 + 80P where Q is measured in thousands of tons per year and P is
measured in Rs. per ten tons. What is the price elasticity of demand when
the market is in equilibrium?

a. –20
b. –1.08
c. –0.92
d. –120

30. Given a demand function of a good X has been estimated as

Q = 100Px-1.2Pz0.5Y0.7 where
Px is the price of good X
Pz is the price of good Z,
Y is the income
Then we can infer that:
 a. X is an inferior good, X and Z are substitutes
b. X is a normal good, X and Z are complements
c. Demand for X is price elastic but X is an inferior good
d. Demand for X is price elastic and X and Z are substitutes

I. Read the following news item and answer the questions following
it:

Railways cut fares on five more trains after Shatabdi success

Enthused by the increase in revenue of Shatabdi Express following a reduction in
fares between Bengaluru and Mysuru, South Western Railway (SWR) has decided to
replicate the model in five other trains by the end of the year.
The revenue went up by Rs.50 crores in 2017 after fares for AC Chair car were
slashed from Rs.490 to Rs.260 in October 2016. Between Huballi and Yeshwantpur
the fare will be reduced from Rs.735 to 590. From Gadag to Solapur it will be
reduced from Rs.495 to Rs.435. From Yeswanthpur to Dharmavaram it will be
reduced from Rs.345 to Rs.305.
Based on traffic pattern and timings, some trains in specific sections see less
occupancy in AC coaches despite the high traffic of regular short distance travellers,
in general. For instance in the Mysuru-Bengaluru section, majority of passengers on
long distance trains board or get down at Bengaluru station and the train’s higher
classes go almost empty in the Bengaluru-Mysuru section..
The Railway Board has recently given powers to general managers at Zonal levels to
apply the Shatabdi model to other trains. This is to encourage passengers to travel
short distances in 2 and 3-AC coaches. Passengers can travel comfortably in superfast
trains at reduced fares.
Deccan Herald, August 11, 2018
31. What is the nature of elasticity of demand in Bengaluru-Mysuru section?
a. Inelastic
b. Elastic
c. Perfectly elastic
d. Perfectly inelastic

32. Compared to Bengaluru-Mysuru where the price reduction was 47%, In the 3
other station pairs, Yashwanthpur-Hubballi, Yashwanthpur-Dharmavaram and
Gadag-Solapur, it was 20%, 11.5% and 12% respectively. The price
reduction is
a. Likely to yield similar results
b. Unlikely to yield similar results
c. Likely to yield better results
d. We cannot judge the result since we do not know the exact quantum of
elasticity, for any of the 4 sections.

33. What will be your specific objective, given the broad objective is to increase
revenue? What additional data would you seek?
a. Maximize profit; cost figures
b. Maximize revenue; elasticity figures
c. Maximize revenue; initial revenue figures
 d. Social welfare; demand curve equation.

Answer sheet. PoE : hs202_2

Name ____________________ Roll No. ______________

I. Tick the right column.
Qn. No. a b c d
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Part II : Problems

1. Lakshmi has a utility function U = 3SC (where S is the number of soft

drinks per week and C the number of bags of chips per week). Soft
drinks are priced at Rs. 10 each, chips Rs. 20 per bag. If Lakshmi has
Rs.200.0 in one week to spend on chips and soft drinks, how many of
each would she purchase? 10 marks

2. The wheat market is perfectly competitive, and the market supply and
demand curves are given by the following equations:
QD = 20,000,000 - 4,000,000P
QS = 7,000,000 + 2,500,000P,
where QD and QS are quantity demanded and quantity supplied
measured in kg, and P = price per kg.
a. Determine consumer surplus at the equilibrium price and
quantity.
b. Assume that the government has imposed a price floor at
Rs. 2.25 per kg and agrees to buy any resulting excess
supply. How many tons of wheat will the government be
forced to buy?
 c. Instead of the price floor, the Govt. imposes a specific tax of
Rs.1 per kg. What is the incidence/burden on consumer and
producer of this tax? 3 x 5=15 marks

Answer the following questions. (Question 3: 6 points, question 4: 4 points )

3. Queen Caruna rules the country of Bilekahalli whose primary crop is coconuts. If
the price of coconuts is p, then Queen Caruna’s subjects will demand D(p) =
coconuts per week for their own use. The number of coconuts supplied is S(p) =
(a) The equilibrium price of coconuts will be ---Rs. -- and the equilibrium quantity
will be ---- ----.
(b) One day, Queen Caruna decided to tax her subjects in order to collect coconuts for
the Royal festival. The queen required that every subject who consumed a coconut
would have to pay a coconut to the queen as a tax. When the price that is received
by the sellers is ps, how much does it cost one of the queen’s subjects to get a
coconut for himself?
(c) When the price paid to suppliers is ps, how many coconuts will the queen’s
subjects demand for their own consumption?
(d) Since the queen consumes a coconut for every coconut consumed by the subjects,
the total amount demanded by the queen and her subjects is twice the amount
demanded by the subjects. Therefore, when the price received by suppliers is ps ,
the total number of coconuts demanded by Caruna and her subjects is ----------
(e) Solve for the equilibrium value of ps ----- ----, the equilibrium total number of
coconuts produced ----- ------, and the total number of coconuts consumed by
Caruna’s subjects ------- --------------.
(f) Queen Caruna’s subjects resented paying the extra coconuts to the queen, and
whispers of revolution spread through the palace. Worried by the hostile
atmosphere, the queen changed the coconut tax. Now, the shopkeepers who sold
the coconuts would be responsible for paying the tax. For every coconut sold, the
shopkeeper would have to pay one coconut to the queen. This plan resulted in -
-----coconuts being sold to the consumers. The shopkeepers got --- - per coconut
after paying their tax to the queen, and the consumers paid a price of – ---- per
coconut. 30 marks
4. A study of the demand for water among commercial users such as apartment
buildings, hotels, and offices reported that the own price elasticity was –0.36, the
elasticity with respect to the number of commercial establishments was 0.99, and the
elasticity with respect to average summer temperature was 0.02. (Willams and Suh,
1986). 12 marks

a. Intuitively, would an increase in the number of commercial establishments

increase or reduce the demand for water? Is the estimated elasticity consistent
with your explanation?
b. Intuitively, would a rise in the average summer temperature increase or reduce the
demand for water? Is the estimated elasticity consistent with your explanation?
c. By considering the own-price elasticity of demand, explain how the water
company could increase its profit.