Indian Institute of Management Visakhapatnam

Microeconomics

Mid-Term Exam

1. Please enter your Full Name and your Roll Number on your answer sheet.

2. The time allotted for this exam is 75 minutes. You must not take more than

75 minutes.

3. This is a closed book, closed notes exam. Use of a calculator is allowed.

4. There are five questions. Answers all the questions.

5. Please be precise in your answers. Clarity in answers/explanations will fetch

more points.

6. Please follow the Academic Honour Code.

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Notes: In case you need - if y = ax2 + bx + c, then dx = 2ax + b.

Question 1

The demand for Pepsi is given by

Q = 100 − 4P − 2PN + 0.5I,

where, P is the price of Pepsi, PN is the price of nuts, and I is consumer income.

(a) What happens to the demand for Pepsi when the price of nuts goes up? Are Pepsi and

nuts substitutes or complements? Why? (3 points)

(b) What happens to demand for Pepsi when consumer income rises? Is Pepsi a normal or

inferior good? Why? (3 points)

(c) Graph the demand curve for Pepsi when PN = 100 and I = 1000. What is the maximum

revenue earned by the firm. Answer this question without directly taking the derivative of the

revenue function. (9 points)

Question 2

A company is considering how to allocate its Rs. 4 million between Labour (L) and Capital

(K). The following table shows the new production when a given amount of money is spent on

hiring labour and hiring capital. Let CL be the amount of money spent on labour, and let CK

be the amount of money spent on capital. The objective of the company is to allocate the Rs.

4 million budget in order to maximize production.

Total Spent (million) Production from Hiring Labour Production from Hiring Capital
0 0 0
1 30 12
2 38 16
3 40 18
4 41 19

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 Define Marginal Cost (M C) as the reduction in production from labour due to a decline

in money spent on hiring labour by 1 million. Similarly, define Marginal Benefit (M B) as the

increase in production from hiring capital due to an increase in money spent on hiring capital

by 1 million.

(a) Prepare a table containing this information. (12 points)

(b) Use the M B, M C table that you have constructed to find the optimal amount of labour

and capital. (3 points)

Question 3

Sam Robbins, owner and CEO of PC solutions, arrived at the office and glanced at the front

page of The Wall Street Journal kept on his desk. One of the articles contained statements from

executives of two of South Korea’s largest semiconductor manufacturers - Samsung Electronic

Company and Hynix Semiconductor - indicating that they would suspend all their memory

chip production for one week. The article went on to say that another large semiconductor

manufacturer was likely to follow suit. Collectively. these chip manufacturers produce about

30 percent of the world’s basic semiconductor chips.

PC solutions is a small but growing company that assembles PCs and sells them. The com-

pany is in the process of interviewing recent graduates in an attempt to double its workforce.

After reading the article, Sam picked up the phone and called a few of his business contacts

to verify for himself the information contained in the Journal. Satisfied that the information

was correct, he called the director of personnel, Jane Remak.

What do you think Sam and Jane discussed? Answer in no more than five to seven sen-

tences. (15 points)

Question 4

Consider a firm that manufactures and sells CD’s. The price that the firm will receive per CD
3q
is given by the function p(q) = 6 − 5000 . Suppose that the firm was initially producing 2000

3
units of the product and then decides to increase its output to 2001 units.

(a) What price does the firm charge when it sells 2001 units? (2 points)

(b) Define Marginal Revenue. What is the Marginal Revenue of the firm from the 2001th

CD? (4 points)

(c) Explain the difference between your answers to part (a) and part (b). Answer in no

more than two sentences. (9 points)

Question 5

A football promoter must allocate 40,000 seats in the stadium among the supporters of

two competing teams, A and B. If she sells B seats to team B supporters, she will receive Rs.
B
20 − 2000 for each, while she can get Rs. 10 per ticket from team A supporters. Her objective

is to allocate the 40,000 seats she has available to maximize her gate receipts.

(a) What is the marginal revenue from a team A supporter? What is the marginal revenue

from a team B supporter? (5 points)

(b) On a single graph draw the marginal revenue functions. (5 points)

(c) What is the optimal allocation of seats between team A and team B supporters? (5

points)

(d) How would your answer to part (c) change if instead of 40,000 seats, the stadium had

9000 seats? (5 points)