Micro Economics for Business-1

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Assignment A

Q1 Explain the relationship between different determinant of demand and the quantity demanded

Q 2 State the law of supply. Why does a supply curve have a positive slope?

Q3 What is opportunity cost? Give some examples of opportunity cost.

Q4 “Long run average cost curve is an envelop curve.” Explain

Q5 Explain the concept of returns to scale. Illustrate different types of return to scale with the help of isoquant curves.

Assignment: B

Q1 What is meant by price discrimination? Illustrate the third degree price discrimination assuming two markets. (Show diagram also)

Q2 “In a perfectly competitive market, while an industry is a price-maker, an individual firm is a price taker.” Elaborate it

Q3 Explain the meaning of welfare economics and the Pareto optimality Criterion of social welfare

 

CASE STUDY

 

Variety is spice of Life – Indian Fast Food Industry

 

Walk down the streets of Delhi ( or for that matter any big city ), one will come across number of food joints, starting fro the local ‘dhaba’ to one time favourite food the Delhites ‘Nirula’s’ to the KFC’s and Mc Donald’s. The fast food industry has a sizable number of new entrants and the trend seems to continue. An obvious reason for such industrial growth seems to be the ‘cosmopolitan’ taste pattern developed by us. An average Indian 5-10 years back would imagine a masala dosa or a burger to be a fast food. We have come a long way from those days. Today’s Indians, and by that we do not mean only the ‘X-generation’, but, school children, middle aged executives, grandfathers and house wives, all are fond of fast food, In fact, fast food is too general a term, Today one has to specify, whether he wants a ‘fish-o-fillet’ burger from Mc Donald’s or a ‘pan pizza’ from the Pizza Hut or the special KFC fried chicken, the list of various types of fast food just goes on.

 

Technically speaking, it is the same chicken, which will be simply roasted with the standard Indian marination in a road side tandoor, while in a KFC outlet, the chicken will be fried in the famous KFC batter, and served with finger chips, coleslaw and the Coke. You feel you have been transported to the country of Uncle Sam. There lies the difference. For the consumer, it is a different product.

 

The ‘product’ is differentiated in a number of ways starting from the way you present, the ambience of the eating joint to the location and duration of working hours. The shop owners harp on this factor and bolster their sales based on this ‘product differentiation’ in their advertisements.

 

After all a Mc Chicken burger, with its declared calorie content, rendered by well dressed smart boys and girls in the posh market place is not the same as a simple chicken burger, kept in the hot case of a local shop.

 

Product Differentiation is costly. Developing a new variety of cheese to be used on your pizza and to suit the Indian taste requires some laboratory research, market research and aggressive sales effort. Opening another Mc Donald’s joint in another busy market place all these are costly affair. But, this differentiation brings in additional revenue. A new chicken burger with lesser calorie content than an average burger will attract the young girls. A KFC outlet with a special floor filled with balls and balloons will be a child’s delight. Since this is an industry, where any body with a decent budget can enter, it almost becomes an obligation for the existing ones to have a continues product innovation and differentiation to continue in the business, in the long term.

 

Questions:

Q1 Describe how will you justify that the above example is describing monopolistic competition. Can you draw a parallel example for another industry?

 

Q2 What are the marketing strategies followed under monopolistic competition?

 

Assignment C

 

Q1 The goods that can be substituted with each other are known as:

(a) Complementary goods

(b) Competitive goods

(c) Inferior goods

(d) Veblen goods

 

Q2 Law of demand state that:

(a) Price is inversely proportional to quantity demanded

(b) Price is inversely proportional to 1/quantity demanded

(c) Not related

(d) None of the above

 

Q3 Law of supply states that:

(a) Price is inversely proportional to supply

(b) Price is inversely proportional to 1/suppy

(c) Price and supply are constant

(d) Price and supply are not related

 

Q4 At equilibrium price:

(a) Quantity demanded> Quantity supplied

(b) Quantity demanded< Quantity supplied

(c) Quantity demanded is not equal to quantity supplied

(d) Quantity demanded is equal to Quantity supplied

 

Q5 Demand for a Quantity is perfectly inelastic when:

(a) When quantity demanded changes with price

(b) When quantity does not change with price

(c) Quantity demanded increases with decrease in price

(d) Quantity demanded decreases with increase in price

 

Q6 Which of the following is the best example of the law of demand?

a. As the price of fur coats decreases, more consumers will buy them.

b As the price of fur coats increases, more consumers will buy them.

c. As the price of fur coats decreases, people buy more wool jackets.

d. As the price of fur coats increases, people buy more leather jackets.

 

Q7 The price of an item drops 10% in such a way that the Price Elasticity of Demand of that item is unit-elastic. We would expect the quantity of the item demanded to

(a) drop by 5%

(b) stay the same

(c) increase by 5%

(d) increase by 10%

 

Q8 Law of variable proportions is not based on which of the following assumptions: –

a) Constant Technology

b) Homogeneous factor units

c) Short-Run

d) Factor proportions are constant

 

Q9 Increasing returns to a scale refer to a situation when all factors of production are increased, output:-

a) Increases at a higher rate

b) Increases at a slower rate

c) Output remains the same

d) Is constant

 

Q10 The main cause of the operation of diminishing returns to scale is that:-

a) Internal and external economies<internal and external diseconomies

b) Internal and external economies> internal and external diseconomies

c) Internal and external economies= internal and external diseconomies

d) None of the above

 

Q11 Which of the following is not an external economy:-

a) Economies of concentration

b) Managerial economies

c) Economies of Disintegration

d) Economies of Localisation

 

Q12 Implicit cost is:-

a) Cost of payments for resources bought or hired by the firm

b) Cost of self owned resources and services

c) Cost borne by the society as a whole

d) None of the above.

 

Q13Total cost is equal to:-

a) TC=FC+VC

b) TC=FC-VC

c) TC=VC-FC

d) TC=FC+VC/2

Q14The relationship between Average Cost Curve and Marginal Cost Curve of a firm is:-

a) When AC is falling, MC is falling at a much faster rate and stays below AC.

b) At lowest point of the AC curves MC becomes equal to AC.

c) When AC starts rising,MC rises at a much faster rate & the MC curve is always above the AC curve

d) All the above.

 

15 Increasing returns to scale for a firm are shown graphically by

A) returns to scale have nothing to do with the shape of the long-run average cost curve.

B) a horizontal long-run average cost curve.

C) a vertical long-run average cost curve.

D) an upward-sloping long-run average cost curve.

E) a downward-sloping long-run average cost curve.

 

16 When cost curves are drawn for a firm, all of the following are generally assumed EXCEPT

A) average fixed costs are constant.

B) firm is too small to influence factor prices.

C) average variable cost initially declines, and then rises at higher output levels.

D) total fixed costs are constant.

E) marginal product of the variable factor eventually declines.

 

17 Consumer surplus

A) is the difference between what the consumer is willing to pay for all the units consumed and what he/she actually paid.

B) is the total value that a consumer receives from a purchase of a particular good.

C) is a measure of the gains a consumer receives in the market.

D) is the sum of the marginal values to the consumer.

E) is the consumption of a commodity above and beyond the amount required by the consumer.

 

18 The supply curve remains the same if there is a change in

A) the number of suppliers of the commodity

B) technology.

C) the price of the good

D) the price of a commodity that is a substitute or complement in production.

E) factor costs.

 

19 For an inferior good, the quantity demanded

A) does not change when income rises or falls.

B) rises when income falls.

C) falls when income falls.

D) rises when income rises

E) responds directly to changes in income.

 

20 The law of diminishing returns states that if increasing quantities of a variable factor are applied to a given quantity of fixed factors, then

A) the marginal product and the average product of the variable factor will eventually decrease.

B) total product will eventually begin to fall.

C) the average product will eventually decrease with constant marginal product.

D) the marginal product will eventually decrease with constant average product.

E) the average product will eventually decrease, but only if total product is held constant.

 

21 The opportunity cost of money that a firm’s owner has invested is an example of

A) implicit costs.

B) direct production costs.

C) sunk costs.

D) accounting costs.

E) explicit costs.

 

22 In the short run, the firm’s product curves show (TP= Total Product, MP is marginal product

AP is average product)

A) TP is at its maximum when MP = O.

B) TP begins to decrease when AP begins to decrease.

C) when MP > APAP is decreasing.

D) when the MP curve cuts the AP curve from below, the AP curve begins to fall.

E) AP is at its minimum when MP = AP.

 

23 A fall in the price of raw milk used in the production of ice cream will

A) decrease the supply of ice cream, causing the supply curve of ice cream to shift to the left.

B) decrease the demand for ice cream.

C) increase the supply of ice cream, causing the supply curve of ice cream to shift to the right.

D) have no effect on the supply curve of ice cream but cause a downward movement along the supply curve of ice cream.

E) have no effect on the supply curve of ice cream.

 

24 A monopolistically competitive firm is like a monopoly firm insofar as

a. both face perfectly elastic demand.

b. both earn an economic profit in the long run.

c. both have MR curves that lie below their demand curves.

d. neither is protected by high barriers to entry.

 

25 A monopolistically competitive firm is like a perfectly competitive firm insofar as

a. both face perfectly elastic demand.

b. both earn an economic profit in the long run.

c. both have MR curves that lie below their demand curves.

d. neither is protected by high barriers to entry.

 

26 Product differentiation

a. means that monopolistically competitive firms can compete on quality and marketing.

b. occurs when a firm makes a product that is slightly different from that of its competitors.

c. makes the firm’s demand curve downward sloping.

d. All of the above answers are correct

 

27 If a collusive agreement in a duopoly maximizes the industry’s profit,

a. each firm must produce the same amount.

b. the industry level of output is efficient.

c. industry marginal revenue must equal industry marginal cost at the level of total output.

d. total output will be greater than without collusion

 

28 A firm that has a kinked demand curve assumes that, if it raises its price, ____ of its competitors will raise their prices and that, if it lowers its price, ____ of its competitors will lower their prices.

a. all; all

b. none; all

c. all; none

d. none; none

 

29 In the dominant firm model of oligopoly, the large firm acts like

a. an oligopolist.

b. a monopolist.

c. a monopolistic competitor.

d. a perfect competitor.

 

30 Limit pricing refers to

a. the fact that a monopoly firm always sets the highest price possible.

b. a situation in which a firm might lower its price to keep potential competitors from entering its market.

c. how the price is determined in a kinked demand curve model of oligopoly.

d. none of the above

 

31 If marginal product is below average product:

 

a) The total product will fall

 

b) The average product will fall

 

c) Average variable costs will fall

 

d) Total revenue will fall

 

 

 

32 The law of diminishing returns assumes:

 

a) There are no fixed factors of production

 

b) There are no variable factors of production

 

c) Utility is maximised when marginal product falls

 

d) Some factors of production are fixed

 

33 When firms collude to set prices, their individual demand curves become relatively more elastic.

 

  1. true
  2. false
  3. may be
  4. None of the above.

 

34 Oligopolists are less likely to experience price rigidity when they have excess capacity than when they are near full capacity

A. true

B. false

C. may be

D. none of the above

35 The resources in an economy are:

a) Constantly increasing

b) Fixed at any moment

c) Constantly increasing

d) None of the above

36 Economic growths can be shown by:

a) An inward shift of the production possibility frontier

b) A movement down the production possibility frontier

c) An outward shift of the production possibility frontier

d) All

Q37 .The marginal productivity theory states that under perfect competition, price of each factor of production will be:-

a) Equal to its marginal productivity

b) More than its marginal productivity

c) Less than its marginal productivity

d) Equal to or more than its marginal productivity.

 

Q38.The factor price for the industry is determined by the point where:-

a) Demand > Supply of a factor

b) Demand< Supply of a factor

c) Demand =Supply of a factor

d) None of the above.

 

Q39.Which of the following is not an assumption of Marginal Productivity Theory:-

a) Homogeneous factors

b) Perfect Competition

c) Short-run analysis

d) Law of diminishing marginal returns

 

Q40. In order to attain the equilibrium position a firm will employ laborers up to a point where their respective:-

a) MRP>wage rate

b) MRP<wage rate

c) MRP <=wage rate

d) MRP=wage rate