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Posted By: Kenny Member Level: Gold Posted Date: 22 May 2008
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2003 ICFAI University M.B.A Economics (MB141) : October 2003 Question paper
Question Paper
Economics (MB141) : October 2003
Part A : Basic Concepts (30 Points)
•?This part consists of questions with serial number 1 - 30.
•?Answer all questions.
•?Each question carries one point.
•?Maximum time for answering Part A is 30 Minutes.
1. Which of the following is false in first-degree price discrimination?
a. The monopolist will be able to extract the entire consumer’s surplus
b. The price of each unit will be different
c. By following first degree price discrimination, the profit of the monopolist will be more
than what he could otherwise earn at a single price
d. The price of the first unit will be less than that of the subsequent units
e. It is another name for perfect price discrimination.
<
Answer >
2. Which of the following is not an example of an intermediate good?
a. Cycle tyres bought by Hero Cycles Ltd.
b. Fertilizer bought by a vegetable cultivator
c. Art paper purchased by a painter
d. A pack of sweets bought by Mr. Rajesh to celebrate his success with friends
e. Aviation fuel sold to Air India.
<
Answer >
3. In the recent monetary policy, the RBI Governor reduced the CRR from 4.75% to 4.50%. Which of
the following sequences correctly shows the impact of the reduction in CRR?
I. Change in money supply.
II. Change in nominal interest rates.
III. Change in consumption and investment.
IV. Change in aggregate demand.
V. Change in real GDP and price level.
a. (I), (II), (III), (IV) and (V) above
b. (I), (II), (III), (V) and (IV) above
c. (I), (II), (IV), (V) and (III) above
d. (I), (V), (II), (III) and (IV) above
e. None of the above.
<
Answer >
4. Three countries – A, B and C have same Production Possibility Frontier (PPF), but have different
investment behavior. Country A made a gross investment equal to its depreciation. Country B
spent most of its income on consumption. Country C invested heavily by sacrificing its current
consumption. After 10 years which country will have a higher PPF?
a. Country A
b. Country B
c. Country C
d. Both (b) and (c) above
<
Answer >
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e. Cannot be determined.
5. Immediately following a depression,
a. Unemployment rate increases moderately
b. Aggregate demand decreases further because of recession
c. There will be rapid increase in wages but less than the increase in prices of goods and
services
d. The cost of production will gradually increase because of gradual increase in wages
e. Output will decrease rapidly.
<
Answer >
6. An economy is said to be facing inflation with respect to a base year if the price index for the
current year is
a. Greater than 0 (i.e. positive)
b. Greater than 100
c. 100
d. Between 0 to 100
e. Less than 0 (i.e. negative).
<
Answer >
7. Banks can create money
a. By printing currency notes
b. By paying interest to their depositors
c. By making loans that result in additional deposits
d. By offering financial services, such as money market accounts
e. By accepting deposits from the public.
<
Answer >
8. In which of the following markets, the demand curve faced by a firm will be least elastic?
a. Perfectly competitive market
b. Monopolistic market
c. Monopoly
d. Pure oligopoly
e. Differentiated oligopoly.
<
Answer >
9. Total market value of all the final goods and services produced in a given period by factors of
production located within a country is
a. Gross National Product at market prices
b. Gross Domestic Product at market prices
c. Net National Product at market prices
d. Gross National Product at factor cost
e. Gross Domestic Product at factor cost.
<
Answer >
10. “The money payments which are not due to any current productive activity on the part of income
receiver” is called
a. Plan expenditure
b. Transfer payments
c. Consumption expenditure
d. Past expenditure
e. Both (b) and (d) above.
<
Answer >
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11. The difference between M3 and M1 is
a. Demand deposits
b. Post office savings deposits
c. Savings deposits
d. Time deposits
e. M2.
<
Answer >
12. The diagram of circular flow of income shows
I. Households providing firms with factors of production.
II. Income for factors of production flowing from households to firms.
III. Firms owning factors of production.
a. Only (I) above
b. Only (III) above
c. Both (I) and (III) above
d. Both (II) and (III) above
e. All (I), (II) and (III) above.
<
Answer >
13. Which of the following is not included in personal income?
a. Personal savings
b. Personal income taxes
c. Dividends
d. Retained earnings
e. Personal consumption.
<
Answer >
14. In the long-run, a perfectly competitive firm earns only normal profits because of
a. Product homogeneity in the industry
b. Large number of sellers and buyers in the industry
c. Free entry and exit of firms in the industry
d. Both (a) and (b) above
e. Both (b) and (c) above.
<
Answer >
15. When the Government increases tax on cigarettes, cigarette manufacturers pass on much of the
additional tax to consumers in the form of higher prices. This implies that the demand for
cigarettes is
a. Relatively less elastic than supply
b. Relatively more elastic than supply
c. As elastic as the supply
d. Perfectly inelastic
e. Perfectly elastic.
<
Answer >
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16. Which of the following is not an example of a firm’s explicit cost?
a. Salaries paid to workers
b. An amount of Rs.500 paid to an employee towards the reimbursement of medical
expenses incurred by him
c. Advertisement expenditure incurred by the firm towards promotion of its branded good,
‘Atoka’
d. The firm’s owner has given up a job, where he was earning Rs.10,000 per month to run
the firm
e. Payment of telephone bills by the firm.
<
Answer >
17. A rice miller can sell as much rice as he wants in the market at the prevailing market price. He
knows that even if he increases the price by a small proportion, he will lose the entire market. The
slope of the demand curve faced by the miller would be
a. Infinity
b. Zero
c. One
d. Between zero and infinity
e. Between one and infinity.
<
Answer >
18. In economics, normal profit means
a. Zero accounting profit
b. MR = MC
c. Zero economic profit
d. Zero opportunity cost
e. Both (b) and (c) above.
<
Answer >
19. Which of the following costs is not recorded in the books of a firm?
a. Out-of-pocket costs
b. Indirect costs
c. Private costs
d. Implicit costs
e. Fixed costs.
<
Answer >
20. When the available resources in an economy are fully employed, expansionary monetary policy
normally result in
I. Demand pull inflation.
II. Supply shock inflation.
III. Wage push inflation.
a. Only (I) above
b. Only (II) above
c. Only (III) above
d. Both (I) and (II) above
e. Both (I) and (III) above.
<
Answer >
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21. Which of the following costs remain constant as the output increases?
a. Marginal cost
b. Average variable cost
c. Average fixed cost
d. Total variable cost
e. None of the above.
<
Answer >
22. In India which of the following best describes a perfectly competitive market?
a. Wheat cultivation
b. Indian railways
c. Soft drinks industry
d. Toilet soap industry
e. Electricity distribution.
<
Answer >
23. Diseconomies of scale refer to
a. The forces which reduce the average cost of producing a good as the firm expands the
size of its plant
b. The forces which reduce the marginal cost of producing a good as the firm expands the
size of its plant
c. The forces which increase the average cost of producing a good as the firm expands the
size of its plant
d. The forces which increase the marginal cost of producing a good as the firm expands
the size of its plant
e. The forces which keep the average cost of producing a good constant as the firm
expands the size of its plant.
<
Answer >
24. Which of the following is not true with respect to a perfectly competitive market?
a. There are many sellers in the market
b. Individual firms are price makers
c. Products sold by the firms are identical
d. Anyone can enter or exit the industry without any difficulty
e. Buyers and sellers have perfect information about the market.
<
Answer >
25. In a two-sector economy, the consumption function (C) is equal to 8 + 0.7Y and autonomous
investment is equal to 22. The equilibrium level of income in the economy is
a. 21
b. 30
c. 43
d. 100
e. None of the above.
<
Answer >
26. Savings function of an economy is S = – 300 + 0.25 Yd. Break-even disposable income for the
economy is
a. 75
b. 300
c. 900
d. 1200
<
Answer >
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e. 1500.
27. The difference between additional revenue gained by a firm from selling a unit and the additional
cost incurred for producing the unit is
a. Average profit
b. Average revenue
c. Marginal profit
d. Marginal revenue
e. None of the above.
<
Answer >
28. For a consumer in equilibrium, Marginal Rate of Substitution of good X for good Y (MRSxy) is 3.
If price of the good X (Px) is Rs.75, price of the good Y (Py) is
a. Zero
b. Rs. 25
c. Rs. 75
d. Rs.150
e. None of the above.
<
Answer >
29. To produce good X, two inputs L and K are used. If Marginal Rate of Technical Substitution
(MRTSLK) remains constant, shape of the Isoquant for the product X is
a. Concave to origin
b. Convex to origin
c. Straight line with negative slope
d. Straight line with positive slope
e. L-shaped.
<
Answer >
30. Which of the following price indices is/are most widely used for determining the inflation in India?
a. Wholesale price index (WPI)
b. GDP deflator
c. Consumer price index (CPI)
d. Both (a) and (b) above
e. Both (b) and (c) above.
<
Answer >
END OF PART A
Part B : Problems/Caselets (50 Points)
This part consists of questions with serial number 1 – 6.
Answer all questions.
Points are indicated against each question.
Detailed workings should form part of your answer.
Do not spend more than 110 - 120 minutes on Part B.
1. Kiran Lightning Limited (KLL) is currently employing 150 unskilled workers, 100 factory technicians, 50
machinists and 60 electricians. KLL has estimated the marginal product of various categories of labor to be as
follows:
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Category of labor Marginal Product of the last unit of labor
Unskilled workers 800 lights per week
Factory technicians 900 lights per week
Machinists 1100 lights per week
Electricians 1200 lights per week
Unskilled workers are paid Rs.400 as wages per week. Factory technicians are paid Rs.600 per week,
Machinists are paid Rs.700 per week and Electricians are paid Rs.800 per week as wages.
Required:
a. Explain whether KLL is using the optimum combination of labor or not.
b. What would you suggest KLL to minimize the total cost of production for the current level of output.
(4 + 1 = 5 points) < Answer >
2. Alpine Juices Ltd. sells packaged (Tetra pack) juices in New Delhi.The demand function for apple juice is
estimated to be
Q = 7500 – 1500PA + 3.5Y + 150PC + 10AA
Where
Q = Number of packs demanded for Alpine
PA = Price of one packet of apple juice charged by Alpine
PC = Price charged by a competitor for one pack of apple juice
Y = Per capita income of the consumer in New Delhi
AA = Number of advertising messages displayed by Alpine.
Assume that the current price charged by Alpine for each pack is Rs.2.5, the price charged by the competitor
is Rs.3 per pack and the per capita income of the consumer is Rs.3000. At present, Alpine is displaying 30
advertising messages in the local network.
Required:
a. Compute the price, income and promotional elasticities of demand for apple juice sold by Alpine
Juices Ltd. at the current values.
b. For the next period the target sales for Alpine is 17250 packets of apple juice. What are the
options available to Alpine to achieve the target sales? Show all your computations.
(6 + 4 = 10 points) < Answer >
3. The following information is extracted from National Income Accounts of a country:
Million Units of
Currency
GDP at factor cost 50,000
NNP at factor cost 47,000
Personal consumption expenditure 25,000
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Gross domestic investment 12,000
Corporate profits (Profit before tax) 10,000
Transfer payments by the government 500
Subsidies 1,000
Net Domestic investment 8,000
Personal tax payments 5,000
Indirect taxes 6,000
Dividends 400
You are required to compute:
a. NDP at market prices
b. Net Factor Income from Abroad
c. Personal Income
d. Personal Savings
(3 + 2 + 2 + 2 = 9 points) < Answer >
4. The following information is available from the balance sheet of the Reserve Bank of India:
Particulars Rs. Crore
Credit to Banking Sector 10,000
Credit to Government 40,000
Government Deposits 500
Other deposits with the RBI 200
Net worth 12,000
Other non-monetary liabilities 600
Credit to commercial sector 250
Net foreign exchange assets 65,000
Other assets 400
Government money in the economy is Rs.1,450 cr. Currency deposit ratio for the economy is estimated to be
0.30. Cash reserve ratio (CRR) imposed by the RBI is 5 percent. You are required to calculate the money supply
in the economy.
(6 points) < Answer >
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Caselet 1
Read the following caselet carefully and answer the following questions:
5. a. Is branding helping Dabor India in differentiating its products? Apart from branding, what are the
other means available to Dabor India to differentiate its products?
b. Dabur India is planning to promote the key brands by devoting more resources. How does
branding and advertising affect the cost functions of Dabor India? Explain with suitable diagrams.
(4 + 6 =10 points) < Answer >
Dabur India has decided to merge the family products and healthcare products divisions into one besides identifying
five growth drivers in Vatika, Dabur, Hajmola, Anmol and Real brands to maximize shareholder value.
In the new brand architecture, the company decided to deploy far more resources for the growth of the five key brands -
Dabur, Vatika, Hajmola, Anmol and Real - and back these up with much stronger advertising and larger marketing
spends. As part of focused brand building strategy, Dabur will stress on certain key brands already well established in
the consumer's mind, devising a clear positioning for each.
Thus, Vatika will stand for herbal beauty, Hajmola for tasty digestive, Real for fruit-based drinks, Anmol for value for
money hair care and Dabur for natural health. Besides, Dabur has decided to extend the Vatika brand from hair care
products to personal wash category and this year could see the launch of Vatika soap. Vatika will also be the skin care
brand under which two products will be launched this year.
Besides restructuring the FMCG business, the company has also laid out its plans for the new pharma entity, which
include forging alliances and going aggressive overseas. Dabur Pharma plans to be a major player in the global
Oncology generics business, supplementing its own strengths in this area by entering into key alliances with pharma
majors.
Caselet 2
Read the following caselet carefully and answer the following questions:
6. a. Households are driving the economic growth in America but in Japan they are one of the sources
of economic stagnation. Discuss.
b. Explain how the shift in demography and change in inflation affected the savings of households in
Japan
(5 + 5 = 10 points) < Answer >
The profligacy of American households is legendary: their eagerness to spend and spend has been the main motor of the
American economy in recent years. The Japanese, in contrast, are renowned for their thrift. It is often claimed that one
reason for the country's economic stagnation is that consumers, fearful of deflation and unemployment, insist on
keeping their wallets firmly shut. Yet it is a myth. Although in the early 1980s Japanese households were among the
world's champion savers, they are so no longer. Indeed, their saving rate is now roughly the same as that of spendthrift
Americans.
Recently revised figures show that Japanese household saving fell from 23% of personal disposable income in 1975 to
14% in 1990, and then to 6.9% in 2001 (the latest official figure). Osamu Tanaka, an economist at Morgan Stanley,
thinks the ratio fell to 4% last year and to a piffling 2% in the first quarter of 2003. If so, Japan's household saving rate
is now below America's (at present 3.5%) for the first time in 50 years. It is also well below rates in the euro area,
which are typically above 10%.
Thanks to the decline in saving, Japanese consumer spending has outpaced the growth in incomes. Over the past couple
of years it has continued to rise even as incomes have shrunk. Such a sharp fall in saving seems puzzling: a popular
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argument has it that deflation causes people to put off buying things in the expectation that they will be able to get them
more cheaply next year. In addition, Japanese households have suffered from a slump in asset prices, and thus a loss of
wealth. So they should be saving more to rebuild their nesteggs. And there is a third reason why you might have
expected higher, not lower, household saving in Japan: the big increase in government borrowing in the past decade.
According to a theory known as Ricardian equivalence, households should now be anticipating higher future taxes to
repay the extra government debt, by saving more today. Yet ordinary Japanese are saving less.
A study by Peter Morgan, an economist at HSBC, finds that the demographic shift can explain half of the fall in Japan's
saving rate over the 20 years to 2000. The ratio of Japanese aged over 65 to those of working age rose from 15% in
1980 to 28% in 2000. It is forecast to increase to 38% by 2010 and to 50% by 2020. Much of the rest of the decline may
be related to fall in the inflation.
END OF PART B
Part C : Applied Theory (20 Points)
This part consists of questions with serial number 7 - 8.
Answer all questions.
Points are indicated against each question.
Do not spend more than 25 -30 minutes on Part C.
7. In a frenzied bid to cash in on the great Indian retail boom, developers in the two southern cities of
Bangalore and Hyderabad are building huge shopping spaces. Many are crying foul saying that there will be a glut
in the shopping malls and retail space in 12-24 months. Illustrate, with supply and demand curves, how a glut
(excess supply) could happen and what would be the impact on the price and quantity demanded.
(10 points) < Answer >
8. “Inflation is estimated to hover around 4.5-5.0 percent this fiscal. Combined with the encouraging corporate
results, a remarkable buoyancy in the export growth and the appreciating rupee, India’s macroeconomic
fundamentals never looked better”, feels the finance minister. Explain inflation and discuss the sources of inflation.
(10 points) < Answer >
END OF PART C
END OF QUESTION PAPER
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