PREVIOUS YEAR SOLVED EXAMPLES

IInd Sem [2016-17 & 2017-18] and

Ist Sem[2018-19]
DD & SSAPPLICATION
[CH-3 & CH-4]
MID-SEM (IIND SEM 2017-18)
• QUESTION 2:
• In Stardust magazine, several fans and rock stars, including Arijit Singh,
were criticizing the high ticket prices for concert entry. Arijit argued, “It
just isn’t worth Rs 5000 to see sing. No one should have to pay that
much to g o to a concert.” Assume this star sold out concerts around
the country at ticket price of Rs. 5000. [2.5*4=10Marks]

All subparts should b e answered with respect to initial condition given

above in separate graphs.
• a. Suppose that due to this star’s protests, ticket prices were lowered
to Rs. 3500. In what sense is this price too low? Draw a diagram using
supply and d e m a n d curves to support your argument.
• b. Suppose Arijit Singh really wanted to bring down ticket prices. Since
the singer controls the supply of its services, what d o you recommend
they do? Explain using a supply and d e m a n d diagram
• c. Suppose the Arijit Singh’s next album flopped. Do you think he
would still have to worry about ticket prices being too high? Why or
why not? Draw a supply and d e m a n d diagram to support your
argument
• d. Suppose Arijit Singh announced their next tour was going to b e their
last. What effect would this likely have on the d e m a n d for and price of
tickets? Illustrate with a supply a n d d e m a n d diagram.
IIndSemester (2016-17)
DD & SSAPPLICATIONS
Ist Sem [2018-19]
CONSUMER SURPLUS/ PRODUCER
SURPLUS/DEAD WEIGHT LOSS
• Please Note:
• Correct PS= 3*(8-5) + ½ * 3*( 5-2)
-
• Instead of
• PS= 3*(8-5) + ½ * 3*( 8-5)
EQUILIBRIUM
ELASTICITY
[CH-5]
MID-SEM (IIND SEM 2017-18 )
• Question No. 3: Given below are prices and quantity d e m a n d e d for
g o o d X, g o o d Y and g o o d Z at different income levels (Assume that
tastes and preferences are constant and there are 3 goods only).

(Important: →No step marking or partial marking will b e given if you use
the wrong formula and → the type of g o o d should b e answered on the
basis of the sum solved; no marks will b e given for the type of g o o d if
you write it without solving or you write on the basis of a wrong answer)
• a. Calculate price elasticity of d e m a n d for g o o d Y. Is it elastic? Why or
why not?

• Answer: In all subparts, no sense of direction of change is given, so we need

to use the midpoint formula
a) Price Elasticity of Demand for Y:
The relevant combination is:
• b. Find cross price elasticity of d e m a n d between the relevant products
(consider the case where you observe a change in quantity d e m a n d e d
due to change in price of another good). What type of goods are they?
• Answer:
• b) The relevant change is Change in quantity of Z due to price of Y (Why
not for X?)- so we are calculating cross price elasticity of d e m a n d for Z
due to change in price of Y:
The relevant combination is:
• c. Find the income elasticity of d e m a n d for g o o d X. What kind of
g o o d isit?

• Answer:
MID-SEM [IIND SEM 2016-17]
Ist Sem 2018-19 [Mid-Sem]
COMPARATIVE & ABSOLUTE
ADVANTAGE
IIND SEMESTER [2016-17]
MID-SEM (IIND SEM 2017-
18)
• QUESTION 3: Olivia and Harry live in a small town of Kansas. They produce
burgers and donuts at a small scale and work on their own. The table
below mentions per hour production of e a c h items by both
Olivia and Harry:
• a. Find out the opportunity cost of a Donut for both. Who has the
comparative advant age in the production of Donuts and who has in
Burgers? Explain

• Burgers:
• Olivia – 1B=6/15D=0.4D [Comparative Advantage]
• Harry – 1B=0.5D
• Donuts:
• Olivia – 1D=15/6B=2.5B
• Harry – 1D=2B [Comparative Advantage]
• b. If Olivia works for 22 hours per week, draw a graph of production possibilities of
burgers and donuts that she could produce in a week. Do the same exercise for
Harry as well

• For Olivia
• Maximum B=15*22B
• Maximum D=6*22D
• Similarly for Harry

• c. If Harry devotes half of his time that is 11 out of 22 hours in week for producing
burgers and half for producing donuts, how many of e a c h would b e produced in
week. Do the same exercise for Olivia as well.

• d. If Olivia spends all 22 hours of her time on burgers and Harry spends 18 hours on
burgers and 4 hours on donuts. How many of e a c h item would b e produced?
Ist Sem 2018-19 [Mid-Sem]
CHAPTER-6
IIndSemester(2016-17)
INCOME & SUBSTITUTIONEFFECT
MID-SEM (IIND SEM 2017-
18)
INCOME & SUBSTITUTIONEFFECT
• Question No. 2: Explain why in product markets the substitution a n d income effects work in
the same direction for normal goods, but in the labor market, the income a n d substitution
effects work in opposite directions when leisure is considered a normal good.

• Answer:
• For a normal good, when price rises, household becomes worse off since
real income has fallen, households buy less of this good. Higher price also means
“more expensive relative to substitutes,” a n d households buy less of this g o o d a n d
more of other goods. So income a n d substitution effect work in same direction, to reduce
the quantity of the normal g o o d bought by the household.

• If leisure is a normal good, an increase in income will lead to a higher d e m a n d for leisure
a n d lower quantity of labour supplied. This is the income effect of w a g e increase. A higher
w a g e rate also means leisure is more expensive. So w e expect households to substitute
leisure for work. Lower quantity of leisure demanded. Higher quantity of labour supplied. This
is the substitution effect of w a g e increase. When leisure is considered as a normal g o o d a n d
the wages increase, income a n d substitution effect thus work in opposite direction
BUDGET CONSTRAINT
IIndSemester(2016-17)
UTILITY
MID-SEM (IIND SEM 2017-
18)
UTILITY
• 1. Alia enjoys watching movies at PVR and going to Dance Club
“Boom Shaka Boom”. The extent of her enjoyment is revealed by the
following utility schedules
• a. Compute Alia’s marginal utility for e a c h activity.
• b. Assume initially that the price for both a movie and an entry at Dance
Club is Rs. 200 per game. Given a budget of Rs. 600, how many visits to PVR
and Dance Club should Alia make?
• c. Now suppose the price of going for a movie is Rs. 100, half the price
of a visit to Dance Club. With a Rs. 600 budget, how many visits to
movies and Dance Club e a c h would maximize Alia’s utility? Justify
your answers.
• d. Based on the above information, plot Alia’s d e m a n d for visits to
Dance Club
UTILITY MAXIMIZATION
[LAGRANGE]
COMPRE EXAM [IIND SEM 2018-19]
Ist Sem 2018-19 [Mid-Sem]
EXTRA QUESTIONS
 32.

 A firm uses two inputs, capital and labor, to produce output. Its
production function exhibits a diminishing marginal rate of technical
substitution.

 a. If the price of capital and labor services both increase by the same
percentage amount (e.g., 20 percent), what will happen to the cost-
minimizing input quantities for a given output level?

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  If the price of both inputs change by the same percentage amount, the
slope of the isocost line (  w / r ) will not change. Since we are
holding the level of output fixed, the point at which the isocost line is
tangent to the (fixed) isoquant does not change.
 Therefore, the cost-minimizing quantities of the inputs will not
change.

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  b. If the price of capital increases by 20 percent while the
price of labor increases by 10 percent, what will happen to the
cost-minimizing input quantities for a given output level?

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  If the price of capital increases by a larger percentage than the price of labor,
the isocost lines become flatter (since w / r decreases). This means that the
point of tangency will move to the southeast as shown in the diagram below:

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  Another way to think about this is to realize that when the price of capital
increases by a larger percentage than the price of labor, labor has become
cheaper relative to capital. The firm responds by substituting away from
capital in favor of labor.

 In sum, the cost-minimizing quantity of labor should increase, and the

costminimizing quantity of capital should decrease.

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