Microeconomics – 1 (Understanding Firms)

MBA
MOCK EXAM
Maximum Marks: 60 Time: 90 Minutes Weight: 50%

__________________________________________________
Instructions to students:
 This is a Closed Book examination.
 Use of mobile phone or any electronic storage and access system is
prohibited.

ANSWER ANY THREE QUESTIONS

QUESTION 1 (20 POINTS)

A. You are the manager of a firm that produces and markets a generic type of
soft drink in a competitive market. In addition to the large number of
generic products in your market, you also compete against major brands
such as Coca-Cola and Pepsi. Suppose that, due to the successful lobbying
efforts of sugar producers in the United States, Congress is going to levy a
$0.50 per pound tariff on all imported raw sugar—the primary input for your
product. In addition, Coke and Pepsi plan to launch an aggressive
advertising campaign designed to persuade consumers that their branded
products are superior to generic soft drinks. How will these events impact
the equilibrium price and quantity of generic soft drinks? Explain using a
demand and supply diagram. (10)

B. The demand and supply curves for T-shirts in in a city are given by the
following equations:
QD = 24000 - 500P
QS = 6000 + 1000P
Where P is measured in dollars and Q is the number of T-shirts sold per year.
 a. Find the equilibrium price and quantity algebraically.
(2.5)

b. If people decide they do not really like T-shirts that much, which of the
following might be the new demand curve?

OPTION 1: QD = 21000 - 500P

OPTION 2: QD = 27000 - 500P

Find the equilibrium price and quantity after the shift of the demand curve.
(3.5)

c. If, instead, two new stores that sell T-shirts open up in town, which of the
following might be the new supply curve?
OPTION 1: QS=3000+1000P
OPTION 2: QS=9000+1000P

Find the equilibrium price and quantity after the shift of the supply curve.
(4)

QUESTION 2 (20 POINTS)

A. Amazon.com, the online bookseller, wants to increase its total revenue. One
strategy is to offer a 10% discount on every book it sells. Amazon.com knows
that its customers can be divided into two distinct groups according to their
likely responses to the discount. The accompanying table shows how the two
groups respond to the discount.

Group A Group B
(sales per week) (sales per
week)
Volume of sales 1.55 million 1.50 million
before the 10%
discount
Volume of sales 1.65 million 1.70 million
after the 10%
discount

a. Using the midpoint method, calculate the price elasticities of demand for
group A and group B.
(5)
b. Explain how the discount will affect total revenue from each group.
(2)
 c. Suppose Amazon.com knows which group each customer belongs to when he
logs on and can choose whether or not to offer the 10% discount. If
Amazon.com wants to increase its total revenue, should discounts be offered to
group A or to group B, to neither group, or to both groups? (3)

B. What can you conclude about the price elasticity of demand in each of the
following statements? Explain the underlying elasticities and the reason.
(2.5 x 4 = 10)
a. “The pizza delivery business in this town is very competitive. I’d lose half my
customers if I raised the price by as little as 10%.”
b. “I owned two Bob Kane autographed first volume of Batman Comics in
existence. I sold one on eBay for a high price. But when I sold the second one,
the price dropped by 80%.”
c. “My economics professor has chosen to use the McConnell textbook for this
class. I have no choice but to buy this book.”
d. “I always spend a total of exactly Rs. 300 per week on coffee.”

QUESTION 3 (20 MARKS)

You own a textile firm and you would like to know the impact of price and income
on quantity demanded (Q). For that purpose, you form a regression model and
run the regression in MS Excel. The output is given below.

SUMMARY
OUTPUT

Regression Statistics
Multiple R 0.8367
R Square 0.7001
Adjusted R Square 0.6668
Standard Error 7.9455
Observations 21.0000

ANOVA
Significance
Df SS MS F F
1326.29 21.00
Regression 2.0000 2652.5999 99 88 0.0000
Residual 18.0000 1136.3525 63.1307
Total 20.0000 3788.9524
Coefficie Standard
nts Error t Stat P-value
Intercept 49.1876 9.8451
Price -3.1179 0.6991
Income 0.5100 0.2503

Based on the result above, answer the following questions –

A. Write down the estimated regression and forecast for the quantity
demanded (Q) when price is $10 and income is $4500.
(3+ 3 = 6)
B. Find out the missing t-values in the regression table above.
(3)
C. Write the hypothesis corresponding the two independent variables.
(4)
D. Comment on the impact (size, sign and significance) of the two
independent variables on Q. (5)
E. Comment on the explanatory power of the model.
(2)

QUESTION 4 (20 MARKS)

Assume that in a perfectly competitive market, a few firms are enjoying
supernormal profit initially. Using a clearly drawn diagram, explain the long run
adjustment process in this market.

END OF PAPER

Microeconomics – 1 (Understanding
Competition)
MBA
MOCK EXAM
 Maximum Marks: 60 Time: 90 Minutes Weight: 50%

__________________________________________________
Instructions to students:
 This is a Closed Book examination.
 Use of mobile phone or any electronic storage and access system is
prohibited.

ANSWER ANY THREE QUESTIONS

QUESTION 1 (20 POINTS)

A. Explain the concept of externality. How does externality lead to market

failure? (5 + 5 = 10)
B. Using clearly drawn diagrams, discuss how social optimal can be restored in
markets characterized by positive and negative externality in production.
(5 + 5 = 10)

QUESTION 2 (20 POINTS)

A. A competitive firm has the following cost function: C = 128 + 69q -14q 2 + q3

If the price in the market is $60, what is the profit maximizing level of
production for this firm? What are its profits? Show all work.
(10)

B. A local microbrewery has total costs of production given by the equation

TC=500+10q+5q2. The market demand for beer is given by the equation Q D=105 –
(1/2)*P.
a. Write the equations showing the brewery's average total cost and average
variable cost and average fixed cost, each as a function of q. Show the firm's
MC, ATC and AVC on one graph. (2)
b. What is the breakeven price and breakeven quantity for this firm in the short
run? (2)
c. What is the shutdown price and shutdown quantity for this firm in the short
run? (2)
d. If the market price of the output is $50, how many units will this firm
produce? (2)
 e. Given a market price of $50, how many firms are in this market?
(2)

QUESTION 3(20 POINTS)

A. Consider the following situation.

Two players: The employee (Radhika) and the employer (Veera). Radhika has to
choose whether to pursue training that costs $1,000 to herself or not. Veera has to
decide whether to pay a fixed wage of $10,000 to Radhika or share the revenues of
the enterprise 50:50 with Radhika. The output is positively affected by both
training and revenue sharing. Indeed, with no training and a fixed wage total
output is $20,000, while if either training or profit sharing is implemented the
output rises to $22,000. If both training and revenue sharing are implemented the
output is $25,000.

a. Construct the pay-off matrix

(5)
b. Is there any equilibrium in dominant strategies?
(3)
c. Is there any Nash equilibrium?
(2)

B. Firms Alpha and Beta serve the same market. They have constant average
costs of Rs. 2 per unit. The firms can choose either a high price (Rs. 10) or a
low price (Rs. 5) for their output. When both firms set a high price, total
demand = 10,000 units which is split evenly between the two firms. When both
set a low price, total demand is 18,000, which is again split evenly. If one firm
sets a low price and the second a high price, the low-priced firm sells 15,000
units, the high priced firm only 2,000 units.

Analyze the pricing decisions of the two firms as a non-co-operative game.

a. In the normal from representation, construct the pay-off matrix, where the
elements of each cell of the matrix are the two firms’ profits.
(5)
b. Derive the equilibrium set of strategies.
(3)
c. Explain why this is an example of the prisoners’ dilemma game.
(2)
QUESTION 4 (20 POINTS)

A. Compare and contrast between adverse selection and moral hazard. Give
examples of each. (12)
B. Explain the problem of principal-agent problem in an organization.
(8)

END OF PAPER