Department of Economics M .Phil/Ph. D Qualifying Examination Questions MICROECONOMICS 1. a) In what sense is economics a science? b) Draw a Production Possibilities Frontier (PPF) for a society that produces food and clothing. Discuss how the following concepts are depicted in the PPF: i) Scarcity; ii) Choice; iii) Opportunity Cost; iv) Efficiency and Inefficiency; and v) Economic Growth. c) Assume Econoland produces haircuts and shirts with inputs of labor. Econoland has 1000 hours of labor available. A haircut requires 1/2 hour of labor, while a shirt requires 5 hours of labor. Construct Econoland's PPF. What is the opportunity cost of a shirt? 2. a) Define market and market equilibrium . b) Calculate the equi1ibrium price and quantity in the market, where the demand schedule is represented by the equation QD = a - bP (a>0, b> 0) and the supply schedule can be represented by the equation QS = c + dP (c>0, d>0). Show your results in a diagram. c) Explain three steps that are involved in a comparative static analysis. We observe two possible outcomes for a simultaneous increase in demand and decrease in supply. Show your results in diagrams and explain why the outcomes could be different. 3. a) Define price elasticity of demand (Ed ). b) Calculate the price elasticity of demand (Ed) from the price-quantity data given below: P=$8; Q = 120 units; P=$12; Q=80 units c) “City mass transit authority (BRTC) increases bus fare to reduce deficits where as opera house reduce ticket price to reduce deficits”. Use the versatile tools of supply, demand and elasticity to justify whether both strategies are correct or not. 4. a) What are the common set of market outcomes and implications observed when government imposes taxes to raise revenue? b) Suppose that the market for a good is described by the following demand and supply equation: Qs = -500 + 15P; Qd = 700 - P i) Solve for the equilibrium price and quantity. ii) Suppose that a tax of $5 is placed on buyers of the good. Solve for the new equilibrium. Calculate the price received by sellers, the price paid by buyers, the quantity sold. iii) Solve for tax revenue and the deadweight loss caused by this $5 tax. 5. (a) Describe the three key attributes of monopolistically competitive market. b) Draw a diagram depicting a firm in a monopolistically competitive market that is making profits. Now show what happens t o t his firm as new firms enter t he industry. c) Firms are said to have excess capacity under monopolistic competition. Is excess capacity is a social problem? 6. (a) Draw a budget constraint and Indifference Curves (ICs) for X and Y commodities. Show what happens to the budget constraint and the consumer's optimum when the price of commodity X decreases. In your diagram, decompose the change into an income effect and a substitution effect. b) Use consumer choice theory to analyze the following: (i) Do all demand curves slope downward? ii) How do wages affect labor supply? 7. A recent study found that the demand and supply schedules for two-bedroom apartments in the town of Collegeville are as follows: Price (rent per month) Quantity Demanded Quantity Supplied $200 400apartments 100apartments 250 375 150 300 350 200 350 325 250 400 300 300 450 275 350 a) What are the equilibrium price and quantity of two-bedroom apartments in Collegeville? b) The City Council of Collegeville receives a petition from students complaining about the high rent in town. As a result, the Council creates a price ceiling that is$100 below the equilibrium price. What is the new market price? How many two-bedroom apartments will be rented? c) Landlords show up the next Council meeting and demand an increase in rents. The Council member s (concerned about their upcoming reelection campaigns) vote to repeal the price ceiling and instead replace it with a price floor that is$50 above the equilibrium price. What is the new market price? How many two bedroom apartments will be rented? · 8. The following questions are related to the applications of supply, demand, and elasticity: a) Can good news for farming be bad news for farmers? Explain with diagram. b) Why did OPEC (Organization of Petroleum Exporting Countries) fail to keep the price of oil high? Discuss the salient features of oil market in the short run and long run with diagrams. c) Which of the policies do you prefer to reduce the use of illegal drugs and drug-related crimes? Drug interdiction versus drug education? 9. Consider how health insurance affects the quantity of health care services performed. Suppose that the typical medical procedure has a cost of $100, yet a person with health insurance pays only $20 out of pocket. Her insurance company pays the remaining $80. a) Draw the demand curve in the market for medical care. Show the quantity of procedures demanded if each procedure has a price of $100. b) On your diagram, show the quantity of procedures demanded if consumers pay only $20 per procedure. If the cost of each procedure to society is truly $100, and if individuals have health insurance, will the number of procedures performed maximize tot al surplus? Explain. c) Economists often blame the health insurance system for excessive use of medical care. Given your analysis, why might the use of care be viewed as "excessive"? d) What sort of policies might prevent the excessive use? 10. Suppose that a market is described by the following supply and demand equations: Qs = 2P Qd= 300- P a) Solve for the equilibrium price and the equilibrium quantity. b) Suppose that a tax of T is placed on buyer s, so the new demand equation is Q'd= 300 - (P + T). Solve for the new equilibrium. What happens to the price received by sellers, the price paid by buyers, and the quantity sold? c) Tax revenue is T×Q. Use your answer to part (b) to solve for tax revenue as a function of T. Graph this relationship for T between O and 300. d) Solve for deadweight loss as a function of T. e) The government now levies a tax on this good of $200 per unit. Is this a good policy? Why or why not? Can you propose a better policy? 11. (a) Draw a budget constraint and Indifference Curves (ICs) for Pepsi and Pizza. Show what happens to the budget constraint and the consumer's optimum when the price of Pizza rises. In your diagram, decompose the change into an income effect and a substitution effect. b) Use consumer choice theory to analyze the following: i) How do wages affect labor supply? ii) How do interest rates affect household saving? 12. (a) Explain why a monopoly will never produce a quantity at which the demand curve is inelastic. b) Explain with diagram how monopoly firm maximizes its profit. c) Why a monopoly does not have a supply curve? d) Is monopoly profit a social cost? 13. a) Define price ceiling and price floor and give an example of each. b) “Price control often hurt those the policymakers try to help". Do you agree with the statement? If yes, why, and if not, why not? c) What are the common set of market outcomes and implications do you observe when government impose taxes to raise revenue? 14. Consider the total cost and total revenue given in the following table: Quantity 0 1 2 3 4 5 6 7 Total Cost (C) $8 9 10 11 13 19 27 37 Total Revenue (R) $0 8 16 24 32 40 48 56 a) Calculate profit for each quantity. How much should the firm produce to maximize profit? b) Calculate marginal revenue (MR) and marginal cost (MC) for each quantity. Graph them. (Hints: Put the points between whole numbers. For example, the MC between 2 and 3 should be graphed at 2 1/2). At what quantity do these curves cross? How does this relate t o your answer to part (a)? c) Can you tell whether this firm is in a competitive industry? If so, can you tell whether the industry is in a long -run equilibrium? 15. a) A consumer has income of $3,000. Pepsi costs $3 a glass, and a Pizza slice costs $6. Draw the consumer's budget constraint. What is the slope of the budget constraint? b) Draw a consumer's indifference curves (ICs)for Pepsi and Pizza. Describe and explain four properties of these ICs. c) Pick a point on an IC for Pepsi and Pizza slice and show the marginal rate of substitution (MRS). What does the MRS tell us? d) Show the optimal consumption choice. What is the MRS at this optimum? e) The price of pizza slice rises from $6 to $10, while the price of Pepsi remains the same. For a consumer with a constant income of $3,000, show what happens to consumption of Pepsi and pizza. Decompose the change into income and substitution effects. f) Can an increase in the price of Pizza per slice possibly induce a consumer to buy more Pizza slices? Explain. 16. Draw a circular flow diagram. Identify the parts of the model that correspond to the flow of goods and services and the flow of taka for each of the following activities. · a. Karim earns Taka 15 per hour working in a factory. b. Ayesha spends taka 60 for a pizza. c. Bakeman's Bakery pays Taka 5000 for the rent on its shop. d. Laila purchases a new pair of earrings for Taka 10,000 . 17. Imagine a society that produces military goods and consumer goods, which we'll call "guns" and "butter". a. Draw a production possibilities frontier (PPF) for guns and butter. Using the concept of opportunity cost, explain why it most likely has a bowed-out shape. b. Show a point that is impossible for the economy to achieve. Show a point that is feasible but inefficient. c. Imagine that the society has two political parties, called the HAWKS (who want a strong military) and the DOVES (who want a smaller military). Show a point on your PPF that the HAWKS might choose and a point the DOVES might choose. d. Imagine that an aggressive neighboring country reduces the size of its military. As a result, both the HAWKS and the DOVES reduce their desired production of guns by the same amount. Which party would get the bigger "peace dividend," measured by the increase in butter production? Explain. 18. (a) Market research has revealed the following information about the market for pizza: The demand schedule can be represented by the equation QD = 380 - 20P, where QD is the quantity demanded and P is the price. The supply schedule can be represented by the equation QS= -120 + 30P, QS is the quantity supplied. Calculate the equilibrium price and quantity in the market for pizza. b) "An increase in the demand for notebooks raises the quantity of notebooks demanded but not the quantity supplied." Is this statement true or false? Explain. 19. Suppose that your demand schedule for T-shirts is as follows: Price Quantity Demanded Quant it y Supplied (Income= $ 12,000) (Income= $ 15,000) $5 20 T-shirts 25 T-shirts 8 16 I 22 11 12 19 14 8 16 17 4 13 a. Use the midpoint method to calculate your price elasticity of demand as the price of T-shirts increases from $5 to$8 if (i) your income is $12,000and (ii) your income is $15,000. b. Calculate your income elasticity of demand as your income rises from $12,000 to $15,000 if (i) the price is $14 and (ii) the price is $17. c. Two drivers - Tom and Jerry- each drive up to a gas station. Before looking at the price, each places an order. Tom says, "I'd like 10 gallons of gas." Jerry says, "I'd like $10 worth of gas". What is each driver's price elasticity of demand? 20. The supply and demand for ice cream cones are described by the following equations: Supply: QS = -30 + 38P; Demand: QD = 90 - 2P. Q is the quantity of ice cream cones per day, and Pis the price per cone (in Takas). a. Graph the supply curve and the demand curve. What is the equilibrium price and quantity? b. Calculate consumer surplus (CS), producer surplus (PS), and total surplus (TS) at the equilibrium. c) If a dictator who hated ice cream were to out-law the sale of ice cream cones, who would bear the largest burden - t he buyers or the sellers of ice cream cones? 21. (a) Why is a monopolist's marginal revenue(MR) less than the price (P) of its good? Can marginal revenue (MR) ever be negative? Explain. b. Draw the demand, marginal revenue, and marginal cost curves for a monopolist. Show the profit maximizing level of output. Show the profit -maximizing price. c. In your diagram from (b), show the level of output that maximizes total surplus. Show the deadweight loss from the monopoly. Explain your answer. 22. Distinguish between a change in quantity demanded and change in demand. Describe with the help of appropriate diagrams. How each of the following will affect the Dell personal computers: (a) a rise in income (assuming computers are normal goods); (b) a lower expected future price of computers; (c) a rise in the computers of other brands; (d) a cheaper software has been developed. 23. a) Define price elasticity of demand. b) How do you relate different values of own price elasticity and income elasticity of demand with the nature of the commodities consumed? c) “'A bumper crop production in agriculture may be good news for the consumers, but bad news for the farmers” Explain using the concept of price elasticity of demand. 24. A person’s ranking of beef burgers (y) and soft drinks (x) is represented by the utility function u = √. If utility level is arbitrarily set at u = 10, then a) find the equation for the indifference curve between x and y. b) find the MRS between y and x. c) find the MRS at (y=20) and (x=5), and (y=5) and (x=20) d) can you show how convexity of indifference curve is illustrated by (c) above? 25. The production function for a product during a particular period is given by q = f (k,l) = 600k2l2 – k3l3 where k is capital and l is labour and q is the production. Assuming k = 10, find a) Marginal product of labour b) at what level of labour input does the MPL = 0? c) the average product of labour d) suppose capital inputs were increased to k = 20, how would your answers to (a), (b) and (c) change? 26. Describe briefly the assumptions of perfect competition. How would you determine the short-run equilibrium of a firm under perfect competition? What is the supply curve of the firm in the short-run? 27. What are the sources of monopoly? How would you determine the long run equilibrium of a firm under monopoly? What is the social cost of monopoly?