Intermediate Microeconomics I: Behavioural Foundations of Market Interactions — DU B.A (Prog.) Economics as Major Previous Year Question Papers

Section A — Short Answer (18 Marks) Answer all six parts. Each part carries 3 marks. 1. (a) Define the budget line and explain what happens when the price of one good doubles. (b) Give two examples each of normal and inferior goods. (c) A consumer is having (W,, W,) endowment of two goods x and y. Explain the change in consumer budget line if the value of endowment decreases. (d) What is marginal rate of substitution? Illustrate it with an indifference-curve diagram. (e) Explain the difference between risk-neutral and risk-averse individuals using the shape of the utility-wealth curve. (f) What are fixed, variable, and sunk costs? Give one simple example of each. 2. (a) A consumer has income = 7120; price of X = 210; price of Y = 220. (i) Write the budget equation. (2) (i) Find intercepts and draw the budget line. (2) (b) Explain in words what happens to the equilibrium consumption if income rises to 7200. (6) (c) Explain the properties of Indifference curve. Maya like sugar in tea, but cannot differentiate between quantity of sugar which differ by Igram or less. Explain why her preferences violate assumptions of Indifference curve and which assumption is violated. (8) 3. (a) Using diagrams, explain the substitution effect and income effect when the price of good X falls. (8) (b) Suppose the price of X falls from 10 to 5 and the quantity demanded increases from 6 to 10. Compute the price elasticity of demand and comment on whether the good is elastic or inelastic. (5) (c) Distinguish between normal, inferior, and Giffen goods using examples. 4. (i) A person has wealth 710,000 and faces a 50% chance of losing 72,000. (a) Find the expected value of wealth. (4) (b) Explain how buying insurance changes the outcome for a risk-averse individual. (3) • (c) What is meant by diversification? Give one everyday example of risk spreading. (3) (ii) The curvature of the expected utility function describes the consumer's attitudes towards risk. If a consumer has a concave utility function, will he be considered a risk lover or a risk averter? Explain it with the help of the diagram. (8) 5. (a) Complete the following table and compute marginal product (MP) and average product (AP) of labour. (6) Labour Output (b) Explain why the marginal product eventually declines. (6) (c) Draw and explain the shapes of short-run total, average, and marginal cost curves. (6) (6) Labour Output 6. (a) Suppose the demand equation is Q, = 60 - 2P and supply is Qs = 4P. Find the equilibrium price and quantity. If income increases and the demand curve shifts to Op = 70 - 2P, find the new equilibrium price. (6) (b) Explain how market demands equals market supply in equilibrium. (6) (c) For each of the following utility functions below, for good 1, derive and draw the Engel curve, x, (m), and the demand curve, x, (P,). 7. (a) Explain how a subsidy to poor households affects their consumption and welfare. (5) (b) A consumer's total utility from consuming X units of a good is :