End-Semester Exam
ECON F211: Principles of Economics
Time Duration: 120 Minutes Date: 19/June/2021
Maximum Marks: 70
Instructions:
All questions are compulsory
Part A consist of 30 MCQs carries 1 mark each
Part B consist of four questions carries 40 marks in total. You need to write the answers on
the space given. No uploading is required.
You will be given 120 minutes to complete the exam
Part B
Descriptive/Numerical Type Questions
Question B-1: Refer to the following figure drawn for a monopolistically competitive firm, A
Custom Sweater Shop. Answer the following questions: [10 Marks]
a) How much this firm should produce and at what price to maximize profits in the short run,
if the fixed cost is 500? Support your answer.
b) What would be the level of profit of this firm at profit maximising level of output and price
in the short-run? Support your answer.
c) What happens to the level of production, if the fixed cost is 250? Support your answer.
d) What would be the loss minimizing quantity produced if fixed cost is 500? Also, calculate
the minimum level of fixed cost which would lead to the firm continuing to operate in the
short run? Support your answer.
e) How the situation changes in the long-run?
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Answer B-1 cum evaluation scheme:
a) If FC is 500 then profit maximising output is 100 units at 46 price per unit because earning
is 4600 and ATC is 5000. Difference is 400 which is lesser than the FC [2 Marks]
b) (-) 400 [2 Marks]
c) Zero because at 100 units selling, profit is – 400 which is greater than the loss by not
producing anything [2 Marks]
d) 100 and 400 [3 Marks]
e) In the long run few firms will leave until all the firms attain normal profits [1 Marks] –
Those who have not mentioned this reason while explain other long run outcomes are not
considered for the marks
Question B2: Given the following data:
[10 Marks]
Spending ₹ billions
Durable goods 2000
Non-residential investment 1040
Federal purchase of goods 780
Exports 1040
State and local purchase of goods 520
Residential investment 130
Services 1300
Imports 650
Change in business inventories -65
Nondurable goods 1800
a) Compute the personal consumption expenditures
b) Compute the value for gross private domestic investment
c) Compute the value for net exports
d) Compute the value of gross domestic product
e) Compute the value of government spending
Answer (2 marks each):
a) 2000 + 1800 + 1300 = 5100
b) 1040 +130 -65 = 1105
c) 1040 – 650 = 390
d) 2000 + 1800 + 1300 + 1040 + 130 – 65 + 780 + 520 + 1040 – 650 = 7895
e) 780 + 520 = 1300
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Question B3 – Given the following data:
[10 Marks]
Heads ₹ billions
Depreciation 220
Receipts of factor income from the rest the world 168
Government purchases 560
Imports 280
Payments of factor income to the rest of the world 280
Net private domestic investment 1120
Personal income taxes 672
Personal consumption expenditures 3360
Dividends 112
Exports 336
Amount of national income not going to households 112
a) Compute the value of GDP
b) Compute the value of GNP
c) Compute the value of NNP (national income)
d) Compute the value of personal income
Answer (2.5 marks each):
a) 3360+1120+220+560+336-280 = 5316 [C + Gross I + G + (X – M) ]
b) 5316 + 168 -280 = 5204 [GDP + Net factor income from abroad]
c) 5204 – 220 = 4984 [GNP – Depreciation]
d) 4984 – 112 = 4872 [PI = NNP (without discrepancy) – income not going to HH]
Question B-4: [Marks: 2.5 for game construction in each part; 2.5 for the solution and
explanation]
Part A: In a strategic interaction between two firms (A & B) in the market, both firms have two
strategies to exercise: Increase Price & Not to increase price. Given the following payoffs under
different strategy combinations:
If both would increase price: (3000,3000)
If both would not increase price: (5000, 5000)
If A increase price and B don’t: (10000, 15000)
If A do not increase price and B increase: (15000, 10000)
Assuming A as a row player and B as a column player, construct the game as per the game theory
format (you can write the payoffs in bracket and mention which bracket will appear in the different cells of
two by two setup) and provide the profit maximizing payoffs using Nash Equilibrium.
3
Part B: In a strategic interaction between two firms (A & B) in the market, both firms have two
strategies to exercise: Advertise & Not to Advertise. Given the following payoffs under different
strategy combinations:
If both advertise, then the profits are: (75,75)
If both would not advertise, then the profits are: (100, 100)
If A advertise and B don’t: (200, 50)
If A do not advertise and B does: (50, 200)
Construct the game, solve and comment on the solution of this game.
Answer:
a) (Raise Price, Don't Raise Price) and (Don't Raise Price, Raise Price) using Nash equilibrium
b) Firms’ dominant strategy is to advertise. The game is known as prisoners’ dilemma and its
result can be improved by playing repeatedly.
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