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microeconomics

Questions and Answers of Microeconomics

‘In general, individual shares are riskier than investment in a mutual fund’.Comment.
‘In general, bonds are riskier than stocks’. Comment.
An investment in a project gives a yield of Rs 4 lakh for four years starting the next year. (At the end of the project period, there is no return of the principal or any sale value of the investment
lakh per year. If the interest rate is 7 per cent, what is the discounted value of the next year’s expected salary?
This year your job is paying you Rs 9 lakh per year. You expect to get a promotion next year with a salary of Rs
Mahesh is looking into the prospects of buying one stock out of two, A and B. Stock A yields a return of 5 per cent with probability of 60 per cent and a return of 9 per cent with a probability of 40
Mr Mitchell Abrahim invested $2,000 in gold bullion, which he bought at$520 per ounce. Two years later, he sold them all at $566 per ounce. What is his annual rate of return from this investment?
In the Numerical Example 7.1, is there any capital gain or loss involved? If so, how much is it?
What is the difference between yield and capital gains of an asset?
What information do we need in order to calculate the rate of return of an asset?
Briefly describe various ways of demand forecasting.
Briefly describe any simple procedure to obtain the trend line fitting a time series data.
What are the different components of a time series data?
Briefly describe what is meant by the ‘trend component’ of a time series data.
The following table gives monthly time series data on the number of colour televisions sold in India (in lakhs). Plot this data. Show that there is some seasonality, that is, during some months sales
What is the essential difference between the regression method and the time series method?
Briefly describe the Delphi method of forecasting demand.
How is demand forecasting useful to a manager? Substantiate your answer with suitable examples.
‘The regression method does not give a perfect fit of the estimated line for the dependent variable. Therefore it is highly unreliable’. Comment.
In the context of a multiple linear regression of estimating a demand function, the data on quantity demanded, own price, the price of a substitute good and income are used. Which sign will we expect
‘In a multiple linear regression there are several intercept coefficients and several slope coefficients’. Comment.
In linear regression, what is the interpretation of the ‘slope coefficient’?
In linear regression, what is the interpretation of the ‘intercept coefficient’?
What is the criterion on which the least-squares regression coefficients are estimated?
Suppose the data on price and quantity demanded for a commodity are plotted as a scatter diagram and the fitted regression line has a positive slope. Does it necessarily imply that the regression is
What is linear regression? Which coefficient of linear regression indicates whether there is an increasing or a decreasing relationship between the two variables and why?
Consider the following scatter diagram. If a regression line is fitted to this data, would it be positively sloped or negatively sloped? Explain.
Explain in words how a decrease in the interest rate would affect the amount borrowed by a borrower through income and substitution effects.
Explain in words how a decrease in the interest rate would affect the amount lent by a lender through income and substitution effects.
Explain how a decrease in the interest rate would change the intertemporal budget line of an individual.
‘Increases in present income and future income have a similar impact on a person’s current savings’. Defend or refute.
The intertemporal budget line is given as follows. What is the interest rate?
What is meant by intertemporal rate of substitution? Does it increase with an increase in the interest rate? Explain.
Referring to the previous question, suppose that the consumer’s present consumption is Rs 12,000. What is then his future-period consumption?
Consider the consumption-savings model. The present and future incomes are Rs 10,000 and Rs 15,000 respectively. The interest rate is 10 per cent. Draw the intertemporal budget line indicating the
In reality an individual or a household consumes many goods. Then how can the present consumption or the future consumption be treated as a single good in the consumption-savings decision model?
Intuitively explain why an individual would prefer a direct tax like income tax to an indirect tax on the consumption of a good.
If individuals prefer cash-subsidy to kind-subsidy and both programmes cost the same to the government, why in reality do we see examples of kindsubsidy?
Intuitively explain why an individual would prefer a cash-subsidy programme to a kind-subsidy programme.
Explain why the equilibrium bundle chosen by a consumer under a cashsubsidy or a direct tax programme is always available under a kind-subsidy or an indirect tax programme, given that the budgetary
Suppose we compare an income tax programme with an indirect tax on a good, which a consumer does not consume. Which programme would he prefer?
Give examples of indirect taxes.
Give examples of direct taxes.
Do the programme of kind-subsidy and an indirect tax shift the budget line of a consumer in a similar way? Explain.
Do the programmes of cash-subsidy and income tax shift the budget line of a consumer in a similar way? Explain.
Your house-maid asks you for her Diwali gift. You offer her either Rs 100 or some item of Rs 100 that she can use. Which will she prefer and why?
What is the definition of consumer surplus?
Derive the consumer’s equilibrium condition (4.6) by using the Lagrangean method outlined in the General Appendix.
Suppose the utility function is V = exp(F) + T. Show that it does not satisfy the assumption of diminishing MRS (and therefore if you plot the indifference curve, it will look concave to the origin).
Refer to the previous question. Using the revealed preference approach and assuming that income is compensated, the amount purchased of good B at the new equilibrium is less than or equal to
In equilibrium a consumer was buying 5 units of good A and some of good B.His income was Rs 100 and the prices were pA = Rs 8 and pB = Rs 5. The price of good A falls to Rs 5. By how much does his
‘In the revealed preference approach to demand, we begin with assumptions about preferences and then arrive at what a rational consumer will choose’.Defend or refute.
What is the weak axiom of revealed preference?
Briefly describe what the composite good theorem means.
‘The marginal utility theory considers both the income and the substitution effect of a price change’. Agree or disagree. Give reasons.
Explain how the shape of the price consumption curve depends on the price elasticity of demand for the product whose price is changing.
Trace the shape of the PCC if the price of elasticity of demand for a good is zero.
Explain the notion of the price consumption curve.
Explain in terms of substitution and income effects, why the demand curve for a product is downward sloping.
‘An inferior good is a Giffen good, but a Giffen good is not necessarily an inferior good’. Defend or refute.
‘The own substitution effect is always negative, that is, when the price of a product falls, by the substitution effect the consumer will demand more of it’. Defend or refute.
Suppose the price of an inferior good falls. Outline how this will affect the quantity demanded of this good via the substitution effect and the income effect.
Explain the difference between Hicks’ and Slutsky’s substitution effect.
What is an Engel curve? Is it always upward sloping?
What is an income consumption curve? Is it always upward sloping?
Suppose preferences do not satisfy diminishing marginal rate of substitution.As a result, the indifference map is as shown in Figure 4.12(b). Prove that (in this case) the consumer will maximise
On a price line choose a point above and to the left of the optimal bundle (the point of tangency between the price line and the indifference curve). Argue in terms of marginal rate of substitution
Suppose a family has an income of Rs 150. It spends this income on two goods: sugar and potato. The price of potato is Rs 15/kg. Sugar can be bought from the ration shop and the open market. The
How will a decrease in income, coupled with an increase in the price of one good, shift the price line and why?
Suppose income and prices of all goods increase by the same percentage.How will it affect the budget line and why?
How will a decrease in the price of a good shift the price line and why?
What is meant by ‘relative price’? Explain it via an example.
Suppose there are two goods A and B. Their respective prices are pA = 10 and pB = 15. Draw the budget line for a consumer whose income is Rs 300.
Why is the price line a straight line?
Explain why the marginal rate of substitution of one good for another should decline as more of the good is consumed?
Prove that, as long as a consumer’s preferences satisfy non-satiation, (a) all goods she consumes cannot be inferior and (b) if the price of a good falls, the demand for all goods cannot decrease.
Suppose there are two goods and each is an economic ‘bad’. How would the indifference curve look?
If two goods are perfectly complementary to each other in consumption, how would the indifference curve look like and why?
What is the relationship between marginal rate of substitution and marginal utilities?
Suppose that, of two goods, non-satiation holds for one good, whereas for the other good, the consumer does not care how much she consumes (that is, the marginal utility of this good is zero). How
Which assumption on preference implies that the indifference curve is convex to the origin and why?
Which assumption on preferences implies that the indifference curve is downward sloping and why?
Briefly explain how the marginal utility analysis assumes cardinal utility, whereas the indifference curve analysis assumes ordinal utility.
An indifference schedule is given as follows. What is the marginal rate of substitution of good Y for good X between bundles C and D?Bundle Good X Good Y A 1 40 B 2 30 C 3 22 D 4 16 E 5 12
An avid eater has Rs 205 to spend on chicken roll and ice-cream, selling at Rs 25 and Rs 20 respectively. The total utility schedules are given in the following table. How many chicken rolls and
Among many other goods, Mumtaz regularly buys oil for her hair (L) and hand-lotion (N). Let MUL and MUN denote the respective marginal utilities and pL and pN their prices. Both goods are measured
Explain in terms of diminishing marginal utility, the logic behind the law of demand.
Carrot halwa sells for Rs 40/kg. A family consumes 3.5kg of carrot halwa(over a month) and its marginal utility is 100 utils. Assume that carrot halwa can be measured continuously. If for this family
Atal’s total utility schedule from buying phone card for international calls is the following.Minutes of Call Total Utility 0 0 1 50 2 95 3 135 4 170 5 200 6 225 7 245 8 260 The phone card costs Rs
How are total utility and marginal utility curves related? ‘If we know a total utility schedule, we can derive a marginal utility schedule and vice versa.’ Is this correct? Give reasons.
In recent years there is an increase in the outsourcing of jobs, especially in the IT (Information Technology) sector, from developed countries like the US to developing countries like India and
A ladies-clothing manufacturer produces saris and shalwars. How will an increase in the average price of saris affect the supply curve of shalwars?
‘Among two straight line supply curves, the steeper one is less price elastic.’Comment.
A pencil manufacturer was supplying 400 dozen pencils when the price was Rs 10. Now the market price has risen to Rs 14 and the manufacturer is supplying 420 dozen of pencils to the market. Calculate
‘An increase in the market demand curve will shift the market supply curve as well.’ Defend or refute.
A local fisherman catches fish from a nearby river early in the morning and sells all his catch by the same day (he does not have any storing facility).Consider his daily supply curve of fish to the
How will entries of foreign firms into a particular sector shift the individual supply curve of local firms as well as the market supply curve?
A massive flood cuts off supplies of essentials like edible oil and onions to a particular region. All else the same, how would this affect the current supply of edible oil by local sellers and why?
Suppose the government reduces the excise duty imposed on a particular sector. How will this affect the supply curve?
A farmer has some land, a part of which is used for growing wheat and the remaining for corn. Starting with a given supply curve of corn, if wheat begins to fetch a higher price in the market, how

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