ॐ हनुमते नमः 

BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE, PILANI

Hyderabad Campus
First Semester 2017‐18
Principles of Economics: ECON F211
Comprehensive Examination (Closed Book)
Time: 3 Hour Date: 12.12.2017 Max. Marks: 45
Weightage: 45%
Instructions:
1. Answer all questions.
2. Answer all sub‐parts of a question at one place otherwise it would not be evaluated.
3. Whenever you need to write options A/B/C/D/E, use only capital letter.
4. If you are drawing a diagram, keep it neat and well labeled.
Answer the following:

1. Define the following: 0.5*4 = 2 Marks

A. Stagflation
B. Optimal Scale of Plant
C. Contestable Markets
D. Injunction

2. Answer the following:
A. Suppose that the Bergy Company’s long‐run average cost curve is 200 4 0.05
where is the long‐run average cost (in Rupee) and is the firm’s output per day. If Bergy
is a price‐taker, find 1*3 = 3 Marks
I. Long‐run profit maximizing output per day
II. Long‐run average and marginal costs at equilibrium level of output
III. Long‐run equilibrium price

B. You are hired as a consultant to a firm producing ball bearings. This firm sells in two distinct
markets, one of which is completely sealed off from the other. The demand curve for the firm’s
output in the first market is 160 8 , where is the price of the product and is
the amount sold in the first market. The demand curve for the firm’s output in the second
market is 80 2 , where is the price of the product and is the amount sold in
the second market. The firm’s marginal cost curve is 5 , where is the firm’s entire output
(destined for either market). The firm asks you to suggest what its pricing strategy should be.
1*3 = 3 Marks
I. How many units of output should the firm sell in the second market?
II. How many units of output should it sell in the first market?
III. What price should it establish in each market?

C. Assume that the market demand is
100 0.5 100 0.5
and the two colluding firms have costs given by

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5 0.5
The central agency of the cartel aims at the maximization of total profit

where . Find

i. Output of the colluding firms 1 Mark

ii. Price 1 Mark
iii. Joint profits 1 Mark

3. “In case of perfect price‐discrimination by a monopolist, there would be no loss in efficiency.”
Do you agree with the statement? Using proper logic and diagrams substantiate your answer.
Show the area of consumer surplus in the same diagram.
1.5+1.5+1=4 Marks
4. Answer the following:
A. “The shape of the long‐run average cost curve of a competitive firm is determined by the
external economies or diseconomies.” Agree or disagree with the given statement using
proper logic. 3 Marks
B. “The area below the marginal cost curve up to the level of output being produced gives
variable costs of producing that level of output.” Agree or disagree with the given
statement using proper logic. 3 Marks
C. “A voluntary health insurance policy with high deductible (co‐payment) and less
premium shall attract people with high probability of falling sick.” Agree or disagree with
the given statement giving proper logic. 2 Marks
D. You offered your friend the following bet: ‘If heads come on a coin flip, you will give Rs100
to your friend and if tails come, he will give you Rs100’. Your friend declined to take the
bet. What can you infer about risk‐preference of your friend and why?
1+1 = 2 Marks
5. Answer the following:
A. The Game Theory is applicable to many types of business negotiations involving competitors.
According to Dr. Joseph Bernstein of the University of Pennsylvania, it is one of the major
reasons why many doctors, who would prefer to remain in their own practices, find
themselves with no choice but to join a health maintenance organization (HMO)1. According
to Dr. Bernstein, if you are a doctor in your own practice and you compete with another
doctor in the same local area, you are faced with a strategic situation when an HMO moves
into your community and begins to recruit doctors. An HMO recruits each to sign up. As
Bernstein notes, the two doctors are prevented from communicating with each other because
communication violates the antitrust laws. Grey and Carter are two doctors in an area.
Assuming Grey and Carter currently share their market 50‐50 and they both have the ability
and willingness to take on many additional patients (all the available patients, according to
Bernstein), then they each face the same choices. Consider the situation facing Grey. If she
                                                            
1
 A type of health insurance plan that usually limits coverage to care from doctors who work for or contract with 
the HMO. It generally won't cover out‐of‐network care except in an emergency. 

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joins the HMO and Carter also joins, she keeps 50 percent of the patients, but her income goes
substantially down as they have to share a part of it with the HMO. If she joins the HMO and
Carter does not, she gets 100 percent of the patients and her income goes way up. If she
refuses to join the HMO and Carter joins, she loses her entire patient base and may as well
move out of town. Finally, if she refuses to join the HMO and Carter also refuses, she keeps 50
percent of the patients and her current high income. Carter, of course, is faced with exactly
the same set of choices.
i. Draw the normal form for the above strategic situation. 1 Mark
ii. What will be the outcome of this strategic situation and why? 1+1=2 Marks

B. Suppose there are two firms in an industry and sell into a market with the linear demand
function 100 where is the output of the firm 1,2. Let’s assume that each
firm’s cost of production is zero. If the these two firms do make their output decision
simultaneously and if this is just one period model, find the best‐response functions of the two
firms. 3 Marks

C. There are three banks in Macondo, A, B, and C. If the actual reserve of the bank A is Rs1000
and the money multiplier is 10, find the excess reserve with Bank A. 1 Mark

D. Assume that the actual reserve with Bank A is Rs100 while the required reserve ratio is 20%.
How much of new loan can be created in this system by the first three banks (let’s say A, B,
C). What will be the level of total deposits for the first three banks? Answer illustrating the
process. 1+1 = 2 Marks

6. Ram has Rs200 that he spends on good X and good Y completely. When the price of good X
was Rs20, Ram was purchasing 12 units of good Y. He was consuming 10 units of good Y,
when decreased to Rs10, and 8 units of Y when became Rs5. Using above information
and giving proper logic, graphically derive the demand curve for good X.
3+3 = 6 Marks

7. Given below are an assertion and a reason. Write option A if both assertion and reason are
correct and reason explains the assertion, B if both assertion and reason are correct but
reason does not explain the assertion, C if assertion is correct but reason is wrong, D if
assertion is wrong but reason is correct, and E if both assertion and reason are wrong. Also
give proper logic for your answer justifying your choice. (1+1.5 = 2.5)*2 = 5 Marks

i. Assertion: Taxes levied on broad tax bases tend to distort choices less and impose
smaller excess burdens than taxes on more sharply defined tax bases.
Reason: The size of the excess burden imposed by a tax depends on the extent to which
economic decisions are distorted.

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ii. Assertion: In case of negative network externality for good X, the market demand for
good X will increase with a fall in price of good X if the pure price effect of the price fall is
less than the snob effect.
Reason: For a good with negative network externality, the demand decreases when many
more people have it.

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