S. P.

JAIN INSTITUTE OF MANAGEMENT & RESEARCH

PGEMP Batch _____ Pre Foundation Phase

Business Economics Marks: 50

Time: 60 min Date: 00/00/0000

Instructions:

 It is a closed book exam. No exchange of books, notes, readings etc.

 No network or cell phones allowed during the test.
 All Questions are compulsory.
 Use of calculators is permitted.

Q1) Suppose a chair manufacturer is producing in the short run when equipment is fixed. The
manufacturer knows that as the number of laborers used in the production process increases
from 1 to 7, the number of chairs produced changes as follows: 10,17,22,25,26,25,23.
a. Calculate the Marginal and Average product of labor for this production function. (7 marks)
b. Does this Production function exhibit diminishing returns to labour? Explain. (1 mark)
c. Explain what might cause the marginal product of labor to become negative ( 2 marks)

Q2) Assume a computer firm’s marginal costs of production are constant at $ 1000 per computer.
However, the fixed costs of production are equal to $10,000.
Calculate the firm’s average variable cost and average fixed cost at each level of output for 10
units of output. (10 marks)

Q3) Easing the Oil Shortage

Saudi Arabia Increases Oil Production

World leaders were very pleased when Saudi Arabia's foreign minister, Prince Saud al Faisal,
announced in early July that his country would increase its crude oil production by 500,000
barrels per day. The half million barrel boost in daily production represents a two percent increase
in the 25.4 million barrels per day currently produced by the Organization of Petroleum Exporting
Countries (OPEC), of which Saudi Arabia is one of fourteen member nations. The goal of the
increased production is to decrease crude oil prices from $30 per barrel to $25 per barrel.
The Saudi announcement came as an unpleasant surprise for the other OPEC countries, who
said they saw no reason to increase crude oil supplies at this time. Saudi Arabia, however, has
taken a long-term view of the currently high energy prices. They fear that the high oil prices may
cause consumers to shop for more fuel-efficient cars and begin to look for other ways to conserve
energy, thus reducing future demand for petroleum. They also fear that higher oil prices might
cause global inflation, higher interest rates, and recession, leading to slower growing economies
and less demand for petroleum products.
Most economists predict that the Saudi increase will do little to decrease gas prices at the pump
because most of the Saudi crude is "sour," which means that it has a high sulfur content. In the
United States the gasoline refineries use "sweet" crude, which has a low-sulfur content. Several
energy economists predicted that prices at the pump would decrease by around 11.5 cents per
gallon. Although gasoline prices were over $2 per gallon in parts of the Midwest, the national
average price in late June was $1.71 per gallon. The Saudi production increase should be helpful,
however, in stabilizing the price of heating oil, which does use the high-sulfur crude.

DISCUSSION QUESTIONS
1) Using the information in the article, calculate the elasticity of demand for barrels of crude oil.
(3 marks)

2) Using the relationship between elasticity and total revenue, explain why the other OPEC
countries might oppose a production increase. (3 marks)

Q4) The Boeing 747 is an airline that carries many of the world’s travelers. According to the data
provided by Boeing to a Senate committee in 1975, the costs (in cents) per Passenger-mile of
operating such a plane on a flight of 1200 miles and 2500 miles with 250, 300 and 350
passengers was as follows: (6 marks)

Number of Passengers Number of miles

1200 2500
(cents per passenger-mile)
250 4.3 3.4
300 3.8 3.0
350 3.5 2.7

a. If the number of passengers is between 250 and 300, what is the marginal cost of carrying an
extra passenger on a 1200-mile flight?
b. If the number of passengers is 300 and if the flight is between 1200 and 2500 miles, what is
the marginal cost of flying an additional mile?
c. In 1975, the economy fare for a 2500 mile flight was $156.60. If a Boeing 747 carried 300
passengers on such a flight, would it cover its operating costs?

Q5) The price elasticity of demand for imported whiskey is estimated to be –0.20 over a wide
interval of prices. The federal government decides to raise the import tariff on for-eign whiskey,
causing its price to rise by 20 percent .Will sales of whiskey rise or fall, and by what percentage
amount? (3 marks)

Q6) The demand curve for the daily edition of the Lubbock Avalanche Journal is
D = 85,000 - 30, 000 P. The current price of the newspaper is $0.50. Derive the Consumer
Surplus for the newspaper. (4.5 marks)
Q7) Complete the following table: (10.5 marks)

Total Variable Fixed Marginal

Output Cost Cost Cost Cost

0 60
1 10
2 90
3 20
4 80
5 180
6 50