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Question 2 NAT · 1.5 marks
The market for paper in southern region in the India is characterized by the following demand and
supply curves: QD = 160,000−2000P and QS = 40,000+2000P, where QD is the quantity demanded in
100-pound lots, QS is the quantity supplied in 100-pound lots, and P is the price per 100-pound lot.
Currently there is no attempt to regulate the dumping of effluent into streams and rivers by paper
mills. As a result, dumping is widespread. The Marginal External Cost (MEC) associated with the
production of paper is given by the curve MEC = 0.0006QS.
Based on the above data, answer the given subquestions.
Calculate the output of paper if it is produced under competitive conditions and no attempt is
made to monitor or regulate the dumping of effluent. Q = __________
Published solution
**1. Equate unregulated supply and demand:** \(160000-2000P=40000+2000P\).
**2. Solve:** \(4000P=120000\), so \(P=30\) and \(Q=100000\) lots. Firms ignore the external damage.
**Answer: 100000.**
The market for paper in southern region in the India is characterized by the following demand and
supply curves: QD = 160,000−2000P and QS = 40,000+2000P, where QD is the quantity demanded in
100-pound lots, QS is the quantity supplied in 100-pound lots, and P is the price per 100-pound lot.
Currently there is no attempt to regulate the dumping of effluent into streams and rivers by paper
mills. As a result, dumping is widespread. The Marginal External Cost (MEC) associated with the
production of paper is given by the curve MEC = 0.0006QS.
Based on the above data, answer the given subquestions.
Calculate the Price of paper if it is produced under competitive conditions and no attempt is made
to monitor or regulate the dumping of effluent. P = ___________
Published solution
**1. Equate unregulated supply and demand:** \(160000-2000P=40000+2000P\).
**2. Solve:** \(4000P=120000\), so \(P=30\) and \(Q=100000\) lots. Firms ignore the external damage.
**Answer: 30.**
The market for paper in southern region in the India is characterized by the following demand and
supply curves: QD = 160,000−2000P and QS = 40,000+2000P, where QD is the quantity demanded in
100-pound lots, QS is the quantity supplied in 100-pound lots, and P is the price per 100-pound lot.
Currently there is no attempt to regulate the dumping of effluent into streams and rivers by paper
mills. As a result, dumping is widespread. The Marginal External Cost (MEC) associated with the
production of paper is given by the curve MEC = 0.0006QS.
Based on the above data, answer the given subquestions.
Determine the socially efficient price of the paper. P = ________
Published solution
**1. Invert the curves:** Marginal benefit is \(P_D=80-0.0005Q\), and private marginal cost is \(MC=0.0005Q-20\).
**2. Add external damage:** \(MSC=(0.0005Q-20)+0.0006Q=0.0011Q-20\).
**3. Solve the social condition:** \(80-0.0005Q=0.0011Q-20\) gives \(Q_s=62500\). The demand-side efficient price is \(P_s=80-0.0005(62500)=48.75\).
**Answer: 48.75.**
The market for paper in southern region in the India is characterized by the following demand and
supply curves: QD = 160,000−2000P and QS = 40,000+2000P, where QD is the quantity demanded in
100-pound lots, QS is the quantity supplied in 100-pound lots, and P is the price per 100-pound lot.
Currently there is no attempt to regulate the dumping of effluent into streams and rivers by paper
mills. As a result, dumping is widespread. The Marginal External Cost (MEC) associated with the
production of paper is given by the curve MEC = 0.0006QS.
Based on the above data, answer the given subquestions.
Determine the socially efficient quantity of the paper. Q = _________
Published solution
**1. Invert the curves:** Marginal benefit is \(P_D=80-0.0005Q\), and private marginal cost is \(MC=0.0005Q-20\).
**2. Add external damage:** \(MSC=(0.0005Q-20)+0.0006Q=0.0011Q-20\).
**3. Solve the social condition:** \(80-0.0005Q=0.0011Q-20\) gives \(Q_s=62500\). The demand-side efficient price is \(P_s=80-0.0005(62500)=48.75\).
**Answer: 62500.**
Bharat Airlines (BA) flies only one route: Delhi-Chennai. The demand for each flight is Q=600-2P.
BA’s total cost of running each flight includes a fixed cost of 20000 and a variable cost of 90 per
passenger.
Based on the above data, answer the given subquestions.
What is the profit maximizing price that BA will charge?
6406536959830.
90
6406536959831.
195
6406536959832.
180
6406536959833.
390
Published solution
**1. Invert demand and find MR:** \(Q=600-2P\) implies \(P=300-Q/2\), so \(MR=300-Q\).
**2. Set MR=MC:** \(300-Q=90\) gives \(Q=210\) and \(P=300-210/2=195\).
**Answer: B — $195.**
A: **Incorrect:** This equals marginal cost rather than the monopoly price.
B: **Correct:** This price follows from MR=MC.
C: **Incorrect:** This does not satisfy the monopoly first-order condition.
D: **Incorrect:** The choke price is 300, so 390 would give no demand.
Bharat Airlines (BA) flies only one route: Delhi-Chennai. The demand for each flight is Q=600-2P.
BA’s total cost of running each flight includes a fixed cost of 20000 and a variable cost of 90 per
passenger.
Based on the above data, answer the given subquestions.
How many passengers will be on each flight in equilibrium?
6406536959834.
210
6406536959835.
300
6406536959836.
420
6406536959837.
250
Published solution
**1. Invert demand and find MR:** \(Q=600-2P\) implies \(P=300-Q/2\), so \(MR=300-Q\).
**2. Set MR=MC:** \(300-Q=90\) gives \(Q=210\) and \(P=300-210/2=195\).
**Answer: A — 210 passengers.**
A: **Correct:** This output sets marginal revenue equal to marginal cost.
B: **Incorrect:** At 300 passengers, marginal revenue is 0.
C: **Incorrect:** At 420 passengers, marginal revenue is negative.
D: **Incorrect:** At 250 passengers, marginal revenue is 50, below MC 90.
Bharat Airlines (BA) flies only one route: Delhi-Chennai. The demand for each flight is Q=600-2P.
BA’s total cost of running each flight includes a fixed cost of 20000 and a variable cost of 90 per
passenger.
Based on the above data, answer the given subquestions.
What is BA’s profit for each flight?
6406536959838.
2050
6406536959839.
2000
6406536959840.
22050
6406536959841.
25000
Published solution
**1. Invert demand and find MR:** \(Q=600-2P\) implies \(P=300-Q/2\), so \(MR=300-Q\).
**2. Set MR=MC:** \(300-Q=90\) gives \(Q=210\) and \(P=300-210/2=195\).
**3. Calculate profit:** \[\pi=(195-90)(210)-20000=2050.\] Fixed cost affects profit, not this interior output condition.
**Answer: A — $2050.**
A: **Correct:** This subtracts both variable cost and the 20000 fixed cost.
B: **Incorrect:** The calculated profit is 2050 rather than 2000.
C: **Incorrect:** This is contribution before fixed cost, not profit.
D: **Incorrect:** This is not revenue minus the stated costs.
Bharat Airlines (BA) flies only one route: Delhi-Chennai. The demand for each flight is Q=600-2P.
BA’s total cost of running each flight includes a fixed cost of 20000 and a variable cost of 90 per
passenger.
Based on the above data, answer the given subquestions.
Now, suppose BA realizes that the fixed costs per flight are in fact 25000 instead of 20000. It also
finds out that two different types of passengers fly to Chennai. Type A consists of business people
with a demand of QA=520-0.8P and type B consists of students with a demand of QB=240-0.4P. BA
decides to charge these two types different prices.
The market demand curve will have a kink at
6406536959842.
P=240
6406536959843.
P=520
6406536959844.
P=625
6406536959845.
P=600
Published solution
**1. Find each choke price:** Type A demand reaches zero at \(520/0.8=650\); type B demand reaches zero at \(240/0.4=600\).
**2. Aggregate nonnegative demands:** At a common price below 600, both groups buy; above 600, only A buys. Thus the aggregate demand slope changes at P=600.
**Answer: D — P=600.**
A: **Incorrect:** 240 is the intercept of the B quantity-demand equation, not its choke price.
B: **Incorrect:** 520 is A’s quantity intercept, not the kink price.
C: **Incorrect:** The B group exits at 600, not 625.
D: **Correct:** This is the student group’s choke price where aggregate demand changes slope.
Bharat Airlines (BA) flies only one route: Delhi-Chennai. The demand for each flight is Q=600-2P.
BA’s total cost of running each flight includes a fixed cost of 20000 and a variable cost of 90 per
passenger.
Based on the above data, answer the given subquestions.
Now, suppose BA realizes that the fixed costs per flight are in fact 25000 instead of 20000. It also
finds out that two different types of passengers fly to Chennai. Type A consists of business people
with a demand of QA=520-0.8P and type B consists of students with a demand of QB=240-0.4P. BA
decides to charge these two types different prices.
The price that BA charge the students is PB= ________
Published solution
**1. Invert student demand:** \(P_B=600-2.5Q_B\), hence \(MR_B=600-5Q_B\).
**2. Set MR_B=MC:** \(600-5Q_B=90\) gives \(Q_B=102\), then \(P_B=600-2.5(102)=345\).
**Answer: 345.**
Bharat Airlines (BA) flies only one route: Delhi-Chennai. The demand for each flight is Q=600-2P.
BA’s total cost of running each flight includes a fixed cost of 20000 and a variable cost of 90 per
passenger.
Based on the above data, answer the given subquestions.
Now, suppose BA realizes that the fixed costs per flight are in fact 25000 instead of 20000. It also
finds out that two different types of passengers fly to Chennai. Type A consists of business people
with a demand of QA=520-0.8P and type B consists of students with a demand of QB=240-0.4P. BA
decides to charge these two types different prices.
The price that BA charge the business people is PA= __________
Published solution
**1. Invert business demand:** \(P_A=650-1.25Q_A\), hence \(MR_A=650-2.5Q_A\).
**2. Set MR_A=MC:** \(650-2.5Q_A=90\) gives \(Q_A=224\), then \(P_A=650-1.25(224)=370\).
**Answer: 370.**
Bharat Airlines (BA) flies only one route: Delhi-Chennai. The demand for each flight is Q=600-2P.
BA’s total cost of running each flight includes a fixed cost of 20000 and a variable cost of 90 per
passenger.
Based on the above data, answer the given subquestions.
Now, suppose BA realizes that the fixed costs per flight are in fact 25000 instead of 20000. It also
finds out that two different types of passengers fly to Chennai. Type A consists of business people
with a demand of QA=520-0.8P and type B consists of students with a demand of QB=240-0.4P. BA
decides to charge these two types different prices.
Profit maximizing quantity for both groups will be QA= ___________
Published solution
**1. Invert business demand:** \(P_A=650-1.25Q_A\), hence \(MR_A=650-2.5Q_A\).
**2. Set MR_A=MC:** \(650-2.5Q_A=90\) gives \(Q_A=224\), then \(P_A=650-1.25(224)=370\).
**Answer: 224.**
Bharat Airlines (BA) flies only one route: Delhi-Chennai. The demand for each flight is Q=600-2P.
BA’s total cost of running each flight includes a fixed cost of 20000 and a variable cost of 90 per
passenger.
Based on the above data, answer the given subquestions.
Now, suppose BA realizes that the fixed costs per flight are in fact 25000 instead of 20000. It also
finds out that two different types of passengers fly to Chennai. Type A consists of business people
with a demand of QA=520-0.8P and type B consists of students with a demand of QB=240-0.4P. BA
decides to charge these two types different prices.
Profit maximizing quantity for both groups will be QB= ______
Published solution
**1. Invert student demand:** \(P_B=600-2.5Q_B\), hence \(MR_B=600-5Q_B\).
**2. Set MR_B=MC:** \(600-5Q_B=90\) gives \(Q_B=102\), then \(P_B=600-2.5(102)=345\).
**Answer: 102.**
Bharat Airlines (BA) flies only one route: Delhi-Chennai. The demand for each flight is Q=600-2P.
BA’s total cost of running each flight includes a fixed cost of 20000 and a variable cost of 90 per
passenger.
Based on the above data, answer the given subquestions.
Now, suppose BA realizes that the fixed costs per flight are in fact 25000 instead of 20000. It also
finds out that two different types of passengers fly to Chennai. Type A consists of business people
with a demand of QA=520-0.8P and type B consists of students with a demand of QB=240-0.4P. BA
decides to charge these two types different prices.
The profit of BA for each flight will be = ________
Published solution
**1. Invert business demand:** \(P_A=650-1.25Q_A\), hence \(MR_A=650-2.5Q_A\).
**2. Set MR_A=MC:** \(650-2.5Q_A=90\) gives \(Q_A=224\), then \(P_A=650-1.25(224)=370\).
**3. Invert student demand:** \(P_B=600-2.5Q_B\), hence \(MR_B=600-5Q_B\).
**4. Set MR_B=MC:** \(600-5Q_B=90\) gives \(Q_B=102\), then \(P_B=600-2.5(102)=345\).
**5. Subtract the updated fixed cost:** \[\pi=(370-90)(224)+(345-90)(102)-25000=63730.\]
**Answer: 63730.**
Bharat Airlines (BA) flies only one route: Delhi-Chennai. The demand for each flight is Q=600-2P.
BA’s total cost of running each flight includes a fixed cost of 20000 and a variable cost of 90 per
passenger.
Based on the above data, answer the given subquestions.
Now, suppose BA realizes that the fixed costs per flight are in fact 25000 instead of 20000. It also
finds out that two different types of passengers fly to Chennai. Type A consists of business people
with a demand of QA=520-0.8P and type B consists of students with a demand of QB=240-0.4P. BA
decides to charge these two types different prices.
What is the total consumer surplus? CStotal = _________
Published solution
**1. Invert business demand:** \(P_A=650-1.25Q_A\), hence \(MR_A=650-2.5Q_A\).
**2. Set MR_A=MC:** \(650-2.5Q_A=90\) gives \(Q_A=224\), then \(P_A=650-1.25(224)=370\).
**3. Invert student demand:** \(P_B=600-2.5Q_B\), hence \(MR_B=600-5Q_B\).
**4. Set MR_B=MC:** \(600-5Q_B=90\) gives \(Q_B=102\), then \(P_B=600-2.5(102)=345\).
**5. Sum the surplus triangles:** \[CS=\tfrac12(650-370)(224)+\tfrac12(600-345)(102)=31360+13005=44365.\]
**Answer: 44365.**
The production function for a product is given by **q = 450KL**. If the price of capital is INR 30 per day
and the price of labour is INR 150 per day.
Based on the above data, answer the given subquestions.
What is the cost minimizing quantity of labour and capital respectively for producing 9000 units of
output? L\(^{*}\) = ________
Published solution
**1. Apply cost minimization:** For \(q=450KL\), \(MP_L/MP_K=K/L\). Set \(K/L=w/r=150/30=5\), so \(K=5L\).
**2. Impose the target:** \(KL=9000/450=20\), hence \(5L^2=20\). Thus \(L=2\), \(K=10\).
**3. Compute minimum daily cost:** \(C=150(2)+30(10)=600\) INR.
**Answer: 2.**
The production function for a product is given by **q = 450KL**. If the price of capital is INR 30 per day
and the price of labour is INR 150 per day.
Based on the above data, answer the given subquestions.
What is the cost minimizing quantity of labour and capital respectively for producing 9000 units of
output? K\(^{*}\) = __________
Published solution
**1. Apply cost minimization:** For \(q=450KL\), \(MP_L/MP_K=K/L\). Set \(K/L=w/r=150/30=5\), so \(K=5L\).
**2. Impose the target:** \(KL=9000/450=20\), hence \(5L^2=20\). Thus \(L=2\), \(K=10\).
**3. Compute minimum daily cost:** \(C=150(2)+30(10)=600\) INR.
**Answer: 10.**
The production function for a product is given by **q = 450KL**. If the price of capital is INR 30 per day
and the price of labour is INR 150 per day.
Based on the above data, answer the given subquestions.
What is the minimum cost of producing 9000 units of output in INR?
Published solution
**1. Apply cost minimization:** For \(q=450KL\), \(MP_L/MP_K=K/L\). Set \(K/L=w/r=150/30=5\), so \(K=5L\).
**2. Impose the target:** \(KL=9000/450=20\), hence \(5L^2=20\). Thus \(L=2\), \(K=10\).
**3. Compute minimum daily cost:** \(C=150(2)+30(10)=600\) INR.
**Answer: 600.**
Consider two investment opportunities in new products: gourmet marmite and gourmet honey.
People might either really like or really dislike the gourmet marmite, so it generates a payoff of
$0.5 with 30 percent probability, a payoff of $1 million with 40 percent probability and a payoff of
$1.5 million with 30 percent probability. The gourmet honey is less likely to either really turn
people off or really turn them on, so it has a payoff of $0.5 million with 20 percent probability, $1
million with 60 percent probability and $1.5 million with 20 percent probability.
Based on the above data, answer the given subquestions.
Expected value of first product is ___________
**NOTE:** Enter the exact answer without any extra space in the beginning or at the end.
Published solution
**1. Use millions of dollars consistently:** Marmite probabilities are 0.3,0.4,0.3 at payoffs 0.5,1,1.5 million.
**2. Average:** \[E[I_M]=0.3(0.5)+0.4(1)+0.3(1.5)=1\text{ million}.\]
**Answer: $1000000.**
**Convention note:** The first marmite payoff is printed as “$0.5”, while the other payoffs are in millions. These calculations interpret it as $0.5 million, consistent with the symmetric lottery and supplied key. Taken literally as $0.5, the first expected payoff would be $850000.15.
Consider two investment opportunities in new products: gourmet marmite and gourmet honey.
People might either really like or really dislike the gourmet marmite, so it generates a payoff of
$0.5 with 30 percent probability, a payoff of $1 million with 40 percent probability and a payoff of
$1.5 million with 30 percent probability. The gourmet honey is less likely to either really turn
people off or really turn them on, so it has a payoff of $0.5 million with 20 percent probability, $1
million with 60 percent probability and $1.5 million with 20 percent probability.
Based on the above data, answer the given subquestions.
Expected value of second product is _____________
**NOTE:** Enter the exact answer without any extra space in the beginning or at the end.
Published solution
**1. Weight honey’s payoffs:** The probabilities at 0.5,1,1.5 million are 0.2,0.6,0.2.
**2. Average:** \[E[I_H]=0.2(0.5)+0.6(1)+0.2(1.5)=1\text{ million}.\]
**Answer: $1000000.**
Consider two investment opportunities in new products: gourmet marmite and gourmet honey.
People might either really like or really dislike the gourmet marmite, so it generates a payoff of
$0.5 with 30 percent probability, a payoff of $1 million with 40 percent probability and a payoff of
$1.5 million with 30 percent probability. The gourmet honey is less likely to either really turn
people off or really turn them on, so it has a payoff of $0.5 million with 20 percent probability, $1
million with 60 percent probability and $1.5 million with 20 percent probability.
Based on the above data, answer the given subquestions.
Choose the correct alternative(s)
6406536959857.
The second product is riskier than the first product
6406536959858.
Second product has lower variance than the first product
6406536959859.
First product has a lower variance than the second product
6406536959860.
The first product is riskier than the second product
Published solution
**1. Compare variances at the common mean 1 million:** Marmite’s variance is \(0.3(0.5-1)^2+0.4(1-1)^2+0.3(1.5-1)^2=0.15\). Honey’s is \(0.2(0.5-1)^2+0.6(1-1)^2+0.2(1.5-1)^2=0.10\), in million-dollar squared units.
**2. Rank risk:** Marmite places more probability at the extreme payoffs and is a mean-preserving spread of honey. The first product is riskier.
**Answer: B, D — Honey has lower variance; marmite is riskier.**
**Convention note:** The first marmite payoff is printed as “$0.5”, while the other payoffs are in millions. These calculations interpret it as $0.5 million, consistent with the symmetric lottery and supplied key. Taken literally as $0.5, the first expected payoff would be $850000.15.
A: **Incorrect:** Honey has less, not more, dispersion.
B: **Correct:** Honey’s variance 0.10 is below marmite’s 0.15.
C: **Incorrect:** Marmite’s variance is higher.
D: **Correct:** Marmite has the higher variance and is a mean-preserving spread.
Consider two investment opportunities in new products: gourmet marmite and gourmet honey.
People might either really like or really dislike the gourmet marmite, so it generates a payoff of
$0.5 with 30 percent probability, a payoff of $1 million with 40 percent probability and a payoff of
$1.5 million with 30 percent probability. The gourmet honey is less likely to either really turn
people off or really turn them on, so it has a payoff of $0.5 million with 20 percent probability, $1
million with 60 percent probability and $1.5 million with 20 percent probability.
Based on the above data, answer the given subquestions.
6406536959861.
Expected utility of investing in gourmet marmite is more than expected utility
of investing in gourmet honey
6406536959862.
A risk averse decision maker prefers investing in gourmet honey to investing
in gourmet marmite
6406536959863.
Expected utility of investing in gourmet marmite is less than expected utility of
investing in gourmet honey
6406536959864.
A risk averse decision maker prefers investing in gourmet marmite to
investing in gourmet honey
Published solution
**1. Use concavity:** \(U(I)=\sqrt{25I}=5\sqrt I\) is strictly concave for positive payoffs.
**2. Compare expected utilities:** In a common million-dollar payoff scale, \[EU_H-EU_M=0.1[2U(1)-U(0.5)-U(1.5)]>0.\] The inequality follows from strict concavity at the midpoint 1.
**3. Choose:** Honey yields higher expected utility and is preferred by this risk-averse decision maker. Changing all payoffs from millions to dollars multiplies both expected utilities by the same positive factor.
**Answer: B, C — Honey is preferred; its expected utility is higher.**
**Convention note:** The first marmite payoff is printed as “$0.5”, while the other payoffs are in millions. These calculations interpret it as $0.5 million, consistent with the symmetric lottery and supplied key. Taken literally as $0.5, the first expected payoff would be $850000.15.
A: **Incorrect:** Marmite’s expected utility is lower under the concave utility function.
B: **Correct:** The lower-spread honey lottery is preferred.
C: **Correct:** Strict concavity gives EU_M<EU_H.
D: **Incorrect:** A risk-averse decision maker does not prefer the mean-preserving spread here.
India currently imports all of its palm oil. The annual demand for palm oil by Indian consumers is
given by the demand curve **Q=2000-4P**, where Q is quantity of palm oil in thousand litres and P is
market price in INR per litre. World producers can harvest and ship palm oil to Indian distributors
at a constant marginal cost (=average cost) of INR 50 and Indian distributors can distribute it at a
cost of INR 10 per litre. Consider market for palm oil to be competitive.
Indian government is considering a tariff on palm oil import of INR 10 per litre. Answer the given
subquestions.
If there is no tariff, what is the quantity demanded (in thousand litres) ____________
Published solution
**1. Add competitive supply costs:** Without the tariff, the retail price is \(50+10=60\) INR per litre.
**2. Substitute into demand:** \(Q=2000-4(60)=1760\) thousand litres.
**Answer: 1760.**
India currently imports all of its palm oil. The annual demand for palm oil by Indian consumers is
given by the demand curve **Q=2000-4P**, where Q is quantity of palm oil in thousand litres and P is
market price in INR per litre. World producers can harvest and ship palm oil to Indian distributors
at a constant marginal cost (=average cost) of INR 50 and Indian distributors can distribute it at a
cost of INR 10 per litre. Consider market for palm oil to be competitive.
Indian government is considering a tariff on palm oil import of INR 10 per litre. Answer the given
subquestions.
If the tariff is imposed, how much a consumer will pay for a litre of palm oil ______________
Published solution
**1. Add the import tariff:** Perfectly elastic import supply passes the additional 10 INR cost into the retail price.
**2. Calculate:** \(P=50+10+10=70\) INR per litre.
**Answer: 70.**
India currently imports all of its palm oil. The annual demand for palm oil by Indian consumers is
given by the demand curve **Q=2000-4P**, where Q is quantity of palm oil in thousand litres and P is
market price in INR per litre. World producers can harvest and ship palm oil to Indian distributors
at a constant marginal cost (=average cost) of INR 50 and Indian distributors can distribute it at a
cost of INR 10 per litre. Consider market for palm oil to be competitive.
Indian government is considering a tariff on palm oil import of INR 10 per litre. Answer the given
subquestions.
What is the new quantity demanded now (in thousand litres)? ____________
Published solution
**1. Use the tariff-inclusive price:** \(P=50+10+10=70\).
**2. Calculate demand:** \(Q=2000-4(70)=1720\) thousand litres.
**Answer: 1720.**
India currently imports all of its palm oil. The annual demand for palm oil by Indian consumers is
given by the demand curve **Q=2000-4P**, where Q is quantity of palm oil in thousand litres and P is
market price in INR per litre. World producers can harvest and ship palm oil to Indian distributors
at a constant marginal cost (=average cost) of INR 50 and Indian distributors can distribute it at a
cost of INR 10 per litre. Consider market for palm oil to be competitive.
Indian government is considering a tariff on palm oil import of INR 10 per litre. Answer the given
subquestions.
What will be the lost consumer surplus due to the imposed tariff (in thousand INR) _____________
Published solution
**1. Calculate the quantity change:** Price rises from 60 to 70, so demand falls from 1760 to 1720 thousand litres.
**2. Calculate consumer-surplus loss:** \[\Delta CS_{loss}=10(1720)+\tfrac12(10)(1760-1720)=17400\text{ thousand INR}.\]
**Answer: 17400.**
India currently imports all of its palm oil. The annual demand for palm oil by Indian consumers is
given by the demand curve **Q=2000-4P**, where Q is quantity of palm oil in thousand litres and P is
market price in INR per litre. World producers can harvest and ship palm oil to Indian distributors
at a constant marginal cost (=average cost) of INR 50 and Indian distributors can distribute it at a
cost of INR 10 per litre. Consider market for palm oil to be competitive.
Indian government is considering a tariff on palm oil import of INR 10 per litre. Answer the given
subquestions.
Tax revenue for the government will be (in thousand INR) ____________
Published solution
**1. Find taxed imports:** At retail price 70, imports are \(2000-4(70)=1720\) thousand litres.
**2. Multiply by the tariff:** \(R=10(1720)=17200\) thousand INR.
**Answer: 17200.**
India currently imports all of its palm oil. The annual demand for palm oil by Indian consumers is
given by the demand curve **Q=2000-4P**, where Q is quantity of palm oil in thousand litres and P is
market price in INR per litre. World producers can harvest and ship palm oil to Indian distributors
at a constant marginal cost (=average cost) of INR 50 and Indian distributors can distribute it at a
cost of INR 10 per litre. Consider market for palm oil to be competitive.
Indian government is considering a tariff on palm oil import of INR 10 per litre. Answer the given
subquestions.
Tariff results in
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Net gain for the society
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Net loss for the society
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Neither loss nor gain
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Cannot compute
Published solution
**1. Calculate the quantity change:** Price rises from 60 to 70, so demand falls from 1760 to 1720 thousand litres.
**2. Calculate consumer-surplus loss:** \[\Delta CS_{loss}=10(1720)+\tfrac12(10)(1760-1720)=17400\text{ thousand INR}.\]
**3. Separate transfer and loss:** Government tariff revenue is \(10(1720)=17200\) thousand INR, leaving deadweight loss \(17400-17200=200\) thousand INR.
**Answer: B — Net loss for society.**
A: **Incorrect:** The lost trades create a deadweight loss rather than a gain.
B: **Correct:** Consumer losses exceed the government’s revenue by 200 thousand INR.
C: **Incorrect:** The lost consumption triangle is a net loss.
D: **Incorrect:** Demand and the tariff determine the loss.
Based on the above data, answer the given subquestions.
Find the optimal bundle of goods 1 and 2 for this consumer. The optimal bundle will consist of X1 =
___________
Published solution
**1. Apply tangency:** For \(U=\log X_1+\log X_2\), \(MRS=(1/X_1)/(1/X_2)=X_2/X_1\). Prices are 2 and 6, so \(X_2/X_1=1/3\).
**2. Use the budget:** \(2X_1+6(X_1/3)=240\), giving \(X_1=60\) and \(X_2=20\). Both goods receive half the budget.
**Answer: 60.**
Based on the above data, answer the given subquestions.
Find the optimal bundle of goods 1 and 2 for this consumer. The optimal bundle will consist of X2 =
___________
Published solution
**1. Apply tangency:** For \(U=\log X_1+\log X_2\), \(MRS=(1/X_1)/(1/X_2)=X_2/X_1\). Prices are 2 and 6, so \(X_2/X_1=1/3\).
**2. Use the budget:** \(2X_1+6(X_1/3)=240\), giving \(X_1=60\) and \(X_2=20\). Both goods receive half the budget.
**Answer: 20.**
A monopolist with marginal cost, MC = 10+6Q, faces a demand curve P = 20 - 2Q. Answer the given
subquestions based on this information.
The price elasticity of demand at the profit-maximizing point is _____________
Published solution
**1. Derive MR:** \(P=20-2Q\) gives \(MR=20-4Q\).
**2. Set MR=MC:** \(20-4Q=10+6Q\), hence \(Q=1\) and \(P=18\). The profit derivative falls at rate 10, confirming a maximum.
**3. Compute elasticity:** Inverting demand gives \(Q=10-P/2\), so \(dQ/dP=-1/2\). At the optimum, \[\epsilon=\frac{dQ}{dP}\frac{P}{Q}=-\tfrac12\frac{18}{1}=-9.\]
**Answer: -9.**
Firms compete by selling differentiated products that are highly, but not
perfectly, substitutable
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Entry and exit are not free in the market
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None of these
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Both Firms compete by selling differentiated products that are highly, but not
perfectly, substitutable and Entry and exit are not free in the market
Published solution
**1. Recall the market structure:** Monopolistic competition has many firms selling differentiated close substitutes and relatively free entry and exit. Differentiation gives each firm some pricing power.
**Answer: A — Firms compete by selling differentiated products that are highly, but not .**
A: **Correct:** Differentiated products are close but imperfect substitutes.
B: **Incorrect:** Relatively free entry and exit is part of the standard model.
C: **Incorrect:** The product-differentiation statement is true.
D: **Incorrect:** The entry-barrier statement is false.
a person takes more risks that are not known to the life insurance company
because he has life insurance
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a person buys life insurance because he has a risky lifestyle that is not known
to the life insurance company
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a person is a risk lover
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pregnant women with health insurance make more doctor visits than
uninsured pregnant women
Published solution
**1. Distinguish hidden type from hidden action:** Adverse selection concerns private information about risk before insurance is purchased. People with higher unobserved risk are more likely to seek coverage.
**Answer: B — a person buys life insurance because he has a risky lifestyle that is not known .**
A: **Incorrect:** Changing behaviour after obtaining insurance is moral hazard.
B: **Correct:** The applicant has a pre-existing risky type unknown to the insurer.
C: **Incorrect:** Risk-loving preferences alone do not establish asymmetric information or selection.
D: **Incorrect:** More care after insurance is a possible utilization response, not necessarily adverse selection.
Moral hazard occurs when contracts are written in such a way that
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the interests of agent and principal converge
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the interests of agent and principal diverge
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agents will wish to maximize the principal's utility
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production and risk-bearing eficiency are achieved
Published solution
**1. Identify the incentive problem:** With unobserved actions, an agent may choose what benefits the agent rather than the principal. Contracts that leave their incentives misaligned can create moral hazard.
**Answer: B — the interests of agent and principal diverge.**
**Convention note:** Incentive divergence is the intended answer; moral hazard additionally requires that the relevant action be imperfectly observed or contractible.
A: **Incorrect:** Aligned interests reduce the incentive conflict.
B: **Correct:** Diverging incentives permit self-interested hidden actions that harm the principal.
C: **Incorrect:** An agent fully maximizing the principal’s utility would not create that conflict.
D: **Incorrect:** Achieving efficiency is not the defining moral-hazard problem.
