ECO402 Midterm Solved Papers and Quiz

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Q24. Define Consumer Surplus and describe its benefits briefly. (3)

The difference between the maximum amount a consumer is willing to pay for a good and the amount actually paid.

Q25. Describe the followings:

1. Marginal Cost and Marginal Revenues

Marginal revenue is the additional revenue from producing one more unit of output. Marginal cost is the additional cost from producing one more unit of output.

b) Total Cost and Total Revenues Total cost is the cost that has to bear by the producer to produce goods while total revenue is the monetary return for the producer after selling the produce goods.

Q26. Discuss the different preferences toward risk with the help of examples

Risk Averse Risk Nutral Risk Loving

Q27. When do the economics of scope exits? Spout your answer with the help of Example. Hw can u measure the degree of economics of scope? Explain with the help of Formula.

Question : Complete the following. (marks 5)

Output Total Cost Variable Cost Fixed Cost Marginal Cost

Question: define snob effect and bandwagon effect. + what is NETWORK EXTERNALITIES ? (marks 5) From

From If the network externality is negative, a snob effect exists. The snob effect refers to the desire to own exclusive or unique goods. This is the desire to be in style, to have a good because almost everyone else has it, or to

indulge in a fad. This is the major objective of marketing and advertising campaigns (e.g. toys, clothing). Network externalities can be positive or negative. A positive network externality exists if the quantity of a good demanded by a consumer increases in response to an increase in purchases by other consumers. Negative network externalities are just the opposite.

Question: A. How do we calculate the user cost of capital? B. Why isocost lines are straight lines? (Marks: 1+2) User Cost of Capital = Economic Depreciation + (Interest Rate)(Value of Capital) Example An Airline buys a Boeing 737 for $150 million with an expected life of 30 years. Its Annual economic depreciation = $150 million/30 = $5 million and Interest rate = 10%

User Cost of Capital = $5 million + (.10 ) ($150 million – depreciation) Year 1 = $5 million + (.10)($150 million) = $20 million Year 10 = $5 million + (.10) ($100 million) = $15 million

Q23. Define the Diminshing Marginal Utility & Equi-Marginal Utility.(3) Diminishing marginal utility means reduction in the utility after using each additional unit of a commodity. While Equi-Marginal Utility is the consumption of income on two goods in such a way that marginal utility of both the goods become equal.

If the price of a house is Rs. 200, 000 and there is 5% chances that the seller does not own the house. What amount risk neutral person will pay to buy a house?

Rs.10, 000 Rs 100, 000 Rs.190, 000 0.95[200,000] + 0.05[0] = 190, 000 page65 Rs. 210, 000

Coffee and tea are considered as substitutes, if price of tea increases then it will shift:

Demand curve for tea towards right. Demand curve for coffee towards right. From

From Supply curve for coffee towards left. Demand curve for coffee towards left.

The law of diminishing returns applies to:

The short run. The long run. Both the short and the long run. Neither the short nor the long run.

When the cost of labor increases then it will lead to shift in:

A person can earn Rs. 20,000 with 100% probability from a job “A” with utility level of 16. The person also can have a job “B” with 50% chance of earning Rs.30, 000 and a 50% chance of earning Rs.10, 000 with utility level of 14. What will be the decision of risk averse person?

He will prefer job A. as job A give him more units He will prefer Job B. He will not do any of these two jobs. He will be indifferent between job A and B.

above scenario, if P=$25, which of the following is true?

Quantity supplied is greater than quantity demanded. Quantity supplied is less than quantity demanded. Quantity supplied equals quantity demanded.