XLRI - Xavier School of Management

Final Exam
Managerial Economics (MGEBJ21-1)
Maximum Marks: 40 Duration: 120 Minutes Date: 29/09/2021

Instructions:

ˆ Answer all the questions.

ˆ This is a closed book quiz.

ˆ Usage of calculator is allowed.

ˆ The students are advised to write their solution clearly on their pages and upload
the scanned copies on AIS.

1. Answer the following questions just writing either one equation, word or one sentence
as required. Each question carries 1 mark.

(a) Suppose that a budget equation is given by p1 x1 + p2 x2 = m. The government

decides to impose a lump-sum tax of u, a quantity tax on good 1 of t and a
quantity subsidy on good 2 of s. What is the formula for the new budget line?
(b) If we observe a consumer choosing (x1 , x2 ) when (y1 , y2 ) is available one time, are
we justified in concluding that (x1 , x2 )  (y1 , y2 )?
(c) A college football coach says that given any two linemen A and B, he always
prefers the one who is bigger and faster. Is this preference relation transitive? Is
it complete?
√
(d) Consider the utility function u(x1 , x2 ) = x1 x2 . What kind of preferences does
it represent? Is the function v(x1 , x2 ) = x21 x2 represents the same preferences
(monotonic transformation) as given by u(x1 , x2 )?
(e) If two goods are perfect substitutes, what is the demand function for good 2?
(f) If a consumer has a utility function u(x1 , x2 ) = x1 x42 , what fraction of her income
will she spend on good 2?
(g) If S1 (p) = p − 10 and S2 (p) = p − 15 be the supply functions of firm 1 and 2, then
at what price does the industry supply curve have a kink in it?
(h) Suppose that a monopolist sells to two groups that have constant elasticity de-
mand curves, with elasticity 1 and 2 . The marginal cost of production is constant
at c. What price is charged to each group?

1
 100
(i) If D(p) = p
and c(y) = y 2 , what is the optimal level of output of the monopolist?
(j) A firm has a production function Q = x1 x2 . If the minimum cost of production
at w1 = w2 = 1 is equal to 4, what is Q equal to?
(k) The demand function for bangles is q(p) = (p + 1)−2 . What is the price elasticity
of demand at price p?
(l) The prices of inputs (K, L) are (4, 1). If the production function is given by
Q = min{L, K}, what is the minimum cost of producing one unit of output?
1
(m) Suppose Jack’s production function of collecting wood is Q = 2L 3 . Suppose wage
rate is w. Jack can sell each log of wood for rupees p. What is Jack’s supply
function when wage rate is w = 8?

2. Mr. Micro’s utility function is given by u = min{x, y}. Mr. Micro has Rs. 10,000
and price of x and y are both 1. He is working in Jamshedpur. Now his boss thinking
of sending him to Bengaluru where the price of x is 1 and the price of y is 2. The
boss offers no raise in pay. Micro, who understands compensating variation perfectly,
complains bitterly. He says that although he does not mind moving for its sake and
Bengaluru is as pleasant as Jamshedpur. He says he would not mind moving if when
he moved he got a raise of Rs. B. What is B equal to? (2)

3. Consider a market with three identical firms producing homogeneous goods. Each has
constant marginal cost c. Market inverse demand for the good is given by P = a − bQ,
where a > c.

(a) Suppose the firms compete in a simultaneous quantity-setting game. What are
the Nash equilibrium strategies, prices, and profits? (4)
(b) Suppose firms 1 and 2 merge, now acting like a single firm with marginal cost c.
In the simultaneous quantity-setting game between the merged firm and firm 3,
what are the industry proits in Nash equilibrium? What are the profits to each
firm? Based on these results, what is your assessment of the incentives for firms
1 and 2 to merge rather than competing independently as in part (a)? (5)

4. Consider the cricket bat market which consists of one dominant player and five fringe
firms. The market demand is Q = 400−2p. The dominant firm has a constant marginal
cost of 20. The fringe firms each have a marginal cost of M C = 20 + 5q.

(a) Find the total supply curve for the five fringe firms. (1)
(b) Find the dominant firm’s demand curve. (1)
(c) Find the profit-maximizing quantity produced and price charged by the dominant
firm, and the quantity produced and price charged by each of the fringe firms. (2)

2
 (d) Suppose there are 10 fringe firms instead of five. How does this change your
results? (1)
(e) Suppose there continue to be five fringe firms but that each manages to reduce
its marginal cost to M C = 20 + 2q. How does this change your results? (1)

5. Suppose you own a badminton club in CH Area of Jamshedpur. You are thinking to
decide on membership dues and fees for court time. There are two types of badminton
players. “Serious” players who have demand

Q1 = 10 − p

where Q1 is court hours per week and p is the fee per hour for each individual player.
There are also “occasional” players with demand
1
Q2 = 4 − p.
4
Assume that there are 1,000 players of each type. Because you have plenty of courts,
the marginal cost of court time is zero. You have fixed costs of rupees 10,000 per week.
Serious and occasional players look alike, so you must charge them the same prices.

(a) Suppose that to maintain a “professional” atmosphere, you want to limit mem-
bership to serious players. How should you set the annual membership dues and
court fees (assume 52 weeks per year) to maximize profits, keeping in mind the
constraint that only serious players choose to join? What would profits be (per
week)? (2)
(b) A friend tells you that you could make greater profits by encouraging both types
of players to join. Is the friend right? What annual dues and court fees would
maximize weekly profits? What would these profits be? (4)
(c) Suppose that over the years young, upwardly mobile professionals move to your
community, all of whom are serious players. You believe there are now 3,000
serious players and 1,000 occasional players. Would it still be profitable to cater
to the occasional player? What would be the profit maximizing annual dues and
court fees? What would profits be per week? (4)