INDIAN ECONOMICS

SERVICES (IES)
TEST SERIES - 2023
Test-04 GENERAL ECONOMICS PAPER-I
Time Allowed: Three Hours Maximum Marks : 200

QUESTION PAPER SPECIFIC INSTRUCTIONS

(Please read each of the following instructions carefully before attempting questions)

There are THIRTEEN questions divided under THREE Sections.

The ONLY question in Section—A is compulsory.
In Section—B, FIVE out of SEVEN questions are to be attempted.
In Section—C, THREE out of FIVE questions are to be attempted.
Candidates should attempt questions/parts as per the instructions given in the Sections.
The number of marks carried by a question/part is indicated against it.
Diagrams/Figures, wherever required, shall be drawn in the space provided for answering the question
itself. Unless otherwise mentioned, symbols and notations have their usual standard meanings.
Candidates are required to write clear, legible and concise answers and to adhere to word limits,
wherever indicated. Failure to adhere to word limits may be penalized.
Attempts of questions shall be counted in sequential order. Unless struck off, attempt of a question
shall be counted even if attempted partly.
Any page or portion of the page left blank in the Question-cum-Answer (QCA) Booklet must be
clearly struck off.
Candidates are required to write clear, legible and concise answers.
Answers must be written in ENGLISH only.

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 GENERAL ECONOMICS PAPER-I

SECTION-A

1. Answer all the following seven parts. (5 × 7 = 35)

(a) Distinguish between Walrasian and Marshallian stability analysis.
(b) What do you mean by ‘white noise’ term? Underline the assumptions about it for regression
estimation.
(c) State and interpret Euler’s theorem.
(d) Explain with a diagram why the compensated demand curve is vertical if the consumer
consumes complementary goods.
(e) Differentiate between Roy’s identity and Shepherd lemma.
(f) Show how private optimal can be converted to social optimal in case of externalities.
(g) Comment on economies and diseconomies of scope.

SECTION-B

Answer any five out of the following seven Questions (18 × 5 = 90)

2. Derive an expression for elasticity of factor substitution for CES production function and use it to
establish that Cobb-Douglas production function is a special case of CES production function.
Interpret the parameters as well. 18

3. (a) Differentiate between regression and correlation. Derive the coefficient of correlation. 8

(b) Consider a regression model passing through origin.

(i) Derive the parameter estimators of the model.

(ii) Comment on R2 7+3

4. Distinguish between compensating variation and equivalent variation of the budget line. How can
you measure consumer’s surplus using these concepts? 18

5.. What is autocorrelation? How can we detect it? How can it be treated under the lag of one
period? 18

6. (a) Given the technology matrix

 0.1 0.3 0.1 

A   0 0.2 0.2 
 0 0 0.3 

and final demands are F1, F2 and F3.

Find the output levels if F1 = 20, F2 = 0 and F3 = 100. 12

(b) State the Hawkins-Simon conditions and explain their economic significance. 6

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 TEST - 04

7. What is primal dual problem? Show how profit maximization and cost minimization are primal
dual problems. Derive the equations to validate your claims. 18

8. (a) Suppose TATA is the major player in salt market. Show how the output and pricing decisions
of TATA firm will impact the decision of other firms in the market. 12

(b) Show how market concentration is the measure of monopoly power in the market. 6

SECTION-C

Answer any three out of the following five Questions (25 × 3 = 75)

9. Heights of groups of best-friends’ X and Y in inches are given below:

(a) Calculate the correlation coefficient between the heights of best-friends.

(b) Obtain the equation of the lines of regression and the estimate of X for Y = 70
(c) Given that, X = 4Y + 5 and Y = kX + 4 are the lines of regression of X on Y and Y on X
respectively. Show that 0 < 4k < 1.
7

If k = 1/16, what is the point of intersection of the two regression lines? 8+7+10

10. (a) Consider the first –order autoregressive scheme in the general regression model. How would
you estimate the variance, covariance and autocorrelation coefficient of the disturbance term
of the model?

(b) Describe the Durbin-Watson (DW) test of autocorrelation.

(c) Given a sample of 50 observations and 4 explanatory variables what can you say about
autocorrelation if the computed Durbin-Watson (DW) Values are.

(i) 1.05
(ii) 2.50 and
(iii) 3.97 ?

{DW L = 1.378, DW U = 1.721 at 5% level of significance, n = 50, k = 4} 9+7+9

11. A local business firms is planning to advertise a special sale on radio and television. Its weekly
advertising budget is Rs 16,000. A radio commercial costs Rs 800 per 30 second slot while a
television commercial costs Rs 4,000 per 30 second slot. Radio slots cannot be bought less

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 GENERAL ECONOMICS PAPER-I

than 5 in number while TV slots available are at the most 4 per week. Given that TV slot is 6 times
as effective as a radio slot in reaching consumers, how should the firm allocate its advertising
budget to attract the largest number of them? How will the optimal solution be affected if the
availability of the television slots is no longer constrained?

(i) Formulate LPP model 10

(ii) Solve the above using graphical method. 15

12.(a) (i) Explain the concept of direct regression and reverse regression in presence of two variables
X and Y. 5
(ii) Suppose a two variable linear regression model without intercept term. Estimate the slope
parameter of such a model and show that it is an unbiased estimator. 10
(iii) Find the value of R2 when the intercept term is absent in the two variable linear regression
model. 5
(b) Consider Cobb-Douglas production function:

Q  b0 Lb1 K b2
Test the hypothesis at 5% level of significance
H 0 : b1  b2  1

Against, H 1 : b1  b2  1 5

13. Given the demand function, P = 30 – Q, and the two firms 1 and 2 in an industry producing a
product. Marginal cost of production of each firm is zero.

(a) Suppose firm 1 behaves as a Stackelberg’s leader and firm 2 as its follower. What will be the
equilibrium output and price?

(b) How are the equilibrium values different when both firms operate in a Cournot model?
12.5+12.5



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(a) Distinguish between Walrasian and Marshallian stability analysis.
(b) What do you mean by ‘white noise’ term? Underline the assumptions about it for regression
estimation.

The simplest kind of time-series process corresponds to the classical, normal error term
of the Gauss-Markov Theorem. We call this kind of variable white noise. If a variable is
white noise, then each element has an identical, independent, mean-zero distribution.
Each peri- od’s observation in a white-noise time series is a complete “surprise”: nothing
in the previous history of the series gives us a clue whether the new value will be positive
or negative, large or small.

Some authors define white noise to include the assumption of normality, but although
we will usually assume that a white-noise process εt follows a normal distribution we do
not in- clude that as part of the definition. The covariances in the third line of equation
have a special name: they are called the autocovariances of the time series. The s-order
autocovari- ance is the covariance between the value at time t and the value s periods
earlier at time t – s.
Fluctuations in most economic time series tend to persist over time, so elements near
each other in time are correlated. These series are serially correlated and therefore
cannot be white-noise processes. However, even though most variables we observe are
not simple white noise, we shall see that the concept of a white-noise process is
extremely useful as a building block for modeling the time-series behavior of serially
correlated processes.
(c) State and interpret Euler’s theorem.
(d) Explain with a diagram why the compensated demand curve is vertical if the consumer
consumes complementary goods.
(e) Differentiate between Roy’s identity and Shepherd lemma.
(f) Show how private optimal can be converted to social optimal in case of externalities.
(g) Comment on economies and diseconomies of scope.
2. Derive an expression for elasticity of factor substitution for CES production function
and use it to establish that Cobb-Douglas production function is a special case of CES
production function. Interpret the parameters as well. 18
3. (a) Differentiate between regression and correlation. Derive the coefficient of correlation. 8
(b) Consider a regression model passing through origin.
(i) Derive the parameter estimators of the model.
(ii) Comment on R2 7+3
4. Distinguish between compensating variation and equivalent variation of the budget line.
How can you measure consumer’s surplus using these concepts? 18

Economic changes like change in price, entry of new products in the economy change the
consumption pattern and utility derived from the goods.

Compensating variation refers to the amount that the consumer is willing to pay or needs to
derive utility from any economic change. An equivalent variation would measure the amount of
change in a consumer's income if any economic change occurred in the market.

Compensating variation and equivalent variation will be the same if the effect of a price change
or any other economic change on the quantity consumed is zero.

Equivalent variation is the amount taken away from the consumer to keep them in the same
utility level as the original price, whereas compensating variation is the amount compensated
because of the price change.
5.. What is autocorrelation? How can we detect it? How can it be treated under the lag of one
period? 18
(b) State the Hawkins-Simon conditions and explain their economic significance. 6
7. What is primal dual problem? Show how profit maximization and cost minimization are
primal dual problems. Derive the equations to validate your claims. 18

The Duality in Linear Programming states that every linear programming

problem has another linear programming problem related to it and thus can be
derived from it. The original linear programming problem is called “Primal,”
while the derived linear problem is called “Dual.”
8. (a) Suppose TATA is the major player in salt market. Show how the output and pricing
decisions of TATA firm will impact the decision of other firms in the market. 12

⑱
(b) Show how market concentration is the measure of monopoly power in the market.
b
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