Birla Institute of Technology & Science, Pilani

Work-Integrated Learning Programmes Division

Second Semester 2020-2021
Mid-Semester Test (EC-2 Regular)

Course No. : MBA ZC416

Course Title : MANAGERIAL ECONOMICS
Nature of Exam : Open Book
Weightage : 30% No. of Pages =2
Duration : 2 Hours No. of Questions = 9
Date of Exam : Saturday, 06/03/2021 (FN)
Note:
1. Please follow all the Instructions to Candidates given on the cover page of the answer book.
2. All parts of a question should be answered consecutively. Each answer should start from a fresh page.
3. Assumptions made if any, should be stated clearly at the beginning of your answer.

Q.1. Mention two important applications of microeconomics in your organization? Be clear and concise in
your response. [2]

Q.2. In a small town in North India where winter temperatures are very low, the demand function for a
truckload of firewood for college students in a small town is Q c = 400 - p. It is sometimes convenient to
rewrite a demand function with price on the left side. We refer to such a relationship as the inverse
demand function. Therefore, the inverse demand function for college students is p = 400 - Q c. The
demand function for other town residents is Q r = 400 - 2p. Solve the following & Show all your
calculations. [1 + 2 + 2 = 5]
(a) What is the inverse demand function for other town residents?
(b) At a price of Rs.300, will college students buy any firewood? What about other town residents? At
what price is the quantity demanded by other town residents zero?
(c) Draw the total demand curve, which sums the demand curves for college students and other
residents. Clearly label X-axis and Y-axis. Draw the curve for at least five points.

Ans:1- a) : Demand function for other town :

Qr = 400 – 2P
-2P = Qr – 400
-P = (Qr - 400)/2
P = - Qr /2 + 400/2
P = 200 - .5Qr

b) : - At a price of Rs.300, will college students buy any firewood:

Qc = 400 – p
Qc = 400 – 300 => Qc = 100, i.e. they will buy
- What about other town:
- Qr = 400 – 2x300
- Qr = 400 – 600 = -200 , so they will not buy

Q.3. The estimated supply function for tomatoes is Q = 58 - 15p - 20p f, where pf is the price of fertilizer.
Provide answers to the following questions. Note: If calculations are involved, provide all the steps of
calculations. If plots are needed for explanation, label the plots clearly with different points of X-axis
and Y-axis. Show all your calculations. [2 + 2 + 2 = 6]
(a) Explain why a change in the price of fertilizer causes a shift in the supply curve for tomatoes rather
than a movement along the supply curve for tomatoes.
(b) Determine how much the supply curve for tomatoes shifts if the price of fertilizer rises by Rs.1.10
per Kg. Illustrate this shift in a diagram.
 (c) Holding the price of fertilizer constant, by how much would the price of tomatoes need to rise to
cause an increase of 60 million Kg per month in the quantity of tomatoes supplied?

Q.4. Increases in the price of petroleum affect the demand curve for aluminum. Petroleum-based chemicals
(petrochemicals) are the main raw material used for plastic. Manufacturers use plastics to make many
products, including beverage containers, auto parts, and construction materials. An alternative to plastic
in these (and other) uses is aluminum. Thus, plastic and aluminum are substitutes. An increase in
petroleum prices increases the cost of petrochemicals. Petroleum prices also affect the supply curve for
aluminum. Increases in petroleum prices tend to raise energy prices, including electricity prices.
Electricity is a very important input in producing aluminum. Therefore, increasing petroleum prices tend
to increase the cost of electricity. [2 + 1 + 1 = 4]

(a) In a supply-and demand diagram, show how an increase in petroleum prices affects the demand
curve and supply curve for aluminum.
(b) If the price of petroleum rises, would the price of aluminum rise, fall, or remain unchanged, or is the
result indeterminate?
(c) Would the quantity of aluminum sold rise, fall, or remain unchanged, or is the result indeterminate?
Explain your answers in 25-30 words.

Q.5. You work for a firm producing fitness equipment. The firm tells you that the demand curve for the
firm’s main product—a multi-station home gym—is linear. You have in hand price and quantity data
obtained from focus groups and instructions to run a regression of revenue on price.
Question: Should you use a linear functional form—with revenue as a linear function of price—or
something else? Explain clearly 25-30 words. [2]

Q.6. According to Duffy-Deno (2003), when the price of broadband access capacity (the amount of
information one can send over an Internet connection) increases 10%, commercial customers buy about
3.8% less capacity. [2]
(a) What is the elasticity of demand for broadband access capacity for these firms?
(b) Is demand at the current price inelastic?

Q.7. Calculate the price elasticity of demand and cross-price elasticity of demand for coconut oil. The
coconut oil demand function is : [4]
Q = 1,200 - 9.5p + 16.2pp + 0.2Y,
Where: Q is the quantity of coconut oil demanded in thousands of metric tons per year
p is the price of coconut oil in rupees per Kg,
pp is the price of palm oil in cents per Kg,
Y is the income of consumers.

Assume that p is initially Rs.45 per Kg, pp is Rs.31 per Kg, and Q is 1,275 thousand metric tons per
year. Show all your calculations.

Q.8. Suppose that “q” is quantity of outputs produced, L is labour employed, and K is the capital invested.
Say, for the function q = f (L, K), if L = 3 and K = 5 then q = 10.
Question: Is it possible that L = 3 and K = 6 also yields q = 10 for this production function? Why or why
not? [2]

Q.9. Ms. Aditi has a business plan where she wants to develop a website and a mobile application for women
healthcare services. The services on the both website and mobile platforms will be provided on
subscription as well as pay as per service requirement. The business plan also suggests to provide
regular updates to the website and mobile application in case of change in requirements as well as
possible advertisements. In the financing part of the business plan costs involved are: [3]

1. Initial development of: website is Rs.1 lakh, and mobile application is Rs.25, 000.
2. Development of regular updates: Rs. 5000 per month.
3. Marketing costs and commission to payment gateway for payment processing: Rs.20 per customer
per transaction.
4. Selling price of each time the service is availed by consumers is Rs. 200.

Ms. Aditi estimates that she will be able to sell to 800 units of the service to customers in the first
month. Question:
(a) Is Ms. Aditi going to break even at this level of sale?
(b) What is going to be her profit or loss at the end of 800 transactions?
(c) What is her break even point in no. of transactions?
Show all your calculation.

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