All India Management Association (AIMA) 2007 M.B.A Marketing Management Business Economics – I - Question Paper

relevant in the short run only. And function such as C = 200Q + 0.5Q2 and
C = 10Q + 150Q2 are examples of long run cost function because there is no fixed
cost components exist in these 2 functions.
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36. C The cost function indicates that the total cost is depended on the output to be
produced.
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37. C The marginal cost curve intersects both the avg. variable cost curve and the
short run avg. total cost curve at their least points
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38. E (a) is actual hence it is not the accurate ans
(b) is actual hence it is not the accurate ans
(c) is actual hence it is not the accurate ans
(d) is actual hence it is not the accurate ans
(e) is not actual because real economies of scale can be achieved through the
reduction in the volume of inputs. Hence it is the accurate ans.
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39. C
AC = + 30 + 6Q
TC = 200 + 30Q + 6Q2
TVC = 30Q + 6Q2
At output 10, TVC = 30(10) +6(10)2 = 300 + 600 = Rs.900.
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40. E MC will be minimum when ?MC/?Q = 0
50 -30Q + 0.25Q2
?MC/?Q = -30 + 0.5Q
Or, 0.5Q = 30
Or, Q = 30/0.5
Q = 60 units.
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41. B The minimum price beneath which the firm is shut down its operation is the
minimum avg. variable cost.
The avg. variable cost will be equal to price or marginal revenue at the
minimum point on avg. variable cost curve.
?MC = AVC.
75 – 20Q + 1.5Q2 = 75 – 10Q + 0.5Q2
1.5Q2 – 0.5Q2 – 20Q + 10Q = 0.
Q2 –10Q = 0
Q(Q–10) = 0
Q = 10.
At Q = 10, AVC = 75 – 10(10) + 0.5 (10)2
= 75 – 100 +50 = Rs.25.
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42. E TC=TFC + TVC = 200 + 1, 060 = 1260
avg. Fixed Cost of Producing fifth units
= 1260/5 = Rs.252
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43. C AC is minimum when AC/ Q = 0
AC = 36 – 0.80Q + 0.020Q2
=> – 0.80 + 0.040Q = 0
=> 0.040Q = 0.80
=> Q = 20
At Q = 20, AC = 36 – 0.80(20) + 0.020(20) two = 36 –16 + eight = Rs.28
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44. C AC = 450 + 9,500/Q. At the break-even point, avg. revenue or price (P) is equal
to avg. cost, thus P = 500 = 450 + 9,500/Q = AC.
Or, 50Q = 9,500
Or, Q = 9500/50 = 190 units.
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45. D TC = 500 – 2Q + 3Q2
AC = 500/Q – two + 3Q
= 500/5 – two + 15
= Rs.113.
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46. A The marginal cost of producing 100 additional units is 3,80,000 – 1,50,000 =
2,30,000
Per unit marginal cost = 2,30,000/100 = Rs.2,300
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47. E A price taking firms is a firm which is operating in a perfect competitive market.
choice (e) is not actual because the in perfect competition the MR = AR
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48. D The industry demand curve in perfect competition is a downward sloping straight
line.
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49. D In a freely competitive market mechanism a simultaneous equilibrium of
production and consumption can be achieved when there is efficient combination
of products.
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50. E If the market supply curve is more elastic then the burden of specific tax will be
less on seller and more on buyer.
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51. A In perfect competition, since the firm is a price taker, the total revenue curve is a
straight line starting from orgin.
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52. A In a perfectly competitive market a firm is price taker hence it’s MR will be equal
to it’s AR and price. Total profit = TR – TC
Here TR = 20 ? six = 120
TC = 17.6 ? six = 105.6
Total profit of sixth unit is = 120 – 105.6 = Rs.14.4. thousand
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53. C The firm operating in a perfectly competitive industry earns only normal profits in
the long run because of free entry and exit of the firms. The firm operating at its
minimum avg. cost can only prevail in the market. Thus, the equilibrium
condition in the long run is when the firm is operating at Min. LAC.
If AC = 150 – 1250Q + 25Q2 LTC = 150Q – 1250Q2 + 25Q3
LMC = = 150 – 2500Q + 75Q2
LAC is minimum, when LMC = LAC
Thus, 150 – 2500Q + 75Q2 = 150 – 1250Q + 25Q2
Or, 1250Q = 50Q2
Or, 50Q = 1250
Or, Q = 25 units.
TR = P ? Q = 150 ? 25 = Rs.3,750.
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ans cause
54. C For a firm operating in a perfectly competitive industry, the part of MC curve
which is above the AVC curve is the supply curve of the firm.
MC = ?TC/?Q = - 100 + 10Q = P (because at equilibrium MC = MR and in perfect
competition MR = AR = P = Demand)
Or, 10Q = P + 100
Or, Q = 0.10P + 10
There are 100 firms, hence Qs = 100x Q = 10P + 1000
Equilibrium price is where, Qs = Qd
6000 – 490P = 10P + 1000
Or, 500P = 5000
Or, P = Rs.10
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55. B A firm will shut down its operations if the price is less than avg. variable cost.
Since under perfect competition, price is also equal to marginal revenue, the firm
will continue on operations in the short run so long as price is at lowest equal to avg.
variable cost. Thus the minimum price, at which the firm will shut down, is the
minimum avg. variable cost.
AVC = 2800 – 240Q + 8Q2
Minimum avg. variable cost: AVC/ Q = 0
Thus, -240 + 16Q = 0
Or, Q = 15
When the firm is producing 15 units, then
AVC = 2800 – 240(15) + 8(225) = Rs. 1,000.
Thus, if price falls beneath Rs.1,000, the firm has to shut-down its operation in the
short run.
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56. C To maximize profits, a perfectly competitive firm produces an output where P =
MC
TC = 1200 + 600Q – 50Q2 + Q3
MC = ?TC/?Q = 600 – 100Q + 3Q2
P = 600 – 100Q + 3Q2, where Q = 150 units (given)
Hence, P = 600 – 100(150) + 3(150)2 = 53,100
Thus, total industrial production is equal to (200 + four ? 53,100) = 2,12,600 Units.
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57. D There are strict barriers to entry. Due to this feature of monopoly the firm earns
abnormal profits.
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58. C In monopoly the profit maximizing price is found by equating MC and MR.
TC = 200 + 50Q
MC = 50
TR = P ? Q
= (440 – 15 Q) Q
= 440Q – 15Q2
MR = 440 – 30Q
MR = MC
= 440 – 30Q = 50
Q = 390/30 = 13.
Profit maximizing price = 440 –195 = Rs.245
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ans cause
59. B Demand function of the firm is provided as Q = 75 – P
P = 75 – Q
TR = P Q
= 75Q – Q2
MR = 75 – 2Q
TC = 25Q
MC = 25
Profit maximizing output is found when MR = MC
= 75 - 2Q = 25
2Q = 50
Q = 25
P = 75 – Q
= 75- 25 = 50
Profit = TR – TC
TR = P Q
= 50 25 = 1250
TC = 25Q
= 25 25 = 625
? profit = 1250 – 625 =Rs.625.
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60. E The factors make price discrimination possible under monopoly are
Consumer’s preference.
The nature of the good.
Distance and frontier barrier.
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61. A The profit maximizing output is where MC = MR
30 – 40Q + 3Q2 = 30 – 4Q
Or, 3Q2 = 36Q
Or, Q = 12
At output of 12 units,
Total cost = 15000 + 30(12) – 20(12)2 + (12)3
= 15000 + 360 – 2880 + 1728 = Rs.14,208.
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62. B The firms are interdependent in their decision making. They strictly follow the
reactions pricing strategies. In fact because of this interdependency it becomes very
difficult to determine equilibrium level of price and output in an oligopoly market.
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63. E The firms after forming a cartel appoint a central agency. The central agency is
delegated the authority to decide:
I. Total volume of the product to be produced.
II. Price of the product.
III. Allocation of production among the members of the cartel.
IV. Distribution of the maximum joint profits among the members.
Hence choice (e) is the accurate ans.
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64. A In Price leadership by a low cost firm the follower has to follow the price at which
the low cost firm is selling its output. In the provided case the 1st firm is the low cost
firm whose MC curve lies beneath the MC curve of the 2nd firm. The 1st firm’s
MR is equal to its MC at point D where it sells Q1 units of output and sets a price
P1. The 2nd firm if it follows the leader will also charge the identical price. At this
point it cannot maximize its profits. If at all it decides to maximize its profit it has
sell it output at price where MC2 = MR2. Therefore, the firm will get maximum
profit at point A.
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ans cause
65. B The firm will be in equilibrium when the wage rate, avg. revenue product and
marginal revenue product avg. wage and marginal wage are equal. In the provided
diagram this condition is satisfied at point P.
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66. E All the provided statements are actual.
I. When we consider the supply of land for a particular economy or society the
supply is fixed and cannot be altered. Hence there is no transferring earning
and the true earning is rent.
II. The supply of land is perfectly elastic for certain use. It implies that as much
of land can be found as needed for use of that purpose. It is possible only
when the transferring of all the units of land is identical. Then the true earnings
and transfer earnings are 1 and the identical and no rent is earned.
III. If we consider from the point of view of an individual then land is neither
elastic nor inelastic. Here, true earnings are greater than the transfer earning
and the difference ranging from them is rent.
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67. B The wages which are paid depending on the volume of output are termed as piece
wages
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68. C Price level differentiate market rate of interest with real rate of interest < TOP
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69. E Non-insurable risks are those risks which cannot be covered through insurance.
Knight identified the subsequent non insurable risks:
Risk of competition.
Risk arising out of modifications in technology.
Market conditions risk.
Government policy risk.
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70. D Qualitative technique of demand forecasting includes:
Expert opinion.
Surveys.
Market experiments.

Earning:   Approval pending.