ECO402 MIDTERM PAPERS SMSTR FALL 2011 (MONTH OF MAY)
Q24. Define Consumer Surplus and describe its benefits briefly. (3)
CONSUMER SURPLUS
Consumer Surplus is the difference between the maximum amount a consumer is willing to pay for a good and the amount actually paid.
CONSUMER & PRODUCER SURPLUS
Consumer surplus is the total benefit or value that consumers receive beyond what they pay for the good. Producer surplus is the total benefit or revenue that producers receive beyond what it cost to produce a good
Q25. Describe the followings:
a) 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 of production equals the fixed cost (the cost of the fixed inputs) plus the variable cost (the cost of the variable inputs), or…
tc = vc + fc
Profit (π ) + Total Cost = Total Revenue
Q26. Discuss the different preferences toward risk with the help of examples
DESCRIBING RISK
To measure risk we must know:
1) All of the possible outcomes.
2) The likelihood that each outcome will occur (its probability).
RISK PREMIUM
The risk premium is the amount of money that a risk-averse person would pay to avoid taking a risk.
RISK LOVING
A person is said to be risk loving if they show a preference toward an uncertain income over a certain income with the same expected value.
Examples: Gambling, some criminal activity
RISK NEUTRAL
A person is said to be risk neutral if they show no preference between a certain income, and an uncertain one with the same expected value
A person who prefers a certain given income to a risky income with the same expected value.
RISK AVERSE:
. A person is considered risk averse if they have a diminishing marginal utility of income. The use of insurance demonstrates risk aversive behavior.
Q27. When do the economics of scope exits? Spout your answer with the help of Example. How can u measure the degree of economics of scope? Explain with the help of Formula.
PAPER#2
Question : Complete the following. (marks 5)
Output Total Cost Variable Cost Fixed Cost Marginal Cost
0 50 0 50 –
1 60 ? ? ?
2 75 ? ? ?
3 100 ? ? ?
4 150 ? ? ?
Question: define snob effect and bandwagon effect. + what is NETWORK EXTERNALITIES ? (marks 5)
THE BANDWAGON EFFECT
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).
THE SNOB EFFECT
If the network externality is negative, a snob effect exists. The snob effect refers to the desire to own exclusive or unique goods. The quantity demanded of a “snob” good is higher the fewer the people who own it.
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)
ans b because the prices are constant
Question: Differentiate between the law of diminishing marginal utility and the law of equi-marginal utility.
(Marks: 1.5+1.5)
DIMINISHING MARGINAL UTILITY
The principle of diminishing marginal utility states that as more and more of a good isconsumed, consuming additional amounts will yield smaller and smaller additions to utility.
Total utility is maximized when the budget is allocated so that the marginal utility per dollar of expenditure is the same for each good. This is referred to as the equal marginal principle.