ECO155 · TU past paper
Economics 2080.1 question paper
The complete TU 2080.1 exam paper for Economics (ECO155), all 12 questions with solved model answers written to the mark scheme.
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- 110 marksIncome elasticity of demand and typesHideAnswer
Define income elasticity of demand. Describe the various types of income elasticity of demand with suitable diagrams.[10]
Income Elasticity of Demand
Definition
Income Elasticity of Demand (YED) measures the responsiveness or sensitivity of quantity demanded of a good to changes in consumer income. It shows the percentage change in quantity demanded resulting from a one percent change in consumer income.
Formula:
$$E_y = \frac{% \text{ Change in Quantity Demanded}}{% \text{ Change in Income}}$$
$$E_y = \frac{\Delta Q_d / Q_d}{\Delta Y / Y} = \frac{\Delta Q_d}{\Delta Y} \times \frac{Y}{Q_d}$$
Where:
- E_y = Income elasticity of demand
- ΔQ_d = Change in quantity demanded
- ΔY = Change in income
- Y = Initial income
- Q_d = Initial quantity demanded
Types of Income Elasticity of Demand
Income elasticity can be classified into five categories based on the coefficient value:
1. Positive Income Elasticity (E_y > 0)
When income elasticity is positive, quantity demanded increases with an increase in income.
Sub-types:
a) Normal Goods (0 < E_y < 1) - Income Inelastic
- Quantity demanded increases, but proportionally less than income increase
- Examples: Basic food items, clothing, utilities
- Diagram:
Q_d | D (Normal Good) | / | / | / | / |/_________ Y (Income)b) Superior/Luxury Goods (E_y > 1) - Income Elastic
- Quantity demanded increases proportionally more than income increase
- Examples: Jewelry, luxury cars, premium services
- Diagram:
Q_d | D (Luxury Good) | / | / | / | / |___/_________ Y (Income)2. Negative Income Elasticity (E_y < 0) - Inferior Goods
When income elasticity is negative, quantity demanded decreases as income increases. Consumers switch to better alternatives when they become wealthier.
Examples: Low-quality food items, second-hand goods, public transport
Diagram:
Q_d | |\ | \ | \ D (Inferior Good) | \ |____\_______ Y (Income)3. Zero Income Elasticity (E_y = 0) - Income Neutral
Quantity demanded remains constant regardless of income changes. These are essential goods with no income effect.
Examples: Salt, basic medicines
Diagram:
Q_d | D (Income Neutral) | ___________ | | | | |_|____________ Y (Income)
Summary Table
Type Coefficient Relationship Examples Normal Goods 0 < E_y < 1 Quantity ↑ less than income ↑ Food, clothing Luxury Goods E_y > 1 Quantity ↑ more than income ↑ Jewelry, cars Inferior Goods E_y < 0 Quantity ↓ when income ↑ Low-quality goods Income Neutral E_y = 0 No change in quantity Essential items
Significance
Income elasticity helps businesses and policymakers:
- Forecast demand changes with economic growth
- Classify products for marketing strategies
- Plan production and inventory
- Understand consumer behavior patterns
- 210 marksIndifference curve definition and propertiHideAnswer
What is indifference curve? What are its properties?[10]
An indifference curve is a graphical representation showing all possible combinations of two goods or commodities that provide a consumer with the same level of satisfaction or utility. In other words, it represents different bundles of ...
- 310 marksPrice and output determination under monopHideAnswer
What is monopoly market? How price and output are determined under monopoly market?[10]
A monopoly market is a market structure characterized by: - Single seller: There is only one firm producing and selling a particular product or service - No close substitutes: The product has no close substitutes available in the market ...
- 45 marksProduction possibility curve concept and sHideAnswer
Explain the concept of production possibility curve. [5]
A Production Possibility Curve (also called Production Possibility Frontier or PPF) is a graphical representation that shows the maximum possible combinations of two goods or services that an economy can produce with its available resour...
- 55 marksMixed economy features and characteristicsHideAnswer
Describe the features of mixed economy. [5]
A mixed economy is an economic system that combines elements of both market (capitalist) and command (socialist) economies, allowing both private enterprise and government intervention. - Both private individuals/businesses and the gover...
- 65 marksNumericalPrice elasticity of demand definition and HideAnswer
Question
Consider the following table:
Combinations A B C D E F G Price (Rs.) 6 5 4 3 2 1 0 Demand (Units) 0 1000 2000 3000 4000 5000 6000 a) Find the price elasticity of demand for movement from points B to D and D to B by proportional method.
b) Compute the price elasticity of demand at the mid way between A to C and C to A by arc method. [5+0]
Combination A B C D E F G ------------------------ Price (Rs.) 6 5 4 3 2 1 0 Demand (Units) 0 1000 2000 3000 4000 5000 6000 Points of interest: - B: $P = 5$, $Q = 1000$ - D: $P = 3$, $Q = 3000$ - A: $P = 6$, $Q = 0$ - C: $P = 4$,
- 75 marksNumericalCost schedule computationsHideAnswer
Cost Analysis Problem
Consider the following cost schedule:
Output 0 1 2 3 4 5 6 7 8 TFC 200 - - - - - - - - TVC 0 20 36 48 64 100 160 248 360 a) Calculate $TC$, $AFC$, $AVC$, $AC$ and $MC$.
b) Derive $TFC$, $TVC$ and $TC$ curves. Explain their relationship. [5+0]
- TFC = 200 (fixed cost, constant at all output levels) - TVC by output: Output (Q) 0 1 2 3 4 5 6 7 8 ------------------------------ TVC 0 20 36 48 64 100 160 248 360 Formulas: - $TC = TFC + TVC$ - $AFC = TFC / Q$ - $AVC = TVC / Q$ -
- 85 marksNumericalIndirect tax effects on equilibriumHideAnswer
Question
The market demand and supply functions for product are given below:
$$Q_d = 500 - 5P$$ $$Q_s = 100 + 5P$$
a) Find the equilibrium price and output.
b) If the sales tax (indirect tax) of Rs. 10 per unit is imposed by the government, what will be the new equilibrium price and output? [5+0]
- Demand function: $Qd = 500 - 5P$ - Supply function: $Qs = 100 + 5P$ - Sales tax (part b): Rs. 10 per unit --- At equilibrium, $Qd = Qs$: $$500 - 5P = 100 + 5P$$ $$400 = 10P$$ $$P = 40$$ Equilibrium Price = Rs. 40 per unit Quantity: $$Q...
- 95 marksMonetary policy objectivesHideAnswer
Explain the objectives of monetary policy. [5]
Monetary policy refers to the actions undertaken by a central bank to influence the quantity of money and credit in an economy, primarily through controlling interest rates and money supply. - Maintain stable price levels and control inf...
- 105 marksIsoquants definition and propertiesHideAnswer
Define isoquants. What are the properties of isoquants? Explain. [5]
An isoquant (or iso-product curve) is a curve that represents all possible combinations of two inputs (typically labour and capital) that yield the same level of output. In other words, it is a locus of points showing different input com...
- 115 marksCentralized cartel definition and explanatHideAnswer
What is cartel? Why is it illegal? Give the examples of cartel. [5]
A cartel is a formal or informal agreement between competing firms in the same industry to coordinate their business activities in ways that reduce competition. Members of a cartel typically agree to: - Fix prices at artificially high le...
- 125 marksGDP and GNP distinctionHideAnswer
Distinguish between GDP and GNP. What are the problems of calculating national income in developing countries like Nepal? [5]
GDP (Gross Domestic Product) GNP (Gross National Product) ------ Total value of all final goods and services produced within a country's borders during a specific period Total value of all final goods and services produced by nationals o...