DSE- 2009

[Pinky]

14. A monopoly faces the demand curve P=8-Q. the monopoly has a constant unit cost equal to 5 for Q<=2 and a constant unit cost equal to 3 for Q<=2. its profit maximizing output equals:
(a) 3/2
(b) 2
(c) 5/2
(d) both 3/2 and 5/2

....the MR=MC condition gives values 3/2 and 5/2 .. which is the answer in key...
but wont we further find the profits both at 3/2 and at 5/2 ..
profit when Q=5/2:
PQ-3Q:
(8-5/2)*(5/2)-3(5/2)
=5/2*(8-5/2-3)
=5/2*5/2
=25/4

similarly for 3/2 it comes out to be 9/4..

since profit at 5/2> profit at 3/2

so 5/2 is the answer..

is this correct..?????????
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17. In the IS-LM framework, an increase in expected rate of inflation results in
a) an increase in the equilibrium value of income and an increase in the equilibrium value of real interest rate
b)a decrease in the equilibrium value of income and a decrease in the equilibrium value of real interest rate
c)an increase in the equilibrium value of income and an decrease in the equilibrium value of real interest rate
d)a decrease in the equilibrium value of income and an increase in the equilibrium value of real interest rate

....how to do this..? .. how expected inflation enters into IS-LM model..???

[duck]

Hi Pinky.. :)

14) Cost function would be
C= 5q  for q<= 2
  = 10+3(q-2)  for q>2

Now, find the profits at q=3/2 and 5/2, you'll get the same profits.

17) Nominal interest rate = real interest rate + expected inflation
Now, if expected inflation increases, real rate of interest has to decrease to maintain the same level of nominal interest rate.
Hence, the LM curve will shift down ( if plotting in (Y,r) space) implying an increase in equilibrium level of output and a reduction in real interest rate.

[Pinky]

ohkayyy.. thanks a lot..

I interpreted the question like when output increases beyond 2, cost of all units come down to 3 per unit!!!

[Ayushya Kaul]

Won't the IS curve shift to the right rather than the LM curve?