QUIZONOMICS
Question 1.
A person has the following indifference curves for songs of Arijit Singh and
Armaan Malik. When will the optimal consumption basket of the person be a
corner solution in this case?
Options:
A. When the prices of both Arijit and Armaan's songs are the same
B. When prices are different
C. There will never be a corner solution
D. There will always be a corner solution
Solution:
The indifference curves are of perfect substitute products. With perfect
substitutes, there will be corner solution only when prices are different. If
prices are equal, any point on the budget line is a solution.
Hence, the correct option is B.
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Question 2.
Because of a technological breakthrough, hydrogen can now be efficiently
produced and stored. Because of this, there is a sudden surge in the supply of
hydrogen fuel based cars in the market. Assuming all else constant, what can
you say about the demand for hydrogen cars at the new equilibrium point?
Options:
A. Demand will be more price elastic
B. Demand will be less price elastic
C. Price elasticity of demand will be the same
D. Uncertain
Solution:
Since the supply for hydrogen based cars has increased and demand being the
same, the new market equilibrium will be at a lower point on the demand
curve. With this, the price elasticity of demand will reduce in case of a linear
demand curve. But in case of an iso-elastic demand function (same elasticity at
all points), there will be no change in the elasticity. Hence, correct option is D
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Question 3.
A person has the following set of indifference curves for milk and beer. What
can we say about his total utility when price of beer rises in the market?
Options:
A. Utility increases
B. Utility decreases
C. Utility remains the same
D. Uncertain
Solution:
The indifference curves show normal goods. Hence, the solution to these will
always contain a combination of both goods. Thus, a price increase for one of
the goods will lead to a decrease in overall utility. Hence, correct option is B.
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Question 4.
A first year management student at IIM Ranchi wants a matching pair of
stilettos (s) and a dress (d) for her freshers. If she derives a utility of 10 from a
matching pair, which of the following is likely to be her utility function?
Options:
A. u(s,d) = 10(s+d)
B. u(s,d) = 10 max (s,d)
C. u(s,d) = 10 min (s,d)
D. u(s,d) = 10
Solution:
The girl derives utility from only a combination of matching pair of dress and
stilettos. So, an increase in one good only will not lead to an increase in utility.
This is an example of perfect complementary goods such as a socks or shoes
etc. Thus, her utility function should be minimum of the number of dresses she
has and the number of stilettos she has. Hence, correct option is C.
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Question 5.
Utility function of a person looks like the following:
This person has Rs 1,000 excess cash and faces two options:
Option I - To participate in a quiz on Economics which has a cash prize of Rs
1,000 for winner and Rs 500 for runner up.
Option II - To play a perfectly fair lottery for Rs 1,000 and a winning amount of
1 lac.
Given his knowledge level he has a probability 0.5 of winning the quiz and 0.4
of being the runner up.
The person would choose to play lottery instead of quiz in the case when:
Options:
A. 61 people are playing the lottery
B. 58 people are playing the lottery
C. 59 people are playing the lottery
D. 57 people are playing the lottery
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Solution:
The graph shown represents the utility function of a risk lover or risk seeking
person. He will always go for a high risk option even if he gets a higher return
on a safer option (although it depends on how much risk premium he is willing
to pay). Quiz is certainly a safer option as there is no probability of loss. He will
choose the lottery in all the cases because he is always exposed to the risk and
has a probability of earning 1 lac.
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QUIZONOMICS
Question 6.
Corn market in U.S appears to be a perfectly competitive market. There are
large number of relatively small farmers who take market price of corn as
given. What does this say about the market demand for corn?
Options:
A. Demand for corn is infinitely elastic
B. Demand for corn is inelastic
C. There is a large buyer
D. Demand for corn can be elastic or inelastic
Solution:
Corn market in U.S is indeed appears to be a perfectly fair market.
This actually does not say anything about the demand for corn. It only means
that individual suppliers of corn cannot change the price of their produce.
However, the demand can be anything from elastic to inelastic. Hence, the
correct option is D.
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Question 7.
Following two snapshots comparing the prices of computer memory in 1990
and now:
What do you think is the best option that describes the stark differences in
prices even though the product has become far better today?
Options:
A.
B.
C.
D.
Increase in supply of computer memory
Increase in demand for computer memory
Fall in demand and increase in supply for computer memory
Supply outpacing demand for computer memory
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Solution:
The first snapshot is from Infoworld - September 3, 1990 and the second one is
from Amazon (previous month).
Both demand and supply have been increasing in the market for computers,
computer memories etc. Prices have been falling because rate of increase in
supply is more than the growth of demand.
Hence, the correct option is D.
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Question 8.
Suppose Leaf Technologies Pvt Ltd and Google Nest are the only firms in the
market for Internet of Things products in India.
Both firms face a market demand curve P = 100 - Q1 - Q2 where Q1 is the
quantity produced by Leaf and Q2 is the quantity produced by Nest. They
compete in the market by simultaneously choosing quantities. There is no fixed
cost while both firms face a marginal cost of 10.
Leaf now plans to conduct a market research so that they can preempt Nest by
setting quantity first. What is the maximum amount that Leaf can spend on the
market research project?
Options:
A.
B.
C.
D.
112.5
102.5
400
900
Solution:
These firms resemble a duopoly market where the two firms are competing on
quantities. Thus, basic Cournot’s Duopoly Model can be applied here.
Profit function of Leaf: π1 = Q1 * (100 – Q1 – Q2) – Q1 * 10
Maximizing this function and applying First Order and Second Order Normal
Conditions we get reaction function of Leaf as R1: Q1 = (90 – Q2)/2
Since, the data is symmetric for both firms we get reaction function of Nest R2:
Q2 = (90 – Q1)/2
Equilibrium quantity is obtained when R1 = R2
So, we get Q1=Q2 = 30 & Price P = 40
π1= π2=900
Now, if Leaf decides its quantity first, then it can incorporate Nest’s reaction
function into its profit function.
π1 = [100 – Q1 – (90 – Q1)/2] – Q1*10
Applying maximization conditions, we get Q1 = 45 & P = 32.5 which gives
π1=1012.5.
The difference between Leaf’s profits between the two scenarios is 112.5.
Leaf can spend at most 112.5 on market research. Hence, correct option is A.
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Question 9.
Country X during 1980-2008 strengthened its exports very aggressively. As a
result, the productivity of tradable sector in the country increased at a faster
pace than that of the rest of the world. However, the productivity in the nontradable sector rose at the same rate as the rest of the world while the
demand was increasing at a faster rate.
During this period, how would you expect the real exchange rate of the
country vis-a-vis its major trading partners to behave?
Options:
A.
B.
C.
D.
Real exchange rate would have reduced
Real exchange rate would have increased
No effect of tradable vs non-tradable growth on real exchange rates
Uncertain
Solution:
Real exchange rate of a country depends directly on the ratio of the prices of
its non-tradable and tradable goods relative to that of some foreign country.
So, if the prices of non-tradable goods rise in the country more than it is rising
in some foreign country then, the real exchange rate of the country will also
rise. Here, since the productivity in non-tradable sector is not increasing
relatively then the price of non-tradable will increase thereby increasing the
real exchange rate. So, the correct option is B.
The country in the question is China.
In long run purchasing power parity holds for all tradable goods. But every good has some
tradable as well as some non-tradable component. So, the same big mac could be purchased
from anywhere but maybe the service associated cannot be replicated.
If, Pt = Price of a tradable component of a good and Pnt = Price of non-tradable component of
good then P = b × Pnt + (1 - b) × Pt where P = total price of good and b = share of non-tradable
component in good.
Similarly for a foreign good
P* = b* × P*nt + (1 - b*) × Pt* where P* and b* represent foreign price and share of tradable
respectively.
Applying the PPP condition and with some modifications we get:
Real exchange rate = [b (Pn/Pt) + (1 – b)] / [b* (Pn*/Pt*) + (1 – b*)
This proves that Real Exchange Rate of a country depends on the ratio of prices of nontradable to tradable goods in the country relative to other country.
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QUIZONOMICS
Question 10.
Suppose, inflation level in U.S.A is 150 while it is 100 in U.K. If the exchange
rate (nominal) is E = 2/3 £/$, what is the real exchange rate between US dollar
and British pound.
Options:
A.
B.
C.
D.
4/3
3/2
1
4/9
£/$
£/$
£/$
£/$
Solution:
Real exchange rate = Nominal Exchange rate * Domestic price level / Foreign
price level = 2/3 * 150/100 = 1. Correct option is C.
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QUIZONOMICS
Question 11.
In the following chart, real interest rates, GDP (% change yearly) marked in red
and inflation (consumer prices) marked in blue are shown for United States for
some years.
Which year can X be?
Options:
A.
B.
C.
D.
1999-00
2008-09
1973-74
2012-13
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Solution:
The above chart is taken from the World Bank Database and it shows 3 series,
annual GDP growth %, inflation (consumer prices) % growth and real interest
rate. The period marked X is surely a severe stagflation when GDP growth is
negative (recession) and inflation is quite high. Out of the given options there is
only one period which matches the chart’s description for U.S which is the great
inflation of 1973-74. Hence, correct option is C.
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QUIZONOMICS
Question 12.
Watch this Youtube video https://www.youtube.com/watch?v=2d_dtTZQyUM
up to two minutes. In this video, Nash (Rusell Crowe) explains that if all boys (A,
B, C, D) go after the blonde girl, they will block each other and nobody will get
her. After rejection, if they approach the other girls, they will not accept their
offers. Utility for having a blonde girl is more than utility of having some other
girl and utility of having a girl is more than utility of being single. Which of the
following cannot be a Nash Equilibrium?
Options:
A. Boy A approaches the blonde and all others approach other girls
B. All boys approach the blonde and get rejected
C. Boy B randomizes with some probability between approaching blonde
and some other girl and all other boys approach some other girl
D. Boy C approaches the blonde and all others approach other girls
Solution:
This is rather celebrated problem and much talked about in famous literature
and films. In this scene of the movie, what Russell Crowe describes as the Nash
Equilibrium is the only situation which is absolutely not a Nash Equilibrium in
reality.
A Nash Equilibrium is a combination of strategies for each player such that no
player can unilaterally deviate and gain more. Thus, once trapped in a Nash.
In option B, if all boys approach blonde and get rejected, they will not be
accepted by other girls also. And since, the utility of having some girl is more
than the utility of being single, hence, everyone has an incentive to change his
strategy and approach some other girl. So, clearly option B is not a Nash
Equilibrium and hence is correct option.
In the equilibrium explained by Crowe i.e. all boys approach some other girl and
leave the blonde, everyone has an incentive to change strategy and approach
blonde. Thus, even this is not a Nash Equilibrium.
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QUIZONOMICS
Question 13.
Two firms are competing in an oligopoly competing in terms of prices.
What is the first mover advantage in such a situation?
Options:
A.
B.
C.
D.
Positive
Negative
Uncertain
Zero
Solution:
This is a case of first mover in Bertrand’s duopoly wherein firms compete by
setting prices. Clearly, there is no first mover advantage in this case unlike the
Cournot’s duopoly. In fact there, is a first mover disadvantage because the
second mover can always undercut the price set by the first price setter.
The correct option is B.
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QUIZONOMICS
Question 14.
Which of the following could be an example of a Pigouvian tax?
Options:
A.
B.
C.
D.
Mobile companies paying tax per unit of radiation their handsets emit
Income tax on citizens above an income bracket
Customs duty
Value Added Tax
Solution:
Pigouvian taxes are kind of taxes levied on negative externalities caused by
economic agents. Out of the given options, only option A seems to be a negative
externality. Correct option is A.
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QUIZONOMICS
Question 15.
TCP/IP protocol uses an algorithm to control network congestion. Whenever a
node in a system is bombarded with too many packets, the node simply dumps
or throws away some or all of the packets until it reaches its normal load of
packets. A node may not receive acknowledgment and keep sending the
packets which aggravates the congestion. The anti- congestion algorithms
correct this by slowing down the speed of sending packets and all nodes would
do that thus, restoring normal throughput.
Assume two nodes in a system. Both nodes receive a delay of 2 milliseconds
when they both enable the algorithm. A node receives a delay of 5 milliseconds
if it enables the algorithm and other node does not and the other node
receives no delay. If both nodes don't enable the algorithm, they both receive
a delay of 3 milliseconds.
Which of the following set of strategies can be a Nash Equilibrium?
Options:
A.
B.
C.
D.
Both nodes enable the algorithm
Both nodes don’t enable the algorithm
One node enables and the other does not
Nodes are indifferent between enabling the algorithm or not
Solution:
The payoff matrix for the nodes is the following: Row player is Node 1 and
Column player is Node 2 (it does not matter anyways since the game is
symmetric.
Node1/2
Enable
Don’t
Enable
-2, -2
-5,0
Don’t
0,-5
-3,-3
Not enabling the algorithm is a dominant strategy for both nodes. Thus, in an
equilibrium both nodes will choose not to enable the algorithm. Correct option
is B. This is a very common problem that Computer Scientists face while designing computer
mechanisms. A whole discipline originating from Game Theory has been developed majorly by
Computer Science called Multi Agent Systems. This is a very active field of research in
contemporary times.
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QUIZONOMICS
Question 16.
Suppose you are playing the following game with your friend:There are 3 stacks of 30, 15 and 20 coins. One of you picks up any number of
coins from any stack and then the other can also pick any number of coins
from any stack. You keep doing this sequentially one after another. The person
who does not have any coins to pick up loses the game.
What can you say about this game?
Options:
A. First mover will always win
B. Second mover will always win
C. The game always results in a draw
Solution:
This is a typical and famous game of Nim Heap. It can be played with any
number and size of heaps.
The problem can be solved by hit and trial method or by just taking the binary
sum or XOR of the heap sizes.
Here, 30 ⊕ 15 ⊕ 20 = 5
The logic is that if the XOR sum is non zero then there is a winning move for
first mover and she can always win if she plays the right moves sequentially.
Thus, the correct option is A.
This problem belongs to a discipline called Combinatorial Game Theory which is a subset of
the Economic Game Theory or Game Theory in general. It deals with only 2 player perfect
information sequential (extensive form) games. These are very popular among
mathematicians and Computer Scientists generally used in finding strategic actions,
automated actions/reactions and optimization.
Although chess is considered to be a combinatorial game but in pure Combinatorial Game
Theory games which can lead to a draw are not studied.
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Question 17.
Watch the following video from the film The Dark Knight (2008):
https://www.youtube.com/watch?v=K4GAQtGtd_0
In this scene, joker plays a game with the citizens of Gotham. He puts bombs in
both the ships (one with prisoners and one with ordinary citizens) and gives
detonators to the people. Within half an hour both the ships have to decide
whether to blow the other ship using a detonator. If they do not press the
button until the time limit specified, joker blows them all up.
Analyse this problem game theoretically. Suppose people at each ship think of
the problem as a trade-off between values of survival and morality. If they die,
they lose the value of survival and if they press the button they gain survival
but lose morality. Also, they know that there is a 20% chance that batman
catches joker just before he tries to blow the two ships.
Batman is trying hard to catch joker before midnight and conjectures that
morality of people will outweigh their value of survival. What should be the
value of the morality for Batman's conjecture to be true?
Options:
A.
B.
C.
D.
More than 100% of survival
More than 140% of survival
More than 180% of survival
More than 200% of survival
Solution:
Payoff matrix of this is
Citizens/Prisoners
Detonate
Don’t detonate
Detonate
–S, –S
S – M, –S
Don’t detonate
–S, S – M
–S * 0.8 , –S * (0.8)
Let the valuations of survival and morality be S and M respectively for both
types of citizens.
The game is fully symmetric, so we can calculate the expected payoff for one
party only.
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Say, citizens are calculating their payoff: Assume a probability of p that the
prisoners detonate the bomb. The expected utility when citizens detonate = p *
(–S) + (1 – p) * (S – M) = – 2pS + (S – M) + pM
When citizens do not detonate, expected utility = p * (–S) + (1 – p) (– S) (0.8)
(There is 20% chance that Batman catches joker)
For not detonating to be better strategy expected payoff of not detonating
should be more than that of detonating. So,
p * (–S) + (1 – p) (– S) (0.8) > 2pS + (S – M) + pM
Which gives M > 1.8 S. (The calculation will be same for prisoners also).
Hence, option C is correct.
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Question 18.
Observe the following image.
The image could best correspond to which of the following phenomena
Options:
A.
B.
C.
D.
A financial crisis in US
A global financial crisis
A savings glut outside US
Financial crises in the emerging economies
Solution:
In a financial crisis, the central bank is highly unlikely to keep short term
interest rate high or to increase it. The usual response is to reduce short term
interest rate.
Thus, it cannot be a financial crisis in any way. The graph shows a global
savings glut outside U.S. The correct option is C.
In the first graph, Fed is pushing up the short term rate but the long term rate in market (the
rate on 10 year treasury) is not responding to the rate hike by Fed which should usually
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happen. This happened during 2003-07 just before the global financial crisis, what we call
the ‘housing bubble’.
The second graph just shows the boosting effect of such phenomenon on the economy. The
long term (30 year mortgage rate) follows from the treasury rate. So, when Fed was trying
to push up these long term rates, they actually stayed at the same level and hence the
mortgage rates also did not rise much causing a tremendous bubble in the housing market,
one of the major causes of the global financial crisis.
Ben Bernanke, before he was Governor of the Fed mentioned in a very significant and
powerful speech about this puzzle. He mentioned that rates are low because of a global
savings glut in the emerging economies and commodity rich countries with large current
account surpluses (China, Japan etc.). Since, the demand for safe assets globally was much
larger, the mere increase in short term rates did not affect the long term rates much.
For more insights you may read (the figure is taken from this paper):
International Capital Flows and the Returns to Safe Assets in the United States, 2003-2007
Ben S. Bernanke, Carol Bertaut, Laurie Pounder DeMarco, and Steven Kamin
2011-1014 (February 2011).
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