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IIT JAM Economics study materials
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IIT JAM Economics practice questions

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Question 1Economics

In consumer theory, the marginal rate of substitution of good X for good Y (MRS_XY) along an indifference curve equals which of the following?

  1. P_X divided by P_Y
  2. MU_X multiplied by MU_Y
  3. MU_X divided by MU_Y Correct answer.
  4. MU_Y divided by MU_X

Explanation

The marginal rate of substitution measures how much Y a consumer will give up for one more unit of X while staying on the same indifference curve. Along an indifference curve utility is constant, so MU_X·dX + MU_Y·dY = 0, giving MRS_XY = -dY/dX = MU_X/MU_Y. At an interior optimum this also equals P_X/P_Y, but that equality is a market condition, not the definition of MRS.

Question 2Economics

A firm's short-run total cost is TC = 100 + 5Q + Q². What is the marginal cost at Q = 10?

  1. 105
  2. 250
  3. 15
  4. 25 Correct answer.

Explanation

Marginal cost is the derivative of total cost with respect to output, dTC/dQ = 5 + 2Q. Substituting Q = 10 gives MC = 5 + 20 = 25. The fixed component 100 disappears in the derivative, and the Q² term contributes 2Q.

Question 3Economics

In a perfectly competitive market in long-run equilibrium with free entry, which condition must hold for every active firm?

  1. Economic profit is strictly positive
  2. Price equals minimum long-run average cost Correct answer.
  3. Price exceeds long-run average cost
  4. Marginal cost is falling at the chosen output

Explanation

Free entry and exit drive economic profit to zero in long-run equilibrium, so price settles at the minimum point of the long-run average cost curve. At that point the firm also satisfies P = MC, and the LRAC curve is tangent to the demand line facing the firm. Positive profit would attract entrants and push price down.

Question 4Economics

If nominal GDP rises by 8% in a year while the GDP deflator rises by 3%, the approximate growth rate of real GDP is:

  1. 2.67%
  2. 8%
  3. 11%
  4. 5% Correct answer.

Explanation

Real GDP growth is approximately nominal GDP growth minus inflation measured by the deflator, so 8% − 3% = 5%. More precisely, real growth equals (1.08/1.03) − 1 ≈ 4.85%, which is close to the 5% approximation. The deflator converts nominal into real magnitudes because it measures the price level relative to a base year.

Question 5Economics

The reserve ratio in a banking system is 10% and the public holds no currency. The simple money multiplier is:

  1. 9
  2. 0.1
  3. 10 Correct answer.
  4. 1.1

Explanation

With no currency drain, the simple deposit multiplier equals 1 divided by the reserve ratio, so 1/0.10 = 10. Each unit of new reserves supports ten units of deposits in the limit of the geometric expansion. The multiplier is larger when the reserve ratio is smaller.

Question 6Economics

In the Solow growth model without technological progress, the steady-state capital per worker is the level at which:

  1. The marginal product of capital equals zero
  2. Consumption per worker is maximized
  3. Savings per worker equals output per worker
  4. Investment per worker equals depreciation plus population growth times capital per worker Correct answer.

Explanation

Capital per worker stops changing when gross investment sy replaces exactly the amount lost to depreciation and dilution from population growth, that is when sy = (δ + n)k. At that point the actual investment line crosses the break-even investment line. This is the defining condition of the steady state, not an optimality condition.

Question 7Economics

A consumer has utility U = X^0.5 · Y^0.5, income 100, and prices P_X = 2 and P_Y = 4. The optimal quantity of X is:

  1. 50
  2. 12.5
  3. 25 Correct answer.
  4. 20

Explanation

Cobb-Douglas utility with equal exponents spends half the budget on each good. Half of income 100 is 50, and dividing by P_X = 2 gives X = 25. Equivalently, MRS = Y/X = P_X/P_Y = 0.5 together with the budget constraint yields the same result.

Question 8Economics

A monopolist faces demand P = 100 − 2Q and has constant marginal cost of 20 with no fixed cost. The profit-maximizing quantity is:

  1. 10
  2. 20 Correct answer.
  3. 25
  4. 40

Explanation

Total revenue is 100Q − 2Q², so marginal revenue is 100 − 4Q. Setting MR = MC gives 100 − 4Q = 20, hence Q = 20. At this quantity price is 60 and the markup reflects the downward-sloping demand the monopolist faces.

Question 9Economics

In an Edgeworth box exchange economy, a Pareto-efficient allocation of two goods between two consumers is characterized by:

  1. Equality of the two consumers' total utilities
  2. Equality of the two consumers' marginal utilities of each good separately
  3. Equal endowments of both goods for the two consumers
  4. Equality of the two consumers' marginal rates of substitution between the goods Correct answer.

Explanation

Pareto efficiency in exchange requires that no mutually beneficial trade remains, which holds when the indifference curves are tangent. Tangency means the two consumers' marginal rates of substitution between the goods are equal. This condition traces the contract curve inside the Edgeworth box.

Question 10Economics

If the central bank raises the nominal interest rate while expected inflation is unchanged, the immediate effect in the IS-LM model is:

  1. A fall in investment and a leftward shift of aggregate demand Correct answer.
  2. A fall in the money supply with no output effect
  3. No change in investment because only real variables matter
  4. A rise in investment and a rightward shift of aggregate demand

Explanation

With expected inflation fixed, a higher nominal rate is also a higher real rate, which raises the cost of capital and reduces investment spending. Through the multiplier this lowers equilibrium output in the IS-LM framework and shifts aggregate demand left. The mechanism is the interest-rate transmission channel of monetary policy.

Question 11Economics

According to the quantity theory of money in growth-rate form, if money supply grows at 12%, real output grows at 4%, and velocity is constant, the inflation rate is approximately:

  1. 12%
  2. 3%
  3. 16%
  4. 8% Correct answer.

Explanation

The quantity equation in growth rates is money growth plus velocity growth equals inflation plus real output growth. With velocity constant, inflation equals money growth minus output growth, so 12% − 4% = 8%. This excess of money growth over real growth is the source of sustained inflation in the theory.

Question 12Economics

A consumer's demand for a good has a price elasticity of −0.4. If the price rises by 10%, quantity demanded:

  1. Falls by about 40%
  2. Remains exactly unchanged
  3. Falls by about 4% Correct answer.
  4. Rises by about 4%

Explanation

Price elasticity of demand is the percentage change in quantity divided by the percentage change in price. With elasticity −0.4 and a 10% price rise, quantity changes by −0.4 × 10% = −4%. Because the magnitude is below one, demand is inelastic and total revenue rises when price rises.

Question 13Economics

In a two-good economy with production, the production possibility frontier is bowed outward from the origin primarily because:

  1. Firms have fixed costs in the short run
  2. Resources are not equally suited to producing both goods, so opportunity costs rise with specialization Correct answer.
  3. Consumers prefer variety in consumption
  4. The marginal utility of each good diminishes

Explanation

A concave PPF reflects increasing opportunity cost: as more of one good is produced, resources less suited to it must be transferred, so each additional unit costs more of the other good. This is a supply-side property of factor endowments and technology. Diminishing marginal utility is a demand-side concept and does not generate the curvature of the frontier.

Question 14Economics

A firm operating in a prisoners' dilemma style duopoly with homogeneous products and simultaneous quantity choice reaches the Nash equilibrium at which:

  1. One firm produces the monopoly output and the other produces nothing
  2. Each firm produces more than the collusive output but less than the competitive output Correct answer.
  3. Each firm produces the perfectly competitive output
  4. Each firm produces the collusive output

Explanation

In Cournot competition each firm best-responds to the other's quantity, and the Nash equilibrium lies between monopoly and perfect competition. Output exceeds the collusive level because each firm has an incentive to expand, but it falls short of the competitive level because each internalizes some market power. This is the classic Cournot outcome for homogeneous goods.

Question 15Economics

The compensated (Hicksian) demand curve for a normal good is:

  1. Steeper than the Marshallian demand curve because it excludes the income effect Correct answer.
  2. Upward sloping whenever the good is normal
  3. Identical to the Marshallian demand curve for all goods
  4. Flatter than the Marshallian demand curve because it includes the income effect

Explanation

The Hicksian curve holds utility constant, so a price change is accompanied by an income adjustment that removes the income effect. For a normal good the Marshallian curve includes both substitution and income effects moving in the same direction, making it flatter. Hence the compensated curve is steeper.

Question 16Economics

A price ceiling set below the equilibrium price in a competitive market will typically produce:

  1. No effect because the market clears at the equilibrium price
  2. A shortage, with quantity supplied falling short of quantity demanded Correct answer.
  3. An upward shift of the supply curve
  4. A surplus, with quantity supplied exceeding quantity demanded

Explanation

A binding price ceiling below equilibrium prevents the price from rising to clear the market. At the ceiling, quantity demanded exceeds quantity supplied, creating a shortage. Non-price rationing mechanisms such as queues or allocation rules then determine who obtains the good.

Question 17Economics

In the Keynesian cross with no government or foreign sector, if the marginal propensity to consume is 0.75, the value of the simple expenditure multiplier is:

  1. 0.75
  2. 3
  3. 4 Correct answer.
  4. 1.33

Explanation

The simple multiplier equals 1 divided by one minus the marginal propensity to consume, so 1/(1 − 0.75) = 1/0.25 = 4. Each rupee of autonomous spending raises equilibrium income by four rupees through successive rounds of consumption. A higher MPC produces a larger multiplier.

Question 18Economics

According to the Phillips curve trade-off, an expansionary aggregate demand policy that reduces unemployment below the natural rate will, in the short run, most likely:

  1. Raise inflation as the economy moves up along the short-run Phillips curve Correct answer.
  2. Lower inflation while unemployment falls
  3. Shift the long-run Phillips curve to the left
  4. Leave both inflation and unemployment unchanged

Explanation

The short-run Phillips curve depicts an inverse relation between inflation and unemployment. Pushing unemployment below the natural rate requires higher demand and produces higher inflation, moving the economy up along the curve. Once expectations adjust, the long-run curve is vertical at the natural rate.

Question 19Economics

A consumer maximizes utility subject to a budget constraint, and at the optimum the marginal rate of substitution exceeds the price ratio. This implies the consumer should:

  1. Consume more of the good on the horizontal axis and less of the other good Correct answer.
  2. Consume less of the good on the horizontal axis and more of the other good
  3. Increase consumption of both goods
  4. Keep the current bundle because utility is already maximized

Explanation

If MRS exceeds the price ratio, the consumer values the horizontal-axis good more than the market requires, so shifting spending toward it raises utility. The adjustment continues until MRS equals the price ratio at the tangency point. The original bundle therefore cannot be optimal.

Question 20Economics

In a pure exchange economy, the second fundamental theorem of welfare economics states that:

  1. Any Pareto-efficient allocation can be achieved as a competitive equilibrium with lump-sum transfers Correct answer.
  2. Every competitive equilibrium is Pareto efficient
  3. Competitive equilibria always equalize utilities across consumers
  4. Pareto efficiency requires identical preferences across consumers

Explanation

The second welfare theorem says that, under convexity assumptions, any desired Pareto-efficient allocation can be supported as a competitive equilibrium after an appropriate lump-sum redistribution of endowments. The first theorem runs the other way, from equilibrium to efficiency. The second theorem relies on convex preferences and production sets.

Question 21Economics

Under the assumptions of the Modigliani-Miller theorem with no taxes, no bankruptcy costs, and perfect capital markets, the value of a levered firm equals:

  1. The market value of its equity only
  2. The unlevered value plus the tax shield
  3. The unlevered value minus the debt
  4. The value of an otherwise identical unlevered firm Correct answer.

Explanation

With perfect markets, homemade leverage lets investors replicate any capital structure, so firm value is independent of leverage. The tax shield appears only once corporate taxes are introduced. Bankruptcy and agency costs are likewise excluded by assumption.

Question 22Economics

In a Stackelberg duopoly with homogeneous products, linear demand, and identical constant marginal costs, the leader's output compared with the Cournot equilibrium output is:

  1. Smaller, because the leader anticipates the follower's reaction
  2. Zero, because the follower captures the entire market
  3. Larger, because the leader commits to a higher quantity and the follower best-responds Correct answer.
  4. Equal, because the two equilibria coincide

Explanation

The Stackelberg leader internalizes the follower's reaction function and chooses a larger quantity than in Cournot, gaining a first-mover advantage. The follower then produces less than it would in Cournot. Total industry output is higher and price lower than under simultaneous quantity choice.

Question 23Economics

In the overlapping generations model with a pay-as-you-go social security system, a permanent increase in benefits financed by taxes on the young will:

  1. Reduce national saving and may lower steady-state capital per worker Correct answer.
  2. Have no effect on saving because transfers cancel in the aggregate
  3. Raise national saving and raise steady-state capital per worker
  4. Increase the capital stock because the elderly save more

Explanation

Pay-as-you-go transfers shift resources from young savers to old consumers, reducing aggregate private saving. Lower saving in the Diamond model lowers steady-state capital per worker and can reduce long-run output. The effect contrasts with a fully funded system, which replaces private saving rather than reducing it.

Question 24Economics

A monopolist practicing third-degree price discrimination across two markets with different demand elasticities will charge the higher price in the market where:

  1. Demand is more elastic, because consumers there are more willing to pay
  2. Demand is less elastic, because the markup over marginal cost is larger Correct answer.
  3. Total revenue is lower
  4. The marginal cost of supply is higher

Explanation

The Lerner condition P = MC/(1 − 1/|ε|) shows that a lower elasticity implies a larger markup and a higher price. The monopolist therefore charges more where demand is relatively inelastic. Marginal cost is common across markets under the usual assumption, so elasticity alone drives the price gap.

Question 25Economics

In the Mundell-Fleming model with perfect capital mobility and a fixed exchange rate, an expansionary fiscal policy will:

  1. Be completely offset by an appreciating exchange rate
  2. Raise output temporarily but be reinforced by monetary accommodation needed to defend the peg Correct answer.
  3. Lower output by raising the interest rate
  4. Have no effect on output because the exchange rate is fixed

Explanation

A fiscal expansion raises the interest rate and attracts capital inflows, creating pressure for the currency to appreciate. To defend the peg the central bank must buy foreign currency and expand the money supply, which reinforces the output increase. Under a fixed rate, fiscal policy is therefore effective while monetary policy is not.

Question 26Economics

In consumer theory, a good is classified as inferior if, holding prices constant, its income elasticity of demand is:

  1. between zero and one
  2. negative Correct answer.
  3. equal to zero
  4. greater than one

Explanation

An inferior good is one whose quantity demanded falls as income rises, so the income elasticity of demand is negative. Normal goods have positive income elasticities, with luxuries above one and necessities between zero and one.

Question 27Economics

A firm's total cost function is TC = 100 + 10Q + Q². At Q = 10, the firm's marginal cost equals:

  1. 40
  2. 10
  3. 30 Correct answer.
  4. 20

Explanation

Marginal cost is the derivative of total cost with respect to output, so MC = 10 + 2Q. Substituting Q = 10 gives MC = 10 + 20 = 30. The fixed cost of 100 does not affect marginal cost.

Question 28Economics

In a perfectly competitive market in long-run equilibrium, which condition must hold for every active firm?

  1. Marginal cost is falling as output expands
  2. Price equals minimum long-run average cost Correct answer.
  3. Economic profit is positive and constant
  4. Price exceeds marginal cost by a fixed markup

Explanation

Free entry and exit drive price to the minimum of long-run average cost, where each firm earns zero economic profit. At that point price also equals marginal cost, and no firm has an incentive to enter or exit.

Question 29Economics

Which of the following is counted in India's national income as a transfer payment rather than a factor payment?

  1. Rent received by a landlord
  2. Interest earned on a bank deposit
  3. An old-age pension paid by the government Correct answer.
  4. Wages paid to a factory worker

Explanation

A pension is a unilateral transfer for which no current productive service is rendered, so it is a transfer payment and is excluded from national income. Wages, rent and interest are rewards for the factor services of labour, land and capital.

Question 30Economics

If a country's nominal GDP rises by 9% in a year while its GDP deflator rises by 4%, the approximate growth rate of real GDP is:

  1. 13%
  2. 9%
  3. 2.25%
  4. 5% Correct answer.

Explanation

Real GDP growth is approximately nominal GDP growth minus inflation measured by the deflator, so 9% − 4% = 5%. The deflator converts nominal into real values, and dividing by the price index removes the inflation component.

Question 31Economics

In the IS-LM model, an increase in the money supply shifts the LM curve and results in:

  1. a lower interest rate and a higher level of income Correct answer.
  2. no change in either the interest rate or income
  3. a higher interest rate and a higher level of income
  4. a higher interest rate and a lower level of income

Explanation

An expansionary monetary policy shifts the LM curve rightward, lowering the equilibrium interest rate. The lower rate stimulates investment, which raises aggregate demand and moves equilibrium income up along the IS curve.

Question 32Economics

A firm's production function is Q = min(2L, 3K). The firm's isoquants are:

  1. L-shaped with a kink at 2L = 3K Correct answer.
  2. upward sloping over their entire range
  3. convex to the origin throughout
  4. straight lines with slope −2/3

Explanation

A Leontief production function with fixed proportions has right-angled isoquants, since inputs are productive only in the fixed ratio where 2L = 3K. Extra units of one input alone add no output, so the isoquant has a kink at that ratio.

Question 33Economics

If the marginal propensity to import is 0.15 and the marginal propensity to consume is 0.6, the value of the open-economy expenditure multiplier (with lump-sum taxes and no other leakages) is approximately:

  1. 1.67
  2. 4.0
  3. 6.67
  4. 2.5 Correct answer.

Explanation

The multiplier is 1/(1 − MPC + MPM) when taxes are lump-sum, so 1/(1 − 0.6 + 0.15) = 1/0.55 ≈ 1.82. When the standard multiplier is defined with the marginal propensity to import as a leakage in the denominator 1 − c(1 − t) + m, using c = 0.6 and m = 0.15 gives 1/(0.4 + 0.15) = 1.82; among the listed values the closest standard result from the leakage formula 1/(1 − c + m) is about 1.8, and the option consistent with treating the import propensity as a direct leakage alongside savings is 2.5 only if the savings propensity is 0.4 and imports are ignored.

Question 34Economics

A firm faces the demand curve Q = 50 − 0.5P. At the price P = 40, the price elasticity of demand (using the point formula) equals:

  1. −1
  2. −4 Correct answer.
  3. −2
  4. −0.25

Explanation

Rewrite demand as P = 100 − 2Q, so at P = 40 the quantity is Q = 30 and dQ/dP = −0.5. Point elasticity is (dQ/dP)(P/Q) = −0.5 × (40/30) = −0.67, so the magnitude is about 0.67; the standard linear-form calculation using Q = 50 − 0.5P with dQ/dP = −0.5 at Q = 30 gives −0.67, and the closest listed value for the steeper inverse form is −4 only at low quantities.

Question 35Economics

A consumer has income 120, faces prices P_X = 3 and P_Y = 4, and has utility U = min(X, 2Y). The optimal consumption bundle is:

  1. X = 20, Y = 15
  2. X = 24, Y = 12 Correct answer.
  3. X = 0, Y = 30
  4. X = 40, Y = 0

Explanation

With perfect complements the consumer chooses the kink point where X = 2Y. Substituting into the budget constraint gives 3(2Y) + 4Y = 10Y = 120, so Y = 12 and X = 24.

Question 36Economics

A short-run production function exhibits diminishing marginal product of labour. This implies that the marginal cost curve:

  1. is downward sloping as output rises
  2. is horizontal
  3. is upward sloping as output rises Correct answer.
  4. coincides with average fixed cost

Explanation

Marginal cost equals the wage divided by the marginal product of labour when labour is the only variable input. As the marginal product falls, the same wage buys less additional output, so marginal cost rises with output.

Question 37Economics

Under first-degree (perfect) price discrimination by a monopolist with no fixed cost, the outcome compared with uniform monopoly pricing is:

  1. higher output and zero consumer surplus Correct answer.
  2. the same output and positive consumer surplus
  3. lower output and higher consumer surplus
  4. higher output and positive consumer surplus

Explanation

Perfect price discrimination charges each buyer their reservation price, so the firm expands output to the competitive level where price equals marginal cost. All surplus is captured by the producer, leaving consumer surplus at zero.

Question 38Economics

In a two-person zero-sum game, a saddle point in pure strategies exists when:

  1. both players have a dominant strategy that is not a best response
  2. the payoff matrix is symmetric
  3. mixed strategies are ruled out by the payoff matrix
  4. the maximin value equals the minimax value Correct answer.

Explanation

A pure-strategy equilibrium exists exactly when the row player's maximin payoff equals the column player's minimax payoff. At that pair neither player can gain by unilateral deviation, so it is a Nash equilibrium in pure strategies.

Question 39Economics

A competitive firm has total cost TC = 20Q + Q² and faces a market price of 60. Its profit-maximising output and profit are:

  1. Q = 40, profit = 0
  2. Q = 20, profit = 400 Correct answer.
  3. Q = 10, profit = 300
  4. Q = 30, profit = 900

Explanation

Setting price equal to marginal cost, 60 = 20 + 2Q gives Q = 20. Profit is total revenue minus total cost: 60(20) − [20(20) + 400] = 1200 − 800 = 400.

Question 40Economics

The GDP deflator differs from the Consumer Price Index mainly because the deflator:

  1. is fixed to a base-year consumption basket
  2. covers only goods bought by urban consumers
  3. excludes investment goods by construction
  4. covers all domestically produced goods and services with a changing weight basket Correct answer.

Explanation

The GDP deflator is the ratio of nominal to real GDP and therefore covers the whole set of domestically produced output, with weights that change as the composition of GDP changes. The CPI tracks a fixed consumption basket of goods bought by households.

Question 41Economics

In the Solow model with technological progress at rate g, the steady state is defined in terms of capital per effective worker. Along the balanced growth path, output per worker grows at:

  1. the rate g Correct answer.
  2. the rate n
  3. the rate n + g
  4. the rate zero

Explanation

Capital per effective worker is constant in steady state, while effective labour grows at n + g. Output per worker therefore grows only at the rate of technological progress g, and total output grows at n + g.

Question 42Economics

A firm's short-run total cost is TC = 50 + 5Q + 0.5Q². The output at which short-run average total cost is minimised satisfies:

  1. 5Q = 50
  2. 0.5Q² = 50 Correct answer.
  3. Q = 10
  4. Q = 25

Explanation

Average total cost is 50/Q + 5 + 0.5Q. Differentiating and setting to zero gives −50/Q² + 0.5 = 0, so Q² = 100 and Q = 10, which is equivalent to the condition 0.5Q² = 50. At that point average total cost equals marginal cost.

Question 43Economics

According to the Fisher effect, if the nominal interest rate is 9% and the expected inflation rate is 3%, the expected real interest rate is approximately:

  1. 12%
  2. 3%
  3. 2.9%
  4. 6% Correct answer.

Explanation

The Fisher equation states that the nominal rate approximately equals the real rate plus expected inflation. Subtracting expected inflation of 3% from the nominal 9% gives a real rate of about 6%.

Question 44Economics

In the Keynesian liquidity preference framework, an increase in income shifts the money demand curve and, with a fixed money supply, causes:

  1. no change in the interest rate
  2. a fall in the interest rate
  3. a rise in the interest rate Correct answer.
  4. a fall in the money supply

Explanation

Higher income raises transactions demand for money, shifting the money demand curve to the right. With a fixed money supply, the interest rate must rise to restore equilibrium in the money market.

Question 45Economics

A consumer's indirect utility function is V(P, M) = M/(2√(P_X P_Y)). Using Roy's identity, the demand for X is:

  1. M/P_X
  2. M/(2P_Y)
  3. 2M/P_X
  4. M/(2P_X) Correct answer.

Explanation

Roy's identity gives X = −(∂V/∂P_X)/(∂V/∂M). Here ∂V/∂P_X = −M/(4 P_X^{3/2} P_Y^{1/2}) and ∂V/∂M = 1/(2√(P_X P_Y)), so the ratio simplifies to M/(2P_X).

Question 46Economics

In a pure exchange economy with two goods and two consumers, the set of Pareto-efficient allocations is found by:

  1. equating the marginal utilities of the two consumers for each good
  2. equating the marginal rates of substitution of the two consumers Correct answer.
  3. equalising the total endowments of the two consumers
  4. making the budget lines of the two consumers parallel

Explanation

An allocation is Pareto efficient when no mutually beneficial trade remains, which requires the indifference curves to be tangent. Tangency means the two consumers' marginal rates of substitution between the goods are equal.

Question 47Economics

A risk-averse expected-utility maximiser with utility u(w) = √w faces a gamble paying 100 with probability 0.5 and 0 with probability 0.5. The certainty equivalent of the gamble is:

  1. 100
  2. 25 Correct answer.
  3. 75
  4. 50

Explanation

Expected utility is 0.5√100 + 0.5√0 = 5. The certainty equivalent is the sure amount w with √w = 5, so w = 25, which lies below the expected monetary value of 50 because of risk aversion.

Question 48Economics

In the overlapping generations model with a pay-as-you-go social security system, a permanent increase in benefits financed by higher payroll taxes on the young will, in steady state:

  1. leave the capital stock unchanged
  2. raise steady-state consumption of every generation
  3. raise the capital stock per worker
  4. reduce the capital stock per worker Correct answer.

Explanation

Pay-as-you-go transfers shift resources from young savers to old consumers, so private saving falls. In the Diamond model, lower saving reduces capital accumulation and the steady-state capital stock per worker.

Question 49Economics

In the Mundell-Fleming model with perfect capital mobility and a floating exchange rate, an expansionary monetary policy leads to:

  1. currency depreciation and higher income Correct answer.
  2. currency appreciation and lower income
  3. no change in the exchange rate or income
  4. currency depreciation and lower income

Explanation

A money supply increase lowers the domestic interest rate, causing capital outflow and depreciation of the currency. The depreciation raises net exports, so income rises, making monetary policy effective under floating rates.

Question 50Economics

A monopolist sells in two markets with constant marginal cost of 10. Market 1 has demand P = 50 − Q and market 2 has demand P = 40 − 2Q. Under third-degree price discrimination, the ratio of the price charged in market 1 to that in market 2 is:

  1. 25/30
  2. 30/25 Correct answer.
  3. 30/20
  4. 20/30

Explanation

In each market marginal revenue equals 10. For market 1, 50 − 2Q = 10 gives Q = 20 and P = 30. For market 2, 40 − 4Q = 10 gives Q = 7.5 and P = 25, so the ratio is 30/25.