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JANUARY EXAMINATIONS 2002
Subject
SUBJECT
ECONOMICS
ECONOMICS
Title of Paper
EC 100
Time Allowed
Two Hours (2 Hours)
MICROECONOMICS 1
__________________________________________________________________________________________
Instructions to candidates
This paper is in two sections. Students should attempt ALL the
questions in Section A and ONE in Section B. Section A carries 60%
of the maximum marks for the paper.
__________________________________________________________________________________________
SECTION A : MULTIPLE-CHOICE
All questions should be attempted. Use the answer sheet provided to record the
one response you believe to be the most appropriate for each question.
1.
The supply of a good is price elastic. If the demand for the good falls, expenditure on the
good will
A
B
C
D
E
2.
fall
stay the same
double
rise
be impossible to tell without more information
The supply of a good is price inelastic. If the demand for the good falls because of a
change in consumers’ tastes, expenditure on the good will
A
B
C
D
E
fall
be unchanged
rise, if the price elasticity of demand exceeds unity in absolute value
increase
be excessive
Questions 3 and 4 refer to the following figure
Movies
20
A
xZ
xX
B
15
3.
The figure shows Jonathon’s budget constraint. Which of the following statements about
the budget constraint is correct.
A
B
C
D
E
4.
Concerts
It is impossible to say whether attending a movie is more or less expensive than
attending a concert.
Attending a movie is more expensive than attending a concert.
It costs Jonathon the same price to attend a movie as it does to attend a concert.
Attending a movie is less expensive than attending a concert.
The price of a movie is 20, the price of a concert is 15.
Which of the following statements about Jonathon’s budget constraint is correct?
A
B
C
D
E
Points A and B are attainable; points X and Z are unattainable.
Point X is attainable; points A, B, and Z are unattainable.
Points A, B, X, and Z are all attainable.
Points A, B, and Z are attainable; point X is unattainable.
Points A, B, and X are attainable; point Z is unattainable.
5.
Which of the following will lead to a leftward shift in the demand schedule for
a particular product?
A
B
C
D
E
6.
Justin buys only glasses of wine and smoked salmon. If the price of a glass of wine
decreases, the:
A
B
C
D
E
7.
An increase in consumers’ income.
A decline in the price of the product.
An increase in the price of the product.
A decline in the price of a substitute.
A discovery that consumption of the product increases life expectancy.
income and substitution effects each lead to increased consumption of salmon.
income and substitution effects each lead to reduced consumption of salmon.
income effect will increase consumption of salmon, but the substitution effect
will reduce it.
substitution effect will increase consumption of salmon, but the income effect
will reduce it.
income and substitution effects will cancel each other out and leave the demand
for salmon unchanged.
Jade Lim buys only China tea and noodles. She can increase utility by reallocating
income among the two goods until the:
A
B
C
D
E
marginal utilities are equal.
willingness to pay for an additional unit is equal for tea and noodles.
ratio of marginal utilities equals the ratio of the prices.
last packet of noodles purchased yields the same benefit as the last packet of tea
purchased.
above are all true.
Questions 8 and 9 refer to the following figure.
Meat
•
A
C
B
x
Potatoes
8.
In the above figure, which shows a decrease in the price of potatoes, which of
the following is true?
A
B
C
D
E
9.
The substitution effect is the movement from A to B and the income effect is the
move from B to C.
The substitution effect is the movement from C to B and the income effect is the
movement from B to A.
The substitution effect is the movement from A to C and the income effect is the
movement from C to B.
The substitution effect is the movement from B to C and the income effect is the
movement from C to A.
The substitution effect is the movement from C to A and the income effect is the
movement from A to B.
In the above diagram for a decrease in the price of potatoes, which of the following is
true?
A
B
C
D
E
The substitution effect of the price change results in increased consumption of
potatoes and the income effect results in reduced consumption.
The substitution effect and the income effect of the price change both result in
increased consumption of potatoes.
The substitution effect and the income effect of the price change both result in
reduced consumption of potatoes.
The substitution effect of the price change results in reduced consumption of
potatoes and the income effect results in increased consumption.
The substitution effect and the income effect suggest potatoes are a Giffen Good.
10.
When there are constant returns to a factor in the production process,
A
B
C
D
E
11.
If the cost of a fixed input in production increases,
A
B
C
D
E
12.
output increases less than proportionately with input of the variable factor.
input of the factor increases more than proportionately with output.
output increases more than proportionately with input of the variable
factor.
input of the factor increases less than proportionately with output.
output increases proportionately with input of the variable
factor.
the average and marginal cost curves both shift downwards.
the marginal cost curve shifts upwards, but the average cost curve is unchanged.
neither the average cost curve nor the marginal cost curve is affected.
the average cost curve shifts upwards, but the marginal cost curve is unchanged.
the average cost and marginal cost curves both shift upwards.
A profit-maximising monopolist finds that at the present level of output, marginal
revenue equals £20 and marginal cost is £12. The price for this output has been
determined from the demand curve. What should the monopolist do to increase profits?
A
B
C
D
E
Nothing: it is already maximising profits.
Increase output and reduce price.
Reduce price and output.
Increase price and output.
Increase price and reduce output.
Questions 13 and 14 relate to the following diagram which shows the cost and revenue
schedules of a firm operating under competitive conditions.
MC
MR
AC
AR
MC
AC
Price
MR = AR
0
13.
Q1
Q2
Q3
Q4
In the above figure, if the firm were initially producing Q2, it should:
A
B
C
D
E
14.
Q
expand output to Q3 to maximise profits.
reduce output to Q1 to maximise profits.
continue to produce Q2, which is the profit-maximising output.
expand output to Q4 to maximise profits.
expand output beyond Q4 to maximise profits.
In the figure above, at the outputs Q1 and Q4, the firm is:
A
B
C
D
E
making negative profits.
making positive profits.
just covering its fixed costs.
just covering its fixed and variable costs.
just covering its fixed costs and making negative profits.
15.
The more price-inelastic the demand curve faced by a firm, the:
A
B
C
D
E
16.
Economists judge a monopolist’s output as being too low because:
A
B
C
D
E
17.
smaller is the firm’s degree of market power.
more the firm’s sales will drop in the face of a price rise.
larger is the firm’s degree of market power.
smaller is the difference between price and marginal revenue.
greater is the likelihood that a price reduction will increase revenue.
there is excess demand for the product at the profit-maximising price.
output is less than the equilibrium level.
output is below what a perfectly competitive industry would produce.
economies of scale are not fully exploited.
at this output there is not full employment of labour.
In an industry with constant returns to scale technology, the dead-weight loss to society
from monopoly is the:
A
B
C.
D
E
excess profits as compared with perfect competition.
consumer surplus on all the units that would be produced with
competition but are not produced under monopoly.
consumer surplus on all units that would be produced with competition, less the
monopoly profits.
sum of the producer and consumer surplus under monopoly.
largest of all the above.
18.
P
Marginal
cost
P3
P2
P1
Social
marginal
benefit
Private
marginal
benefit
Q
0
Q1
Q2
Q3
The above figure illustrates a case of a market with an externality. The socially efficient
output is at ____, and the socially efficient price is at _____.
A
B
C
D
E
19.
Q1; P1
Q2; P2
Q3; P1
Q1; P3
Q3; P3
When the supply of labour is relatively inelastic, the burden of a payroll tax (National
Insurance contributions) falls primarily on:
A
B
C
D
E
consumers, in the form of higher prices.
consumers in the form of higher prices, and workers, in the form of higher wages.
workers, in the form of lower wages.
consumers, in the form of higher prices, and shareholders, in the form of lower
dividends.
shareholders, in the form of lower dividends.
20.
A tax is levied on a product. The more price-inelastic the demand for the product is, the:
A
B
C
D
E
more likely it is that the tax is borne equally by consumers and sellers.
less likely it is that the tax will be reflected in a change in price rather than a change
in quantity.
smaller is the proportion of the tax borne by consumers.
lower is the revenue that is raised by the tax.
greater is the revenue that is raised by the tax.
SECTION B
Answer one of the questions numbered 1 to 3
1.
2.
3.
(a)
What are the own price elasticity of demand and the elasticity of supply of a
commodity? What are the principal factors which determine the magnitudes of
these elasticities?
(40%)
(b)
How will the elasticity of supply and the elasticity of demand influence the extent
to which a shift in a good’s supply curve results in a change in price and a change
in quantity?
(30%)
(c)
Why might the government’s Finance Minister be interested in the elasticities of
demand and supply of goods?
(30%)
(a)
Consider a consumer who spends all of her fixed income on the purchase of two
goods. Using indifference curve analysis or otherwise, show how she will
determine the quantities of the goods to purchase. Describe and explain the
conditions for the consumer to be in equilibrium.
(50%)
(b)
Suppose the price of one of the goods increases. Use indifference curve analysis
to explain what the effects on the demand for the two goods might be. (50%)
(a)
Outline how a monopolist chooses its quantity of production to maximise profits.
Why will producing more or less than the output at which marginal revenue
equals marginal cost reduce profits? Why is it possible that, at a high enough
level of output, if a monopoly produced and sold more, its revenue would actually
decline?
(60%)
(b)
When can a monopoly be said to be a natural monopoly? Why does a natural
monopoly require subsidisation in order to operate efficiently?
(40%)