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NANYANG
POLYTECHNIC
2015/2016 SEMESTER 2- SEMESTRAL EXAMINATION
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BM0007 - Microeconomics
Feb 2016
Time Allowed: 2 hrs
1.
This examination paper consists of SEVEN (7) pages including this page.
2.
Section A and Care COMPULSORY. Answer ALL questions.
3.
Section B: Answer TWO (2) out of THREE (3) questions
4.
All answers should be written in the answer booklets provided.
5.
Start your answers to each section on a fresh page.
6.
All computational work must be clearly shown
Semestral Exam I BM0007 I Page 2
1'),n
SECTION A (Total 30 Marks)
Answer ALL questions in this section.
Question 1 ( 10 marks )
(a)
Explain the difference between 'Microeconomics' and 'Macroeconomics'.
(4 marks)
(b)
Identify and explain whether
Macroeconomics issues:
(i)
the
following
are
Microeconomics
or
"The cost of living in Singapore is rising."
(2 marks)
(ii)
"If a large business raises its wages by 10 percent across the board,
what is the effect of this policy on the pricing of its products going to be?"
(2 marks)
(iii)
"United States Federal Reserve Chairwoman Janet Yellen argued the
case for raising short-term interest rates later this year."
(2 marks)
Question 2 ( 10 marks )
Indicate with the aid of a diagram whether the following scenarios would affect the
demand for N95 masks in the market, ceteris paribus. In each instance, identify the
determinant and briefly explain your answer.
(a)
The haze in Singapore has worsened.
(5 marks)
(b)
The price of the N95 mask has increased.
(5 marks)
Question 3 ( 10 marks )
Due to limited land, a farmer can either use the land for tea plantation or grow apples
trees. There is an increase in the price of tea, ceteris paribus.
(a)
With the help of a well-labelled supply diagram, explain what will happen to the
tea production.
(4 marks)
(b)
With the help of a well-labelled market equilibrium diagram, explain what will
happen to the apples production.
(6 marks)
END OF SECTION A
Semestral Exam I BM0007 I Page 3
SECTION B (Total 40 Marks)
Answer any TWO out of three questions in this section.
Question 4 ( 20 marks)
The table below shows the demand schedule for cars.
Price ($ in thousands)
Quantity demanded
(millions per year)
139
2,400
133
2,800
126
3,200
118
3,600
(a)
Calculate the price elasticity of demand when the price of a car raises from
$126,000 to $139,000. Use the mid-point formula and round off your answer to
2 decimal places.
(4 marks)
(b)
Interpret your answer to question 4 (a).
(1 mark)
(c)
Explain TWO (2) possible factors which can explain your answer derived in
question 4 (b).
(4 marks)
(d)
Assume that the income elasticity for cars. is +2.50 and a recent economic
recession causes a decrease in income by 20%.
(i)
Define income elasticity and state the basic percentage change formula.
(4 marks)
(ii)
Compute the change in the quantity demanded for cars (in percentage).
(3 marks)
(iii)
Based on your answer in question 4(d)(ii), interpret the effects of a
recession to the demand for cars.
(2 marks)
(iv)
Suggest any TWO (2) ways that the car suppliers could do in managing the
problem of lower car sales.
(2 marks)
Semestral Exam I BM0007 I Page 4
Question 5 ( 20 marks )
In the example below, a business hires extra units of labour to produce a higher
quantity of wheat. The table below tracks the output that results from the
employment of each unit of labour.
I Units of Labour
t
Ii
!
Ii
Employed
!
1
2
l
3
I
4
5
£
lj
---,
---,
- o-·-----1
i
Total Product
(tonnes of wheat},
TP
0
I
T
1-e--1I
_,___2____
(a)
.
-r
3
10
24
36
40
42
42
--·---~1
Marginal Product Average Product
(tonnes of wheat}, (tonnes of wheat},
MP
AP
NA
NA
I
1-
I
3
3
5
I
I
I
I
I
8
9
4
2
--- 0
---=1 ----
-
Define the Law of Diminishing Marginal Returns.
(3 marks)
(b)
Given the above information, ~ and complete the blanks in the table in your
answer booklet. Round off your answers to 2 decimal points.
(6 marks)
(c)
Sketch the TP and MP curves in a diagram using the figures in question 5(b).
Show the relationship between TP and MP through 3 stages of production.
(6 marks)
(d)
From your answers in question 5(b), identify the quantity of labour where
diminishing marginal returns begin.
(2 marks)
(e)
Explain whether this company is operating in the short-run or long-run.
(3 marks)
T\'~:(-:1
Semestral Exam I BM0007 I Page 5
...
..:....
.!._
Question 6 ( 20 marks )
The table below shows the production costs schedule of a company that pays
$1,000 per month for each worker employed. It also incurs $4,500 for monthly rental
and another monthly equipment cost of $5,000.
Output
Worker
0
0
10
20
30
40
6
TFC
($)
9,500
TVC
($)
0
TC($)
MC($)
AFC($)
9,500
-
-
($)
ATC
($)
-
-
AVC
10
13
16
(a)
Given the above information, gmy and complete the table above in your
answer booklet. Round off your answers to whole numbers.
(7 marks)
(b)
St~te and briefly explain whether the MC curve will cut through the ATC curve
at its minimum point.
(3 marks)
(c)
Distinguish long-run from short-run with reference to the concept of production
costs.
(2 marks)
(d)
Explain the concept of economies of scale and identify whether it relates to the
long-run or short-run average costs.
(4 marks)
(e)
With the help of a well-labelled envelop curve diagram, explain the relationship
between long-run and short-run average cost curves.
·
(4 marks)
END OF SECTION 8
Semestral Exam I BM0007 I Page 6
I\;{?
SECTION C ( Total 30 Marks)
Read the following article and answer ALL the questions
Question 7 ( 30 marks )
Powershop boss sees electricity market go from boring to scary
Energy retailer Powershop's chief executive Ben Burge says that the primacy of
the top three players in the Australian energy sector is so deeply entrenched that
customers have little option other than to comply with their demands.
Speaking at the at the Beyond the Boardroom event in Melbourne, Mr Burge said
that with AGL, Origin Energy and Energy Australia locking up 75 per cent of the
market there has been little incentive for either of the companies to focus on
service.
"So electricity used to be boring; it's now scary." The biggest paint point for
customers, according to Mr Burge, is the non-transparency. around electricity
usage. This knowledge gap more often than not translates to significant bill shock
for consumers and a trend that Mr Burge says allows the incumbent energy
retailers to fatten their revenues.
Powershop is focused on putting consumers back into the heart of the equation.
And that means giving them every shred of information they need to make their
decisions on usage. "We give customers at-the-minute data on how much they're
using and we also give them an accurate prediction of how much it's going to cost
them," Mr Burge said. Once a user signs up, Powershop buys the cheapest
"everyday" electricity for them automatically, but users can access "specials" and
"powerpacks" in an app.
Mr Burge said that the domination of the big three energy retailers had led to such
situation that the entry of a new player, one challenging the status quo on price
and service, was only a matter of time.
Source: Edited and adapted from The Australian, 26 June 2015.
(a)
(i)
Identify the market structure of the electricity market in the Australia's
energy sector.
(1 mark)
(ii)
Explain TWO (2) reasons for your answer to question 7(a) (i).
(4 marks)
(b)
"AGL, Origin Energy and Energy Australia locking up 75 per cent of the market
there has been little incentive for either of the companies to focus on service."
Identify the economic term for the profit of the three companies in short run.
Briefly explain your answer.
(3 marks)
Semestral Exam I BM0007 I Page 7
(c)
Assuming that the demand (D) and marginal revenue (MR) are straight lines,
and marginal cost (MC) and average total cost (ATC) are U-shaped curves.
(i)
Draw a well-labelled diagram to illustrate your answers to question 7 (b).
(6 marks)
(ii)
Explain why would a rational, profit-maximizing firm will choose to produce
the quantity where marginal cost is equal to marginal revenue, or where
the MC and MR curves intersect.
(6 marks)
(d)
Briefly explain TWO (2) consequences to the market with the price competition
initiated by Powershop.
(4 marks)
(e)
Give a reason for the existing players to choose non-price competition.
(2 marks)
(f)
Suggest 1WO (2) other ways that the existing players can compete with
Powershop besides making adjustments to its fares.
(4 marks)
END OF SECTION C
END OF PAPER