Download 2002-2003 microeconomics (paper 1) mock exam s703mop1

2002-2003 microeconomics (paper 1) mock exam
s703mop1.doc
CHOOSE THE BEST ANSWER ：
1. A useful theory is testable if it
A. can yield observable and refutable implications.
B. is simple to understand.
C. does not involve the use of any tautological element.
D. All of the above .
A
2. Equilibrium
A. is an economic concept that cannot be observed.
B. is a phenomenon that can be observed.
C. is an assumption.
D. cannot be refuted in economic analysis.
A
3. Scarcity implies
A. competition
B. discrimination
C. willingness to sacrifice
D. All of the above
D
4. Economic prediction is possible because
A. individual human behaviour is never capricious
B. irregularities in individual behaviour all seem to be in the same direction.
C. group behaviour can be predicted accurately.
D. individual behaviour can be predicted accurately.
C
5. To increase revenues, an ice cream retailer is planning to decrease prices.
This action will have the desired effect of increasing revenues if
A. demand for that particular ice cream is elastic.
B. demand for that particular ice cream is inelastic.
C. demand for that particular ice cream has zero price elasticity.
D. price elasticity of demand for that particular ice cream is unitary.
A
6. Which of the following would less be an example of price discrimination ?
A. A doctor charges for service according to the income of patients.
B. A theatre charges children under 12 less for a movie ticket than it would charge adults.
C. Public hospitals charge non-residents of Hong Kong higher medical fee.
D. M.T.R. Company Limited charges less for trips during off-peak hours.
D
7. Which of the following about consumer surplus is/are correct ?
A. It gives rise to a variety of pricing arrangements.
B. Assuming the real income effect constant, it is the maximum amount that can be charged
without
altering the consumption behaviour.
C. If the good is normal, the higher the price, the smaller will be the consumer surplus.
D. All of the above .
D
8. A firm exists
A. when there is a visible hand directing resource use.
B. When there is a separation of the product market from the factor market.
C. When the input owners are not paid by directly measuring their contributions.
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9.
D. All of the above.
D
"Pareto-efficient" situation is one in which
A. all industries are producing their output in the cheapest way possible.
B. all industries are in perfect competition.
C. no household can be made better off without making another worse off.
D. all economic decisions are made by a central economic planning authority.
C
10. If a competitive industry should be monopolized, and the behaviour of costs is unknown,
then we can be sure that the monopoly firm will
A. increase output.
B. decrease output.
C. produce in the inelastic portion of its demand curve.
D. produce in the elastic portion of its demand curve.
D
11. Which of the following would raise the average cost of production ?
(1) It is necessary to speed up the rate of production at the request of buyers.
(2) There is a rise in the rental value of the machinery used for production.
(3) The market interest rate is increased.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. All (1), (2) and (3)
D
12. Under perfect price discrimination
A. the gain from trade is zero at the margin.
B. The marginal use value is higher than the marginal cost.
C. The marginal revenue curve lies below the marginal use value curve.
D. The price searcher’s marginal cost curve may be regarded as its supply curve.
A
13. In the short run, assuming one fixed factor of production and one variable factor, then,
A. when the average product of the variable factor rises, the average variable cost falls.
B. when the average product of the variable factor falls, the average cost rises.
C. when the marginal product of the variable factor rises, the marginal cost rises.
D. when the total product of the variable factor rises, the total cost falls.
A
14. Which of the following statements about Giffen good is correct ?
A. The income effect of Giffen good outweighs its substitution effect in magnitude.
B. It is logically impossible to have a Giffen good.
C. The existence of Giffen good implies that the demand curve cannot be derived.
D. All of the above.
A
15. The following diagram shows a rise in demand from D1 to D2 in a price-searcher's market.
If the marginal cost is constant, then
A. the price will rise.
C. the price will remain unchanged.
B. the price will fall.
D. the price cannot be determined.
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C
16. Suppose good X is measured on the horizontal axis and good Y on the vertical axis.
If the price-consumption curve for X is a vertical straight line, then
A. Y is an inferior good.
B. X is an inferior good.
C. X is a normal good.
D. X is a Giffen good.
B
17. Exchange contributes to the society because
A. exchange reallocates consumption from users of low marginal value to users of high marginal
value.
B. exchange reallocates production from producers of low marginal cost to those of high marginal cost.
C. exchange makes specialization and production possible.
D. All of the above.
A
18. Suppose three individuals, A, B and C, enter into exchange over good X.
Their marginal use value schedules are shown in the following table :
Quantity(units)
MUVA($)
MUVB($)
MUVC($)
1
14
11
17
2
11
8
14
3
8
5
11
4
5
2
8
5
2
0
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If the total supply of good X is 6 units, its market price will be
A. $5
B. $8
C. $11
D. $14
C
19. Which of the following about an investment decision is correct ?
A. The cost of an investment project will be lowered if it is completed earlier.
B. The more one has invested in a project, the more reluctant one is to abandon it.
C. Given an investment project, wealth maximization may not imply cost minimization.
D. The net present value of an investment project is the key factor in an investment decision.
D
20. The capital value of an asset decreases when
A. interest rate falls.
B. the life span of the asset is prolonged due to technological advance.
C. maintenance cost decreases.
D. the utilization of the asset is delayed due to the training of workers.
D
21. Mr. Leung and Mr. Wong are equally skilled at their jobs as teachers. Their productive capacities in
everything else are similar except that Mr.Wong has more creative talent. If both of them have the
same salary as teachers of a famous school, then
A. their economic rent as teachers is the same.
B. Mr. Wong has a higher economic rent in the work of teaching.
C. Mr. Leung has a higher economic rent in the work of teaching.
D. None of the above.
C
22. A pianist plays the piano. His neighbour enjoys the music but the pianist receives no payment from
the neighbour. A divergence between private and social costs occurs in the following situations
EXCEPT :
A. The more music the pianist plays, the more the neighbour enjoys the music.
B. The more music the pianist plays, the less the neighbour enjoys the music.
C. The neighbour feels that the last minute of the music has a zero value.
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D. Although the neighbour loves the music, he feels that it would be better if the pianist plays a little less.
C
23. The role of middlemen between producers and consumers
A. raises the prices of goods without contribution to production.
B. reduce transaction costs and facilitate exchange.
C. is to earn a commission at the expense of consumer surpluses.
D. is significant in the society even with zero transaction costs.
B
24. The presence of transaction costs implies
A. the price mechanism is always the most efficient allocative device.
B. the firm will emerge to organize production.
C. the product market and the factor market are not separable.
D. some resources will be misallocated.
B
25. Restaurant waiters or waitresses are allowed to collect tips from the customers because
A. it will reduce the administrative cost of a restaurant.
B. the prices listed on the menu can be set at a low level to attract the customers.
C. tips is a means to monitor the quality of services provided by the employees.
D. All of the above.
C
26. An effective price ceiling imposed on a good by the government will lead to
A. an increase in production as producers respond to higher consumer demand at the lower price.
B. a more even distribution of income.
C. a dissipation of the value of the good.
D. a decline in its demand.
C
27. A public good is
A. a free good which can be consumed by an unlimited number of consumers.
B. a common property because no one can exclude others from using it.
C. a good for which the marginal cost of serving an additional consumer is zero.
D. a good for which the marginal cost of producing an additional unit is zero.
C
28. Which of the following statements about common property is INCORRECT ?
A. Over-utilization of the property will be resulted.
B. No one will invest on the property.
C. Dissipation of rent appears.
D. The resulting resource allocation is inefficient.
D
29. According to the marginal productivity theory, a worker is paid a wage rate equal to his marginal
product. Thus :
A. in our school, the principal earns twice the salary of an ordinary teacher because the principal is
twice as productive of an ordinary teacher.
B. medical interns (young doctors under training) earn very little because their marginal products are
very low.
C. the marginal productivity theory is not useful because in the real world marginal products are
not measured.
D. none of the above is correct. The marginal productivity theory does not apply in some property
right arrangements or in the absence of a free market.
D
30. Which of the following statements is FALSE ?
A. The slope of the total cost curve is marginal cost.
B. The slope of the total variable cost curve is marginal cost.
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C. The slope of an all-or-nothing demand curve is marginal use value.
D. The slope of the budget line is relative price.
C
Section B :
B1.
(a) What is the necessary condition for exchange ?
(b) Is it a sufficient condition you have mentioned for exchange ?
(5 marks)
(3 marks)
Suggested Approach to B1 :
If the MUVs of two individuals on good X are the same, no beneficial reallocation of the good
between the two can take place.
Therefore different in MUVs is a must.
Reallocate the good from the low MUV user to the high MUV user at a price between the MUVs
benefit both.
A well labeled diagram as a help for explanation is entertained.
(5)
However, it is NOT a sufficient condition if the transaction cost involved are larger than potential
gain.
With more elaboration
(3)
B2.
Sometimes we use the term "human capital" instead of "labour" or "human effort".
However we cannot use the term "labour" instead of a "capital" good. Explain.
(8 marks)
Suggested Approach to B2:
Any productive asset(including human labour) that generates income is a capital asset, and the
discounted present value of the income stream is its capital value.
Thus land and labour are different physical entities engaged in production, and as such they are
different factors of production, but they are all capital assets.
(5)
However, before the concept of capital is generalized, the different productive entities were often
treated as conceptually different. We cannot use 'labour' to denote a piece of capital goods as they
are different physically.
(3)
B3.
What is consumer surplus? If the consumer‘s surpluses of all consumers are fully extracted by sellers,
will the income distribution of individuals in society necessarily become more unequal? (8 marks)
Suggested Approach to B3:
Consumer surplus of an individual the extra amount of value he is willing to pay in addition to
what he actually pays. Alternatively, graphical presentation of the part of surplus over the
exchange value which sums up to total value. Consumer surplus will all be extracted if consumers
face an all-or-nothing demand or price discrimination payment arrangement.
However, everyone in the economy plays dual roles of consumers and producers. That is everyone
is a seller of factor service and also a buyer of products. An individual may lose on consumer
surplus as a buyer could gain from action of the role of a producer.
We therefore hardly to say the income distribution would become more unequal or not but
depending on the relative magnitude of consumers‘ and producers’ surpluses of an individual.
B4.
Consider the following statement: “Whatever an individual does, he or she is maximizing utility.”
Is this the purpose of using “utility theory” to explain human behaviour? Why or why not? (8 marks)
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Suggested Approach to B4:
The statement itself is a tautology and can never be rejected. Therefore it cannot be used to explain
human behaviour.
No objective measure of utility can be made. Utility is just an arbitrary assignment of numbers to
rank or order choice options. The purpose is to assist the ranking of our preference so that our
behaviour can be predicted or interpreted in terms of choice or preference.
Strictly speaking, it is not crucial for economists to know whether people are in fact maximizing
utility. Economists only assert that people behave in this way. If the assertion or postulate yields
testable implications that succeed to explain or predict behaviour, the postulate is then useful so far
as it coincides with our observation.
In order to have utility maximizing theory, the entity which gives rises to utility must be specified.
In addition, the cost involved in obtaining that entity needs to be specified as well. If responses to
changes in relative costs can be identified, testable implications can be derived.
(8 marks)
B5.
A firm is often regarded as an organization that supersedes or replaces the market. Explain the nature of
this supersession. Some argue that a firm is simply a group of factors for production co-ordinated by a set
of contracts. What does this mean ?
(8 marks)
Suggested Approach to B5:
A firm is an agent or organization on one hand employing factor owners from the factor market,
and on the other hand selling finished products in the product market to the consumers.
Without firms, consumers buy goods in the market according to the marginal value, and the
transactions will be coordinated by the market mechanism.
However, the operation of invisible hand (market operation) usually incurs huge transactions costs.
The existence of firms can lower the transactions costs and thus is considered as a supersession or
replacement of the market. It is because within a firm, the entrepreneur (visible hand) who directs
the production and resource allocation can reduce much market transactions.
Ronald Coase argues that the firm superseding the market may be regarded as the factor market
superseding the product market, because while market transactions involve trading of finished
products, firms involve trading of factors of production. With more activities taking place inside a
firm, fewer transactions will be coordinated through the market operation.
Without firms, there would be no difference between the factor market and product market.
However, one can argue that a firm is simply a group of factors for production co-ordinated by a
set of contracts. Empirical study shows that the persons or institutions involved have contractual
relation with each other. The transactions in the market are governed by contract assignments.
Thus all transactions in this sense, no matter carried out in firms or markets, are contractual in
nature. The existence of firms implies one type of contract replacing another type of contracts.
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Section C:
C6.
Recently, many "megastores" are opened in Hong Kong which signals optimum in the retail sector.
"Megastore" is a super large store that mingles distinctive merchandise such as high-quality daily
necessities, food and books etc. under one roof.
How would you explain the trend of opening of this kind of megastore as a result of rise in living
standard in Hong Kong ?
(10 marks)
Suggested Approach to C6:
The time cost of shopping is reduced. The opportunity cost of shopping time is rising as real wage
increased steadily. The reduction of shopping time worth more.
Transaction cost is also reduced as information cost is reduced because :
--- the megestore becomes popular shopping place. Shopping becomes a favorite pastime for some
people. Convenient spot for shopping.
--- Market signalling : sellers send buyers "signals' that transmit information about the quality of
good.
--- Usually the set-up cost of this store is huge, confidence built up among consumers that the store
will not close down easily.
--- Asymmetric information(different information among sellers and buyers) :
--- Reputation built up by sellers and information of consumers' habit and taste easily obtained.
--- Price information : reduce the searching cost for bargains.
(10 marks)
C7.
“ In a competitive market the wage rate is equal to the marginal revenue product of labour. However in a
monopoly market, the monopolist will use its market power to pay workers less than their marginal
revenue product.” Explain why this statement may be false or uncertain.
(10 marks)
Suggested Approach to C7:
The statement may be false because the sellers may set the wage rate equal to the marginal revenue
product in both competitive and monopoly market.
In a competitive market, sellers are price-takers:
P=MR, Thus the MRP = m.p. x MR = m.p. x price.
In a monopoly market, sellers face a downward-sloping demand curve for its product and this
implies the value of an extra unit of product sold is less than its price for simple price arrangement
(i.e. MR<P):
Thus the MRP = m.p. x MR<value of marginal product
In both cases, the maximum amount that sellers are willing to pay for an extra unit of labour is still
MRP as it measures the additional revenue resulting from hiring one more labour.
The statement may also be uncertain as the monopsonist, being the only employer of a particular
type of labour, having a monopolist power to pay workers less that their marginal revenue product.
(10 marks)
C8.
"Environmentally conscious people, tired of finding chewing gum stuck to seats and pavements, have
echoed their concerns", the China Daily newspaper said.
Chinese authorities are planning to get rid of the country of a sticky problem--- chewing gum. Beijing may
follow the lead of Singapore in its anti-pollution drive and complete ban the popular sweet.
(a) We all agree that the chewing gum users do pollute the environment. Hence account for any difference
between private cost and social cost of chewing gum production.
(b) Do you think whether the government action is justified ? Explain your answer.
(10 marks)
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Suggested Approach to C8:
(a) Since we all agree that the chewing gum users do pollute the environment, it infers that cost or
negative externality generated in the process of production and consumption, which is partly borne
by third party who have not consented to bear it.
If the cost can be fully internalized by the producer and/or consumer, no one is likely to damage or
pollute his/her own environment.
Private cost and public cost differs only if the harmful effects (sticky problem) are borne by
outsiders.
(b) According to Coase Theorem, a divergence between private cost and social cost may be
eliminated by market transactions if the action that causes the damage is involving a private
property right.
It depends on the cost of to what extent of the pollution level and the cost of enforcement the law of
protecting the public hygiene. If the cost of the former is lower than the latter. The pollution can
still be tolerated with regards to economic judgment, and any government action may distort the
efficient allocation of resources.
Total net benefit should be considered.
(10 marks)
(However, the discussion is based on property right, not enough information to justify the action.)
C9.
State-operated enterprises in China are in general not performing well, and nearly one half of them are
losing so much that they are on the verge of declaring bankruptcy. Government subsidy in one form or
another has been essential in keeping many of these enterprises afloat. One of the reasons which explains
the poor performance of state enterprises in China is that workers and managers alike are stealing from
these enterprises, and the government simply does not have enough resources to guard against this
stealing practice.
Suppose, only hypothetically, that in the state-operated enterprises it is literally free to steal. What will the
equilibrium results be in the event of (a) the government not subsidizing the enterprises at all, but
allowing them to do whatever they want to decide their own fate; and (b) the government continuing to
subsidize their survival for as long as possible? Explain.
(10 marks)
Suggested Approach to C9:
(a) If the government truly lets the enterprises alone to decide their own fate, then a great many of
them will try to convert the state-operated enterprises into private enterprises, through the issuance
of stocks or other means. Alternatively, officials in charge of some enterprises may sell out the
enterprises to outside private parties (including foreign parties), grab the money and run; other
officials may take over a state enterprise and declare to be their own property. In any event, a
change in property right structure will likely take place.
(5)
(b) There will be either sharply rising taxes, or rising inflation through printing money as a form
of indirect taxation, to finance the subsidies. The continuation of this development will finally
bankrupt the government or the government may be overthrown. Therefore, the present
subsidization of state-operated enterprises will not persist indefinitely: something would have to
give to sustain the government‘s own survival. If the state-operated enterprises are relatively few in
number, they may persist forever under subsidization, but at present there are simply far too many
of them to sustain long-term subsidization.
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