Download ECN 401

College of Business, Hospitality and Tourism Studies
School of Economics, Banking & Finance
ECN401 – Foundation Economics I
Final Examination: Trimester I, 2016
QUESTION PAPER AND ANSWER BOOKLET
This examination constitutes 50% of total assessment of this unit and students must score
40%/100 in this examination in order to pass this unit.
Instructions
1. Time Allowed: 3 HOURS with additional 10 MINUTES reading time.
2. All answers are to be written in the spaces provided on the question paper.
3. Write your ID Number on ALL pages of your Answer Booklet and any extra sheets that you use.
4. This is a closed book examination. You are not permitted to access any books, notes or other
forms of written or electronic materials.
5. Attach the extra sheets securely at appropriate place before handing-in the Answer Booklet to the
supervisor.
Sections
Question
Marks
Section A: Multiple Choice
30 Questions. All compulsory
30
Section B: Short Answers and
Calculation
6 Questions. All compulsory
50
3 Questions. Answer only two
20
Section C: Essay
TOTAL/WEIGHT
ECN 401
100/50%
Trimeter 1, 2016
Page 1(Turn Over)
SECTION A
MULTIPLE CHOICE
30 MARKS
Use the grid provided to circle the letter of your choice.
1. Microeconomics is concerned with the
A. economy as a whole.
B. electronics industry.
C. study of the individual economic behaviour.
D. interactions within the entire economy.
2. Normative economics forms _____________ based on _____________
A. positive statements, facts
B. opinion, personal values
C. positive statements , values
D. opinion, facts
3. The demand and supply of a product was at equilibrium, the recent cyclone Winston
affected most of the inputs used to create the product, this cause the
A. supply curve of the product to increase.
B. demand curve of the product to increase.
C. supply curve of the product to decrease.
D. demand curve of the product to decrease.
4. An increase in the demand for a good will cause
A. an increase in equilibrium price and quantity
B. a decrease in equilibrium price and quantity
C. an increase in equilibrium price and a decrease in equilibrium quantity
D. a decrease in equilibrium price and an increase in equilibrium quantity
5. The slope of a demand curve depends on
A. the units used to measure quantity but not the units used to measure price.
B. the units used to measure price and the units used to measure quantity.
C. the units used to measure price but not the units used to measure quantity.
D. neither the units used to measure price nor the units used to measure quantity.
6. The price elasticity of demand depends on
A. the units used to measure price but not the units used to measure quantity.
B. the units used to measure price and the units used to measure quantity.
C. the units used to measure quantity but not the units used to measure price.
D. neither the units used to measure price nor the units used to measure quantity.
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7. Producers' total revenue will increase if
A. income falls and the good is a normal good.
B. the price rises and demand is inelastic.
C. the price rises and demand is elastic.
D. income increases and the good is an inferior good.
8. When the efficient quantity of output is produced
A. the marginal benefit of the last unit produced is equal to the marginal cost of the last
unit produced.
B. resources are used in the activities in which they are most highly valued.
C. the sum of consumer surplus and producer surplus is maximized.
D. All of the above answers are correct.
9. Sam's demand curve for pizza
A. lies below her marginal benefit curve for pizza.
B. lies above her marginal benefit curve for pizza.
C. is the same as her marginal benefit curve for pizza.
D. has one point in common with her marginal benefit curve for pizza.
10. A deadweight loss
A. is a loss inflicted on the entire society.
B. is possible only if the good is underproduced but is not possible if the good is
overproduced.
C. is a loss to consumers and a gain to producers.
D. subtracts only from producer surplus.
11. An indifference curve is a graph that shows
A. the combination of goods a consumer consumes and remains indifferent.
B. the relationship between price and quantity of goods consumed.
C. the demand and supply of goods at a given price level.
D. how much a consumer is willing to pay for a good.
12. With the given level of income and the price of two goods, a consumer will always prefer
to
A. consume on a higher indifference curve.
B. consume based on his or her preferences.
C. save first and then consume.
D. consume where the budget line is tangent to the indifference curve.
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13. Senorita loves to consume milk and weet-bix. She prefers to consume 4 packets of milk
and 1 packet of weet-bix per week at an income of $50.00. This week Senorita has been
provided with a bonus which increases her income to $60.00. How will this affect
Senorita’s consumption?
A. She will still consume the same bundle of weet-bix and milk.
B. She will only increase her consumption for milk.
C. She will save the $10.00 and buy a new good.
D. Both her consumption for weet-bix and milk will increase as her income has
increased.
14. Which would be an implicit cost for a firm? The cost:
A. of worker wages and salaries for the firm.
B. paid for production supplies for the firm.
C. of wages foregone by the owner of the firm.
D. paid for leasing a building for the firm.
15. The law of diminishing returns states that:
A. as a firm uses more of a variable resource, given the quantity of fixed resources, the
average product of the firm will increase.
B. as a firm uses more of a variable resource, given the quantity of fixed resources,
marginal product of the firm will eventually decrease.
C. in the short run, the average total costs of the firm will eventually diminish.
D. in the long run, the average total costs of the firm will eventually diminish.
16. Suppose that a firm produces 200,000 units a year and sells them all for $10 each. The
explicit costs of production are $1,500,000 and the implicit costs of production are
$300,000. The firm has an accounting profit of:
A. $500,000 and an economic profit of $200,000.
B. $400,000 and an economic profit of $200,000.
C. $300,000 and an economic profit of $400,000.
D. $200,000 and an economic profit of $500,000.
17. When a firm doubles its inputs and finds that its output has more than doubled, this is
known as:
A. economies of scale.
B. constant returns to scale.
C. diseconomies of scale.
D. violation of the law of diminishing returns.
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18. In a competitive market, when are resources allocated efficiently?
A. When demand is equal to supply.
B. When marginal benefit is equal to marginal cost.
C. When consumers have more surplus.
D. When government decides what has to be produced in the economy.
19. A perfectly competitive firm will maximize profit at the quantity at which the firm's
marginal revenue equals
A. price.
B. average revenue.
C. total cost.
D. marginal cost.
20. Oligopoly is the only market structure characterized by:
A. interdependence in pricing and output decisions.
B. differentiated products.
C. barriers to entry.
D. profit-maximizing behaviour.
21. In monopolistic competition, the products of different sellers are assumed to be
A. similar but slightly different.
B. identical perfect substitutes.
C. either identical or differentiated.
D. unique without any close or perfect substitutes.
22. One of the requirements for a monopoly is that
A. the product cannot be produced by small firms.
B. there are several close substitutes for the product.
C. there is a unique product with no close substitutes.
D. products are high priced.
23. Since a well-educated work force benefits an entire society, education provides
A. negative externalities.
B. positive externalities.
C. incentive to be productive.
D. no marginal cost.
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24. Which of the following characterises a public good?
A. People who do not pay for the good can be excluded from using it.
B. If one person uses the good, it does not prevent others from using it.
C. It is easy to determine who must pay for the good.
D. The good exhibits positive externalities.
25. If the production of a good creates negative externalities, the private market will produce
too
A. much of the good at too low a price.
B. much of the good at too high a price.
C. little of the good at too high a price.
D. little of the good at too low a price.
26. The market system fails to produce public goods because
A. their production seriously distorts the distribution of income.
B. a person unwilling to pay can be excluded from the benefits that the product provides.
C. public enterprises can produce such goods at lower cost than private enterprises.
D. private firms can not restrict the benefits of such goods to consumers who are willing
to pay for them.
27. One of the main causes of unequal income distribution in most poor countries is the
A. an equitable distribution of wealth and property.
B. differences in education and training.
C. the high levels of non-cash transfer.
D. low benefit reduction rates.
28. Government programs that take money from high-income people and give it to low
income people typically
A. improve economic efficiency by reducing poverty.
B. reduce economic efficiency because they distort incentives.
C. have no effect on economic efficiency because they both reduce poverty and distort
incentives.
D. sometimes improve, sometimes reduce, and sometimes have no effect on economic
efficiency.
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29. The graph shows four different Lorenz curves (1,2,3 and 4) The greatest increase in
income equality would occur with the shift in a Lorenz curve from.
A.
B.
C.
D.
1 to 2.
1 to 4.
4 to 1.
3 to 1.
30. When the government taxes income as part of a redistribution program,
A. the poor pay higher taxes.
B. the rich always benefit more than the poor.
C. the poor are encouraged to work.
D. incentives to earn income are diminished.
SECTION B
ECN 401
SHORT ANSWERS
50 MARKS
Trimeter 1, 2016
Page 7(Turn Over)
Answer all question in the spaces provided
1. Explain two assumptions of the production possibility curve?
(2 marks)
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2. Use the table given below to answer the questions that follows
Demand and Supply schedule for Cassava
Prices
Quantity Demanded Quantity Supplied
($)
(00) kg
(00) kg
1
15
2
2
13
4
3
10
5
4
8
8
5
7
10
6
5
13
7
2
16
(i)
Use the information given above to draw the demand and the supply curve.
(3 marks)
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(ii)
Cyclone Winston has damaged most of cassava crops around the country, explain
how this will affect the market for rice?
(2marks)
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(iii)
If the price of a particular product rose from $10 to $15 and the demand for the
same product decreases from 70kg to 75kg, calculate the price elasticity of
demand for the same product.
(3 marks)
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3. (i)
Why are market price regarded as the most efficient way to allocate resources to
the society?
(3 marks)
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(ii)
Using the indifference and the budget line, explain how a consumer will choose to
consume a bundle of goods at a given income and price of the good. (3 marks)
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(iii) Explain where would a consumer prefer to consume if they are consuming
complementary goods?
(2 marks)
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4. A firm has fixed costs of $60 and variable costs as indicated in the table below.
Complete the table
Total
Product
Total
Fixed
Cost
($)
60
(13 marks)
Total
Variable
Cost ($)
Total
Cost
($)
Average Average Average Marginal
Fixed
Variable
Total
Cost ($)
Cost
Cost
Cost
($)
($)
($)
0
0
1
45
2
85
3
120
4
150
5
185
6
225
7
270
8
325
9
390
10
465
Use the space below for your calculation
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5. (i)
Differentiate between a perfectly competitive firm and a monopolistic
competition firm ( Use three characteristics only)
(3 marks)
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(ii)
A perfectly competitive firm realised a profit in the short run. Explain how other
competitive firm would react to this information? (Use graphs to illustrate your answer)
(5 marks)
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(iv)
Explain why a monopoly is said to be inefficient as compared to perfect
competition?
(3 marks)
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6. (i)
Identify and explain the three roles government performs while fulfilling its
allocative role?
(3 marks)
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(ii)
Explain two characteristics of Public Goods
(3 marks)
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(iii)
Distinguish between absolute poverty and relative poverty.
(2 marks)
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SECTION C
ESSAY
20 MARKS
Answer any two questions in the Answer Booklet provided. Each question is worth 10
marks.
1. “Market failures is common in a number of countries that often require government
intervention”
Taking examples from your country:
(i)
Explain the reasons for market failures
(ii)
(iii)
(3 marks)
Explain how government intervention can help overcome market failures
(3 marks)
Explain how government intervention creates more problems
(4 marks)
2. Public Goods and Externalities are always a concern of government and economists
in all countries
Write your essay following the guidelines below
(i)
What are public goods using examples in your area.
(3 marks)
(ii)
Who provides these public goods and why?
(3 marks)
(iii)
What are externalities and explain the two types of externalities with examples.
(4 marks)
3. Economic systems were created to answer the basic economic questions of what to
produce, how to produce and for whom to produce.
Write your essay following the guidelines below
(i)
Explain briefly the four economic systems
(ii)
(4 marks)
Explain how the market economic system answers the three basic questions
(6 marks)
The End
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Essay 1
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Essay 2
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ECN 401
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