SEMESTER Examination Paper (COVER PAGE) Time : pm Reading Time : Nil

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1 ECO 112 / Page 1 of 1 Session : August 2002 SEMESTER Examination Paper (COVER PAGE) Programme : Cambridge A-Level Programme Course : ECO 112 : Economics 2 Date of Examination : October 28, 2002 Time : pm Reading Time : Nil Duration : 2.5 Hours Special Instructions : This paper consists of THREE (3) sections. Answer ALL questions from SECTION A and ONE (1) question from SECTION B and SECTION C. All questions carry equal marks. Materials permitted : Nil Materials provided : Nil Examiner(s) : Adrian Tan Hock Seng and Kaviaarasan Arumugam Moderator : Kaviaarasan Arumugam This paper consists of 10 printed pages, including the cover page.

2 ECO 112 / Page 2 of 2 INTI COLLEGE MALAYSIA CAMBRIDGE A-LEVEL PROGRAMME ECO 112 : ECONOMICS 2 SEMESTER EXAMINATION : AUGUST 2002 SESSION This paper consists of THREE (3) Sections. Answer ALL questions from SECTION A, ONE (1) question from SECTION B and SECTION C. All questions carry equal marks. SECTION A : Answer ALL question 1. Which is a reason why there is no advertising by individual firms under perfect competition? A. Firms produce a homogeneous product. B. The quantity of the product demanded is very large. C. The market demand curve cannot be increased. D. Firms do not make long-run profits. 2. In perfect competition, the average revenue of a firm always equals: A. marginal cost B. average total cost C. marginal revenue. D. total revenue. 3. Which is true for a perfectly competitive firm in short-run equilibrium? A. The firm is making only normal profits. B. The firm s marginal cost is greater than its marginal revenue. C. The firm s marginal revenue is equal to its marginal cost. D. A decrease in output would lead to a rise in profits. 4. Which is a barrier to entry? A. close substitutes

3 ECO 112 / Page 3 of 3 B. diseconomies of scale C. government licensing D. price-taking behavior 5. Many people believe that monopolies charge any price they want without affecting sales. Instead, the output level for a profit-maximizing monopoly is determined by: A. marginal cost = demand. B. marginal revenue = demand. C. average total cost = demand. D. marginal cost = marginal revenue. 6. To practice long-run price discrimination, a monopolist must: A. be a natural monopoly. B. charge one price to all buyers. C. permit the resale of the product by the original buyers. D. be able to separate buyers into different markets with different price elasticities. 7. Which is not true of price discrimination? A. It exists when price differences depend critically on different buyers evaluations of a product. B. Successful price discrimination will provide the firm with higher total revenue than if it did not discriminate. C. Successful price discrimination implies that the producer can separate customers into easily identifiable groups. D. Price discrimination will generally result in a lower level of output than would be the case under a single-price monopoly. 8. The demand curve faced by a monopolistically-competitive firm: A. is more elastic than the monopolist s demand curve. B. is less elastic than the monopolist s demand curve. C. will shift outward as new firms enter the industry. D. is more elastic than the demand curve faced by the perfectly competitive firm.

4 ECO 112 / Page 4 of 4 9. In monopolistic competition, a firm has a limited degree of price making ability. This means that the firm will: A. always earn an economic profit. B. set price equal to marginal cost. C. set price above marginal cost. D. produce at minimum average total cost. 10. Monopolistic competition is characterized by excess capacity because: A. firms are always profitable in the long run. B. firms charge a price that is less than marginal cost. C. firms produce at an output level less than the least-cost output. D. the demand for a product is perfectly elastic in this type of industry. 11. The characteristic most closely associated with oligopoly is: A. easy entry into the industry. B. a few large producers. C. product standardization. D. no control over price. 12. Which has not contributed to the development of oligopolies in the world s economies? A. mergers B. patents C. economies of scale D. inter-industry competition 13. A major prediction of the kinked demand curve model is: A. price stability in oligopolies. B. price instability in oligopolies. C. stability of production costs in oligopolies. D. stable purchasing behavior by consumers over time. 14. Collusive control over price may permit oligopolies to:

5 ECO 112 / Page 5 of 5 A. use new technology, achieve economies of scale, and get government subsidies. B. achieve economies of scale, reduce costs, and prevent price cheating. C. increase product demand, increase product supply, and lower cost. D. reduce uncertainty, increase profits, and possibly limit entry of new firms. 15. The demand for a productive resource is said to be derived because the demand for the factor: A. depends on the demand for the product it is used to make. B. depends on the demand for a complementary factor. C. is derived from the state of the economy. D. is derived from government policy. 16. The marginal revenue product of an input in a competitive market decreases as a firm increases the quantity of an input used because of the: A. law of diminishing returns. B. free mobility of resources. C. homogeneity of the product. D. law of diminishing marginal utility 17. If the marginal revenue product of labor is less than the wage rate: A. the firm is making profits. B. the firm is incurring losses. C. more labor should be employed. D. less labor should be employed. 18. In which case below will the elasticity of demand for laborers who produce yo-yos be most inelastic? The price elasticity of demand for yo-yos is: A. 5, and labor s share of total costs is 20 percent. B. 5, and labor s share of total costs is 75 percent. C. 0.1, and labor s share of total costs is 20 percent. D. 0.1, and labor s share of total costs is 75 percent. 19. According to the marginal productivity theory, the labor demand schedule for a competitive seller is:

6 ECO 112 / Page 6 of 6 A. the same as the marginal resource cost schedule. B. the same as the marginal productivity schedule. C. the same as the marginal revenue product schedule. D. independent of the value of the product being produced. 20. The labor demand curve of a firm which is selling its product in an imperfectly competitive market will: A. decline, solely because of the law of diminishing returns. B. fall, solely because marginal productivity is declining. C. be perfectly elastic if the firm is hiring labor competitively. D. fall, both because of declining marginal productivity and declining product prices. 21. A union representative observed that if the union members wages were increased by some proportion, the workers would eventually suffer a greater than proportional decline in unemployment. This statement could best be explained if: A. the new wages are to take effect immediately. B. union labor can easily be replaced with capital. C. union labor is an insignificant portion of the total cost of production. D. the demand for the final product the workers produce is relatively inelastic. 22. Other things equal, the elasticity of demand for labor will be greater the: A. more rapid the decline in its marginal productivity. B. smaller the proportion of total costs accountable for by labor costs. C. smaller the elasticity of demand for the product it produces. D. larger the number of close substitute resources available. 23. The wages of plumbers are likely to increase when: A. licensing standards for the occupation are increased. B. there is an increase in the cost of plumbing supplies. C. the length of the training period for plumbers is decreased. D. more do-it-yourself home improvement centers open across the nation. 24. An industry would be likely to lay off workers following: A. an increase in the marginal revenue product of labor. B. the imposition of a new minimum wage below the current equilibrium wage. C. a successful attempt by an industrial union to push wages above the marginal revenue product of labor.

7 ECO 112 / Page 7 of 7 D. an increase in the demand for labor. 25. Imposing a minimum wage higher than the equilibrium wage in a competitive industry would: A. increase the demand for labor in the industry. B. increase the income of some workers already employed in that industry. C. decrease the quantity of labor supplied to that industry. D. increase employment in that industry. 26. A public good: A. generally results in substantial spillover costs. B. can never be provided by a non-governmental organization. C. cannot be provided to one person without making it available to others as well. D. costs essentially nothing to produce and thus is provided by the government at zero price. 27. The market demand curve for a public good: A. is derived in the same manner as demand curves for private goods. B. is derived by horizontally summing all individual demand curves. C. shows the total value that all individuals place on each unit of the good. D. shows the total number of units that would be produced by the private sector at each possible price. 28. From the economist s perspective, market failures basically arise when: A. the quantity demanded for a good or service is greater than the quantity supplied of the good or service. B. the quantity supplied of a good or service is greater than the quantity demanded for a good or service. C. demand and supply do not accurately reflect all the benefits and all the costs of production. D. the market system is unable to adapt to or to accommodate change. 29. Which of these is an example of a spillover cost? A. an increase in the value of land you own when a nearby development is completed. B. the costs paid by a company to build an automated factory. C. decreased property values in a neighborhood where several houses are burglarized. D. the higher price you pay when you buy a heavily advertised product.

8 ECO 112 / Page 8 of If some activity creates external (spillover) benefits as well as private benefits, then economic theory suggests that the activity ought to be: A. taxed. B. prohibited. C. subsidized. D. left alone. SECTION B : Answer ALL questions. 1. (a) In today s demanding business world, employee wages are very often tied to the employee performance (i.e. the productivity level). Gone are the days when an employee s seniority in the company reflected his/her high wage rates. How will a change in productivity change the demand for a resource (factor of production)? What three factors will affect productivity? (7 marks) (b) Complete the following table, where L = units of labor, TPL = total product of labor, MPL = marginal product of labor, P = product price, TR = total revenue, and MRPL = marginal revenue product of labor. (9 marks) L TP L MP L P TR MRP L 0 0 $ $ $

9 ECO 112 / Page 9 of (i) (ii) (iii) In what type of market is the firm selling its product? Discuss. Why does the MRP schedule decrease as labor increases? Complete the following table: (3 marks) (3 marks) Wage Rate Quantity of Workers Employed $ (3 marks) SECTION C : Answer any ONE questions. 1. The higher real wages earned by workers in the U.S. primarily reflect the fact that workers in the U.S. have a greater inherent ability to produce goods and services than do foreign workers. Discuss. (45 marks) 2. Group of bus firms may form consortium [Kuala Lumpur: Express bus operators who do not want to merge with two governmentappointed consortia may be allowed to form another consortium the two consortia had been given the task to help the Government in the merging exercise five years ago, but none of the express bus operators had merged with Mara Holdings and only a few operators had merged with Park May. It is understood that bus operators had refused to merge with the two giants for fear of their participation being reduced to a small role in terms of equity ] (The Star: September 6, 2000)

10 ECO 112 / Page 10 of 10 From the article above, would you consider a monopoly to be beneficial to the public at large? Discuss. (45 marks) 3. Is it possible for perfectly competitive firms to achieve supernormal profits forever? Discuss. (45 marks) - THE END - Ms.Words/ECO112AUG02F/Lynn