January Examinations 2014

Transcription

1 January Examinations 2014 DO NOT OPEN THE QUESTION PAPER UNTIL INSTRUCTED TO DO SO BY THE CHIEF INVIGILATOR Department Module Code Module Title Exam Duration (in words) Economics Microeconomics Two hours CHECK YOU HAVE THE CORRECT QUESTION PAPER Number of Pages 10 Number of Questions 35 Instructions to Candidates This paper is in two sections. Students should attempt ALL the questions in Section A and ONE question in Section B. The maximum mark awarded for Section A is 80 marks. The maximum mark awarded for Section B is 20 marks. The maximum mark for the entire paper is 100 marks. For this exam you are permitted to use the following Calculators Books/Statutes Additional Stationery Casio FX83GTPLUS or Casio FX85GTPLUS NOT REQUIERED NOT REQUIERED Page 1 of 10

2 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. The marking scheme is the following. Each correct answer will be given 2.5 (two and a half) marks. An incorrect answer will be given (one and a half negative) marks. No answer entails zero marks. Identify the letter of the choice that best completes the statement or answers the question. 1. Under duopoly, the profit is a. always greater than the monopoly profit. b. generally lower than the monopoly profit. c. always equal to zero. d. always equal to the monopoly profit. 2. A decrease from 0.75 to 0.50 in the price of milk has caused the demand for milk to increase from 900 to 1100 pints. The demand for milk is a. inelastic. b. elastic. c. unit elastic. d. infinitely elastic. 3. If marginal revenue is 6 and marginal cost is 8, a firm seeking to maximise profits should a. increase its output. b. reduce its price. c. reduce its output. d. do nothing, as the profit is already maximum. Page 2 of 10

3 4. The supply curve of labour slopes upward when a. the income effect prevails over the substitution effect. b. the substitution effect prevails over the income effect. c. there is no substitution effect. d. the wage rate is negotiated by the unions. 5. At the monopoly equilibrium, the elasticity of demand a. can take on any value. b. must be equal to one. c. must be equal to or lower than one. d. must be equal to or greater than one. 6. Which of the following statements is false? Under monopolistic competition, in the long-run equilibrium firms a. equate marginal revenue to marginal cost. b. just break even. c. supply differentiated products. d. produce at the efficient scale level. 7. A drug manufacturer has obtained from the patent holder a licence for marketing a patented drug. The licensing fee to be paid to the patent holder is 15 pence per pill. For the manufacturer, this is a. a fixed cost. b. a variable cost. c. the marginal cost. d. no cost at all, as nothing will be paid if no pill is sold. 8. Assuming that marginal cost is increasing, the average cost is equal to the marginal cost a. when the marginal cost is minimum. b. when the marginal cost is maximum. c. when the average cost is minimum. d. when the average cost is maximum. 9. A downward shift of the demand curve a. decreases the producer surplus. b. increases the producer surplus. c. does not affect the producer surplus. d. may either decrease or increase the producer surplus. Page 3 of 10

4 Table 1 PRICE QUANTITY DEMANDED A monopolist faces the linear demand schedule represented in Table 1. The monopolist has a constant unit cost and no fixed cost. If the unit cost increases from 2 to 8, the monopoly price a. does not change. b. increases by 6. c. increases by 3. d. is indeterminate. 11. Consider again a monopolist that faces the demand schedule in Table 1. The constant unit cost is equal to 10. The market is a natural monopoly if a. there are no fixed costs. b. the fixed cost is equal to 20. c. the fixed cost is equal to 15. d. the fixed cost is equal to In general, marginal revenue cannot be a. equal to marginal cost. b. equal to average cost. c. lower than the price. d. greater than the price. 13. If duopolists individually pursue their own self-interest when deciding how much to produce, the amount they will produce collectively will a. be less than the monopoly quantity. b. be equal to the monopoly quantity. c. be greater than the monopoly quantity. d. any of the above are possible. Page 4 of 10

5 price 13 D after tax D S S D after tax D Figure 1 quantity 14. Refer to Figure 1. The fiscal revenue raised in this market is a b c d Refer again to Figure 1. The excess burden (or deadweight loss) of taxation is a. 75. b c d Consider a short run production function with only one variable input. If the marginal productivity of the input is initially increasing and then decreasing, the marginal cost curve is a. U-shaped. b. inverse U-shaped. c. increasing. d. flat. Page 5 of 10

6 17. In a duopoly market, which of the following statements is false? a. Firms have market power. b. Firms might collude. c. The profit must vanish. d. The products may be differentiated. price 40 D S 10 4 S D 16 quantity Figure Refer to Figure 2. At the equilibrium price, the sum of producers and consumers surplus is a b c d If the technology of a firm exhibits constant returns to scale, the firm s long run average cost curve is a. flat b. increasing c. U-shaped. d. inverse U-shaped. Page 6 of 10

7 20. If a decrease in the consumption of good A increases the demand for good B, the two goods are a. inferior. b. normal. c. substitutes. d. complements. 21. In George Akerlof s market for lemons, market inefficiency is due to a. the market power of the sellers of second-hand cars. b. uncertainty over the quality of second-hand cars. c. the irrational behaviour of the buyers of second-hand cars. d. asymmetric information over the quality of second-hand cars. 22. Buyers of a product will pay the majority of a tax placed on the product when a. the tax is placed on the seller of the product. b. supply is more elastic than demand. c. demand is more elastic than supply. d. the tax is placed on the buyer of the product. 23. Consider an indivisible public good. There are three potential users of the good, whose willingness to pay are, in increasing order, 10, 20 and 30. To maximise social welfare, the good should be provided if the cost is a. less than 60. b. less than 10. c. less than 30. d. greater than 10 but less than The marginal rate of substitution between good A and B a. is the quantity of good A that the consumer could obtain by giving up one unit of good B. b. is the ratio between the price of good A and that of good B. c. is the increase in the quantity of good A that exactly compensates the consumer for the loss of one unit of good B. d. is the slope of the budget constraint. Page 7 of 10

8 25. Consider a two-country, two-good world with only one factor of production. If country A is twice as productive as country B in the production of both goods, then opening up trade will a. benefit both countries. b. disrupt the economy of country B. c. have no effects. d. create a trade surplus in country A and a trade deficit in country B. good 2 A B Figure 3 good Refer to the production possibility frontier in Figure 3. Land is used only in the production of good A. Suppose technological progress increases the productivity of land only. This will a. shift point A up, leaving point B unchanged. b. shift point B right, leaving point A unchanged. c. shift points A and B up. d. shift points A and B right down. 27. A household consumes two goods, 1 and 2. If the household s income doubles, the household will necessarily a. double the consumption of both goods. b. increase the consumption of both goods. c. increase the consumption of at least one good. d. it s impossible to tell without knowing the household s preferences. Page 8 of 10

9 28. A binding price ceiling a. hurts sellers and buyers equally. b. hurts the sellers more than the buyers. c. hurts the sellers but may benefit the buyers. d. hurt the buyers but may benefit the sellers. 29. The term which means whatever must be given up to obtain an item is a. efficiency. b. opportunity cost. c. externality. d. market failure. 30. Which of the following statements in NOT TRUE of indifference curves? a. They could intersect. b. They exhibit higher levels of utility as you move from the origin. c. They are convex to the origin. d. They are downward sloping. 31. The principle of diminishing marginal utility means that when Sarah eats pizza, her satisfaction from the second slice of pizza is probably a. greater than that from the first. b. equal to that from the first. c. less than that from the first. d. not comparable to that from the first. 32. A household spends 1/5 of their income on food. If the price of food increases by 10% and income by 3%, all else equal, the household's real income is: a. unchanged. b. increased. c. decreased. d. it is not possible to tell. Page 9 of 10

10 SECTION B One question should be attempted. For each answer, you will be credited up to 20 (sixteen) marks. There are no negative marks for incorrect answers. You may attempt more question if you wish, but only the best answer will be credited to you. 33. Discuss the notion of externality and the Coase theorem. 34. Explain what is the substitution effect and the income effect, and what we know about their sign. 35. Give a definition of indifference curves and discuss their properties. END OF PAPER. Page 10 of 10