JANUARY EXAMINATIONS 2004 ECONOM ICS. Title of Paper EC 1000 MICROECONOMICS 1 SECTION A : MULTIPLE-CHOICE

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1 No. of Pages: 9 No. of Questions: 23 JNURY XMINTIONS 2004 Subject SUJT ONOMIS ONOM IS Title of Paper 1000 MIROONOMIS 1 Time llowed Two Hours (2 Hours) Instructions to candidates This paper is in two sections. Students should attempt LL the questions in Section and ON in Section. Section carries 60% of the maximum marks for the paper. STION : MULTIPL-HOI ll questions should be attempted. Use the answer sheet provided to record the one response you believe to be the most appropriate for each question. 1. Jodie has just started attending Highbrow University. Which of the following should not be included in the opportunity cost of this activity? Tuition fees. The value of the meal she consumes. The value of the books she purchases for course. The wages she could have earned had she not gone to university. The value of any equipment she is required to buy for her courses. 28/07/2004

2 s price falls, quantity demanded rises along a market demand curve because: I II the lower price encourages the consumer to buy more units of the good. as the price falls, consumers enter the market. Which of the following is correct? Only I applies. Only II applies ither I or II can apply, but not simultaneously. Neither I nor II applies. oth I and II apply. 3. It is to substitute other vegetables for spinach when the price of spinach increases than it is to substitute other foods for vegetables when the price of all vegetables increase. We therefore expect that the demand for will be sensitive to price changes than the demand for. easier; vegetables; more; spinach easier; spinach; less; vegetables harder; vegetables; less; spinach harder; spinach; more; vegetables easier; spinach; more; vegetables

3 Price P P Q Q Quantity The above figure shows a straight-line demand curve. Which of the following statements about the demand curve is correct. The price elasticity of demand is constant along the demand curve. The price elasticity of the demand curve is higher at point than at point. s price falls, demand switches from being price-inelastic to price-elastic. The price elasticity of the demand curve is lower at point than at point. There is not enough information to determine anything about the price elasticity of demand along the demand curve. 5. If the price of a product increases from 5.00 to 5.50 and as a result the quantity demanded declines from 200 to 190, the demand for this product in this price range: is perfectly price-elastic. is price-elastic. has a price elasticity of unity. is price inelastic is perfectly price-inelastic 6. If the demand for a product is perfectly price-inelastic and there is a fall in the price of an input used in the manufacture of the product, equilibrium quantity will and equilibrium price will. increase; remain constant increase; increase remain constant; decrease remain constant; increase decrease; remain constant

4 eer Pizzas The above figure shows Jerry s budget constraint. The absolute value of the slope of Jerry s budget constraint is, which is also the price of, measured in terms of. 0.5; beer; pizza 2; beer; pizza 0.5; pizza; beer 2; pizza; beer 0.5; pizza; pounds 8. live buys only s and chocolate bars. The principle of the diminishing marginal rate of substitution means that, along one of live s indifference curves, as he increases his consumption of s: his valuation of an extra, measured in chocolate bars, falls. his valuation of an extra chocolate bar, measured in chocolate bars, falls. his valuation of an extra, measured in chocolate bars, rises. the number of chocolate bars he must give up to buy another falls. the number of s he must give up to buy another chocolate bar falls.

5 Meat I I 1 Potatoes The above figure shows an increase in income for enjamin, who buys only meat and potatoes. Which of the following is correct? The income elasticity of demand for meat is positive; the income elasticity of demand for potatoes is negative. The income elasticity of demand for meat is negative; the income elasticity of demand for potatoes is positive. The income elasticity of demand for meat and the income elasticity of demand for potatoes are both positive. The income elasticity of demand for meat and the income elasticity of demand for potatoes are both negative. Whether either the income elasticity of demand for meat or the income elasticity of demand for potatoes is negative is indeterminate. 10. reduction in the wage rate has an income effect, which results in consumption of leisure, and a substitution effect, which results in consumption of leisure. reduced; reduced reduced; increased unchanged; reduced increased; reduced increased; increased

6 If the wages of skilled workers increase relative to the wage of unskilled workers, we would expect to observe: fewer people acquiring skills, with the result that the wages of skilled workers will rise further. more people acquiring skills, with the result that the wages of skilled workers will rise further. more people acquiring skills, with the result that the wages of skilled workers will fall back somewhat. fewer people acquiring skills, with the result that the wages of skilled workers will fall back somewhat. fewer people acquiring skills, with the result that the wages of unskilled workers will fall back somewhat. 12. Which of the following statements about marginal and average cost is correct? If marginal cost exceeds average cost, average cost may be rising or falling. If marginal cost is rising, average cost must be rising. If marginal cost is less than average cost, average cost must be falling. If average cost is falling, marginal cost must be falling. Marginal cost can never fall below minimum average cost. 13. If there are no overhead costs and the production process exhibits constant returns to scale: marginal cost and average cost are equal to each other, and neither varies with output. marginal cost falls with output, average cost does not vary with output, and marginal cost exceeds average cost. marginal cost rises with output, average cost does not vary, and average cost exceeds marginal cost. marginal cost does not vary with output, average cost rises with output, and marginal cost exceeds average cost. marginal cost does not vary with output, average cost falls with output, and average cost exceeds marginal cost.

7 If a profit maximising firm operating in a competitive market faces a situation in which marginal cost is less than marginal revenue, the: firm s profit will stay constant if it reduces output. firm will be making a profit. firm will increase profit if it increases output. firm will be making a loss. firm s profit will stay constant if it increases output. 15. profit maximising firm considering entry into a competitive market will compare: total revenue and total variable cost. marginal revenue and market price. minimum marginal cost and market price. marginal revenue and average revenue. minimum average cost and market price. 16. Revenues, osts ( ) ost Revenue 100 Output Q 1 Q 2 Q 3 The above figure shows a firm s total revenue and total cost curves. t points and, the firm is: making negative profit. making positive profit. just covering its fixed costs. just covering its fixed and variable costs. just covering its variable costs.

8 t a profit maximum, the monopolist will set a price that is greater than marginal cost. The difference between price and the monopolist s marginal cost will be smaller, the : smaller is the price elasticity of demand. larger is the price elasticity of demand smaller is the response from its competitors. larger is the price elasticity of supply. smaller is the price elasticity of supply. 18. Which of the following is not a condition for a monopolist to practise price discrimination? There must be distinct groups of customers. The price elasticities of different groups must be different. Resale must be difficult. The monopolist must face an elastic demand curve in all markets. The monopolist must be able to identify the distinct groups. 19. In a monopsony, the marginal cost of the input: exceeds its price and more of the input is hired than in a competitive market. is less than its price and more of the input is hired than in a competitive market. equals its price and the same amount of the input is hired as in a competitive market. is less than its price and less of the input is hired than in a competitive market. exceeds its price and less of the input is hired than in a competitive market. 20. The instability of a cartel stems from the fact that each member of the cartel thinks that it can: raise its price slightly, raise its output and increase its profit. lower its price slightly, raise its output, and increase its profit. raise its price slightly, lower its output, and increase its profit. lower its price slightly, lower its output, and increase its profit. raise its price slightly, keep output unchanged, and increase its profit.

9 STION nswer one of the questions numbered 1 to 3 1. (i) Use indifference curve analysis to explain the possible effects of an increase in the wage rate on the supply of labour. Use your analysis to show why an increase in income taxation might not result in a reduction in labour supply. [65%] (ii) xplain how a firm which uses capital and labour in production will determine its optimal mix of inputs to produce a given output. [35%] 2. (i) xplain how the change in revenue derived from the change in the price of a commodity is related to its price elasticity of demand. [40%] (ii) What is the link between the welfare effects of a price change for a good and the supply and demand elasticities for that good? [60%] 3. (i) ompare and contrast how output and price are determined by a monopolist and under perfect competition. [60%] (ii) xplain why perfect competition is said to lead to allocative efficiency while monopoly does not. [40%]