University of Ghana. lilj ~ IS UNIVERSITY OF GHANA. (All rights reserved) B.SC ADMINISTRATION, FIRST SEl\1ESTER EXAl\1INATION:

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1 lilj EI ~ IS UNIVERSITY OF GHANA (All rights reserved) B.SC ADMINISTRATION, FIRST SEl\1ESTER EXAl\1INATION: UGBS 201: MICROECONOMICS AND BUSINESS (3 CREDITS) TIME ALLOWED: 2 HOURS and 30 MINUTES INSTRUCTIONS 1. Answer All Questions. 2. Provide all answers in the answer booklet. 3. Answer each section on a separate page. "... Examiner: Dr. A Gyeke-Dako Page 1 of 15

2 I 6 Section A (30 Marks) 1 a) Universal Locks Company has a fixed cost of 10,000 gh cedis and the following schedule for variable costs: Quantity of Total Average Average Average Total Marginal Houses Variable Variable Fixed Total Cost Cost Painted per Cost Cost Cost Cost Month (gh cedis) (gh cedis) (gh cedis) (gh cedis) (gh cedis) (gh cedis) , , , ; , ,000 J. Calculate the average fixed cost, average variable cost, and average total cost, total cost and marginal cost of Universal Locks Company. (10 MARKS) 11. What is the efficient scale of Universal Locks Company Limited? (2 MARKS) iii. Establish a mathematical relationship between marginal cost and total variable cost based on this table. (5 MARKS) IV. Does the law of diminishing returns hold here? If yes, after which level of output does it occur? (1 MARK) v. In at most two sentences, distinguish between the law of diminishing returns and decreasing returns to scale. (2 MARKS) Examiner: Dr. A. Gyeke-Dako Page 2 of 15

3 b) Consider the following table of long-run total costs for three different firms: Quantity FirmA (ghc) FinnB (ghc) Finne (ghc) ~ ' ;. "..,t. i. Does e ~fh of these firms experience economies of scale or diseconomies of scale?,. (10 MARKS) Examiner: Dr. A. Gyeke-Dako Page 3 of 15

4 18 Section B (40 Marks) 1. Which of the following statements about monopoly is false? a. A single firm serves the market. b. There are no close substitutes for the monopolist's output. c. There are usually significant barriers to entry. d. Because there is a single firm serving the entire market, the monopolist can charge whatever price it wants to for its output. 2. All else constant; an ~ncrease in imported cameras Jrom. China would cause the supply of. cameras in the United States to: a. Increase. b. Stay the same. c. Decrease. d. Cannot be determined with the information given. 3. Which of the following statements is correct? a. A change in demand or supply can only be causyd by a change in price. b. A simultaneous decrease in demand and increase in supply will result in an increase in equilibrium price and uncertain effect on quantity.. c. If price is currently above equilibrium, market adjustments will result in a decrease in price and quantity supplied. d. An increase in supply invariably leads to a shortage in the affected market. 4. Assume there is a reduction in the shipments of petroleum products due to political tension in Nigeria. Which of the following would not be expected to happen? a. Oil companies would "ration" their supplies of gasoline by raising price. b. There would be a shortage at the original equilibrium price. c. Quantity demanded would decrease. d. The demand curve would shift to the left. Examiner: Dr. A Gyeke-Dako Page 4 of 15

5 5. Assume the cost of certain inputs used to produce artificial Christmas trees increases and, at the same time, the economy moves into a recession, causing the incomes of consumers to decrease. Which of the following will happen to the equilibrium price and quantity of artificial Christmas trees? (Assume artificial Christmas trees are normal goods.) a. Price will increase; quantity cannot be determined. b. Price will decrease; quantity cannot be detennined. c. Quantity will increase; price cannot be determined. d. Quantity will decrease; price camlot be determined. 6. On Se:ptember 3, 2003, Universal Music Group announced plans to reduce the wholesale price of music CDs it distributes by an average of percent. All else constant (i.e., ignoring the effects of file-sharing programs), how would this change affect the retail market for new music CDs? a. Demand for CDs would increase, causing equilibrium price and quantity to increase. b. The supply of CDs would increase, causing equilibrium price to decrease and equilibrium quantity to increase. c. Demand for CDs would decrease, causing equilibrium price and quantity to decrease. d. The supply of CDs would decrease, causing equilibrium price to increase and equilibrium quantity to decrease. 7. The price elasticity of demand for bath tissue has been estimated to be This implies that a 10 percent decrease in the price of bath tissue would cause the quantity demanded of bath tissue to: a. Increase by 2.4 percent. b. Decrease by 2.4 percent. c. Increase by 24.2 percent. d. Decrease by 24.2 percent. Examiner: Dr. A. Gyeke-Dako Page 5 of 15

6 !td 8. Suppose the price elasticity of demand for meals at a medium-priced restaurant is estimated to be -2. If the management of the restaurant is considering decreasing prices, which of the following should management expect? I. Large increase in demand II. Large increase in quantity demanded III. Small decrease in quantity demanded IV. Decrease in total revenue a. I and III only b. II and III only c. I only d. II only 9. An increase in price will result in :no changeointotal revenue if: a. The percentage change in price is large enough to cause quantity demanded to fall to zero. b. The coefficient of elasticity is equal to zero. c. The percentage change in quantity demanded is equal to the percentage change in price. d. The demand function is perfectly elastic. 10. At a price of 5 gh cedis, consumers buy 200 units of good X. When the price falls to 4 gh cedis, quantity demanded increases to 250 units. We can conclude that over this range: a. The effect of the decrease in price on total revenue dominates the effect of the increase in quantity demanded on total revenue; overall total revenue declines. b. The effect of the increase in quantity demanded on total revenue dominates the effect of the decrease in price on total revenue; overall total revenue increases. c. The effects of the decrease in price on total revenue and the corresponding increase in quantity demanded on total revenue perfectly offset one another; overall total revenue remains unchanged. d. Quantity demanded and total revenue fall to zero. Examiner: Dr. A Gyeke-Dako Page 6 of15 0

7 Assume an analyst has been hired to estimate the price elasticity of demand for Levi's brand blue jeans and for blue jeans in general. All other things being constant, we would expect the price elasticity of demand to be: a. Larger for Levi's brand blue jeans than for blue jeans in general. b. Larger for blue jeans in general than for Levi's brand blue jeans. c. Approximately the same for both Levi's brand blue jeans and blue jeans in general. d. None of the above because the market for blue jeans cannot be analyzed using the model of supply and demand. 12. Many unions attempt to raise the hourly wages received by their members by restricting the supply of workers firms can hire from. Assuming the demand for workers who belong to these unions is inelastic, this would cause: a. Wages of individual union members to decrease and the total (combined) income of lll1ioll" members to increase. b. Wages of individual union members and the total (combined) income of union members to decrease. c. Wages of individual union members to increase and the total (combined) income of union members to decrease. d. Wages of individual union members and the total (combined) income of union members to increase. 13. Suppose the price of movies seen at a theater rises from ghc 12 per couple to ghc 20 per couple. The theater manager observes that the rise in price causes attendance at a given movie to fall from 300 persons to 200 persons. What is the arc price elasticity of demand for movies? a. 0.5 b. 0.8 c. 1.0 d. 1.2 Examiner: Dr. A. Gyeke-Dako a Page 7 of15

8 14. Assume a consumer is currently purchasing a combination of goods, X and Y, that maximizes her utility given her budget constraint, i.e., MRS X,Y= PxlP y Now assume that there is a decrease in the price of Y. In this case, to once again maximize her utility, the consumer will want to adjust her purchases of X and Y such that: a. The consumer must buy more of commodity X. b. The consumer must buy more of both commodities. c. The consumer must buy more of commodity Y. d. None of the above. The consumer will continue to maximize her utility after the price change by continuing to consume the same combination of X and Y. 15: An indifferencecurveis ' negative1y-sloped ~ because: a.. Utility isa subjective concept. b. As.the consumerobtains. additionai.unitsofone :.goo d~theconsumer is willing to sacrifice. increasing amounts of the other good. c. In order to remain at the same level of utility, if an individual gets more of one good, he must sacrifice some of the other good. d. Marginal utility is constant along an indifference curve, and increases in the consumption of one good cause the price of that good to fall. 16. Which of the following would he classified as a sholi-run decision? a. A firm's decision to decrease the amount of electricity used in day-to-day operations by encouraging employees to adopt conservation strategies, e.g., shut off lights when leaving a room. h. A restaurant's decision to increase the number of patrons it can accommodate by addi ng on a new dining room. c. A trucking firm's decision to move to a smaller faci lity. d. A university's decision to add a new residence hall. 17. Which of the following is true of the typical relationship between marginal product (MP) and average product CAP)? a. If MP is greater than AP, then AP is falling. b. The AP curve intersects the MP curve at minimum MP. c. The MP curve intersects the AP curve at maximum AP. d. IfMP is less than AP, then AP is increasing. Examiner: Dr. A. Gyeke-Dako ==- Page 8 of ls

9 18. Marginal product is at a maximum when: a. Average product equals marginal product. b. Total product equals average product. c. Total product reaches its maximum value d. None of the above If a person has a constant MRSxy of'4 and if the prices of the two goods (x and y) are equal then the individual will a. Spend) 00% of income on commodity x. b. Spend75% of income on commodity x. c. Spend25% of income on commodity x. d. Spend~% of income on commodity x....,:- 20. Which of the following is an example of an "implicit cost"? a. Interest that could have been earned on retained earnings used by the firm to finance expansion. b. The payment of rent by the firm for the building in which it is housed. c. The interest payment made by the firm for funds borrowed from a bank. d. The payment of wages by the firm. 21. The number of sellers in a market is considered to be large when a. Their total number exceeds 100 b. No single buyer can affect the price through his or her demand for the product c. They cannot be easily counted d. No single seller can affect the price by changing its level of output 22. Barriers to entry into a market could include all of the following, except one of the following: a. Government restrictions b. Brand loyalty c. Large marginal costs d. Licensing fees Examiner: Dr. A. Gyeke-Dako Page 9 of15

10 23. A firm that operates in a perfectly competitive market a. Controls its own price, but accepts its output level as given. b. Controls both its own price and its own output level. c. Controls its own output level, but accepts its price as given. d. Accepts both its output level and its price as given. 24. Justin's Company operates in a perfectly competitive market. Why doesn't Justin try to increase his revenue by lowering his price below the prevailing market price? a.. Hecan sell as much as he.wishes to:auhemarketprice. b. He facesapel;fectly inelastic,demandcurve,.so a pricechangewill have no impact on revenue. c. If he lowers his price, he willjose.,all his sales since.>he faces a horizontal,demand 'curve d. Agreements with other lawn service companies require him to sell at the market pnce 25. Oliver's Bakery Shop operates in a perfectly competitive market. If its marginal revenue is ghc 5 per doughnut, then a. The next doughnut will bring in less than ghc 5 in additional revenue b. The next doughnut will bring in more than ghc 5 in additional revenue c. The market price per doughnut is ghc 5 d. The price of the doughimt is less than ghc A car dealer wants to get rid of the stock oflast year's model. Assume that the dealer knows from past experience that the price elasticity of demand for cars is unitary (= 1). If the price of the cars is currently ghc 20,000 and the dealer wants to decrease the quantity demanded from 50 units to 30 units, what must the new price be if the dealer is to sell the 20 less cars? a. ghc 28,000 b. ghc 12,000 c. ghc16,000 d. ghc 3, Examiner: Dr. A. Gyeke-Dako Page 10 of 15

11 27. When there are implicit costs of production, a. Accounting and economic profit are equal b. Opportunity costs of production are zero c. Explicit costs of production are small d. Accounting profit will exceed economic profit 28. All of the following, except one, are characteristics of monopolistic competition. Which is the exception? a. There js a large number of sellers. b. Each~eller faces a horizontal demand curve for its product. c. There'are no significant barriers to entry or exit. d. Seller<~,. produce differentiated products.,.,:,. 29. If a monopolistically competitive firm raises its price, a. Quantity demanded falls to zero b. Quantity demanded declines, but not to zero c. The market supply curve shifts outward d. The market supply curve shifts inward - Examiner: Dr. A Gyeke-Dako Page 11 of15

12 Figure 1 Money $800 $600 $400 ~ '-: "- ~ \\ " \ \ ~ ~ '\( $200 ~ "'-. ~ 1/ I"" I~ k V ~ ~ / V 1\ V I MC ATC / ~~VC k? ~ ~ o o 5 10 ~MR '" D ' Quantity Figure 1 above illustrates.a monopolistically competitive firm. In order to maximize profit, or minimize loss, the firm will a. Close down b. Produce approximately 10 units of output and charge approximately $500 c. Produce approximately 7.5 units of output and charge nearly $600 d. Produce approximately 12.5 units of output and charge approximately $ The maximum total economic profit, or minimum economic loss, for the monopolistically competitive firm in Figure 1 is a. Zero b. A profit of ghc c. A profit of ghc 1, d. A profit of ghc 2, Examiner: Dr. A. Gyeke-Dako Page 12 of is

13 wfigu re 2 Cedis per unit Me Ghc 6 -',' 250 Units of 32. Given the marginal cost and average total cost curves in Figure 2 above, a monopolistically competitive firm in long-run equilibrium will produce a. 250 units and charge a price of ghc 6 b. Less than 250 units and charge a price below ghc 6 c. more than 250 units and charge a price below ghc 6 d. less than 250 units and charge a price above ghc A natural monopoly exists when a. Economies of scale are negligible b. There are a few dominant firms that corner the market. c. One firm can produce the market output at lower average cost than two or more firms can d. Only a few firms can minimize cost and maximize profit 34. The extent to which a finn is viewed by consumers as being a monopoly depends primarily on a. How the government defines a monopoly b. Whether they believe there are close substitutes for the good it produces c. The level of profits earned by the firm d. The size of the firm Examiner: Dr. A. Gyeke-Dako Page 13 of15

14 35. Suppose that a non-discriminating monopolist lowers its price from ghc75 to ghc70 in order to sell more output. Marginal revenue will a. Be greater than ghc75 h. Equal ghc70 c. Be between ghc75 and ghc70 d. Be less than ghc A perfectly competitive firm'stotalrevenue curve a. Is a horizontal line b. Is a vertical line c. Has a negative slope d. Has a constant positive slope 37. Assume the demand function for good X can be written as Qdx =80-3PX +2Py+ 101, where Px = the price of X, Py = the price of good Y, and I = Consumer income. According to this equation: a. Because the coefficient of Px is negative, X is an inferior goad b. X and Y are complements c. Because the coefficient on income is positive, X is a giffen good d. X and Y are substitutes 38. If income and the prices of two goods, X and Y double, the budget line will a. become flatter b. become steeper c. remain unchanged d. experience a parallel shift Examiner: Dr. A. Gyeke-Dako - Page 14 of 15

15 39. Suppose that the price of a pizza is ghc 10 and tha~ the price of a blouse is ghc30. At her present level of consumption, Magda's ratio of marginal utility of pizza to marginal utility of blouses is 114. To maximize total utility, she should a. buy more pizzas and fewer blouses b. buy fewer pizzas and more blouses c. continue to buy the same quantities of pizza and blouses d. spend more time consuming pizza 40. If good x is an inferior good and has an elastic demand, then which of the following would oc~ur due to a 1 % increase in price a. Quantity of x increases by less than 1 % b. Quantity of x decreases by less than 1 % c. Quantity of x increases by more than 1 % d. Quantity of x decreases by more than 1 % Examiner: Dr. A. Gyeke-Dako Page 15 of15