JANUARY EXAMINATIONS 2005

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1 No. of Pages: (A) 7 No. of Questions: 26 EC1000A ' JANUARY EXAMINATIONS 2005 Subject Title of Paper ECONOMICS EC1000 MICROECONOMICS Time Allowed Two Hours (2 Hours) Instructions to candidates This paper is in two sections. Students should attempt ALL the questions in Section A and ONE in Section B. Section A carries 66% of the maximum marks for the paper. 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 three marks. An incorrect answer will be given one negative mark. 1. In the long run, freedom of entry into a market forces a to charge a price equal to average total cost, but average total cost exceeds its minimum level. a. perfectly competitive firm b. monopolistically competitive firm c. oligopolistic firm d. pure monopoly 2. The greater the price elasticity of demand the a. greater the percentage change in price over the percentage change in quantity demanded. b. more likely the product is a necessity. c. greater the responsiveness of quantity demanded to price. d. smaller the responsiveness of quantity demanded to price. 1

2 EC1000 A - Microeconomics I EC1000 A 3. The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average a. revenue. b. total cost. c. variable cost. d. fixed cost. Figure Refer to Figure 3-2. For Jerry the opportunity cost of 1 pound of ice cream is a. 1/3 pounds of cones. b. 1 pound of cones. c. 3/2 pounds of cones. d. 2 pounds of cones. 5. The invisible hand's ability to coordinate the decisions of the firms and households in the economy can be hindered by a. government actions that distort prices. b. a dramatic reduction in consumer spending. c. increased competition in the market. d. extended periods of unemployment. 6. If the supply of a good is relatively elastic, changing the price causes a. a relatively small change in the amounts that buyers are willing to buy. b. no change in the amounts sellers are willing to sell. c. a relatively large change in the amounts sellers are willing to sell. d. a relatively small change in the amounts sellers are willing to sell. 2

3 EC1000 A - Microeconomics I EC1000 A 7. Suppose a human life is worth $10 million. Installing a better lighting system in the city park would reduce the risk of someone being murdered there from 2.6 to 1.9 percent over the life of the system. The city should install the new lighting system if its cost does not exceed a. $10,000,000. b. $190,000. c. $70,000. d. $260, Maurice receives $100 as a birthday gift. In deciding how to spend the money, he narrows his options down to four choices, Option A, Option B, Option C and Option D. Each option costs $100. Finally he decides on Option B. The opportunity cost of Option B is a. $100. b. $300. c. the value to him of the Option he would have chosen if Option B were not available. d. the value to him of Options A, C and D combined. 9. Productivity is defined as the a. amount of labor which can be saved by replacing workers with machines. b. actual amount of effort workers put into an hour of working time. c. number of workers required to produce a given amount of goods and services. d. amount of goods and services produced from each hour of a worker's time. Figure Refer to Figure 5-5. When price falls from point $40 to $30 we know that demand must be a. inelastic, since total revenue decreases from $9000 to $8000. b. inelastic, since total revenue increases from $8000 to $9000. c. unit elastic, since total revenue decreases from $9000 to $8000. d. elastic, since total revenue increases from $8000 to $

4 EC1000 A - Microeconomics I EC1000 A 11. The amount of money that a wheat farmer could have earned if he had planted barley instead of wheat is a. an accounting cost b. an implicit cost. c. an explicit cost. d. forgone accounting profit. 12. As Al's Radiator Co. continues to add workers, while keeping the same amount of machinery, some workers may be underutilized because they have little work to do while waiting in line to use the machinery. When this occurs, Al's Radiator Co. encounters a. increasing marginal returns. b. diminishing marginal returns. c. diseconomies of scale. d. economies of scale. 13. If leisure were an inferior good, then labor supply curves a. could still be positively or negatively sloped. b. would all be vertical. c. would all be positively sloped. d. would all be negatively sloped. Table 3-4 Hours needed to make one unit of: Amount produced in 2400 hours: Cars Airplanes Cars Airplanes U.S Japan Refer to Table 3-4. The opportunity cost of 1 car for Japan is a. 1/3 airplane. b. 4 airplanes. c. 3 airplanes. d. 1/4 airplane. 15. Causes of market failure include a. externalities and market power. b. incorrect forecasts of consumer demand and foreign competition. c. market power and incorrect forecasts of consumer demand. d. externalities and foreign competition. 4

5 EC1000 A - Microeconomics I EC1000 A 16. Pens are normal goods. What will happen to the equilibrium price of pens if the price of pencils falls, consumers experience an increase in income, writing in ink becomes fashionable, people expect the price of pens to fall in the near future, the population increases, fewer firms manufacture pens, and the wages of pen-makers decrease? a. Price will fall. b. Price will stay exactly the same. c. Price will rise. d. The price change will be ambiguous. 17. Aquilonia has decided to end its policy of not trading with the rest of the world. When it ends its trade restrictions, it discovers that it is importing incense, exporting steel, and neither importing nor exporting rugs. We can conclude that consumer surplus in Aquilonia is now higher for a. incense, lower for steel, and the same for rugs. b. incense and rugs, but not steel. c. incense and steel, but not rugs. d. steel, lower for incense, and the same for rugs. 18. The Borda count fails to satisfy which of Kenneth Arrow's properties of a "perfect" voting system? a. transitivity b. no dictator c. unanimity d. independence of irrelevant alternatives 19. In order to be successful, a cartel must a. agree on the prices charged by each member, but they need not agree on amounts produced. b. agree on the total level of production and on the amount produced by each member. c. agree on the total level of production for the cartel, but they need not agree on the amount produced by each member. d. find a way to encourage its members to produce more than they would otherwise produce. 5

6 EC1000 A - Microeconomics I EC1000 A Use the following information to answer the following questions. Scenario 13-6 Farmer Jack is a watermelon farmer. If Jack plants no seeds on his farm, he gets no harvest. If he plants 1 bag of seeds, he gets 30 watermelons. If he plants 2 bags of seeds, he gets 50 watermelons. If he plants 3 bags of seeds he gets 60 watermelons. A bag of seeds costs $100, and the costs of seeds are his only costs. 20. Refer to Scenario Which of the following statements is (are) true? (i) Farmer Jack experiences decreasing marginal product. (ii) Farmer Jack's production function is nonlinear. (iii) Farmer Jack's total cost curve is linear. a. (i) and (iii) b. (i) only c. (i) and (ii) d. (ii) only The following table represents the costs of five possible sellers. Table 7-3 SELLER COST DALE $1,500 JILL $1,200 DENISE $1,000 CATHERINE $750 JACKSON $ Refer to Table 7-3. If the market price is $1,000, the producer surplus in the market would be a. $3,700. b. $2,250. c. $750. d. $700. Scenario 13-4 For the following questions, assume that a given firm experiences decreasing marginal product of labor with the addition of each worker regardless of the current output level. 22. Refer to Scenario Average variable cost will be a. always rising. b. constant. c. always falling. d. U-shaped. 6

7 EC1000 A - Microeconomics I EC1000 A SECTION B Answer one of the questions numbered 1 to 4. This Section carries 34% of the total mark. 1. What is the production function? What is the marginal product? How would a production function that exhibits decreasing marginal product affect the shape of the total cost curve? Explain or draw a graph. 2. Define carefully the following concepts. Using the graph shown, determine the value in UD$ of each of the following concepts; if appropriate indicate with capital letters the area in the graph of ecah concept: a. equilibrium price before the tax b. consumer surplus before the tax c. producer surplus before the tax d. total surplus before the tax e. consumer surplus after the tax f. producer surplus after the tax g. total tax revenue to the government h. total surplus (consumer surplus + producer surplus + tax revenue) after the tax i. deadweight loss 3. One example of price discrimination occurs in the publishing industry when a publisher initially releases an expensive hardcover edition of a popular novel, and later releases a cheaper paperback edition. Use this example to demonstrate the benefits and potential pitfalls of a price discrimination pricing strategy. 4. How does elasticity affect the burden of a tax? Justify your answer using supply and demand diagrams. 7

8 ID: A ' Answer Section MULTIPLE CHOICE 1. B 2. C 3. B 4. C 5. A 6. C 7. C 8. C 9. D 10. D 11. B 12. B 13. C 14. A 15. A 16. D 17. A 18. D 19. B 20. C 21. C 22. A SHORT ANSWER 1. Apply definitions: the relationship between the amount of the various input used and the maximum amount which can be physically possibly obtained from those input. And: the amount by which output changes for a small change in the input considered. The total cost curve will increase at an increasing rate, or in other words, the total cost curve gets steeper as the amount produced rises. 1

9 ID: A 2. a. $10 b. $3600 c. $2400 d. $6000 e. $900 f. $600 g. $3000 h. $4500 i. $ The answer should address the three basic lessons of price discrimination. First, price discrimination is a rational strategy that can lead to higher monopoly profits. Second, price discrimination requires an ability to separate customers according to their willingness to pay. Third, price discrimination can raise economic welfare. 4. 2

10 No. of Pages: (B) 7 No. of Questions: 26 EC1000 B ' JANUARY EXAMINATIONS 2005 Subject Title of Paper ECONOMICS EC1000 MICROECONOMICS Time Allowed Two Hours (2 Hours) Instructions to candidates This paper is in two sections. Students should attempt ALL the questions in Section A and ONE in Section B. Section A carries 66% of the maximum marks for the paper. 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 three marks. An incorrect answer will be given one negative mark. 1. In the long run, freedom of entry into a market forces a to charge a price equal to average total cost, but average total cost exceeds its minimum level. a. perfectly competitive firm b. monopolistically competitive firm c. oligopolistic firm d. pure monopoly 2. The greater the price elasticity of demand the a. more likely the product is a necessity. b. smaller the responsiveness of quantity demanded to price. c. greater the percentage change in price over the percentage change in quantity demanded. d. greater the responsiveness of quantity demanded to price. 1

11 EC1000 B - Microeconomics I EC1000 B 3. The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average a. revenue. b. total cost. c. fixed cost. d. variable cost. Figure Refer to Figure 3-2. For Jerry the opportunity cost of 1 pound of ice cream is a. 2 pounds of cones. b. 3/2 pounds of cones. c. 1 pound of cones. d. 1/3 pounds of cones. 5. The invisible hand's ability to coordinate the decisions of the firms and households in the economy can be hindered by a. increased competition in the market. b. a dramatic reduction in consumer spending. c. extended periods of unemployment. d. government actions that distort prices. 6. If the supply of a good is relatively elastic, changing the price causes a. a relatively small change in the amounts that buyers are willing to buy. b. no change in the amounts sellers are willing to sell. c. a relatively large change in the amounts sellers are willing to sell. d. a relatively small change in the amounts sellers are willing to sell. 2

12 EC1000 B - Microeconomics I EC1000 B 7. Suppose a human life is worth $10 million. Installing a better lighting system in the city park would reduce the risk of someone being murdered there from 2.6 to 1.9 percent over the life of the system. The city should install the new lighting system if its cost does not exceed a. $70,000. b. $260,000. c. $190,000. d. $10,000, Maurice receives $100 as a birthday gift. In deciding how to spend the money, he narrows his options down to four choices, Option A, Option B, Option C and Option D. Each option costs $100. Finally he decides on Option B. The opportunity cost of Option B is a. $300. b. $100. c. the value to him of Options A, C and D combined. d. the value to him of the Option he would have chosen if Option B were not available. 9. Productivity is defined as the a. amount of labor which can be saved by replacing workers with machines. b. actual amount of effort workers put into an hour of working time. c. amount of goods and services produced from each hour of a worker's time. d. number of workers required to produce a given amount of goods and services. Figure Refer to Figure 5-5. When price falls from point $40 to $30 we know that demand must be a. inelastic, since total revenue decreases from $9000 to $8000. b. unit elastic, since total revenue decreases from $9000 to $8000. c. inelastic, since total revenue increases from $8000 to $9000. d. elastic, since total revenue increases from $8000 to $

13 EC1000 B - Microeconomics I EC1000 B 11. The amount of money that a wheat farmer could have earned if he had planted barley instead of wheat is a. forgone accounting profit. b. an accounting cost c. an explicit cost. d. an implicit cost. 12. As Al's Radiator Co. continues to add workers, while keeping the same amount of machinery, some workers may be underutilized because they have little work to do while waiting in line to use the machinery. When this occurs, Al's Radiator Co. encounters a. diminishing marginal returns. b. diseconomies of scale. c. economies of scale. d. increasing marginal returns. 13. If leisure were an inferior good, then labor supply curves a. would all be vertical. b. would all be negatively sloped. c. would all be positively sloped. d. could still be positively or negatively sloped. Table 3-4 Hours needed to make one unit of: Amount produced in 2400 hours: Cars Airplanes Cars Airplanes U.S Japan Refer to Table 3-4. The opportunity cost of 1 car for Japan is a. 4 airplanes. b. 1/3 airplane. c. 1/4 airplane. d. 3 airplanes. 15. Causes of market failure include a. externalities and foreign competition. b. externalities and market power. c. incorrect forecasts of consumer demand and foreign competition. d. market power and incorrect forecasts of consumer demand. 4

14 EC1000 B - Microeconomics I EC1000 B 16. Pens are normal goods. What will happen to the equilibrium price of pens if the price of pencils falls, consumers experience an increase in income, writing in ink becomes fashionable, people expect the price of pens to fall in the near future, the population increases, fewer firms manufacture pens, and the wages of pen-makers decrease? a. Price will fall. b. The price change will be ambiguous. c. Price will stay exactly the same. d. Price will rise. 17. Aquilonia has decided to end its policy of not trading with the rest of the world. When it ends its trade restrictions, it discovers that it is importing incense, exporting steel, and neither importing nor exporting rugs. We can conclude that consumer surplus in Aquilonia is now higher for a. incense, lower for steel, and the same for rugs. b. incense and steel, but not rugs. c. steel, lower for incense, and the same for rugs. d. incense and rugs, but not steel. 18. The Borda count fails to satisfy which of Kenneth Arrow's properties of a "perfect" voting system? a. transitivity b. no dictator c. independence of irrelevant alternatives d. unanimity 19. In order to be successful, a cartel must a. agree on the total level of production and on the amount produced by each member. b. find a way to encourage its members to produce more than they would otherwise produce. c. agree on the prices charged by each member, but they need not agree on amounts produced. d. agree on the total level of production for the cartel, but they need not agree on the amount produced by each member. 5

15 EC1000 B - Microeconomics I EC1000 B Use the following information to answer the following questions. Scenario 13-6 Farmer Jack is a watermelon farmer. If Jack plants no seeds on his farm, he gets no harvest. If he plants 1 bag of seeds, he gets 30 watermelons. If he plants 2 bags of seeds, he gets 50 watermelons. If he plants 3 bags of seeds he gets 60 watermelons. A bag of seeds costs $100, and the costs of seeds are his only costs. 20. Refer to Scenario Which of the following statements is (are) true? (i) Farmer Jack experiences decreasing marginal product. (ii) Farmer Jack's production function is nonlinear. (iii) Farmer Jack's total cost curve is linear. a. (i) and (iii) b. (ii) only c. (i) only d. (i) and (ii) The following table represents the costs of five possible sellers. Table 7-3 SELLER COST DALE $1,500 JILL $1,200 DENISE $1,000 CATHERINE $750 JACKSON $ Refer to Table 7-3. If the market price is $1,000, the producer surplus in the market would be a. $700. b. $750. c. $3,700. d. $2,250. Scenario 13-4 For the following questions, assume that a given firm experiences decreasing marginal product of labor with the addition of each worker regardless of the current output level. 22. Refer to Scenario Average variable cost will be a. always rising. b. constant. c. always falling. d. U-shaped. 6

16 EC1000 B - Microeconomics I EC1000 B SECTION B Answer one of the questions numbered 1 to 4. This Section carries 34% of the total mark. 1. What is the production function? What is the marginal product? How would a production function that exhibits decreasing marginal product affect the shape of the total cost curve? Explain or draw a graph. 2. Define carefully the following concepts. Using the graph shown, determine the value in UD$ of each of the following concepts; if appropriate indicate with capital letters the area in the graph of ecah concept: a. equilibrium price before the tax b. consumer surplus before the tax c. producer surplus before the tax d. total surplus before the tax e. consumer surplus after the tax f. producer surplus after the tax g. total tax revenue to the government h. total surplus (consumer surplus + producer surplus + tax revenue) after the tax i. deadweight loss 3. One example of price discrimination occurs in the publishing industry when a publisher initially releases an expensive hardcover edition of a popular novel, and later releases a cheaper paperback edition. Use this example to demonstrate the benefits and potential pitfalls of a price discrimination pricing strategy. 4. How does elasticity affect the burden of a tax? Justify your answer using supply and demand diagrams. 7

17 ID: B ' Answer Section MULTIPLE CHOICE 1. B 2. D 3. B 4. B 5. D 6. C 7. A 8. D 9. C 10. D 11. D 12. A 13. C 14. B 15. B 16. B 17. A 18. C 19. A 20. D 21. B 22. A SHORT ANSWER 1. Apply definitions: the relationship between the amount of the various input used and the maximum amount which can be physically possibly obtained from those input. And: the amount by which output changes for a small change in the input considered. The total cost curve will increase at an increasing rate, or in other words, the total cost curve gets steeper as the amount produced rises. 1

18 ID: B 2. a. $10 b. $3600 c. $2400 d. $6000 e. $900 f. $600 g. $3000 h. $4500 i. $ The answer should address the three basic lessons of price discrimination. First, price discrimination is a rational strategy that can lead to higher monopoly profits. Second, price discrimination requires an ability to separate customers according to their willingness to pay. Third, price discrimination can raise economic welfare. 4. 2

19 No. of Pages: (C) 7 No. of Questions: 26 EC1000C ' JANUARY EXAMINATIONS 2005 Subject Title of Paper ECONOMICS EC1000 MICROECONOMICS Time Allowed Two Hours (2 Hours) Instructions to candidates This paper is in two sections. Students should attempt ALL the questions in Section A and ONE in Section B. Section A carries 66% of the maximum marks for the paper. 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 three marks. An incorrect answer will be given one negative mark. 1. In the long run, freedom of entry into a market forces a to charge a price equal to average total cost, but average total cost exceeds its minimum level. a. pure monopoly b. oligopolistic firm c. perfectly competitive firm d. monopolistically competitive firm 2. The greater the price elasticity of demand the a. more likely the product is a necessity. b. smaller the responsiveness of quantity demanded to price. c. greater the responsiveness of quantity demanded to price. d. greater the percentage change in price over the percentage change in quantity demanded. 1

20 EC1000 C - Microeconomics I EC1000 C 3. The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average a. total cost. b. revenue. c. variable cost. d. fixed cost. Figure Refer to Figure 3-2. For Jerry the opportunity cost of 1 pound of ice cream is a. 3/2 pounds of cones. b. 1/3 pounds of cones. c. 2 pounds of cones. d. 1 pound of cones. 5. The invisible hand's ability to coordinate the decisions of the firms and households in the economy can be hindered by a. increased competition in the market. b. a dramatic reduction in consumer spending. c. government actions that distort prices. d. extended periods of unemployment. 6. If the supply of a good is relatively elastic, changing the price causes a. no change in the amounts sellers are willing to sell. b. a relatively small change in the amounts that buyers are willing to buy. c. a relatively small change in the amounts sellers are willing to sell. d. a relatively large change in the amounts sellers are willing to sell. 2

21 EC1000 C - Microeconomics I EC1000 C 7. Suppose a human life is worth $10 million. Installing a better lighting system in the city park would reduce the risk of someone being murdered there from 2.6 to 1.9 percent over the life of the system. The city should install the new lighting system if its cost does not exceed a. $70,000. b. $10,000,000. c. $260,000. d. $190, Maurice receives $100 as a birthday gift. In deciding how to spend the money, he narrows his options down to four choices, Option A, Option B, Option C and Option D. Each option costs $100. Finally he decides on Option B. The opportunity cost of Option B is a. the value to him of the Option he would have chosen if Option B were not available. b. $100. c. the value to him of Options A, C and D combined. d. $ Productivity is defined as the a. amount of goods and services produced from each hour of a worker's time. b. number of workers required to produce a given amount of goods and services. c. actual amount of effort workers put into an hour of working time. d. amount of labor which can be saved by replacing workers with machines. Figure Refer to Figure 5-5. When price falls from point $40 to $30 we know that demand must be a. unit elastic, since total revenue decreases from $9000 to $8000. b. inelastic, since total revenue decreases from $9000 to $8000. c. elastic, since total revenue increases from $8000 to $9000. d. inelastic, since total revenue increases from $8000 to $

22 EC1000 C - Microeconomics I EC1000 C 11. The amount of money that a wheat farmer could have earned if he had planted barley instead of wheat is a. an accounting cost b. an implicit cost. c. an explicit cost. d. forgone accounting profit. 12. As Al's Radiator Co. continues to add workers, while keeping the same amount of machinery, some workers may be underutilized because they have little work to do while waiting in line to use the machinery. When this occurs, Al's Radiator Co. encounters a. diminishing marginal returns. b. diseconomies of scale. c. increasing marginal returns. d. economies of scale. 13. If leisure were an inferior good, then labor supply curves a. would all be vertical. b. could still be positively or negatively sloped. c. would all be positively sloped. d. would all be negatively sloped. Table 3-4 Hours needed to make one unit of: Amount produced in 2400 hours: Cars Airplanes Cars Airplanes U.S Japan Refer to Table 3-4. The opportunity cost of 1 car for Japan is a. 1/4 airplane. b. 4 airplanes. c. 3 airplanes. d. 1/3 airplane. 15. Causes of market failure include a. externalities and market power. b. market power and incorrect forecasts of consumer demand. c. externalities and foreign competition. d. incorrect forecasts of consumer demand and foreign competition. 4

23 EC1000 C - Microeconomics I EC1000 C 16. Pens are normal goods. What will happen to the equilibrium price of pens if the price of pencils falls, consumers experience an increase in income, writing in ink becomes fashionable, people expect the price of pens to fall in the near future, the population increases, fewer firms manufacture pens, and the wages of pen-makers decrease? a. Price will rise. b. Price will fall. c. Price will stay exactly the same. d. The price change will be ambiguous. 17. Aquilonia has decided to end its policy of not trading with the rest of the world. When it ends its trade restrictions, it discovers that it is importing incense, exporting steel, and neither importing nor exporting rugs. We can conclude that consumer surplus in Aquilonia is now higher for a. incense and steel, but not rugs. b. incense and rugs, but not steel. c. steel, lower for incense, and the same for rugs. d. incense, lower for steel, and the same for rugs. 18. The Borda count fails to satisfy which of Kenneth Arrow's properties of a "perfect" voting system? a. unanimity b. independence of irrelevant alternatives c. no dictator d. transitivity 19. In order to be successful, a cartel must a. agree on the total level of production for the cartel, but they need not agree on the amount produced by each member. b. find a way to encourage its members to produce more than they would otherwise produce. c. agree on the prices charged by each member, but they need not agree on amounts produced. d. agree on the total level of production and on the amount produced by each member. 5

24 EC1000 C - Microeconomics I EC1000 C Use the following information to answer the following questions. Scenario 13-6 Farmer Jack is a watermelon farmer. If Jack plants no seeds on his farm, he gets no harvest. If he plants 1 bag of seeds, he gets 30 watermelons. If he plants 2 bags of seeds, he gets 50 watermelons. If he plants 3 bags of seeds he gets 60 watermelons. A bag of seeds costs $100, and the costs of seeds are his only costs. 20. Refer to Scenario Which of the following statements is (are) true? (i) Farmer Jack experiences decreasing marginal product. (ii) Farmer Jack's production function is nonlinear. (iii) Farmer Jack's total cost curve is linear. a. (i) and (ii) b. (ii) only c. (i) only d. (i) and (iii) The following table represents the costs of five possible sellers. Table 7-3 SELLER COST DALE $1,500 JILL $1,200 DENISE $1,000 CATHERINE $750 JACKSON $ Refer to Table 7-3. If the market price is $1,000, the producer surplus in the market would be a. $2,250. b. $3,700. c. $750. d. $700. Scenario 13-4 For the following questions, assume that a given firm experiences decreasing marginal product of labor with the addition of each worker regardless of the current output level. 22. Refer to Scenario Average variable cost will be a. U-shaped. b. always falling. c. constant. d. always rising. 6

25 EC1000 C - Microeconomics I EC1000 C SECTION B Answer one of the questions numbered 1 to 4. This Section carries 34% of the total mark. 1. What is the production function? What is the marginal product? How would a production function that exhibits decreasing marginal product affect the shape of the total cost curve? Explain or draw a graph. 2. Define carefully the following concepts. Using the graph shown, determine the value in UD$ of each of the following concepts; if appropriate indicate with capital letters the area in the graph of ecah concept: a. equilibrium price before the tax b. consumer surplus before the tax c. producer surplus before the tax d. total surplus before the tax e. consumer surplus after the tax f. producer surplus after the tax g. total tax revenue to the government h. total surplus (consumer surplus + producer surplus + tax revenue) after the tax i. deadweight loss 3. One example of price discrimination occurs in the publishing industry when a publisher initially releases an expensive hardcover edition of a popular novel, and later releases a cheaper paperback edition. Use this example to demonstrate the benefits and potential pitfalls of a price discrimination pricing strategy. 4. How does elasticity affect the burden of a tax? Justify your answer using supply and demand diagrams. 7

26 ID: C ' Answer Section MULTIPLE CHOICE 1. D 2. C 3. A 4. A 5. C 6. D 7. A 8. A 9. A 10. C 11. B 12. A 13. C 14. D 15. A 16. D 17. D 18. B 19. D 20. A 21. C 22. D SHORT ANSWER 1. Apply definitions: the relationship between the amount of the various input used and the maximum amount which can be physically possibly obtained from those input. And: the amount by which output changes for a small change in the input considered. The total cost curve will increase at an increasing rate, or in other words, the total cost curve gets steeper as the amount produced rises. 1

27 ID: C 2. a. $10 b. $3600 c. $2400 d. $6000 e. $900 f. $600 g. $3000 h. $4500 i. $ The answer should address the three basic lessons of price discrimination. First, price discrimination is a rational strategy that can lead to higher monopoly profits. Second, price discrimination requires an ability to separate customers according to their willingness to pay. Third, price discrimination can raise economic welfare. 4. 2

28 No. of Pages: (D) 7 No. of Questions: 26 EC1000D ' JANUARY EXAMINATIONS 2005 Subject Title of Paper ECONOMICS EC1000 MICROECONOMICS Time Allowed Two Hours (2 Hours) Instructions to candidates This paper is in two sections. Students should attempt ALL the questions in Section A and ONE in Section B. Section A carries 66% of the maximum marks for the paper. 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 three marks. An incorrect answer will be given one negative mark. 1. In the long run, freedom of entry into a market forces a to charge a price equal to average total cost, but average total cost exceeds its minimum level. a. oligopolistic firm b. monopolistically competitive firm c. perfectly competitive firm d. pure monopoly 2. The greater the price elasticity of demand the a. smaller the responsiveness of quantity demanded to price. b. more likely the product is a necessity. c. greater the responsiveness of quantity demanded to price. d. greater the percentage change in price over the percentage change in quantity demanded. 1

29 EC1000 D - Microeconomics I EC1000 D 3. The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average a. variable cost. b. total cost. c. revenue. d. fixed cost. Figure Refer to Figure 3-2. For Jerry the opportunity cost of 1 pound of ice cream is a. 1/3 pounds of cones. b. 3/2 pounds of cones. c. 2 pounds of cones. d. 1 pound of cones. 5. The invisible hand's ability to coordinate the decisions of the firms and households in the economy can be hindered by a. a dramatic reduction in consumer spending. b. government actions that distort prices. c. extended periods of unemployment. d. increased competition in the market. 6. If the supply of a good is relatively elastic, changing the price causes a. a relatively small change in the amounts that buyers are willing to buy. b. a relatively small change in the amounts sellers are willing to sell. c. a relatively large change in the amounts sellers are willing to sell. d. no change in the amounts sellers are willing to sell. 2

30 EC1000 D - Microeconomics I EC1000 D 7. Suppose a human life is worth $10 million. Installing a better lighting system in the city park would reduce the risk of someone being murdered there from 2.6 to 1.9 percent over the life of the system. The city should install the new lighting system if its cost does not exceed a. $70,000. b. $260,000. c. $10,000,000. d. $190, Maurice receives $100 as a birthday gift. In deciding how to spend the money, he narrows his options down to four choices, Option A, Option B, Option C and Option D. Each option costs $100. Finally he decides on Option B. The opportunity cost of Option B is a. $300. b. the value to him of Options A, C and D combined. c. $100. d. the value to him of the Option he would have chosen if Option B were not available. 9. Productivity is defined as the a. actual amount of effort workers put into an hour of working time. b. amount of goods and services produced from each hour of a worker's time. c. amount of labor which can be saved by replacing workers with machines. d. number of workers required to produce a given amount of goods and services. Figure Refer to Figure 5-5. When price falls from point $40 to $30 we know that demand must be a. elastic, since total revenue increases from $8000 to $9000. b. inelastic, since total revenue increases from $8000 to $9000. c. unit elastic, since total revenue decreases from $9000 to $8000. d. inelastic, since total revenue decreases from $9000 to $

31 EC1000 D - Microeconomics I EC1000 D 11. The amount of money that a wheat farmer could have earned if he had planted barley instead of wheat is a. an explicit cost. b. forgone accounting profit. c. an accounting cost d. an implicit cost. 12. As Al's Radiator Co. continues to add workers, while keeping the same amount of machinery, some workers may be underutilized because they have little work to do while waiting in line to use the machinery. When this occurs, Al's Radiator Co. encounters a. diminishing marginal returns. b. increasing marginal returns. c. economies of scale. d. diseconomies of scale. 13. If leisure were an inferior good, then labor supply curves a. would all be negatively sloped. b. would all be positively sloped. c. would all be vertical. d. could still be positively or negatively sloped. Table 3-4 Hours needed to make one unit of: Amount produced in 2400 hours: Cars Airplanes Cars Airplanes U.S Japan Refer to Table 3-4. The opportunity cost of 1 car for Japan is a. 1/3 airplane. b. 4 airplanes. c. 1/4 airplane. d. 3 airplanes. 15. Causes of market failure include a. externalities and foreign competition. b. externalities and market power. c. incorrect forecasts of consumer demand and foreign competition. d. market power and incorrect forecasts of consumer demand. 4

32 EC1000 D - Microeconomics I EC1000 D 16. Pens are normal goods. What will happen to the equilibrium price of pens if the price of pencils falls, consumers experience an increase in income, writing in ink becomes fashionable, people expect the price of pens to fall in the near future, the population increases, fewer firms manufacture pens, and the wages of pen-makers decrease? a. Price will rise. b. Price will fall. c. The price change will be ambiguous. d. Price will stay exactly the same. 17. Aquilonia has decided to end its policy of not trading with the rest of the world. When it ends its trade restrictions, it discovers that it is importing incense, exporting steel, and neither importing nor exporting rugs. We can conclude that consumer surplus in Aquilonia is now higher for a. steel, lower for incense, and the same for rugs. b. incense, lower for steel, and the same for rugs. c. incense and steel, but not rugs. d. incense and rugs, but not steel. 18. The Borda count fails to satisfy which of Kenneth Arrow's properties of a "perfect" voting system? a. transitivity b. unanimity c. independence of irrelevant alternatives d. no dictator 19. In order to be successful, a cartel must a. agree on the total level of production and on the amount produced by each member. b. agree on the prices charged by each member, but they need not agree on amounts produced. c. agree on the total level of production for the cartel, but they need not agree on the amount produced by each member. d. find a way to encourage its members to produce more than they would otherwise produce. 5

33 EC1000 D - Microeconomics I EC1000 D Use the following information to answer the following questions. Scenario 13-6 Farmer Jack is a watermelon farmer. If Jack plants no seeds on his farm, he gets no harvest. If he plants 1 bag of seeds, he gets 30 watermelons. If he plants 2 bags of seeds, he gets 50 watermelons. If he plants 3 bags of seeds he gets 60 watermelons. A bag of seeds costs $100, and the costs of seeds are his only costs. 20. Refer to Scenario Which of the following statements is (are) true? (i) Farmer Jack experiences decreasing marginal product. (ii) Farmer Jack's production function is nonlinear. (iii) Farmer Jack's total cost curve is linear. a. (ii) only b. (i) only c. (i) and (ii) d. (i) and (iii) The following table represents the costs of five possible sellers. Table 7-3 SELLER COST DALE $1,500 JILL $1,200 DENISE $1,000 CATHERINE $750 JACKSON $ Refer to Table 7-3. If the market price is $1,000, the producer surplus in the market would be a. $700. b. $3,700. c. $750. d. $2,250. Scenario 13-4 For the following questions, assume that a given firm experiences decreasing marginal product of labor with the addition of each worker regardless of the current output level. 22. Refer to Scenario Average variable cost will be a. U-shaped. b. always rising. c. always falling. d. constant. 6

34 EC1000 D - Microeconomics I EC1000 D SECTION B Answer one of the questions numbered 1 to 4. This Section carries 34% of the total mark. 1. What is the production function? What is the marginal product? How would a production function that exhibits decreasing marginal product affect the shape of the total cost curve? Explain or draw a graph. 2. Define carefully the following concepts. Using the graph shown, determine the value in UD$ of each of the following concepts; if appropriate indicate with capital letters the area in the graph of ecah concept: a. equilibrium price before the tax b. consumer surplus before the tax c. producer surplus before the tax d. total surplus before the tax e. consumer surplus after the tax f. producer surplus after the tax g. total tax revenue to the government h. total surplus (consumer surplus + producer surplus + tax revenue) after the tax i. deadweight loss 3. One example of price discrimination occurs in the publishing industry when a publisher initially releases an expensive hardcover edition of a popular novel, and later releases a cheaper paperback edition. Use this example to demonstrate the benefits and potential pitfalls of a price discrimination pricing strategy. 4. How does elasticity affect the burden of a tax? Justify your answer using supply and demand diagrams. 7

35 ID: D ' Answer Section MULTIPLE CHOICE 1. B 2. C 3. B 4. B 5. B 6. C 7. A 8. D 9. B 10. A 11. D 12. A 13. B 14. A 15. B 16. C 17. B 18. C 19. A 20. C 21. C 22. B SHORT ANSWER 1. Apply definitions: the relationship between the amount of the various input used and the maximum amount which can be physically possibly obtained from those input. And: the amount by which output changes for a small change in the input considered. The total cost curve will increase at an increasing rate, or in other words, the total cost curve gets steeper as the amount produced rises. 1

36 ID: D 2. a. $10 b. $3600 c. $2400 d. $6000 e. $900 f. $600 g. $3000 h. $4500 i. $ The answer should address the three basic lessons of price discrimination. First, price discrimination is a rational strategy that can lead to higher monopoly profits. Second, price discrimination requires an ability to separate customers according to their willingness to pay. Third, price discrimination can raise economic welfare. 4. 2

37 No. of Pages: ( E ) 7 No. of Questions: 26 EC1000 E ' JANUARY EXAMINATIONS 2005 Subject Title of Paper ECONOMICS EC1000 MICROECONOMICS Time Allowed Two Hours (2 Hours) Instructions to candidates This paper is in two sections. Students should attempt ALL the questions in Section A and ONE in Section B. Section A carries 66% of the maximum marks for the paper. 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 three marks. An incorrect answer will be given one negative mark. 1. In the long run, freedom of entry into a market forces a to charge a price equal to average total cost, but average total cost exceeds its minimum level. a. pure monopoly b. perfectly competitive firm c. monopolistically competitive firm d. oligopolistic firm 2. The greater the price elasticity of demand the a. smaller the responsiveness of quantity demanded to price. b. greater the responsiveness of quantity demanded to price. c. more likely the product is a necessity. d. greater the percentage change in price over the percentage change in quantity demanded. 1

38 EC1000 E - Microeconomics I EC1000 E 3. The competitive firm's long-run supply curve is that portion of the marginal cost curve that lies above average a. revenue. b. total cost. c. fixed cost. d. variable cost. Figure Refer to Figure 3-2. For Jerry the opportunity cost of 1 pound of ice cream is a. 3/2 pounds of cones. b. 2 pounds of cones. c. 1/3 pounds of cones. d. 1 pound of cones. 5. The invisible hand's ability to coordinate the decisions of the firms and households in the economy can be hindered by a. government actions that distort prices. b. a dramatic reduction in consumer spending. c. extended periods of unemployment. d. increased competition in the market. 6. If the supply of a good is relatively elastic, changing the price causes a. a relatively small change in the amounts sellers are willing to sell. b. no change in the amounts sellers are willing to sell. c. a relatively large change in the amounts sellers are willing to sell. d. a relatively small change in the amounts that buyers are willing to buy. 2

39 EC1000 E - Microeconomics I EC1000 E 7. Suppose a human life is worth $10 million. Installing a better lighting system in the city park would reduce the risk of someone being murdered there from 2.6 to 1.9 percent over the life of the system. The city should install the new lighting system if its cost does not exceed a. $190,000. b. $10,000,000. c. $260,000. d. $70, Maurice receives $100 as a birthday gift. In deciding how to spend the money, he narrows his options down to four choices, Option A, Option B, Option C and Option D. Each option costs $100. Finally he decides on Option B. The opportunity cost of Option B is a. the value to him of Options A, C and D combined. b. $100. c. the value to him of the Option he would have chosen if Option B were not available. d. $ Productivity is defined as the a. amount of goods and services produced from each hour of a worker's time. b. amount of labor which can be saved by replacing workers with machines. c. number of workers required to produce a given amount of goods and services. d. actual amount of effort workers put into an hour of working time. Figure Refer to Figure 5-5. When price falls from point $40 to $30 we know that demand must be a. elastic, since total revenue increases from $8000 to $9000. b. unit elastic, since total revenue decreases from $9000 to $8000. c. inelastic, since total revenue decreases from $9000 to $8000. d. inelastic, since total revenue increases from $8000 to $

40 EC1000 E - Microeconomics I EC1000 E 11. The amount of money that a wheat farmer could have earned if he had planted barley instead of wheat is a. an implicit cost. b. an explicit cost. c. forgone accounting profit. d. an accounting cost 12. As Al's Radiator Co. continues to add workers, while keeping the same amount of machinery, some workers may be underutilized because they have little work to do while waiting in line to use the machinery. When this occurs, Al's Radiator Co. encounters a. diminishing marginal returns. b. diseconomies of scale. c. economies of scale. d. increasing marginal returns. 13. If leisure were an inferior good, then labor supply curves a. would all be positively sloped. b. could still be positively or negatively sloped. c. would all be vertical. d. would all be negatively sloped. Table 3-4 Hours needed to make one unit of: Amount produced in 2400 hours: Cars Airplanes Cars Airplanes U.S Japan Refer to Table 3-4. The opportunity cost of 1 car for Japan is a. 4 airplanes. b. 1/3 airplane. c. 3 airplanes. d. 1/4 airplane. 15. Causes of market failure include a. externalities and market power. b. incorrect forecasts of consumer demand and foreign competition. c. externalities and foreign competition. d. market power and incorrect forecasts of consumer demand. 4

41 EC1000 E - Microeconomics I EC1000 E 16. Pens are normal goods. What will happen to the equilibrium price of pens if the price of pencils falls, consumers experience an increase in income, writing in ink becomes fashionable, people expect the price of pens to fall in the near future, the population increases, fewer firms manufacture pens, and the wages of pen-makers decrease? a. The price change will be ambiguous. b. Price will rise. c. Price will stay exactly the same. d. Price will fall. 17. Aquilonia has decided to end its policy of not trading with the rest of the world. When it ends its trade restrictions, it discovers that it is importing incense, exporting steel, and neither importing nor exporting rugs. We can conclude that consumer surplus in Aquilonia is now higher for a. incense, lower for steel, and the same for rugs. b. incense and rugs, but not steel. c. steel, lower for incense, and the same for rugs. d. incense and steel, but not rugs. 18. The Borda count fails to satisfy which of Kenneth Arrow's properties of a "perfect" voting system? a. no dictator b. independence of irrelevant alternatives c. transitivity d. unanimity 19. In order to be successful, a cartel must a. find a way to encourage its members to produce more than they would otherwise produce. b. agree on the prices charged by each member, but they need not agree on amounts produced. c. agree on the total level of production and on the amount produced by each member. d. agree on the total level of production for the cartel, but they need not agree on the amount produced by each member. 5

42 EC1000 E - Microeconomics I EC1000 E Use the following information to answer the following questions. Scenario 13-6 Farmer Jack is a watermelon farmer. If Jack plants no seeds on his farm, he gets no harvest. If he plants 1 bag of seeds, he gets 30 watermelons. If he plants 2 bags of seeds, he gets 50 watermelons. If he plants 3 bags of seeds he gets 60 watermelons. A bag of seeds costs $100, and the costs of seeds are his only costs. 20. Refer to Scenario Which of the following statements is (are) true? (i) Farmer Jack experiences decreasing marginal product. (ii) Farmer Jack's production function is nonlinear. (iii) Farmer Jack's total cost curve is linear. a. (ii) only b. (i) and (iii) c. (i) and (ii) d. (i) only The following table represents the costs of five possible sellers. Table 7-3 SELLER COST DALE $1,500 JILL $1,200 DENISE $1,000 CATHERINE $750 JACKSON $ Refer to Table 7-3. If the market price is $1,000, the producer surplus in the market would be a. $750. b. $700. c. $2,250. d. $3,700. Scenario 13-4 For the following questions, assume that a given firm experiences decreasing marginal product of labor with the addition of each worker regardless of the current output level. 22. Refer to Scenario Average variable cost will be a. U-shaped. b. always rising. c. constant. d. always falling. 6

43 EC1000 E - Microeconomics I EC1000 E SECTION B Answer one of the questions numbered 1 to 4. This Section carries 34% of the total mark. 1. What is the production function? What is the marginal product? How would a production function that exhibits decreasing marginal product affect the shape of the total cost curve? Explain or draw a graph. 2. Define carefully the following concepts. Using the graph shown, determine the value in UD$ of each of the following concepts; if appropriate indicate with capital letters the area in the graph of ecah concept: a. equilibrium price before the tax b. consumer surplus before the tax c. producer surplus before the tax d. total surplus before the tax e. consumer surplus after the tax f. producer surplus after the tax g. total tax revenue to the government h. total surplus (consumer surplus + producer surplus + tax revenue) after the tax i. deadweight loss 3. One example of price discrimination occurs in the publishing industry when a publisher initially releases an expensive hardcover edition of a popular novel, and later releases a cheaper paperback edition. Use this example to demonstrate the benefits and potential pitfalls of a price discrimination pricing strategy. 4. How does elasticity affect the burden of a tax? Justify your answer using supply and demand diagrams. 7