DO NOT OPEN THE QUESTION PAPER UNTIL INSTRUCTED TO DO SO BY THE CHIEF INVIGILATOR. MICROECONOMICS TWO HOURS (2 Hours)

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1 January Examinations 2016 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 EC1000 MICROECONOMICS TWO HOURS (2 Hours) CHECK YOU HAVE THE CORRECT QUESTION PAPER Number of Pages 8 Number of Questions 32 Instructions to Candidates This paper is in two sections, A and B. You should attempt ALL questions in Section A and ONE question in Section B. For questions in Section A, you will be credited 3 (three) marks for each right answer, - 1 marks (minus one, this is a negative number) for each wrong answer, and 0 mark (no mark) if no answer is given. The total mark awarded for Section A is capped at 80 marks. For questions in Section B, you will be credited up to 20 (twenty) marks for answering one question. There are no negative marks for incorrect answers. In this Section you may attempt more questions if you wish, but only the best answer will be credited to you. The maximum mark for the entire paper is 100 marks. FOR THIS EXAM YOU ARE ALLOWED TO USE THE FOLLOWING: Calculators Books/Statutes provided by the University Are students permitted to bring their own Books/Statutes/Notes? Additional Stationery Permitted calculators are the Casio FX83 and FX85 models No No No Version 1 Page 1 of 8

2 SECTION A: Multiple Choice All questions should be attempted. Use the answer sheet provided to circle the one response you believe to be the most appropriate for each question. Identify the letter of the choice that best completes the statement or answers the question. 1. What is the equilibrium price? a. The price at which the trade occurs. b. The reservation price c. The willingness to pay d. The price the consumer would like to pay 2. There is an equilibrium in the market when: a. The willingness to buy is lower than the market price b. The reservation price is greater than the market price c. The reservation price willingness to pay market price d. Willingness to pay market price reservation price 3. If the price is greater than the equilibrium price, we have: a. Equilibrium b. Excess supply (Surplus) c. Excess demand (Shortage) d. None of the above 4. A reduction in the costs of production will: a. Lead to a movement along the supply curve b. Shift the demand curve c. Shift the supply curve d. Lead to an extension of supply 5. A downward shift of the demand curve: a. Decreases the producer surplus b. Increases the producer surplus Version 1 Page 2 of 8

3 c. Does not affect the producer surplus d. May either decrease or increase the producer surplus 6. A fall in price: a. Will cause an inward shift of demand b. Will cause an outward shift of supply c. Leads to a movement along a demand curve d. Leads to a higher level of production 7. An increase in the price of a complement for product A would: a. Shift demand for product A outwards b. Shift demand for product A inwards c. Shift supply for product A outwards d. Shift supply for product A inwards 8. On a hot day a man buys a glass of lemonade for 1. Which of the following is most likely to be true? a. His consumer surplus is lower than if this was a cold day b. His consumer surplus is higher than if the man paid 2 c. His consumer surplus is lower than if the man paid 2 d. Consumer surplus does not change depending on the price 9. Typically consumer surplus will be under monopoly competition than under perfect competition. a. Lower b. Greater c. The same d. Impossible to say 10. Price A P1 B C D E Quantity Version 1 Page 3 of 8

4 Identify the consumer surplus in the above diagram when the price is P1 a. A only b. A and B c. A, B and C d. You need a supply curve to find consumer surplus 11. Consumer surplus of an individual can be eliminated entirely by: a. raising the price until very few units is bought. b. charging a price for each unit that is equal to the individual's marginal value for each unit. c. raising the price until zero units is purchased. d. both option (b) and (c) 12. Which of the following situations best illustrates the concept of consumer surplus? a. a manufacturer reduces the price of an item from $ 2.50 to $ 2.30 in the hope of being able to sell more units. b. a consumer who was not willing to buy a car at $ 100,995, but was prepared to buy it at $ 99,995. c. a British tourist who was willing to pay $ 5.00 for a burger, but was only charged $ 4.00 instead. d. a market reaches a condition whereby the demand for a product is greater than the producers' ability to supply it. Table 2 The Waco Kid's Cowboy Hats Marginal Cost (Pounds) 1st hat 24 2nd hat 30 3rd hat 38 4th hat Refer to Table 2. The table above lists the marginal cost of cowboy hats by The Waco Kid, a firm that specializes in producing western wear. If the market price of The Waco Kid's cowboy hats is 40 a. producer surplus from the first hat is 40. b. there will be a surplus; as a result, the price will fall to 24. c. The Waco Kid will produce four hats. d. producer surplus will equal 28 Version 1 Page 4 of 8

5 14. Suppose that policymakers are considering placing a tax on either of two markets. In Market A, the tax will have a significant effect on the price consumers pay, but it will not affect equilibrium quantity very much. In Market B, the same tax will have only a small effect on the price consumers pay, but it will have a large effect on the equilibrium quantity. In which market will the tax have a larger deadweight loss? a. Market A b. Market B c. Deadweight loss will be the same in both markets. d. There is not enough information to answer the question. 15. Which of the following statements is correct a. the first price auction delivers higher revenue to the seller than the second price auction. b. the second price auction delivers higher revenue to the seller than the first price auction. c. the first price auction induces buyer to bid their true value. d. the second price auction induces buyer to bid their true value. 16. Which of the following statements is correct? a. being generous to other is a rational behaviour because god will reward us for it. b. being generous to other is a rational behaviour because it will necessarily make others generous to us. c. being generous to other is a rational behaviour because values are part of our preferences. d. being generous is never rational 17. In Nash equilibrium of a game a. each player receives his best possible payoff. b. the total payoff for all players is maximized. c. a player deviating to a different strategy will earn a lower payoff than the equilibrium payoff. d. each player is best responding to the strategies of the other players. 18. Which of the following statements is correct? a. In a stable matching each agent gets his/her best match. b. If no two pairs of agents can swap spouses and make themselves better off, then the matching is stable. c. If a man can find a woman whom he prefers more than his spouse, and whom she prefers more than her spouse than the matching is not stable. d. Stable matching may not exist. Version 1 Page 5 of 8

6 19. Which of the following statements is correct? a. anger in negotiations can never be useful. b. faking anger in negotiations is very often useful c. anger in negotiations can be useful if it is genuine. d. anger in negotiations is only harmful if the other party gets angry as well. 20. An indifference curve shows all the alternative combinations of two consumption goods that a. can be produced with a given set of resources and technology. b. yield the same total of utility. c. can be purchased with a given budget at given prices. d. equate the marginal utilities of these goods and, therefore, make the consumer indifferent between them. 21. At any given point on an indifference curve, the absolute value of the slope equals a. unity - otherwise there would be no indifference. b. the marginal rate of substitution. c. the consumer s marginal utility. d. none of the above. 22. If a consumer s marginal rate of substitution equals 2 eggs for 1 hamburger, a. the consumer s indifference curve must be positively sloped. b. the consumer s indifference curve must be convex with respect to the origin of the graph. c. the ratio of the consumer s marginal utility of 1 egg to that of 1 hamburger must equal ½. d. all of the above are true. 23. Indifference curves that intersect would be illogical constructs because a. more is better than less. b. of diminishing marginal utility. c. of the transitivity property of indifference theory. d. of both a and c above. 24. Suppose that the number of buyers in a market increases and a technological advancement occurs also. What would we expect to happen in the market? a. The equilibrium price would increase, but the impact on the amount sold in the market would be indeterminate. b. The equilibrium price would decrease, but the impact on the amount sold in the market would be indeterminate. c. Both equilibrium price and equilibrium quantity would increase. d. Equilibrium quantity would increase, but the impact on equilibrium price would be Indeterminate. Version 1 Page 6 of 8

7 25. In order for a price floor to be effective, it must be set the equilibrium price, while a price ceiling must be set the equilibrium price in order to be effective. a. above; below b. above; above c. below; above d. below; below 26. Emma s linear demand curve for whiskey has the same slope as Eric s; however, it lies to the right of Eric s. An increase in the price of whiskey will cause a. Emma to incur a greater loss of consumer surplus than Eric will. b. Eric to incur a greater loss of consumer surplus than Emma will. c. Emma and Eric to incur the same loss of consumer surplus. d. Emma s demand curve to shift closer to Eric s. 27. A monopoly produces at the level in which: a. The marginal revenue equals the price. b. The marginal revenue equals the marginal cost c. The marginal revenue is maximized. d. The marginal revenue equals the marginal demand 28. In a market with symmetric information: a. the better informed party will be better off. b. high quality products cannot be sold. c. there will be a welfare loss because trade will be limited. d. the market outcome will be identical to that of a market with symmetric information. 29. Comment on the winner curse and auction fever: a. both work in favor of the seller in an auction b. only the winner curse work in favor of the seller. c. only auction fever work in favor of the seller. d. these are two names for the same phenomenon. 30. Price discrimination in a monopoly a. is illegal b. increases the monopoly profit. c. reduces the monopoly profit as it deters customers. d. shifts the demand function. Version 1 Page 7 of 8

8 SECTION B One question should be attempted. For the answer, you will be credited up to 20 (twenty) marks. There are no negative marks for incorrect answers. You may attempt all the two questions if you wish, but only the best answer will be credited to you. 31. Suppose that in order to benefit home buyers Parliament legislates a bill under which banks are not allow to request a down payment from lenders and can only offer 100% financing. How would such a bill affect the mortgage market and the real estate market? 32. Regulatory authorities often decline requests of two or more firms to merge. Explain the rationale of such a policy in terms of the market price, consumers' welfare, and producers profits and beyond. END OF PAPER Version 1 Page 8 of 8