INTI COLLEGE MALAYSIA BUSINESS FOUNDATION PROGRAMME ECO 181: INTRODUCTORY ECONOMICS FINAL EXAMINATION: AUGUST 2003 SESSION

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1 ECO 181 (F) / Page 1 of 15 INTI COLLEGE MALAYSIA BUSINESS FOUNDATION PROGRAMME ECO 181: INTRODUCTORY ECONOMICS FINAL EXAMINATION: AUGUST 2003 SESSION SECTION A There are SIXTY questions on this paper. Answer ALL questions. (60 marks) For each question there are four possible answers A, B, C and Choose the one you consider correct and record your choice in pencil on the Multiple Choice Answer Sheet provided. 1. Macroeconomics is the branch of economics that examines outcomes of economic behaviour, evaluates them as good or bad, and prescribes preferred courses of action the functioning of individual industries and the behaviour of individual decision-making units, that is, business firms and households the economic behaviour of aggregates - income, employment, and output - on a national scale ways to understand behaviour and the operation of systems without making judgements 2. Which of the following is a normative statement? When the price of a good falls, suppliers will reduce the amount that they produce The government should reduce interest rates in order to encourage private investment When the price of a good rises, people demand less of it. all of the above 3. A society can produce two goods: bread and biscuits. The society's production possibility curve is negatively sloped and 'bowed outward' from the origin. As this society moves down it's production possibility frontier producing more and more units of biscuits, the opportunity cost of producing biscuits increases remains constant decreases could decrease or increase depending on the technology

2 ECO 181 (F) / Page 2 of As more of a good, such as television sets, is produced the opportunity costs of producing it increases. This most likely occurs because as more of a good is produced the quality of the technology available to produce additional units of the good declines and therefore the costs of production increase resources are not equally well suited to producing all goods and as more of a good is produced it is necessary to use resources less well suited to the production of the good as more of a good is produced the inputs used to produce that good will increase in price consumers would be willing to pay higher prices for the good as more of the good is produced 5. For an economy to produce at a point beyond its current production possibility curve, the economy must reduce inputs waste less increase inputs be more efficient 6. An improvement in technology will cause the production possibility curve to shift back and to the left the economy to move down the production possibility curve the production possibility curve to shift up and to the right the economy to move closer to its production possibility curve 7. Which of the following is an element of a centrally planned economy? The market decides distribution The market decides what will be produced Production decisions are centralised The means of production are privately owned 8. In a free-market economy what gets produced, how it is produced, and who gets it. the behaviour of buyers and sellers determines consumers but not firms determine firms but not consumers determine the central government authority determines

3 ECO 181 (F) / Page 3 of Which of the following is the best definition of economics? The study of how consumers spend their income The study of how the government allocates tax revenue The study of how individuals and societies choose to use the scarce resources that nature and previous generations have provided The study of how firms decide what inputs to hire and what outputs to produce 10. Opportunity cost is the additional cost of producing an additional unit of output a cost that cannot be avoided, regardless of what is done in the future the additional cost of buying an additional unit of a product that which we forgo, or give up, when we make a choice or a decision 11. The reason that opportunity costs arise is that there are no alternative decisions that could be made resources are scarce an economy relies on money to facilitate exchange of goods and services people have unlimited wants 12. The branch of economics that examines the functioning of individual industries and the behaviour of individual decision-making units is microeconomics positive economics macroeconomics normative economics 13. The law of demand states that, other things being equal, a decrease in the price of a good will result in greater production of the good a surplus an increase in the quantity willingly purchased a decrease in income 14. Which of the following might shift the demand curve for butter to the right? a decrease in the price of butter a decrease in the price of margarine, a substitute an increase in the price of bread, a complement an increase in income

4 ECO 181 (F) / Page 4 of 15 Use the following to answer question 15: Price D Price B C A Quantity Quantity 15. Refer to the graph above. A decline in quantity demanded is best shown by which arrow? A B C D 16. Which of the following is least likely to change the supply of personal computers? An increase in consumers' incomes. A technological breakthrough that makes it much less costly to produce computer chips. A decrease in the wage paid to electrical engineers. A technological breakthrough that makes it more costly to produce computer chips. 17. Which of the following would be expected to cause an increase in the supply of fax machines? An increase in the number of business firms demanding fax machines. An increase in the price of fax machines. A decrease in the cost of manufacturing fax machines. The expectation that the price of fax machines will increase in future. 18. The more the current price exceeds the equilibrium price: the greater the resulting shortage will be. the smaller the resulting shortage will be. the greater the resulting surplus will be. the smaller the resulting surplus will be.

5 ECO 181 (F) / Page 5 of 15 Use the following to answer question 19: Price of eggs per dozen $1.50 $1.20 $0.90 $0.60 $0.30 $ D S Dozens of eggs per week 19. Refer to the graph above. At a price of 60 cents per dozen: there is a surplus of 2000 dozen eggs per week. the market is in equilibrium there is a shortage of 3000 dozen eggs per week. there is a shortage of 2000 dozen eggs per week. 20. The point at which the supply curve and the demand curve intersect is called: equilibrium, because quantity demanded equals quantity supplied so there is no tendency for price to change. equilibrium, because quantity demanded exceeds quantity supplied so there is a shortage. equilibrium, because quantity supplied exceeds quantity demanded so there I s a surplus. irrelevant, because real-world prices never reach this point. 21. A business produces 800 items and sells them for $25 each. The total cost of producing the items is $19,000 for explicit costs and $2,000 for implicit costs. Accounting profit is: -$1,000. $1,000. $2,000. $20,000.

6 ECO 181 (F) / Page 6 of Implicit cost refers to: the amount a firm receives for selling its product or service. any increase in the value of the assets owned by the firm. the opportunity cost of factors of production provided by the owners of the firm. explicit payments to the factors of production. 23. When labor is the variable input, marginal product is defined as: output per worker. total output divided by the number of workers. the additional output produced by an additional worker. the total production of a group of workers. 24. Output per worker is also called: marginal product. average product. total product. variable product. 25. Which of the following statements about short run is TRUE? Labour may be the fixed factor It could be as short as two weeks At least one factor must be fixed All of the above 26. Fixed cost is: the cost of producing one more unit of capital, say, machinery. any cost which does not change when the firm changes its output. average cost multiplied by the firm's output. usually zero in the short run

7 ECO 181 (F) / Page 7 of If you operated a small bakery, which of the following would be a variable cost in the short run? baking ovens interest on business loans annual lease payment for use of the building baking supplies (flour, salt, etc.) Use the following to answer question 28: 28. Refer to the above diagram. At output level Q average fixed cost: is equal to EF. is equal to QE. is measured by both QF and E cannot be determined from the information given. 29 The relationship between the marginal cost and the average total cost schedule is such that: the behavior of one schedule does not affect the other. if ATC exceeds MC, MC must be rising. if MC is declining, ATC may be either declining or rising. if MC is declining, ATC must also be declining.

8 ECO 181 (F) / Page 8 of Average total cost is: TVC MC TVC - TFC Q TVC TFC + TVC Q Q 31. Economies and diseconomies of scale explain: the profit-maximizing level of production. why the firm's long-run average total cost curve is U-shaped. why the firm's short-run marginal cost curve cuts the short-run average variable cost curve at its minimum point. the distinction between fixed and variable costs. 32. Which of the following is not a source of economies of scale? learning-by-doing. labor specialization. use of larger machines. inelastic resource supply curves. 33. In which of the following industry structures is the entry of new firms the most difficult? pure monopoly oligopoly monopolistic competition pure competition 34. Which of the following statements applies to a purely competitive producer? It will not advertise its product. In long-run equilibrium it will earn an economic profit. Its product will have a brand name. Its product is slightly different from those of its competitors. 35. Pure monopoly means: any market in which the demand curve to the firm is downsloping. a standardized product being produced by many firms. a single firm producing a product for which there are no close substitutes. a large number of firms producing a differentiated product.

9 ECO 181 (F) / Page 9 of Which of the following is correct? Both purely competitive and monopolistic firms are "price takers." Both purely competitive and monopolistic firms are "price makers." A purely competitive firm is a "price taker," while a monopolist is a "price maker." A purely competitive firm is a "price maker," while a monopolist is a "price taker." 37. Under monopolistic competition entry to the industry is: completely free of barriers. more difficult than under pure competition but not nearly as difficult as under pure monopoly. more difficult than under pure monopoly. blocked. 38. Which of the following is a characteristic of pure monopoly? close substitute products barriers to entry the absence of market power "price taking" 39. The clothing industry is an example of: pure competition. homogeneous oligopoly. monopolistic competition. pure monopoly. 40 Which of the following is the best example of oligopoly? women's dress manufacturing automobile manufacturing restaurants cotton farming 41. In an oligopoly, there are only a few buyers many sellers selling the standardized product a few sellers selling either standardized or differentiated product one seller selling an unique product

10 ECO 181 (F) / Page 10 of A nation's gross domestic product (GDP): is the dollar value of the total output produced within the borders of the nation. is the dollar value of the total output produced by its citizens, regardless of where they are living. can be found by summing C + In + S + Xn. is always some amount less than its C + Ig + G + Xn. 43. National income accountants can avoid multiple counting by: including transfers in their calculations. counting both intermediate and final goods. only counting final goods. only counting intermediate goods. 44. If intermediate goods and services were included in GDP: the GDP would then have to be deflated for changes in the price level. nominal GDP would exceed real GDP. the GDP would be overstated. the GDP would be understated. 45. In calculating GDP, governmental transfer payments, such as social security or unemployment compensation, are: not counted. counted as investment spending. counted as government spending. counted as consumption spending. 46. GDP excludes: the market value of unpaid work in the home. the production of services. the production of nondurable goods. positive changes in inventories.

11 ECO 181 (F) / Page 11 of 15 Use the following to answer question 47: Answer the next question(s) on the basis of the following data. All figures are in billions of dollars. Gross investment $ 18 National income 100 Net exports 2 Personal income 85 Personal consumption expenditures 70 Saving 5 Government purchases 20 Net domestic product The gross domestic product for the above economy is: $100. $95. $110. $ "Value added" refers to: any increase in GDP that has been adjusted for adverse environmental effects. the excess of gross investment over net investment. the difference between the value of a firm's output and the value of the inputs it has purchased from others. the portion of any increase in GDP that is caused by inflation as opposed to an increase in real output. 49. GDP data are criticized as being inaccurate measures of economic welfare because: they do not take into account changes in the amount of leisure. they do not take into account changes in product quality. they do not take into account the adverse effects of economic activity on the environment. of all of the above considerations. 50. A $200 price tag on a cashmere sweater in a department store window is an example of money functioning as a: unit of account. standard of deferred payments. store of value. medium of exchange.

12 ECO 181 (F) / Page 12 of When economists say that money serves as a store of value, they mean that it is: a way to keep wealth in a readily spendable form for future use. a means of payment. a monetary unit for measuring and comparing the relative values of goods. declared as legal tender by the government. 52. The money supply (M1) is comprised of: coins, paper currency, and checkable deposits. currency, checkable deposits, and Series E bonds. coins, paper currency, checkable deposits, and credit balances with brokers. paper currency, coins, gold certificates, and time deposits. 53. Which of the following is not part of the M2 money supply? money market mutual fund balances money market deposit accounts currency large ($100,000 or more) time deposits 54. Money market deposit accounts are included in: M1 only. both M1 and M2. both M2 and M3. M3 only. 55. Coins in people's pockets and purses are: included in M1, but not in M2. included in both M1 and in M2. included in M2, but not in M1. excluded from M1 and M2 because people can exchange them for Federal Reserve notes. 56. The asset demand for money is most closely related to money functioning as a: unit of account. medium of exchange. store of value. measure of value.

13 ECO 181 (F) / Page 13 of An increase in nominal GDP increases the demand for money because: interest rates will rise. more money is needed to finance a larger volume of transactions. bond prices will fall. the opportunity cost of holding money will decline. 58. If the quantity of money demanded exceeds the quantity supplied: the supply-of-money curve will shift to the left. the demand-for-money curve will shift to the right. the interest rate will rise. the interest rate will fall. 59. The major role of a commercial bank is to make mortgage loans sell shares and use proceeds to buy stocks receive deposits and make loans restrain growth of money supply 60 In a barter system, we would expect to see many different units of money money and goods exchanged for each other wide spread financial institutions goods traded directly for other goods

14 ECO 181 (F) / Page 14 of 15 SECTION B Answer any TWO questions. (40 marks) QUESTION 1 (a) Define Production Possibilities Curve. (2 marks) (b) Why is a Production Possibilities Curve bowed out? (6 marks) (c) Describe THREE factors that can cause Production Possibilities curve to shift outward. (12 marks) QUESTION 2 (a) With the aid of a diagram, explain shortage and surplus. (5 marks) (b) Describe FIVE determinants of supply. (10 marks) (c) Briefly differentiate between change in quantity supplied and change in supply. (5 marks) QUESTION 3 (a) Complete the following table: Output Variable cost Total cost Average Variable Cost (AVC) Average Total Cost (ATC) Marginal cost (MC) 1 $100 $500 $100 $500 $ (8 marks) (b) Using the above data, draw the AVC, ATC and MC curves. (4 marks)

15 ECO 181 (F) / Page 15 of 15 (c) Describe the relationship between marginal cost (MC), ATC and AVC curve. (d) Describe the fixed cost (FC) and average fixed cost (AFC) curve. (4 marks) (4 marks) QUESTION 4 (a) Explain FOUR reasons on why a country measures National Income. (8 marks) (b) (c) Explain FOUR problems faced in national income measurement. (8 marks) Giving suitable examples, explain the difference between GDP and GNP. (4 marks) QUESTION 5 Write short notes on the following: (a) FOUR characteristics of monopolistic competition. (8 marks) (b) THREE functions of a central bank. (6 marks) (c) THREE problems of barter system. (6 marks) - THE END - eco181f.doc/nisa