1 EC1000 MICROECONOMICS ' MOCK EXAM Time Allowed Two Hours (2 Hours) Instructions to candidates This paper is in two sections. Students should attempt ALL the questions in both Sections The maximum mark awarded for Section A is 70 marks. The maximum mark awarded for Section B is 15 marks. The maximum mark for the entire paper is 80. 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 2.5 marks. An incorrect answer will be given 1.5 negative marks. 1. If the relative price of a ticket to a concert is 3 times the price of a meal at a good restaurant, the opportunity cost of a concert ticket is the a. slope of the budget constraint. b. slope of the indifference curve. c. intercept on the concert axis. d. intercept on the restaurant axis. 2. If marginal cost is greater than average total cost then a. profits are increasing. b. economies of scale are becoming greater. c. average total cost remains constant. d. average total cost is increasing. 3. Suppose that scientists find evidence that proves chocolate pudding lowers cholesterol. We would expect to see a. no change in the demand for chocolate pudding. b. a decrease in the demand for chocolate pudding. c. an increase in the demand for chocolate pudding. d. a decrease in the supply of chocolate pudding. 4. An important difference between the situation faced by a profit-maximizing monopolistically competitive firm in the short run and the situation faced by that same firm in the long run is that in the short run, a. price may exceed marginal revenue; in the long run, price equals marginal revenue. b. price may exceed marginal cost; in the long run, price equals marginal cost. c. price may exceed average total cost; in the long run, price equals average total cost. d. there are many firms in the market; in the long run, there are only a few firms in the market..
2 5. Orange juice and apple juice are substitutes. Bad weather that sharply reduced the orange harvest would a. increase consumer surplus in the market for orange juice but decrease producer surplus in the market for apple juice. b. increase consumer surplus in the market for orange juice and increase producer surplus in the market for apple juice. c. decrease consumer surplus in the market for orange juice but increase producer surplus in the market for apple juice. d. decrease consumer surplus in the market for orange juice and decrease producer surplus in the market for apple juice. 6. Critics of free trade sometimes argue that allowing imports from foreign countries costs jobs domestically. An economist would argue that a. foreign competition may cause unemployment in import-competing industries, but the effect is temporary because other industries, especially exporting industries, will be expanding. b. foreign competition may cause unemployment in import-competing industries, but the increase in consumer surplus due to free trade is more valuable than the lost jobs. c. the critics are correct, so countries must protect their industries with tariffs or quotas. d. foreign competition may cause unemployment in import-competing industries, but the increase in the variety of goods consumers can choose from is more valuable than the lost jobs. 7. Suppose the price of Teletubbies dolls is reduced from 1.45 to 1.25 and, as a result, the quantity of Teletubbies dolls demanded increases from 2,000 to 2,200. Using the midpoint method, the price elasticity of demand for Teletubbies dolls in the given price range is a b c d..64. Scenario 1: Sheila offers to do Stephanie's housework for 20 per week. Stephanie's opportunity cost of doing housework is 30 per week, and Sheila's opportunity cost of doing housework is 10 per week. 8. Refer to Scenario 1. What will be Stephanie's gain in consumer surplus as a result of the proposed transaction? a. Stephanie will gain 30 per week. b. Stephanie will gain 20 per week. c. Stephanie will gain 10 per week. d. Stephanie will gain no consumer surplus. 9. Factors of production are a. used to produce goods and services. b. owned by firms. c. abundant in most economies. d. used by both firms and households.
3 10. Buyers of a product will pay the majority of a tax placed on a product when a. the tax is placed on the seller of the product. b. the demand is more elastic than supply. c. supply is more elastic than demand. d. the tax is placed on the buyer of the product. 11. When something of value has no price attached to it such as a public good a. externalities will be present. b. the good will be completely used up. c. only those who are better off have to pay. d. private companies will eventually produce the product and the good will no longer be free. price B A C D Figure 1 quantity 12. Refer to Figure 1. Total economic surplus would be represented by area a. A + B. b. B + C. c. C + D. d. A + D. 13. A decrease in population can be expected to a. raise land rent. b. increase the supply of land. c. decrease the demand for land. d. increase the demand for land. 14. Price ceilings and price floors a. are desirable because they make markets more efficient as well as equitable. b. cause surpluses and shortages to persist since price cannot adjust to the market equilibrium price. c. can be enacted to restore a market to equilibrium. d. are imposed because they can make the poor in the economy better off without causing adverse effects.
4 15. Suppose a producer is able to separate customers into two groups, one having a price inelastic demand and the other having a price elastic demand. If the producer's objective is to increase total revenue, she should a. increase the price charged to customers with the price elastic demand and decrease the price charged to customers with the price inelastic demand. b. decrease the price charged to customers with the price elastic demand and increase the price charged to customers with the price inelastic demand. c. charge the same price to both groups of customers. d. increase the price for both groups of customers. 16. Market power refers to the a. power of a single person or group to influence market prices. b. ability of a person or group of people to successfully market new products. c. power of the government to regulate a market. d. relative importance of a market to the overall economy. 17. Consider the following information about cricket bats at Woolworm Factory: Number of Workers Marginal Product Woolworm pays all its workers the same wage and labour is his only variable cost. From this information we can conclude that Woolworm's average variable cost decreases a. as output rises from 0 to 10, but rises after that. b. as output rises from 0 to 26, but rises after that. c. as output rises from 0 to 33, but increases after that. d. continually as output rises. Table 1 Labour Hours Needed to Make 1 Pound of: Meat Potatoes Farmer 8 2 Rancher 4 5 Pounds produced in 40 hours: Meat Potatoes Farmer 5 20 Rancher 10 8
5 18. Refer to Table 1. The Rancher has a comparative advantage in a. neither good, and the Farmer has a comparative advantage in both goods. b. both goods, and the Farmer has a comparative advantage in neither good. c. meat, and the Farmer has a comparative advantage in potatoes. d. potatoes, and the Farmer has a comparative advantage in meat. 19. Which of the following would definitely result in a higher price in the market for Snickers? a. demand increases and supply decreases b. demand and supply both decrease c. demand decreases and supply increases d. demand and supply both increase. 20. What happens to the price and quantity sold of a drug when its patent runs out? (i) The price will fall. (ii) The quantity sold will fall. (iii) The marginal cost of producing the drug will rise. a. (i) only b. (i) and (ii) c. (ii) and (iii) d. All of the above are correct. 21. The adage, "There is no such thing as a free lunch," is used to illustrate the concept of a. tradeoffs. b. scarcity. c. productivity. d. efficiency. 22. Consumer surplus is a. a buyer's willingness to pay minus the price. b. a buyer's willingness to pay plus the price. c. the price of the product minus the buyer's willingness to pay. d. when the buyer's willingness to pay and the price of the product are equal. 23. If the quantity supplied responds only slightly to changes in price, then a. supply is said to be elastic. b. increases in supply resulting from an increase in price will not shift the supply curve very much. c. supply is said to be inelastic. d. supply is said to be unit elastic. 24. Tesco stores are ubiquitous in the UK. Tesco buys their goods in large quantities and therefore at cheaper prices. Tesco also locates its stores where land prices are low, usually outside of the community business district. Many customers shop at Tesco because of low prices and free parking. Local retailers, like the corner shop in the Main Street, often go out of business because they lose customers. This story demonstrates that a. consumers are boycotting local retailers whose prices are relatively higher. b. there are diseconomies of scale in retail sales. c. there are economies of scale in retail sales. d. there are diminishing returns to producing and selling retail goods.
6 25. If one were to compare a competitive market to a monopoly that engages in perfect price discrimination, one could say that a. in both cases, total social welfare is the same. b. total social welfare is maximized in the competitive market, but not in the perfectly discriminating monopoly. c. in both cases, some potentially mutually beneficial trades do not occur. d. consumer surplus is the same in both cases. 26. The term which means whatever must be given up to obtain an item is a. efficiency. b. externality. c. opportunity cost. d. market failure. 27. International trade tends to occur whenever a. labour is cheaper in one country than in another. b. one of the trading nations is self sufficient and producing surplus goods. c. one nation can profit from trade at the expense of the other. d. both nations can benefit from trade. 28. The supply of a good will be more elastic the a. more the good is considered a luxury. b. broader the market is defined. c. more close substitutes the good has. d. longer the time period being considered.
7 SECTION B: Exercises All questions should be attempted. Each answer will be given up to 5 marks. There are no negative marks for incorrect answers. The total mark for the final exam is capped at 80. To this, the coursework marks will be added to obtain the final mark. 29. The following table illustrates the demand and supply functions in a market: Table 2 Price Quantity demanded Quantity supplied Determine the market equilibrium. Next suppose that the government levies a tax of 3 on this good. What is the fiscal revenue raised by the government? 30. A consumer, whose income is 800, consumes two goods, X and Y. When the price of good X is 5 and that of good Y is 2, the consumer buys 80 units of good X and 200 units of good Y. Now assume the price of good X becomes 6 and that of good Y 1.6. Might a rational consumer, whose preferences have not changed, choose to buy 90 units of good X and units of good Y? Justify your answer. 31. Consider again the demand schedule in Table 2. Now suppose that the good is produced by a monopolist with a constant unit production cost of 7. Determine the monopoly price and quantity. Calculate the monopoly deadweight loss.
8 Answer Section MULTIPLE CHOICE 1. A 2. D 3. C 4. C 5. C 6. A 7. D 8. C 9. A 10. C 11. A 12. A 13. C 14. B 15. B 16. A 17. B 18. C 19. A 20. A 21. A 22. A 23. C 24. C 25. A 26. C 27. D 28. D ANSWERS' EXERCISES 29. Without the tax, the equilibrium price is 8 and the quantity traded is 7. After the tax, the gross price is 9 and the net price is 6. This can be confirmed by noting that when the gross price is 9 the quantity demanded is 5, which is the same as the quantity supplied at a net price of 6. Since the new quantity is 5 and the unit tax is 3, the fiscal revenue is 5 x 3 = At the old prices, the consumer could have easily afforded the new suggested consumption bundle, as total expenditure would have been 90 x x 2 = =
9 775. Since the consumer chose the bundle X=80, Y=200, then he or she must strictly prefer this to the alternative, feasible bundle X=90, Y= But the old bundle X=80, Y=200 is still just affordable at the new prices. If, at the new prices, the consumer opted for the new suggested bundle, he or she would contradict the previous choice. 31. From the following table, it follows that the optimal monopoly price is 9 and the corresponding output is 5. Price Quantity Total revenue Total cost Profit The competitive and efficient output is 9, i.e. the quantity associated with a price equal to the unit cost. The monopoly deadweight loss is the area of a triangle the height of which is the price cost margin (9-7) and the length of which is the gap between efficient output and monopoly output (9-5). Thus, the monopoly deadweight loss is 2 x 4 x ½ = 4.