Cork Institute of Technology (Institiuid Teicneolaiochta Chorcai) Bachelor of Business (BBUSS_7_Y1) (BACCT_7_Y1) (BMNGT_7_22) Higher Certificate in Business (BBUSE_6_Y1) (BBUSA_6_Y1) Semester 1 Repeat Examination (Autumn 2008) EC1010 Introduction to Microeconomics (Econ 6003) (Time: 2 Hours) External Examiner: Dr. N Timoney. Internal Examiners:Ms A Conway, Mr. K Crilly, Mr. J Keane, Mr. E O Brien, Ms. C Twohig. Name: College ID Number: Class Group: Lecturer: Instructions Please read carefully! Sections Numbers of Questions to be attempted Percentage of Total Marks Available A 20 20 B 3 60 C 1 20 Section A: Section B: Section C: Red Ink: For each question in this section, you should circle the letter opposite the answer that you consider to be correct. In the event of there appearing to be more than one correct answer, you should circle the letter opposite the particular answer that you consider to be most correct. There is no negative marking for incorrect answers in this section. The answer to each question in this section must be answered in the space(s) provided within each question. This question must be answered on the lined pages attached at the end of this Question paper. You may not use red ink. Non-compliance with the above instructions will result in some of your answers not being graded. 1
Section A A1. Which of the following will not cause a shift in the demand curve for good A? A change in the price of the good A itself; A change in the price of a close substitute for good A; A change in the price of a highly complementary good to A; A successful advertising campaign promoting the use of good A. A2. A decrease in supply accompanied by an increase in demand, other things being equal, will cause: Price to increase, with effect on quantity uncertain; Both price and quantity to decrease; Both price and quantity to increase; Quantity to decrease and the effect on price uncertain. A3. If the prices of close substitutes for beer should rise dramatically and nothing else changes, then: The demand for beer will increase; The supply of beer will increase; The demand for beer will fall; The demand for, and supply of, the close substitutes will fall. A4. The price of apples will tend to fall if: There is a surplus at the prevailing price; The current price is above the equilibrium price; Quantity demanded is less than the quantity supplied at current prices; All of the above will cause the price of apples to fall. A5. If at the same time as input prices fall the government raises the rate of VAT charged on a product then: Supply will tend to decrease; Supply will tend to increase; There will be no affect on the supply as one will cancel out the other; The supply could either rise or fall depending on which is the greater change. 2
A6. Two goods are defined as being complementary products if: Their respective PEDs are both greater than one; Their respective YEDs are both equal; Their respective PEDs and YEDs are negative; Their XPED is negative. A7. Economists define inferior products as: Goods that are defective; Goods with a positive income effect; Goods with a negative income effect; Goods for which PED is greater than one. A8. The price elasticity of supply is defined as: % change in quantity supplied divided by the % change in price; % change in price divided by the % change in quantity supplied; % change in quantity supplied divided by the % change in income; % change in income divided by the % change in quantity supplied. A9. If a supply curve is elastic then: The elasticity coefficient is equal to infinity; The supply curve for the good is vertical; The elasticity coefficient is greater than 1; Both and above are correct. A10. Demand is likely to be more elastic due to all but one of the following: There are many close substitutes for the product available; Consumers spend a very small proportion of their income on the product; Consumers have a long period of time to adjust to the new prices; The product is a final product rather than an intermediate product. 3
A11. Economists use the term utility to mean: The value of a product before it has been advertised; The contribution that a good or service makes to social cost; The satisfaction that a consumer obtains from a good or service; Any characteristic of a good or service that cannot be measured. A12. A company knows that its product is demanded elastically. To maximize revenue it should: Increase price; Decrease price; Leave the price unchanged as it is impossible to affect total revenue; None of the above. A13. An improvement in technology will cause: The PPF to shift inwards towards the origin; The PPF to shift outwards away from the origin; The economy to move down the PPF which will not have shifted; The economy to shift upwards along the PPF. : A14. Economists use the term Marginal Utility (MU) to mean the: Additional satisfaction gained divided by the additional cost of the last unit; Total satisfaction gained when consuming a given number of units; The process of comparing marginal units of all goods, which could be purchased. Additional satisfaction obtained by consuming one extra unit of a good. A15. When Marginal Cost (MC) is greater than Average Cost (AC) then: AC must be rising; AC must be falling; AC is constant; None of the above as MC and AC are un-connected. 4
A16. In the short run: A firm s output is fixed; A firm s profit is fixed; At least one of the firm s inputs is fixed; A firm charges a fixed price. A17. A firm increases output from 4 to 6 units per week. As it does its total costs rise from 1200 to 1600. The firms Marginal Cost is: 200; 150; 300; Zero. A18. If a country has a comparative advantage in producing shirts, which one of the following is true? The country produces shirts more efficiently (i.e. using less resources) than other countries. The country produces shirts at a lower opportunity cost than other countries. The country produces shirts more inefficiently (using more resources) than other countries. The country produces shirts at a higher opportunity cost than other countries. A19. If in May 2008 1 = 0.7941 St, a good costing 28 St would have a Euro price of: 35.57; 35.37; 35.26; 35.55. A20. Which of the following EU countries is NOT currently in the Euro Zone? Greece; Austria; Denmark; Each of the above is not participating. 5
Section B B1. The following equations describe the supply and demand conditions for CIT Canteen specials: Qs = 20 + 2P Qd = 100 2P Complete the following Supply and Demand table. (5 marks) Price(P) 0 10 20 30 40 50 Qs Qd Sketch the supply and demand curves for the above. (6 marks) Determine the equilibrium price and quantity. (4 marks) Explain a Price Ceiling with the aid of a diagram (5 marks) 6
B2. Define Own Price Elasticity of Demand (PED) and state its formula. (5 marks) Explain briefly Cross Price Elasticity of Demand (XPED). (5 marks) Explain briefly Income elasticity of demand. (6 marks) If price increases by 5% and the quantity demanded reacts by falling by 10%, the demand for that product should be classified into which category of PED? (4 marks) 7
B3. The table below sets out the levels of total utility (TU) for each of three products depending on the quantity purchased and consumed. The table also gives the prices for the 3 products. The consumer has a budget of 200 to spend and wishes to maximize utility. There is no utility to be derived by saving any of the budget. Product 1 2 3 P = 10 P = 20 P = 30 Q TU MU MU/P TU MU MU/P TU MU MU/P 0 0 - - 0 - - 0 - - 1 25 45 80 2 45 87 155 3 60 127 220 4 70 161 280 5 75 187 330 6 76 202 360 Complete the table by filling in the values for MU and MU/P for each product; (14 marks) Identify from the completed table, the combination of the 3 products that yields the maximum level of total utility (TU), calculating as part of your answer the level of maximum TU and the cost of achieving this level of TU; (6 marks) 8
B4. Complete the cost, revenue and profit table below on the assumption that the firm employs a fixed amount of capital costing 600 per week, that each unit of labour employed costs 350 per person employed and that each unit of output can be sold at the same price of 30. (15 marks) Labour 0 1 2 3 4 5 6 7 8 Output 0 25 60 100 140 170 190 200 205 Fixed cost Variable cost Total cost Marginal cost Total revenue Marginal Revenue Profit/(Loss) Identify the profit maximising level of employment and output, and state the level of profit. (5 marks) 9
Section C C1. Differentiate between the concepts of Absolute Advantage and Comparative Advantage. (8 marks) Explain Absolute Advantage with the aid of an example. (12 marks) C2. What are Fixed and Floating Exchange Rates? (8 marks) If at the same time that the Euro is re-valued against the Dollar by 10%, the price of a good rises by 5% in Euro terms, what does this tell you about the Dollar price for that good? (12 marks) C3. Explain each of the following: The difference between Marginal Cost (MC) and Marginal Revenue (MR). (8 marks) Increasing and Constant returns to scale. (8 marks) Opportunity Cost (4 marks) 10
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