ECO105 (F) / Page 1 of 12 Section A INTI COLLEGE MALAYSIA FOUNDATION IN BUSINESS INFORMATION TECHNOLOGY (CFP) ECO105: ECONOMICS 1 FINAL EXAMINATION: JANUARY 2006 SESSION Instructions: This section consists of 40 questions. Answer ALL questions in the OMR sheet provided. All questions carry equal marks. Table 1 Guns (hundreds) 1 2 3 4 5 Butter (tons) 20 18 15 10 3 Table 1 shows the production-possibilities frontier for the economy of Madagascar. Answer questions 1 to 3 based on this table. 1) If this economy were to produce 3 (hundred) guns and only 12 (tons) of butter it would be operating beyond its production-possibilities frontier. it would be utilizing its resources with maximum efficiency it would be on its production-possibilities frontier it could utilize resources more efficiently to produce 3 more (tons of) butter without sacrificing any guns some change in technology must have occurred relative to the data in Table 1 2) The opportunity cost of increasing gun production from 3 (hundred) guns to 4 (hundred) guns is 1 ton of butter 5 tons of butter 3 hundred guns 7 tons of butter 15 tons of butter 3) As this economy increases its production of guns along the production-possibilities frontier, the opportunity cost of guns first rises and then falls rises continuously falls continuously remains constant falls and then rises
ECO105 (F) / Page 2 of 12 4) An improvement in production technology will cause the production-possibilities frontier to shift outward become more curved become less curved shift inward become linear 5) Which of the following is correct? Resources are land, labor, the price system, and capital the factors of production used to produce goods and services. the fundamental source of abundance only land and labor the inputs used in producing goods only 6) The production-possibilities frontier shows that production from given resources is limited that choosing to consume one good implies sacrificing other goods that producing more public goods reduces the available supply of private goods the maximum production of butter given the production of guns. All of the above 7) According to the concept of scarcity in economics wants will be fully satisfied sometime in the future. the wants of society cannot be satisfied by the goods and services that can be produced from given resources there are no free goods free goods and scarce goods are the same All of the above 8) Which of the following is correct? Macroeconomics studies the price of steel the relationship between inflation and interest rates the number of autos produced in one year the determinants of wheat production the market for medical services
ECO105 (F) / Page 3 of 12 9) The economic reason that the production-possibilities frontier is bowed out is that there are opportunity costs of foregone wheat involved in increasing the production of tanks. that society has to choose scarcity the law of increasing opportunity costs All of the above 10) The demand curve is downward-sloping because as income rises people spend less when the price of something goes down, people substitute other goods for it a higher price brings in more buyers the demand curve is not downward-sloping; it is upward-sloping None of the above 11) The number of personal computers sold annually in the United States has increased at a rapid rate. The price of personal computers has fallen. The rise in sales due to the lower price is called an increase in quantity demanded an increase in quantity supplied an increase in demand an increase in supply an inferior good 12) Table 2 P $10 8 6 4 2 0 Qd 3 7 10 14 20 30 Qs 20 15 10 7 3 0 The data in Table 2 show the supply and demand curves for Essentials of Economics textbooks. According to the data, at a price of $4 there is an excess supply of textbooks there is a shortage of textbooks the quantity supplied exceeds the quantity demanded by 7 units supply and demand are in equilibrium students will be able to purchase 14 textbooks
ECO105 (F) / Page 4 of 12 13) An increase in demand, ceteris paribus, will usually cause an increase in quantity demanded an increase in quantity supplied an increase in supply a higher quantity and a lower price a decrease in supply 14) An increase in the demand for wheat occurring at the same time as an increase in the supply of wheat must increase the price of wheat must reduce the price of wheat and the quantity of wheat sold must reduce the quantity of wheat sold must increase the quantity of wheat sold may increase or decrease the price of wheat but must reduce the quantity of wheat sold 15) Where the demand curve intersects the supply curve the price and quantity are in equilibrium consumers are willing to buy what sellers are willing to sell there is no shortage of the good the price will neither rise nor fall until something else changes All of the above 16) If there is a surplus of oil on the world market oil is no longer scarce at the prevailing price, the quantity demanded exceeds the quantity supplied at the prevailing price, the quantity supplied exceeds the quantity demanded the quantity supplied equals the quantity demanded many OPEC oil ministers will lose their jobs 17) To determine the price elasticity of demand for donuts in Denver, we compare the percentage change in the demand for donuts with the percentage change in the price of donuts. quantity of donuts demanded in Denver with the percentage change in price in Denver demand for donuts in Denver with the percentage change in income in Denver. price of donuts in Denver with the percentage change in the price of coffee in Denver. price of donuts in Denver with the percentage change in the quantity of muffins in Denver
ECO105 (F) / Page 5 of 12 18) An advance in production technology will increase a firm s costs allow firms to raise the price of their product shift the supply curve to the right shift the supply curve to the left not cause any change in supply curve 19) For demand to be elastic means that people do not change the quantity they demand when the price of the good changes a change in price leads to a smaller percentage change in the quantity demanded people substantially decrease the quantity of the good they buy if its price increases by a small percentage. a change in the quantity demanded is smaller than the change in price a change in price of the good does not affect its consumption 20) If the price elasticity of demand for moose hunting lessons is 4.23, then the demand for moose hunting lessons is elastic unit elastic inelastic perfectly unit elastic perfectly inelastic 21) Suppose the demand for peaches sold from one roadside stand in Georgia is perfectly elastic. This fact means that a 7 percent increase in the price charged by the owner of this stand leads to zero peaches sold by this stand no change in the quantity demanded at this stand a 7 percent decrease in the quantity demanded at this stand a 7 percent decrease in demand at this stand less than 7 percent decrease in demand at this stand 22) If a product is narrowly defined, it is likely to have many substitutes and therefore its demand is elastic have few substitutes, and therefore its demand is less elastic be unique, and therefore its demand is inelastic be unique and have many substitutes have no substitutes at all and therefore its demand its perfectly inelastic
ECO105 (F) / Page 6 of 12 23) Which statement about cost curves is false? The average cost curve intersects the marginal cost curve at the minimum point of marginal cost The difference between the average total cost curve and the average variable cost curve is average fixed cost The average fixed cost curve declines as output expands The fixed cost curve is a straight horizontal line. As more and more output is produced, the average total cost and average variable cost curves approach each other 24) The law of diminishing returns states that if increasing quantities of a variable factor are applied to a given quantity of fixed factors the marginal product of the variable factor will eventually decrease the marginal product will eventually decrease with average product remaining constant the marginal product becomes negative the total product cannot be increased the total output will be falling 25) Diseconomies of scale to a firm are shown graphically by a downward-sloping long-run average cost curve a horizontal long-run average cost curve a downward-sloping long-run marginal cost curve an upward-sloping long-run average cost curve an upward-sloping short-run average cost curve 26) Ms. Green quit her job as an electrician to open up a repair shop. In calculating costs, she should include the income she could have earned as an electrician as a cost not include income she could have earned because she has already quit her job include only real expenses because they are what the banks look at. ignore variable costs entirely none of the above is correct 27) The long-run average cost curve is U-shaped because of the law of diminishing returns marginal costs are decreasing as the output level is increased of economies of scale at low levels of production and diseconomies of scale at high levels of production fixed costs increase at the higher level of production of diseconomies of scale at low levels of production and economies of scale at high levels of production.
ECO105 (F) / Page 7 of 12 28) Ceteris paribus, a decrease in labor costs, a variable input, will cause a decrease in the firm's curve(s), leaving the remaining cost curves unaffected marginal and average variable cost marginal cost marginal cost, average variable cost and average total cost marginal cost, average fixed cost and average total cost marginal and average total cost 29) A local print shop hires an additional employee and as a result, the average number of customers served by the print shop increases. The analysis of this chapter tells us that the print shop's average variable cost will decrease average fixed cost will decrease marginal cost will decrease average variable cost will increase. marginal cost will increase 30) Marginal utility is the change in total utility that results from an increase in the price of the good a change in the budget line. a one-unit change in the quantity of a good consumed. a decrease in the price of the good an increase in the income 31) If the total utility of 2 bags of chips is 25, the total utility of 3 bags is 33, and the total utility of 4 bags is 40 units, then the marginal utility of the 3rd and 4th bags are 8 and 7, respectively 12.5 and 11, respectively 11 and 10, respectively 58 and 73, respectively 8 and 15, respectively 32) The concept of diminishing marginal utility is that increases in the consumption of a good lead to a decrease in total utility a decrease in marginal utility an increase in marginal utility no change in marginal utility none of the above
ECO105 (F) / Page 8 of 12 33) Carter spends his income on pizza and Pepsi. He maximizes his utility when he allocates his entire budget and buys pizza and Pepsi so that the marginal utility from pizza is equal to the marginal utility from Pepsi. marginal utility from both pizza and Pepsi is maximized marginal utility per dollar spent on pizza is equal to the marginal utility per dollar spent on Pepsi. total utility per dollar for both pizza and Pepsi are equal marginal utility from both pizza and Pepsi are equal to zero 34) In perfectly competitive markets, the market demand curve is perfectly elastic a horizontal line at the market price perfectly inelastic negatively sloped. positively sloped 35) In the short run, the profit-maximizing rules for a perfect competitive firm are P = minimum average cost and ATC = AVC. P = ATC and AVC = MC. P < ATC and P = MC P > AVC and P = MC P = AVC and P = MC 36) The characteristics of a perfectly competitive industry are price taking, homogeneous products, and significant barriers to entry. advertising and economies of scale price taking, homogeneous products, and ease of entry diseconomies of scale and high average fixed costs high fixed costs and low variable costs. 37) Which of the following is correct? A monopolist will sell less at a higher price has a marginal revenue less than price will produce where MR = MC is a price-maker All of the above
ECO105 (F) / Page 9 of 12 38) If a monopolist's demand is inelastic, total revenue will fall as price is lowered. total revenue will rise as price is lowered. total revenue will remain unchanged as price is lowered. total cost will rise as price is lowered. total cost will fall as price is lowered. 39) Which of the following is correct? A patent granting an inventor the sole right to produce a product promotes competition creates barriers to entry provides disincentives to invent lowers prices is economically worthless 40) An important difference between perfect competition and monopoly competition is that in monopoly competition, the individual firm is a price taker. in perfect competition, the individual firm is a price taker. in monopoly competition, the firm does not aim to maximize profit. in perfect competition, there are barriers to entry. in perfect competition, the product is differentiated.
ECO105 (F) / Page 10 of 12 Section B Instructions: This paper consists of FIVE (5) questions. Answer any THREE (3) questions in the answer booklet provided. All questions carry equal marks. Question 1 The table below shows the production possibilities for a nation: Production point A B C D E F G Ice-cream (gallons) 42 40 36 30 22 12 0 Shirts (units) 0 1 2 3 4 5 6 (i) Draw the production possibilities curve for this nation. (4 marks) (ii) (iii) Can the country produce a combination of 4 shirts and 36 gallons of ice cream? Explain your answer. (3 marks) Can the country produce a combination of 2 shirts and 22 gallons of ice cream? Explain your answer. (3 marks) Your friend is makes the following statement: Instead of attending microeconomics class for two hours, Kiki could have played tennis or watched a movie. Therefore, the opportunity cost of attending class is the tennis and the movie she had to give up. Is your friend s analysis correct or not? Explain your answer. (4 marks) Differentiate between positive and normative statements. Give appropriate examples. (6 marks)
ECO105 (F) / Page 11 of 12 Question 2 Suppose that the price of apples decreases and the quantity of apples in the market decreases. Suggest two reasons why this might have happened. (4 marks) A major freeze in Florida has reduced the orange yield this winter. Draw a graph to illustrate the effect of this freeze on the price and quantity in the orange market, and also in the peach market. (Assume that oranges and peaches are substitutes.) Explain your diagram clearly. (6 marks) Explain why the demand for a particular brand of fast food tends to be more elastic than the demand for all fast food. (4 marks) A B C D E Price (RM) 100 80 60 40 20 Quantity demanded (units per week) 40 60 80 100 120 The table above gives the demand schedule for a good. Using the midpoint method, find the price elasticity of demand between points A and B, between B and C, between C and D, and between D and E. (6 marks) Question 3 With the aid of a diagram, explain the relationship between marginal product and marginal cost of a firm. (6 marks) Professor Rush decided to quit teaching economics and opens a shoe store out at the mall. He gave up an annual income of $50,000 to open the store. A year after opening the shoe store, the total revenue for the year was $200,000. Rush s expenses were $30,000 for labor, rent was $18,000, and utilities were $1,200. He also had to purchase new shoes from manufacturers, at a cost of $60,000. To pay for his expenses, Rush had to use his personal funds of $60,000 that had been in a bank earning 8 percent per year. His entrepreneurial talent is estimated as $20,000. Calculate the following: (i) Accounting profit (2 marks) (ii) Implicit cost (2 marks) (iii) Economic profit (2 marks)
ECO105 (F) / Page 12 of 12 Output (oil changes per hour) Total cost (dollars per hour) 0 10 1 20 2 35 3 50 4 80 The above table gives the total cost schedule for oil changes at the local Jiffy Lube. (i) What is Jiffy Lube s total fixed cost? (2 marks) (ii) What is the average variable cost of 4 oil changes? (2 marks) (iii) What is the average fixed cost of 2 oil changes? (2 marks) (iv) What is the marginal cost of the 3rd oil change? (2 marks) Question 4 Perfectly competitive firms have total control over the price they set for their product. Explain why the previous statement is correct or incorrect. (4 marks) If the price received by a perfectly competitive firm is less than its average variable cost, what will the firm do in the short run? Why? (4 marks) c) Explain how a single-price monopoly determines its output and price. Compare this process to how a perfectly competitive firm determines its output and price. (Use one diagram for each type of firm) (12 marks) Question 5 What is law of diminishing marginal returns? Explain using appropriate diagrams. (8 marks) Differentiate between fixed cost and variable cost by giving suitable examples. (6 marks) Why is demand curve down sloping? Give THREE (3) reasons. The End Eco105(f)jan06/thiru/reformat (6 marks)