ECO 185 (R) / Page 1 of 10 INTI COLLEGE MALAYSIA UNIVERSITY FOUNDATION PROGRAMME ECO 185 : BASIC ECONOMICS 1 RESIT EXAMINATION : APRIL 2003 SESSION Answer ALL questions in SECTION A in the OMR sheet provided and THREE (3) out of FIVE (5) questions in SECTION B in the answer booklet provided. SECTION A : Multiple choice. Answer ALL questions. 1. The existence of scarcity implies that A. there are no free goods. B. an economy is underdeveloped. C. households, firms and governments must make choices. D. there is no net saving. 2. An innovator is defined as an entrepreneur who A. makes basic policy decisions in a business firm B. combines factors of production to produce a good or service C. invents a new product or process for producing a product D. introduces new products on the market or employs a new method to produce a product 3. A production possibility curve does not illustrate A. scarcity B. monetary exchange C. opportunity cost C. attainable and unattainable points.
For questions 4 to 7, see the Production possibilities curve below ECO 185 (R) / Page 2 of 10 Microchips ( 000) A C D B Chocolate( 000) Figure 1: Production Possibilities Curve 4. At point A on the production possibilities curve in the above illustration, A. microchips production is inefficient B. chocolate production is inefficient C. the economy is employing all its resources D. the economy is not employing all its resources 5. Unemployment and production inefficiency would best be represented in the graph by point: A. A B. B C. C D. D 6. The choice of point B over point A as the optimal production mix for society would be based on A. productive efficiency B. full employment of resources C. the law of increasing opportunity costs D. a comparison of marginal costs and benefits 7. Economic growth could be represented by A. a movement from point A to point B B. a movement from point B to point A C. a shift in the production possibilities curve out to point C D. a shift in the production possibilities curve out to point D 8. Which of the following is not an assumption of production possibility curve? A. the factors of production are held constant. B. the firm only produces two goods. C. the technological advancement is held constant. D. all the resources have been used inefficiently.
9. A rightward shift in the demand curve for product C might be caused by: A. an increase in income if C is an inferior good. B. a decrease in income if C is a normal good. C. a decrease in the price of a product that is a close substitute for C. D. a decrease in the price of a product that is complementary to C ECO 185 (R) / Page 3 of 10 The following questions 10 to 13 refer to situation 1 below: Situation 1: Regarding butter, margarine and bread Butter and Margarine are substitutes. Butter and breads are complements. Butter is a normal good. During war last year, three butter-making factories were damaged. 10. As a result of the war, what would you expect? A. the price of butter would increase, the supply of butter would increase and the quantity demanded of butter would decrease B. the supply of butter decreased, the price of butter would increase and the quantity demanded of butter would decrease C. the supply of butter decrease, the price of butter would increase and demand of butter would increase D. the price of butter would increase and both quantity of butter supplied and the quantity of butter demanded increased. 11. The war that destroyed part of the butter production would have caused equilibrium price of margarine to and the equilibrium quantity of margarine to. A. decrease ; decrease B. increase ; increase C. increase ; decrease D. decrease ; increase 12. The war that damaged three of the butter production factories would have caused A. an increase in the demand for breads B. a decrease in the demand for breads C. an increase in the quantity demanded for breads D. a decrease in the quantity demanded for breads 13. Suppose consumers income decreased at the same time as the damage to the butter making factories. Ceteris paribus, in the market for butter this would have caused A. the equilibrium quantity to decrease. The equilibrium price is indetermined B. the equilibrium price to decrease. The equilibrium quantity is indetermined. C. the equilibrium price to increase and the equilibrium quantity to decrease. D. both the equilibrium price and quantity to decrease.
ECO 185 (R) / Page 4 of 10 14. A change in which of the following shifts the demand curve? A. The number of sellers in the market B. The price of the commodity itself. C. The technology with which the commodity is produced D. The tastes and preferences of consumers Use the following to answer question 15: 15. Refer to the above diagram, which shows demand and supply conditions in the competitive market for product X. Other things equal, a shift of the supply curve from S0 to S1 might be caused by a(n): A. increase in the wage rates paid to laborers employed in the production of X. B. government subsidy per unit of output paid to firms producing X. C. decline in the price of the basic raw material used in producing X. D. increase in the number of firms producing X. 16. A change in which of the following will NOT shift the demand curve for vegetable? A. increase in income. B. increase in price of vegetable seeds. C. increase in number of vegetable growers. D. growth in the community. 17. In which of the following situations is the demand for a product said to be price elastic? A. An increase in price brings about a small decease in the quantity demanded B. The quantity demanded responds to a change in price C. A decrease in price brings about a large increase in quantity demanded D. An increase in price induces consumers to spend less on the product
ECO 185 (R) / Page 5 of 10 18. If the decrease in price of A results in less of good of B sold. This would mean that A and B are A. normal goods B. unrelated goods C. complementary goods D. substitute goods 19. If the quantity supplied increases by 32% when price increases by 8%, the price elasticity of supply is A. equals to 4 B. equals to 4 C. equals to 0.25 D. greater than 0.25 but less than 4 20. Suppose that last month the price of sausages increases from $2.00 to $2.20. At the same time, the quantity demanded decreases from 100 to 90. The price elasticity of demand for sausage in absolute terms is A. 0.02 B. 0.9 C. 1.1 D. None of above 21. For which pair of commodities are the cross price elasticity of demand most likely to be negative? A. cinema tickets and videos B. first and second class rail tickets C. salt and sugar D. petrol and cars Use the information in table below to answer questions 22 to 24 Table : Quantity and total utility of ice-cream and chocolate Quantity Ice-cream Price $3.00 each Total utility Chocolate Price $5.00 each Total utility 1 60 75 2 114 125 3 159 165 4 189 190 5 204 200 Ms. Caroline derives utility by consuming ice-creams and chocolates as shown in the table above. If the price of ice-cream is $3.00 each while price of chocolate is $5.00 each and Ms Caroline wants to spend $14.00 on these two fruits. 22. What is the marginal utility of consuming the forth (4 th ) chocolate? A. 75 B. 50 C. 40 D. 25
23. What combination of ice-cream and chocolate will give her maximum utility? ECO 185 (R) / Page 6 of 10 A. 3 ice-creams and 1 chocolate B. 3 ice-creams and 2 chocolates C. 3 ice-creams and 3 chocolates D. 1 ice-cream and 3 chocolates 24. If the price of chocolate fell to $4.00 each and Ms. Caroline has been given extra $10.00 to spend. What combinations will give her maximum utility? A. 5 ice-creams and 5 chocolates B. 4 ice-creams and 4 chocolates C. 4 ice-creams and 3 chocolates D. 3 ice-creams and 4 chocolates Use the following information to answer question 25-26 Joe wants to start his own business. The business he wants to start will require that he purchase a factory that costs $300,000. He is planning to use $100,000 of his own money, and borrow an additional $200,000 to finance the factory purchase. Assume the relevant interest rate is 10 percent. 25. What is the explicit cost of purchasing the factory for the first year of operation?a. A. $10,000 B. $20,000 C. $30,000 D. $40,000 26. What is the opportunity cost of purchasing the factory for the first year of operation? A. $10,000 B. $20,000 C. $30,000 D. $40,000 27. If a firm produces nothing, which of the following costs will be zero? A. variable cost B. total cost C. average cost D. opportunity cost 28. The marginal product of labor can be defined as (where denotes change ) A. output/ labor B. labor/ output C. output/ quantity D. labor/ total cost 29. Average total cost tells us A. the cost of a typical unit of output, if total cost is divided evenly over all the units produced. B. the cost of the last unit of output, if total cost does not include a fixed cost component. C. the variable cost of a firm that is producing at least one unit of output. D. the total cost of the first unit of output, if total cost is divided evenly over all the units produced.
ECO 185 (R) / Page 7 of 10 30. If marginal cost is above average total cost, average total cost will A. be maximized B. decrease C. increase D. remain constant 31. The demand curve for a monopoly A. lies below the marginal revenue curve B. lies above of the marginal revenue curve C. is horizontal D. coincides with the marginal revenue curve 32. If a firm faces a horizontal demand curve for the product, then A. it is not a price taker B. it will want to lower its price to increase sales C. it is a price maker D. its marginal revenue curve is equal to the price of the product. 33. When marginal revenue equals marginal cost A. the firm must be generating economic profits. B. the profit maximizing firm should always increase its level of production. C. the firm must be generating economic losses. D. losses may be minimized, rather than profits being maximized. 34. Since a competitive firm has many substitute goods, it faces a demand curve that is A. perfectly inelastic. B. perfectly elastic. C. inelastic only over a certain region. D. unit-elastic. 35. Which applies to the long run equilibrium of the firm in both perfect competition and monopoly? A. Marginal cost equals to average cost B. Marginal revenue equals to average revenue C. Marginal revenue equals to marginal cost D. Average revenue equals to marginal cost 36. Profit maximizing firms want to maximize the difference between A. total revenue and marginal cost. B. total revenue and total cost. C. marginal revenue and marginal cost. D. marginal revenue and average cost.
37. In perfect competition, a firm that maximizes its profit will sell its product ECO 185 (R) / Page 8 of 10 A. below the market price B. at the market price C. above the market price D. below the market price if its supply curve is inelastic and above the market price if its supply curve is elastic 38. When firms are said to be price takers, it implies that if a firm raises its price, A. buyers will go elsewhere. B. buyers will pay the higher price in the short run. C. competitors will also raise their prices. D. firms in the industry will exercise market power. 39. What is the monopolist's profit under the following conditions? The profit-maximizing price charged for goods produced is $12. The intersection of the marginal revenue and marginal cost curves occurs where output is 15 units and marginal cost is $6. A. $90 B. $100 C. $180 D. Not enough information is given. 40. Your factory has 20 workers and is producing 800 units per day. You employ a new worker and the output increases to 820 units per day. Which of the following is true? A. the marginal product rises with the additional worker B. the average product falls with the additional worker C. the average product rises with the additional worker D. the total product falls with the additional worker SECTION B : Answer any THREE (3) questions out of FIVE (5) questions. Question 1 (a) Draw a production possibilities curve representing a country s production of agricultural and capital goods. Show what will happen to the production possibilities curve if (i) The level of technology improves rapidly in the production of capital goods than agricultural goods. (4 marks) (ii) An increase in demand for agricultural products. (4 marks) (iii) The unemployment rate falls from 7 to 5 percent of the labor force. (4 marks)
ECO 185 (R) / Page 9 of 10 (b) Using the marginal cost and marginal benefit analysis, explain how the allocative efficiency is achieved. Does every point on the production possibilities curve indicate allocative efficiency? (8 marks) Question 2 (a) Using DD-SS curves, explain the effects of the events below on equilibrium price and quantity of breakfast cereal. (i) Wheat harvest increased significantly after the usage of new fertilizer. (3 marks) (ii) Taste shift in favor of porridge. (3 marks) (iii) A flood destroyed half of the wheat crops and consumer s income increases. (Assuming breakfast cereal is a normal good) (4 marks) (b) Define income elasticity of demand. Assume that you are a major producer of both white sliced bread and whole-meal bread. Research indicates that the income elasticity of demand for white sliced bread is 2 and for whole-meal bread is 1.5. If average incomes are expected to increase by 15% over the next four (4) years, what are the implications for quantity demanded of each type of bread? (10 marks) Question 3 (a) Explain the difference between the Law of Diminishing Marginal Utility and Law of Diminishing Marginal Return. (10 marks) (b) How does a monopoly firm protect its profit from competitors? (10 marks) Question 4 (a) (b) A perfectly competitive firm will not suffer losses in the long run. Explain why this statement is true or false. (10 marks) The marginal cost curve of a perfectly competitive firm will indicate how much a firm is willing to supply. Explain this statement. (10 marks)
ECO 185 (R) / Page 10 of 10 Question 5 Write short notes on any TWO(2) of the following : (a) The factors that would lead to lower long run average cost curve. (10 marks) (b) Long run industry supply curve for an increasing cost industry in a perfectly competitive environment. (10 marks) (c) Explain in detail the characteristics of a monopolist. (10 marks) - The End - eco185r/adelinatan/apr03/lml