No. of Pages: (A)
No. of Questions:
11
29
EC1001
master 2009
JANUARY EXAMINATIONS 2009
Subject
ECONOMICS
Title of Paper
EC1000 MICROECONOMICS
Time Allowed
Two Hours (2 Hours)
______________________________________________________________________________________________________
Instructions to candidates
This paper is in two sections. Students should attempt ALL the questions in Section A and ONE in Section
B. The maximum mark awarded for Section A is 75 marks. The maximum mark awarded for Section B is 33
marks. The maximum mark for the entire paper is 100 (any marks over 100 are disregarded).
______________________________________________________________________________________________________
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. 3/(1.35) marks (this is 3 divided by 1.35) for each
right answer, -1/(1.35) marks (this is 1 negative mark divided by 1.35) for each wrong
answer, and Zero mark if no answer is given.
Figure 9-5
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EC1001 A - Macroeconomics I
EC1001 A
1. Refer to Figure 9-5. The amount of deadweight loss caused by the tariff equals
a. £100.
b. £200.
c. £400.
d. £500.
Figure 21-9
2. Refer to Figure 21-9. Assume that the consumer depicted in the figure has an income of £100. Which of
the following price-quantity combinations would be on her demand curve for marshmallows if the price of
chocolate chips is £10?
a. £2.50, 4
b. £2.50, 9
c. £5, 4
d. £5, 9
3. A total-cost curve shows the relationship between the
a. quantity of an input used and the total cost of production.
b. quantity of output produced and the total cost of production.
c. total cost of production and profit.
d. total cost of production and total revenue.
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4. Four friends who love cricket decide to pool their financial resources and equally share the cost of a five
day rent of a flat near Lords for the decisive Ashes test match. Unfortunately the flat does not come with
maid service. Everyone values clean dishes, but the fact that unwashed dishes pile up in the sink would
best be explained by an economist who understands that clean dishes in the cupboard reflect
a. a common resource problem.
b. a problem similar to cost-benefit analysis for public projects.
c. household behavior of the invisible hand.
d. All of the above are correct.
Figure 2-4
5. Refer to Figure 2-4. The opportunity cost of getting 15 additional toasters by moving from point D to
point C is
a. 10 toothbrushes.
b. 20 toothbrushes.
c. 30 toothbrushes.
d. It is impossible for the economy to move from point D to point C.
6. Refer to Figure 2-4. The opportunity cost to the economy of getting 30 additional toothbrushes by moving
from point A to point D is
a. 10 toasters.
b. 15 toasters.
c. 20 toasters.
d. 25 toasters.
7. The producer that can produce a product with lower opportunity cost
a. has a comparative advantage in the production of that good.
b. has an absolute advantage in the production of that good.
c. should import that product.
d. Both b and c are correct.
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8. Your younger sister has been selected to play for Englands U13 girls. She needs £50 to buy a new cricket
bat. She has opened a lemonade stand to make the money she needs. She currently is charging 25 cents
per cup, but wants to adjust her price to earn the money faster. If you know that the demand for lemonade
is elastic, what is your advice to her?
a. Leave the price the same and be patient.
b. Raise the price to increase total revenue.
c. Lower the price to increase total revenue.
d. There isn't enough information given to answer this question.
9. When the United States engages in international trade with China,
a. China reaps economic benefits and the United States loses.
b. both China and the United States reap economic benefits.
c. it is an equal tradeoff so neither country benefits nor loses.
d. China loses and the United States reaps economic benefits.
10. The point of tangency which characterizes long-run equilibrium for a monopolistically competitive firm
always occurs at a certain level of output; call that level of output Q 1. Then Q1
a. exceeds the level of output at which marginal revenue equals marginal cost.
b. exceeds the level of output at which marginal cost equals average total cost.
c. falls short of the level of output at which marginal revenue equals zero.
d. All of the above are correct.
Use the following information to answer the following questions.
Table 13-1
Measures of Cost for Freddie F’s Cricket Helmets
Quantity
Variable
Total
Fixed
of Cricket
Costs
Costs
Costs
Helmets
0
1
2
3
4
5
6
£10
£ 1
£ 3
£ 6
£10
£13
£16
£25
£21
£10
11. Refer to Table 13-1. What is the variable cost of producing five Cricket Helmets?
a. £13.00
b. £14.00
c. £15.00
d. It can't be determined from the information given.
12. Refer to Table 13-1. The average fixed cost of producing five Cricket Helmets is
a. £1.00.
b. £2.00.
c. £3.00.
d. None of the above are correct.
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13. A drawback of government provision of a public good is that
a. government programs may reflect political considerations rather than economic
efficiency.
b. taxes have to be raised to pay for the good.
c. the government does not provide enough of any public good.
d. it would be cheaper for the private sector to provide the good.
14. Economists normally assume that the goal of a firm is to
a. maximize its total revenue.
b. maximize its profit.
c. minimize its explicit costs.
d. minimize its total cost.
15. If the demand for automobiles increases, which of the following markets would also experience an
increase in demand?
a. automobile workers
b. bicycle manufacturers
c. bus drivers
d. financial analysts
16. Since natural monopolies have a declining average cost curve, regulating natural monopolies by setting
price equal to marginal cost would
a. cause the monopolist to operate at a loss.
b. result in a less than optimal total surplus.
c. maximize producer surplus.
d. All of the above are correct.
17. Assume a certain firm regards the number of workers it employs as variable, and that it regards the size of
its factory as fixed. This assumption is often realistic
a. in the short run, but not in the long run.
b. in the long run, but not in the short run.
c. both in the short run and in the long run.
d. neither in the short run nor in the long run.
18. On a 100-acre farm, a farmer is able to produce 3,000 bushels of wheat when he hires 2 workers. He is
able to produce 4,400 bushels of wheat when he hires 3 workers. Which of the following possibilities is
consistent with the property of diminishing marginal product?
a. The farmer is able to produce 5,600 bushels of wheat when he hires 4 workers.
b. The farmer is able to produce 5,800 bushels of wheat when he hires 4 workers.
c. The farmer is able to produce 6,000 bushels of wheat when he hires 4 workers.
d. All of the above are correct.
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EC1001 A - Macroeconomics I
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19. Consider the following information about baseball production at Kevin's Cricket Factory:
Worker
1
2
3
4
5
6
7
Marginal Product
3
5
8
10
7
4
2
Bob pays all his workers the same wage and labor is his only variable cost. From this information we can
conclude that Kevin'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.
20. People have little incentive to produce a public good because
a. the social benefit is less than the private benefit.
b. the social benefit is less than the social cost.
c. there is a free-rider problem.
d. there is a tragedy of the commons.
Figure 6-3
21. Refer to Figure 6-3. In panel (b), at the actual price there will be
a. a shortage of wheat.
b. equilibrium in the market.
c. a surplus of wheat.
d. an excess demand for wheat.
22. Once the demand curve for a product or service is drawn, it
a. can shift either right or left.
b. remains stable over time at a given price.
c. is possible to move up or down the curve, but the curve will not shift.
d. None of the above is possible.
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EC1001 A - Macroeconomics I
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Figure 6-8
23. Refer to Figure 6-8. The equilibrium price in the market before the tax is imposed is
a. £8.00.
b. £6.00.
c. £5.00.
d. £3.00.
24. When a firm pays its workers above-equilibrium wages,
a. the moral-hazard problem is always worsened as a result.
b. the adverse-selection problem is always worsened as a result.
c. it may be because efficiency-wage theories are valid.
d. All of the above are correct.
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EC1001 A - Macroeconomics I
EC1001 A
Use the following information to answer the following questions.
Two cigarette manufacturers (Firm A and Firm B) are faced with lawsuits from states to recover the health
care related expenses associated with cigarette smoking. Both cigarette firms have evidence that indicates
that cigarette smoke causes lung cancer (and other related illness). The European Union does not have
access to the same data used by cigarette manufacturers and thus will have difficulty recovering full costs
without the help of at least one cigarette firm study. Each firm has been presented with an opportunity to
lower their liability in the suit if they cooperate with lawyers representing the European Union.
Table 16-3
Firm B
Concede that
cigarette smoke
causes lung cancer
Argue that there
is no evidence that
smoke causes cancer
Firm A
Concede that
cigarette smoke
causes lung cancer
Argue that there is no
evidence that smoke
causes cancer
Firm A profit = £–20 b
Firm B profit = £–15 b
Firm A profit = £–50 b
Firm B profit = £–5 b
Firm A profit = £–5 b
Firm B profit = £–50 b
Firm A profit = £–10 b
Firm B profit = £–10 b
25. Refer to Table 16-3. When this game reaches a Nash equilibrium, profits for firm A and firm B will be
a. £-5 b and £-50 b, respectively.
b. £-10 band £-10 b, respectively.
c. £-20 b and £-15 b, respectively.
d. £-50 b and £-5 b, respectively.
Table 18-1
Quantity of
Labour
1
2
3
4
5
Number of Cricket balls
Per Day
100
240
360
440
500
26. Refer to Table 18-1. This table describes the number of cricket balls a manufacturer can produce per day
with different quantities of labour. Each cricket ball sells for £5 in a competitive market. The value of
marginal product when marginal product is maximized is
a. 140 cricket balls.
b. £300.
c. £400.
d. £700.
27. Which of the following goods are not sold in monopolistically competitive markets?
a. CDs
b. books
c. cookies
d. wheat
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EC1001 A - Macroeconomics I
EC1001 A
28. Import quotas and tariffs have each of the following in common EXCEPT
a. the domestic price of the good increases.
b. consumer surplus increases.
c. producer surplus increases.
d. deadweight losses occur.
29. Freddie F's Cricket Helmet factory wants to estimate how responsive Cricket Helmets are to a change in
Cricket Bats prices. To accomplish this task, which of the following data would NOT be needed?
a. percentage change in Cricket Helmet price
b. original price of Cricket Bats
c. new quantity of Cricket Helmets sold
d. original quantity of Cricket Helmets sold
30. In a competitive market, a firm's supply curve dictates the amount it will supply. In a monopoly market
the
a. same is true.
b. supply curve conceptually makes sense, but in practice is never used.
c. supply curve will have limited predictive capacity.
d. decision about how much to supply is impossible to separate from the demand curve it
faces.
Scenario 3-1
Jill can sew a child's dress in 3 hours and can knit a baby's blanket in 2 hours. Sarah can sew a child's
dress in 6 hours and can knit a baby's blanket in 3 hours. Use this information to answer the following
questions.
31. Refer to Scenario 3-1. Jill should specialize in
a. sewing.
b. knitting.
c. both activities.
d. neither activities.
32. Market failure can be caused by
a. low consumer demand.
b. government intervention and price controls.
c. externalities and market power.
d. high prices and foreign competition.
33. When buyers in a competitive market take the selling price as given, they are said to be
a. market entrants.
b. monopolists.
c. free riders.
d. price takers.
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EC1001 A - Macroeconomics I
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Figure 13-8
34. Refer to Figure 13-8. The firm experiences diseconomies of scale if it changes its level of output
a. from Q1 to Q2.
b. from Q2 to Q3.
c. from Q3 to Q4.
d. from Q4 to Q5.
SECTION B
Answer one and only one of the questions numbered 35 to 38. Do NOT answer more than one question
from this section. The maximum number of marks awarded for this Section is 33.
35. Using the graph, assume that the government imposes a £1 tariff on hammers. Answer the following
questions given this information.
a.
b.
c.
d.
e.
f.
g.
h.
i.
What is the domestic price and quantity demanded of hammers after the tariff is imposed?
What is the quantity of hammers imported before the tariff?
What is the quantity of hammers imported after the tariff?
What would be the amount of consumer surplus before the tariff?
What would be the amount of consumer surplus after the tariff?
What would be the amount of producer surplus before the tariff?
What would be the amount of producer surplus after the tariff?
What would be the amount of government revenue because of the tariff?
What would be the total amount of deadweight loss due to the tariff?
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EC1001 A - Macroeconomics I
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36. Answer both (a) and (b).
(a) The production function depicts a relationship between which two variables? Also, draw a production
function that exhibits diminishing marginal product.
(b) Describe the difference between a diminishing marginal product of labor and a negative marginal
product of labor. Why would a profit-maximizing firm always choose to operate where marginal product
of labor is decreasing (but not negative)?
37. Describe the source of tension between cooperation and self-interest in a market characterized by
oligopoly. Use an example of an actual cartel arrangement to demonstrate why this tension creates
instability in cartels.
38. Suppose we are analyzing the market for hot chocolate. For each of the scenarios described below,
graphically illustrate the impact each of the following would have on demand or supply. Also show how
equilibrium price and quantity have changed, and explain briefly in word your argument..
a. Winter starts and the weather turns sharply colder.
b. The price of tea, a substitute for hot chocolate, falls.
c. The price of cocoa beans decreases.
d. The price of whipped cream falls.
e. A better method of harvesting cocoa beans is introduced.
f. Research by the BMA proves that hot chocolate cures acne.
g. Protesting farmers dump millions of gallons of milk, causing the price of milk to rise.
h. Consumer income falls because of a recession and hot chocolate is considered a normal good.
i. Producers expect the price of hot chocolate to increase next month.
j. Currently, the price of hot chocolate is £0.50 per cup above equilibrium.
11
ID: A
master 2009
Answer Section
MULTIPLE CHOICE
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
B
D
B
A
D
C
A
C
B
C
C
B
A
B
A
A
A
A
C
C
C
A
B
C
C
D
D
B
A
D
A
C
D
D
1
ID: A
SHORT ANSWER
35.
a. £6, 84
b. 66
c. 44
d. £384
e. £294
f. £45
g. £80
h. £44
i. £11
36. (a) It depicts a relationship between output and a given input. The graph should show output increasing,
but at a decreasing rate as inputs increase.
(b)
Diminishing marginal product of labor means that the last worker hired contributes less to the total output
of the firm than the worker that was hired just previous to her. Negative marginal product of labor
suggests that the last person hired actually causes total output of the firm to decline. If wages are constant
and marginal product is decreasing, it forces the firm to evaluate the benefit of hiring (added revenue)
versus the added cost of hiring (wage). In competitive markets, the cost and benefit converge only when
marginal product declines. If marginal product of labor is negative, hiring an additional worker would
actually decrease revenue.
37. The source of the tension exists because total profits are maximized when oligopolists cooperate on price
and quantity by operating as a monopolist. However, individual profits can be gained by individuals
cheating on their cooperative agreement. This is why cooperative agreements among members of a cartel
are inherently unstable. This is evident in the problem OPEC experiences in enforcing the cooperative
agreement on production and price of crude oil.
2
ID: A
38.
3
ID: A
4