LUMS Economics Placement Test

(SAMPLE TEST)

LAHORE UNIVERSITY OF MANAGEMENT SCIENCES

LUMS Economics Placement Test

Instructions
You will be given three hour to work on the LUMS Placement Test, which consists of 3 multiplechoice sections of 1-hour each. All the sections carry equal marks. Sections Number of Questions

Section A: Microeconomics Section B: Macroeconomics Section C: Econometrics

25 M.C.Qs 25 M.C.Qs 3 Theoratical Questions

You should only use soft lead pencil for the multiple-choice sections. During the time allowed for one section, you are to work only on that particular section. The Supervisor will tell you when to start and stop. If you finish a section before time is called, you may check your work in that section, but you are not allowed to work on any other section. For each question in the test, read the given choices. After you have decided on your response to a question, encircle the correct choice or fill in the blanks. Give only one answer to each multiplechoice question. If you change an answer, be sure that all previous marks are erased completely. Incomplete erasures may be read as intended answers.

One-fourth of a point will be subtracted for each wrong answer from the points for right answers.

SECTION A: MICROECONOMICS Sample Questions

Attempt ALL questions in this section. Carefully encircle the best answers. Where necessary show your work.

1. The "deadweight loss" from a monopoly refers to a. the portion of a monopolist's profits that are above the competitive profit level. b. the increase in price due to the monopolization of a market. c. the inefficient use of factors of production by a monopoly. d. the loss of consumer surplus due to the monopolization of a market that is not transferred to another economic actor.

2. If a firm is a price taker in the input market but not in the output market, its marginal value product of labor a. exceeds the marginal revenue product of labor. b. equals its marginal revenue product of labor. c. is less than the marginal revenue product of labor. d. equals the marginal physical product of labor.

3. The slope of an individual's "consumption-leisure" budget constraint is a. 24 hours minus the number of leisure hours. b. total consumption divided by the wage rate. c. the real wage rate. d. the negative of the real wage rate.

4. Suppose that the market demand in a perfectly competitive industry is given by Qd = 70,000 5000P, and the market supply function is Qs = 40,000 + 2500P with P given in dollars. The market equilibrium price will be a. $4 b. $8 c. $12 d. None of the above

5. In long run equilibrium, all firms in the industry earn e. Positive economic profits f. Zero economic profits g. May or may not earn profits h. None of the above

STOP IF YOU FINISH BEFORE TIME IS CALLED, YOU MAY CHECK YOUR WORK ON THIS SECTION ONLY. DO NOT TURN TO ANY OTHER SECTION IN THE TEST BOOK.

SECTION B: MACROECONOMICS Sample Questions

Attempt ALL questions in this section. Carefully encircle the best answers. Where necessary show your work.
1. The Phillips curve under a version of adaptive expectations is:
P1 P b ( u u n )

Suppose b = 0.6, u n = 0.05 and the government wants to maintain unemployment at 0.02 for period 1 to 4. If P^ = 0.09, what would be the value of P^ i in the following 4 periods: P^ +1 = ___________________________________ P^ +2 = ___________________________________ P^ +3 = ___________________________________ P^ +4 = ___________________________________

The Phillips curve under Rational Expectations is:

e P1 P b (u u n ) 2. Which of the following statements is true given the above Rational Expectations Phillips Curve? (a) Government Aggregate demand management policy would always be ineffective. (b) Government can decrease unemployment below the natural rate if it systematically increases aggregate demand each year which is fully anticipated by the public. (c) Government can increase output above full employment level if it announces its planned expenditure in advance, and workers negotiate their wage contracts accordingly. (d) Government can decrease unemployment below the natural rate if it creates an unexpected increase in money supply.

3. An increase in inflationary expectations would lead to (a) (b) (c) (d) An upward shift of the Phillips curve. An increase in nominal wages. An increase in actual inflation. All of the above.

Question 4 and 5 are based on a model of a small open economy with a flexible exchange rate regime and perfect capital mobility. Starting from a position of long run equilibrium, the central bank buys bonds through open market operations. Suppose that the aggregate supply function is normal Keynesian (upward sloping) and the goods market is sluggish.

4. The open market operation will immediately result in: (a) (b) (c) (d) An increase in the domestic interest rate A decrease in the domestic interest rate No effect on the domestic interest rate Any one of the above

5. The open market operation would also immediately result in (a) (b) (c) (d) The exchange rate to depreciate. The exchange rate to appreciate. The exchange rate to remain unchanged. Any one of the above

STOP IF YOU FINISH BEFORE TIME IS CALLED, YOU MAY CHECK YOUR WORK ON THIS SECTION ONLY. DO NOT TURN TO ANY OTHER SECTION IN THE TEST BOOK.

SECTION C: ECONOMETRICS Sample Questions

Attempt ALL structured questions in this section.

Q.1

Consider the following model:

Y X u
Show that OLS estimator of is as follows:
XY X2

a. (i) (ii) b. c.

Prove that:
E ( )
2 ) = u Var( X2

Under what condition(s) will be BLUE? Show that is consistent estimator.

Q.2 (i) Consider the following production function:

Y AL K eu

Explain the procedure which we may follow to test the hypothesis that 1 (5) (ii) Suppose you have the estimated regression which is based on the data for the years 1962 to 1977:

Y 5807 3.24X

where S.E( 2 ) 1.634

Where Y = retail sales of passenger cars (thousands) and X = the real disposable income (i) (ii) Construct a 95% confidence interval for 2 given t / 2 (n 2) 2.160 Test the hypothesis that this interval includes 2 0 . If not, would you accept this null hypothesis?

Q.3

Explain the term Hetrosedasticity. Explain what sort of problems a researcher may encounter in the presence of Hetroscedasticity. Suggest some measure of removing such problem.

STOP IF YOU FINISH BEFORE TIME IS CALLED, YOU MAY CHECK YOUR WORK ON THIS SECTION ONLY. DO NOT TURN TO ANY OTHER SECTION IN THE TEST BOOK.