EC1301

NATIONAL UNIVERSITY OF SINGAPORE

EC1301 PRINCIPLES OF ECONOMICS Semester 1 AY 2009/2010 MID-TERM EXAM 30th September 2009 Time Allowed: 1 Hour

INSTRUCTIONS TO CANDIDATES
1.

This examination paper comprises ELEVEN (11) printed pages, including this page. There are FORTY (40) multiple choice questions. Answer ALL questions. The total mark for this examination is 30 marks. This is a CLOSED book examination. Use the bubble form for your answers. You must submit this examination question and the bubble forms. NAME: ___________________________________________ MATRICULATION NUMBER: ______________________

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3. 4. 5.

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MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1. A. B. C. D. Economics is concerned with using scarce productive resources efficiently in attempting to satisfy societys economic wants. This statement is positive, but incorrect. positive and correct. normative, but incorrect. normative and correct. When society requires that firms reduce pollution, A. there is no tradeoff, since everyone benefits from reduced pollution. B. there is no tradeoff for society as a whole, since the cost of reducing pollution falls only on the firms affected by the requirements. C. there is a tradeoff only if some firms are forced to close. D. there is a tradeoff because of reduced incomes to the firms owners and workers. Causes of market failure include externalities and foreign competition. market power and incorrect forecasts of consumer demand. externalities and market power. incorrect forecasts of consumer demand and foreign competition. 4. A. B. C. D. The economic perspective used in customer decision making at fast-food restaurants is reflected in customers selecting the shortest line. decisions for which marginal costs exceed marginal benefits. all customer lines tending to be of different length. irrational purchasing of high-fat-content food. 5. Which of the following is a marginal question? A. If I buy a used laptop computer instead of a new one, how much money do I save? B. If I play the lottery, what are my chances of winning? C. If I find a job, how much income tax would I have to pay? D. If I skip another lecture, how much would my final grade suffer? The principle of diminishing returns to labor does not apply in the long run because A. a firm can build an additional production facility so each workers share of the facility doesnt necessarily decrease. B. eventually the marginal product of labor will begin to increase again. 2

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EC1301 C. D. A. B. C. D. a firm can fire inefficient workers. None of the above, the principle of diminishing returns always applies.

If real salaries increase but nominal salaries do not, this means the purchasing power of money has decreased. prices have not changed. prices have risen. prices have fallen.

Using the following data to answer questions 8-10

TABLE 1 Duckistan Production Possibilities A Civilian goods Military goods 20 0 B 18 1 C 14 2 D 8 3 E 0 4

TABLE 2 Herbania Production Possibilities A Civilian goods Military goods 40 0 B 36 1 C 26 2 D 14 3 E 0 4

8.

Refer to TABLE 1 and TABLE 2. Suppose that the amount and quality of resources are the same in both countries. We can conclude that A. Duckistan is technologically better than Herbania at producing military goods. B. Herbanina is technologically better than Duckistan at producing both military goods and civilian goods. C. The total opportunity cost of producing 4 units of military goods is the same in both countries. D. Herbanina is technologically superior to Duckistan in producing civilian goods only.

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9. A. B. C. D. A. B. C. D.

Refer to TABLE 1 and TABLE 2. Suppose that technology and the quality of resources are the same in both countries. We can conclude that Duckistan has more resources than Herbania. Herbania has more resources than Duckistan. Duckistan has greater opportunity costs than Herbania. Prices are twice as high in Herbania as in Duckistan. Refer to TABLE 1 and TABLE 2. Opportunity costs of military goods are increasing in Duckistan but constant in Herbania. constant in both Duckistan and Herbania. larger in Duckistan than in Herbania. smaller in Duckistan than in Herbania. 11. Some agricultural sub-Saharan nations of Africa have overfarmed and overgrazed their land to the extent that significant portions of it have turned into desert. This suggests that A. the soil fertility of the land, due to overplanting and overgrazing, has not depleted. B. the Production Possibilities Curves (PPC) of such nations have shifted inward. C. the Production Possibilities Curves (PPC) of such nations have shifted outward. D. these nations are operating at some point outside of their production possibilities curves (PPC). After you graduate, you have decided to accept a job working at the Ministry of Manpower for $35,000 a year. The two other offers you received were working for the Cold Storage Group for $28,000 and working for IBM Consulting for $32,000. What is the opportunity cost of accepting the position at the Ministry of Manpower? A. The $35,000 you are paid for working at the Ministry of Manpower. B. The $32,000 you would have been paid working for IBM Consulting. C. The $28,000 you would have been paid working for Cold Storage Group. D. The $32,000 you would have been paid working for IBM Consulting and the $28,000 you would have been paid working for Cold Storage Group.

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13. A. B. C. D.

Suppose that the demand for pizza is given by Q = 36 P and the supply is given by Q = P 12. If the price of pizza is $20, which of the following is TRUE? There will be an excess supply of 8 pizzas. There will be an excess demand of 8 pizzas. There will be an excess demand of 20 pizzas. The market is in equilibrium.

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14.

If a forecasted drought is expected to ruin (or destroy) the upcoming coffee crop, then we would anticipate that the price of A. coffee will rise. B. tea will rise. C. coffee creamer will fall. D. All of the above.

15. A. B. C. D.

What will happen to the equilibrium price and quantity of coffee if its discovered to help prevent colds and, at the same time, Brazil and Vietnam emerge in the global market as massive producers of coffee? The price will fall while the effect on the quantity is uncertain. The quantity will rise while the effect on the price is uncertain. The quantity will fall and the price will rise. The quantity will rise while the price will remain unchanged. 16. The quantity sold of a product is 100 at the unit price of $5. Suppose the price elasticity of demand for the product by the initial value method is 1.5, and you would like to increase the quantity to 120. Then the new price must be $3.33. $3.66. $4.33. $4.66. 17. If the demand curve facing a firm had a price elasticity of demand equal to zero and the firm raised its price, its total revenue would A. decreased slightly. B. fall to zero. C. not change. D. increase.

A. B. C. D.

A. B. C. D.

Assume there is an increase in the demand for hand calculators. The subsequent increase in price will be greater in the long run than in the short run. increase in price will be greater the smaller the elasticity of supply. increase in price will be greater the smaller the inelasticity of supply. decline in price will be greater the smaller the inelasticity of supply. 19. If an increase in the price of a good results in an increase in total revenue for the firm, then A. the supply of the good must be unit elastic. B. the supply of the good must be inelastic. C. the supply of the good must be elastic. D. Nothing can be said about price elasticity of supply from the information given.

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20.

The marketing people at TELECOM Company believe that if they lower the price of long-distance phone calls by 5 percent, their quantity sold will increase by 15 percent. If they are correct in their belief, then A. demand for their service is price inelastic. B. the total revenue from long-distance services will increase if they lower the price. C. demand for their service is income elastic. D. the total revenue from long-distance services will decrease if they lower the price. What will happen to the equilibrium price and equilibrium quantity for ice cream cones when consumers incomes decrease? A. If ice cream cones are a normal good, then the equilibrium price and equilibrium quantity of ice cream cones will decrease. B. If ice cream cones are a normal good, then the equilibrium price and equilibrium quantity of ice cream cones will increase. C. If ice cream cones are an inferior good, then the equilibrium price will increase and equilibrium quantity of ice cream cones will decrease. D. If ice cream cones are an inferior good, then the equilibrium price and equilibrium quantity of ice cream cones will decrease.

21.

22. A. B. C. D.

If the price of aluminum used to make bicycles increases, the price of a bicycle rises because of a rightward shift of the demand curve for bicycles. rightward shift of the supply curve for bicycles. leftward shift of the demand curve for bicycles. leftward shift of the supply curve for bicycles. The larger the positive cross elasticity of demand between products X and Y, the stronger their complementariness. greater their substitutability. smaller the price elasticity of demand for both products. the less sensitive purchases of each are to increases in income. 24. The Sing Music Club charges a price of $16 for a CD and $8 for a cassette. Both CDs and cassettes are normal goods. If the Sing Music Club increases the price of a CD to $18, everything else remaining the same, A. the substitution effect induces club members to buy more cassettes and fewer CDs. B. the income effect induces club members to buy fewer CDs. C. Both answers are wrong. D. Both answers A and B are correct.

A. B. C. D.

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25.

The price elasticity of demand for lettuce is 2.3 and the price elasticity of supply for lettuce is 1.8. If demand falls by 15 percent, the price of lettuce will A. rise by 3.66 percent. B. fall by 3.66 percent. C. rise by 2.73 percent. D. fall by 2.73 percent.

Using the following figure to answer question 26

FIGURE 1

26.

A. B. C. D.

Which of the following can be inferred from FIGURE 1 above? i. Marginal costs vary for different levels of output. ii. Diminishing marginal product does not occur directly after the first worker. iii. Marginal product of the second worker exceeds that of the first. (i) and (ii) (ii) and (iii) (i) and (iii) All of the above

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27. A. B. C. D.

Ceterius paribus (that is, other things being equal), if a firms marginal cost curve shifts upward, the average total cost curve remains unchanged at all output levels. the average variable cost curve remains unchanged at all output levels. the average fixed cost curve remains unchanged at all output levels. All of the above. 28. If technological advance reduces the amount of variable resources needed to produce any level of output, then the A. average variable cost curve will shift upward. B. marginal cost curve will shift downward. C. average total cost curve will shift upward. D. average fixed cost curve will shift downward. Which of the following shifts the average total cost curve upward at the Creative Company? A. An increase in the hourly wage that Creative Company pays its workers. B. A decrease in the hourly wage that Creative Company pays its workers. C. An increase in the fixed amount of insurance premiums that Creative Company pays for its business. D. Both answers A and C are correct. In perfect competition, A. the market demand for the good is perfectly elastic but the demand for the output of one firm is not perfectly elastic. B. the market demand for the good is not perfectly elastic but the demand for the output of one firm is perfectly elastic. C. both the market demand for the good and the demand for the output of one firm are perfectly elastic. D. neither the market demand for the good nor the demand for the output of one firm is perfectly elastic.

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30.

31.

A. B.

In perfect competition, when a restaurant stays open for lunch service even though few customers patronize the restaurant for lunch, which of the following principles are best demonstrated? i. Fixed costs are sunk in the short run. ii. In the short run, only variable costs are important to the decision to stay open for lunch. iii. If revenue exceeds variable cost, the restaurant owner is making a profitable strategic decision to remain open for lunch. (i) and (ii) only (ii) and (iii) only

EC1301 C. D. (i) and (iii) only All are demonstrated

Using the following data to answer questions 32-33

TABLE 3 Quantity (pizzas per hour) 0 1 2 3 4 5 6 Total Cost (dollars per hour) 10 18 30 48 70 98 120

32.

Refer to TABLE 3 above. Peters Pizza is a perfectly competitive firm. The firms costs are shown in the table. If the market price is $15, what is Peters profitmaximizing output? 2 pizzas per hour. 3 pizzas per hour. 4 pizzas per hour. 0 pizza per hour. 33. Refer to TABLE 3 above. Peters Pizza is a perfectly competitive firm. The firms costs are shown in the table. If the market price is $15, the firm will shut down.. leave the industry in the long run. stay in the industry in the long run. make an economic profit.

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34.

A. B. C. D.

Young Johnny inherited the only local cable company in town after his father passed away. The company is completely unregulated by the government and is therefore free to operate as it wishes. Assuming that Johnny understands the true power of his new monopoly, he is probably most excited about which of the following statements? i. The customers will be forced into purchasing cable at whatever price he wants to set. ii. He will be able to achieve any profit level he desires. iii. He will be able to control the price of cable. (i) and (ii) only (ii) and (iii) only (iii) only All of the above. Which of the following statements is TRUE of a profit-maximizing monopolist? A. Marginal cost always lies below average cost. B. In the long run, the economic profit equals zero. C. In the short run, it will shut down if marginal cost is below average variable cost. D. In the short run, it can still earn an economic profit even if marginal cost is below average variable cost.

A. B. C. D.

When an industry is a natural monopoly, a larger number of firms may lead to a lower average cost. a larger number of firms may lead to a higher average cost. it is characterized by constant returns to scale. it is characterized by diseconomies of scale. If we observe a firm engaging in price discrimination, it must be true that A. the firm is enjoying higher total profits than it would have earned if it charged a single price for the product. B. the firm can identify the preferences of every customer it serves. C. the firm earns higher profits per unit than it would have earned if it charged a single price for the product. D. All of the above are correct. The existence of a large number of firms in monopolistic competition A. means that each firm has a small market share. B. makes it possible for each firms price to deviate by a large amount from the average price of the other firms. C. means that a firm must pay attention to the behavior of particular competitors. D. All of the above answers are correct.

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A monopolistically competitive firm A. is similar to monopoly in the short run because it can earn an economic profit in the short run and is similar to a perfectly competitive firm in the long run because it cannot earn an economic profit in the long run. B. is similar to a perfectly competitive firm in the short run because it cannot earn an economic profit in the short run and is similar to a monopoly in the long run because it can earn an economic profit in the long run. C. is similar to monopoly in the short run and long run because economic profits are greater than zero in both the short and long run. D. is similar to a perfectly competitive firm in the short run and long run because economic profits are equal to zero in both the short and long run. 40. Suppose in the city of POHKIM video rental stores operate in a monopolistically competitive market. If the price of video tape rentals in POHKIM is currently equal to $5 per tape and the average cost of renting videos is $1 per tape, in the long run we expect the price of renting videos to A. increase. B. stay the same. C. decrease, and the average cost of producing video rentals to increase. D. decrease, and the average cost of producing video rentals to decrease.

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