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Mid Semester Autumn 2014 Sample Exam.

The questions in the exam are for illustrative purposes only and are different from those in the actual exams.
Solutions are provided for practice only. The actual exams will not have solutions.

STUDENT NUMBER:
SURNAME:
(FAMILY NAME)

OTHER NAMES:

This paper and all materials issued must be returned at the end of the examination.
They are not to be removed from the exam centre.
Examination Conditions:
It is your responsibility to fill out and complete
your details in the space provided on all the
examination material provided to you. Use
the time before your examination to do so as
you will not be allowed any extra time once
the exam has ended.
You are not permitted to have on your desk
or on your person any unauthorised
material. This includes but not limited to:
Mobile phones
Smart watches
Electronic devices
Draft paper (unless provided)

Textbooks (unless specified)

Notes (unless specified)


You are not permitted to obtain assistance by
improper means or ask for help from or give
help to any other person.
You are not permitted to leave your seat
(including to use the toilet):
Until 90 mins has elapsed
During the final 15 mins
During the examination you must first seek
permission (by raising your hand) from a
supervisor before:
Leaving early
Using the toilet
Accessing your bag

23115 Economics for Business


th

Monday, 14 April 2014

Time Allowed: 2 hours and 10 mins


Includes 10 minutes of reading time.
Reading time is for reading only. You are not permitted to write, calculate or mark your
paper in any way during reading time.

This is a Closed Book exam


Please refer to the permitted materials below:

Permitted materials for this exam:

Calculators (non-programmable only)

Drawing instruments
i.e. Rulers, Set Squares and Compasses

Materials provided for this exam:

This examination paper

One (1) multiple choice answer sheet (GPAS-240R)

Students please note:

Ensure that your name and student number are correctly


recorded on this cover-sheet as well as on the General
Purpose Answer Sheet.

Part A comprises 30 multiple-choice questions and it is worth


15 marks. Each question is worth 0.5 marks.

All questions in part A are to be answered in pencil on the


General Purpose Answer Sheet. Read carefully the instructions
in the front page of the General Purpose Answer Sheet
Penalties will apply if instructions are not followed strictly.

Part B comprises 10 short answer questions and it is worth 25


marks. Each question is worth 2.5 marks.

Rough work can be done in the space provided at the back of


this page and at the end of this examination paper No rough
work is admitted on the General Purpose Answer Sheet. Be
sure you fully erase mistakes and stray marks from the
General Purpose Answer Sheet.

Disciplinary action will be taken against you if


you infringe university rules.

Do not open your exam paper until instructed.


Faculty of Business (Economics Discipline Group)

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23115 Economics for Business

Faculty of Business (Economics Discipline Group)

Rough work space


Do not write your answers on this page.

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Sample Mid Semester Autumn 2014

Faculty of Business (Economics Discipline Group)

23115 Economics for Business

PART A MULTIPLE CHOICE QUESTIONS (15 Marks)


Record your answers in pencil on the General Purpose Answer Sheet. Be sure you fully erase
mistakes and stray marks from the General Purpose Answer Sheet
1. Which of the following is an example of a market?
A.
the purchase and sale of fruit and vegetable in a shopping centre
B.
the purchase and sale of software over the internet
C.
the purchase and sale of illegal drugs in secret locations in a city
D.
all of the above
2. Suppose that John receives a pay increase. We would expect Johns demand for:
A.
normal goods to remain unchanged
B.
inferior goods to remain unchanged
C.
inferior goods to decrease
D.
normal goods to decrease
3. Wheat is an input used in the production of bread. If the price of wheat increases, but nothing else
changes, this will cause:
A.
the demand for bread to increase
B.
the supply of bread to decrease
C.
the supply of bread to increase
D.
the demand for bread to decrease
Graph 1

4. Refer to Graph 1. According to the graph, at a price of $7:


A.
a surplus would exist and the price would tend to fall
B.
a surplus would exist and the price would tend to rise
C.
a shortage would exist and the price would tend to fall
D.
the market would be in equilibrium

Sample Mid Semester Autumn 2014

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23115 Economics for Business

Faculty of Business (Economics Discipline Group)

Graph 2

5. In which panel(s) in Graph 2 would there be a shortage for a good at the market price?
A.
panel a
B.
panel b
C.
panel a and panel b
D.
neither panel a nor panel b
Graph 3

6. Graph 3 represents a market before and after a per unit tax is introduced According to Graph 3, on
which side of the market is the tax imposed?
A.
Buyers
B.
Sellers
C.
Producers
D.
None
7. According to Graph 3, the amount of the tax imposed in this market is:
A.
$1.00
B.
$1.50
C.
$2.50
D.
$3.00

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Sample Mid Semester Autumn 2014

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23115 Economics for Business

8. According to Graph 3, the equilibrium price in the market before the tax is imposed is:
A.
$8.00
B.
$6.00
C.
$5.00
D.
$3.50
9. An increase in efficiency suggests that an economy:
A.
is using more costly production techniques
B.
has decided to produce more luxury goods
C.
is able to get less goods and services from a given amount of resources
D.
is able to get more goods and services from a given amount of resources
10. For economists, positive statements are:
A.
descriptive, making a claim about how the world is
B.
optimistic, putting the best possible interpretation on things
C.
affirmative, justifying existing economic policy
D.
prescriptive, making a claim about how the world ought to be
Graph 4

11. Refer to Graph 4. What is the opportunity cost to society of the movement from point C to point B,
given the production possibilities frontier shown?
A.
650 pretzels
B.
500 pretzels
C.
300 pretzels
D.
150 pretzels
12. Refer to Graph 4. In the production possibilities frontier shown, what is the opportunity cost to
society of moving from point C to point E?
A.
150 pretzels
B.
300 potato chips
C.
both A and B
D.
zero
13. Refer to Graph 4. In the production possibilities frontier shown, the movement from point C to point
E was most likely caused by:
A.
an increase in societys preference for pretzels
B.
a decrease in societys preference for potato chips
C.
unemployment
D.
both A and B
Sample Mid Semester Autumn 2014

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23115 Economics for Business

Faculty of Business (Economics Discipline Group)

14. Willingness to pay measures the:


A.
amount a buyer is willing to pay for a good minus the amount the buyer actually
pays for it
B.
amount a seller actually receives for a good minus the minimum amount the
seller is willing to accept
C.
maximum amount a buyer is willing to pay minus the minimum amount a seller
is willing to accept
D.
maximum amount that a buyer would pay for a good
Table 1
The costs of five possible sellers
Seller
Kyle
Nathan
Chelsea
Hillary
Landon

Cost ($)
1500
1200
1000
750
500

15. Refer to Table 1. If the market price is $1000, the producer surplus in the market will be:
A.
$700
B.
$750
C.
$2250
D.
$3700
16. Donald produces nails at a cost of $200 per ton. If he sells the nails for $500 per ton, his producer
surplus is:
A.
$200 per ton
B.
$300 per ton
C.
$500 per ton
D.
$700 per ton

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23115 Economics for Business

Graph 5

17. Consider Graph 5. At quantity 100:


A.
willingness to buy and willingness to sell are both $30
B.
willingness to buy is $20 and willingness to sell is $10
C.
willingness to buy and willingness to sell are both $10
D.
willingness to buy is $10 and willingness to sell is $30
18. We can say that the allocation of resources is efficient if:
A.
producer surplus is maximised
B.
consumer surplus is maximised
C.
total surplus is maximised
D.
none of the above is correct
19. If you pay a price exactly equal to your willingness to pay, then:
A.
your willingness to pay is less than your consumer surplus
B.
your consumer surplus is negative
C.
you have no consumer surplus
D.
you place little value on the good

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23115 Economics for Business

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Graph 6

20. According to Graph 6, producer surplus before the tax is represented by area:
A.
A
B.
A+B+C
C.
D+E+F
D.
F
21. According to Graph 6, after the tax is levied, consumer surplus is represented by area:
A.
A
B.
A+B+C
C.
D+E+F
D.
F
22. A positive consumption externality occurs when:
A.
Jack receives personal benefits from his own consumption of a certain good
B.
Jack receives a benefit from Johns consumption of a certain good
C.
Jacks benefit exceeds Johns benefit when they each consume the same good
D.
Jacks consumption is not beneficial to John
23. Internalising a positive production externality through a government subsidy will cause the
industrys supply curve to:
A.
remain unchanged
B.
shift down by an amount less than the subsidy
C.
shift down by an amount equal to the subsidy
D.
shift down by an amount greater than the subsidy
24. Internalising a positive production externality will cause the demand curve faced by an industry to:
A.
shift to the right
B.
shift to the left
C.
become more elastic
D.
remain unchanged

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Sample Mid Semester Autumn 2014

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23115 Economics for Business

25. Paul owns a mushroom farm. The smell from the farm reduces the value of adjacent houses by a
total of $30 000. Suppose that the benefit of the mushroom farm to Paul is $20 000. Assuming that Paul
has the legal right to own the farm, a possible private solution to this problem is that:
A.
adjacent property owners pay $20 000 to Paul to stop farming mushrooms
B.
Paul pays the adjacent property-owners $25 000 for their loss in house-values
C.
adjacent property owners pay $25 000 to Paul to stop farming mushrooms
D.
there is no private solution that would improve this situation
26. To determine whether a good is a common resource or a public good, we need to know:
A.
if the good is provided by the government
B.
if my use of the good reduces its availability to you
C.
if the good can be patented
D.
if the good is very expensive to produce
27. Because the benefit that each citizen receives from having an educated community is a public good:
A.
the private market would undersupply education to the community
B.
the government can potentially help the market reach a socially optimal level of
education
C.
a tax increase to pay for education could potentially make the community better
off
D.
all of the above are true
28. Due to the externalities associated with public goods and common resources:
A.
private markets will lead to an efficient allocation of resources
B.
government intervention can potentially raise economic wellbeing
C.
private markets will correct for the gain or loss to consumer surplus
D.
all of the above are true
29. Basic research is a public good because it:
A.
is difficult to exclude those who might benefit from it
B.
is used to develop public goods
C.
always benefits developed countries at the expense of developing countries
D.
is a rival good
30. Frank was willing to contribute $40 this year to his local public television station. However, after
learning that the television station had already met its goal of raising $400,000, he decided not to
contribute because he knew he could watch public television without contributing. This is an example
of:
A.
An external cost
B.
A deadweight loss
C.
An opportunity cost
D.
The free-rider problem associated with public goods

-- END OF PART A ---

Sample Mid Semester Autumn 2014

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23115 Economics for Business

Faculty of Business (Economics Discipline Group)

PART B SHORT ANSWER QUESTIONS (25 marks)


Record your answers in the space provided.
1. Refer to Graph 7. For the production possibilities frontier illustrated in the graph shown:
Graph 7

Using the graph above, explain how you would measure the opportunity cost of producing more
computers? Is the opportunity cost constant or increasing, as the number of computers gets larger?
Explain why.
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2. Suppose that the equilibrium price in a market is $100. Explain what will happen in the market if the
existing market price were $120 (and show it in the graph below). Represent this situation using a
Demand-Supply graph (carefully label each axis, curve, and the equilibrium point).

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23115 Economics for Business

___________________________________________________________________________________
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___________________________________________________________________________________
3. You are an economist working for the telephone company. You discover that demand for phone calls
during business hours is inelastic and demand for phone calls during evening hours is elastic. How could
your company use this information to increase its total revenue?
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___________________________________________________________________________________
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4. Suppose the government was trying to redistribute income from the richer Australians to the poorer
ones. Would a high tax on luxury cars, compared to other cars, be an effective way to achieve such
redistribution?
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23115 Economics for Business

Faculty of Business (Economics Discipline Group)

5. Suppose the price of good X decreases. Assuming that nothing else changes, explain what happens to
producer surplus and illustrate your answer using a supply curve.

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6. Using demandsupply diagrams, show the difference in deadweight loss (as a result of a tax) between
a market where the supply is more elastic than the demand and a market where the supply is less elastic
than the demand. In each graph, indicate clearly who bears the majority of the tax burden.

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23115 Economics for Business

7. Consider the following negative production externality as depicted:

Identify the social optimum and explain how Pigovian taxes could be used to achieve this outcome.
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___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
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___________________________________________________________________________________
8. What are the two necessary characteristics that a good must satisfy in order for the good to be
classified as a common resource? Explain the meaning of each of these two characteristics.
___________________________________________________________________________________
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___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
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23115 Economics for Business

Faculty of Business (Economics Discipline Group)

Consider the following article by The Sydney Morning Herald (Note, in the actual midsemester exam you fill find an article that is part of the News Analysis.)
More hard toil needed on our 'labour market'
By Ross Gittins
The world is full of economists who, though they know little of the specifics of labour economics,
confidently propose policies for managing the labour market based on their general knowledge of the
neo-classical model. All markets are much the same, aren't they?

I fear this is the best we'll get from the Productivity Commission's inquiry into regulation of the labour
market. So a test of the commission's report will be whether it displays knowledge of advanced
thinking on how labour markets actually work or is just another neo-liberal rant about free markets.

In their efforts to bone up on the topic, the commissioners could do worse than start with a quick read
of Nobel Laureate Robert Solow's 90-page classic, The Labor Market as a Social Institution.

Since the book was published in 1990, it should be old hat to economists, but I doubt it is. If so, it
shows how little effort most economists - even academic economists - have put into studying the
labour market.

Solow starts by reminding economists of a glaring problem they prefer not to think about: if the
market for labour is just a market like any other market, and so is capable of being adequately
analysed by the economists' standard tool kit of demand and supply - prices adjust until demand and
supply are equal and the market ''clears'' - how come the labour market never clears? How come we
always have high unemployment, which shoots up during downturns and stays very high for years
before falling only slowly?

To put it another way, if the labour market works like any other market, making wages just a price like
any other price, why don't wages fall and keep falling as long as the supply of labour exceeds the
demand for it? Why do nominal wages almost never fall? Why is it the closest we ever get is nominal
wages not rising as fast as ordinary prices, so wages fall a bit in ''real terms''?

In a country with Australia's history of many minimum wages, carefully specified in awards and
agreements, it's easy for economists to claim wages can't fall because they're being held up by legal
minimums. But this doesn't wash. In reality, many if not most wages are well above the legal
minimum, meaning the minimum isn't ''binding'' and so isn't stopping actual nominal wages from
falling back to the minimum. But they don't - and nor do they in America, where the minimum wage is
kept so low it's almost never binding.

Overseas, some extreme neo-classical economists have tried to escape this problem by arguing most
unemployment is voluntary rather than involuntary. It just so happens that, when economies turn
down, a lot of people decide now's the time to take unpaid holidays and stay on them for many
months. Yeah, right.
Solow says a more credible line of explanation is to admit the obvious: there must be something about
labour markets hat makes them different from other markets (such as the market for cars, or the
market for bank loans) and so renders economists' usual analytical tools inadequate.

And it's not hard to think of what that something could be. Other markets are for the purchase and
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23115 Economics for Business

sale of inanimate objects, whereas every unit of labour bought or sold comes with a real live human
attached. Every human is different - some are smart, some aren't; some work hard, some don't; some
are co-operative, some aren't - and bosses turn out to be humans, too.

The thing about humans is they have egos and feelings and moods. One apple doesn't care about the
other apples in the barrel, but a human cares about how they're being treated by their human boss, as
well about how they're being treated relative to all the other humans working for the boss.

Hence the title of Solow's book. Unlike other markets, the labour market is also a social institution.
Only an economist could imagine you could analyse the labour market successfully without taking
account of the human factor.

So maybe it's the social dimension of labour that explains why wages are inflexible and the labour
market doesn't clear. Solow uses the work of some woman whose name seems vaguely familiar, a
Janet Yellen, and her Noble prize-winning husband, George Akerlof, to outline a possible explanation
of the conundrum, ''the fair-wage-effort hypothesis''.

The ''efficiency-wage theory'' says that in the modern economy workers often have some control over
their own productivity. They produce more when they are strongly motivated to do so. ''One way for
an employer to provide more motivation is by paying more than other employers do; another is to
threaten to fire the excessively unproductive if and when they are detected,'' Solow says.

If that sounds obvious, note the radical implication: a firm's physical productivity depends not just on
how much labour (and capital) it uses, but also on how well the labour is paid. If so, wages won't fall
just because unemployment rises.

Yellen and Akerlof's version of efficient-wage theory says workers who believe they're being paid ''a
fair day's wage'' feel a social obligation to deliver ''a fair day's work'' in return.

A different approach is ''insider-outsider theory''. This says the people already working for a firm
(insiders) are likely to be more productive than those who aren't (outsiders) because they understand
the peculiarities of how the firm works. If so, the insiders are helping to generate ''economic rent'' for
the firm and thus are able to share this rent by negotiating higher wages. An outsider may be prepared
to work for the firm for a smaller wage, but the boss won't want to risk reducing his productivity by
switching from insiders to outsiders.

Whichever of those theories you find more persuasive, the point is the workings of real-world labour
markets are far more complicated than most economists realise. Let's hope the Productivity
Commission does.

Questions on next page

Sample Mid Semester Autumn 2014

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23115 Economics for Business

Faculty of Business (Economics Discipline Group)

9. Using demandsupply diagrams in the labour market, show what it means that the market clears.
Label the axes carefully.

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10. Using demandsupply diagrams in the labour market, show what it means that there is a minimum
wage but it is not binding. Should we have unemployment if it is not binding?

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23115 Economics for Business

Rough work space


Do not write your answers on this page.

Sample Mid Semester Autumn 2014

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23115 Economics for Business

Faculty of Business (Economics Discipline Group)

Rough work space


Do not write your answers on this page.

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23115 Economics for Business

SOLUTIONS
PART A - Multiple Choice (15 marks)
1. D
2. C
3. B
4. A
5. B
6. A
7. D
8. B
9. D
10. A
11. D
12. C
13. C
14. D
15. B
16. B
17. D
18. C
19. C
20. C
21. A
22. B
23. C
24. D
25. C
26. B
27. D
28. B
29. A
30. D

Sample Mid Semester Autumn 2014

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23115 Economics for Business

Faculty of Business (Economics Discipline Group)

PART B SHORT ANSWER QUESTIONS (25 marks)


SOLUTIONS
1. Refer to Graph 7. For the production possibilities frontier illustrated in the graph shown:
Graph 7

Using the graph above, explain how you would measure the opportunity cost of producing more
computers? Is the opportunity cost constant or increasing, as the number of computers gets larger?
Explain why.
ANS:

The opportunity cost of obtaining more computers is the number of snowboards that have to be
given up to get those computers. In the graph above, this can be seen when moving from Point A to
B as well as when moving from point C to D. For instance, as the production and consumption of
computers increases from 2 to 4 units, the opportunity cost (the number of snowboards which must
be given up) is 1 snowboard. However, to increase the production of computers from 15 to 17 units,
the opportunity cost is 5 snowboards. This is because the resources best suited to making
snowboards are now actually used to computers instead. Please note that numbers have been
added to the graph above to illustrate the increasing opportunity cost as more computers are
produced. Students are welcome to come up with their own figures, so long as it can be shown
that the opportunity cost is increasing.

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23115 Economics for Business

2. Suppose that the equilibrium price in a market is $100. Explain what will happen in the market if
the existing market price were $120 (and show it in the graph below). Represent this situation using
a Demand-Supply graph (carefully label each axis, curve, and the equilibrium point).

ANS:
A market price of $120 is above the equilibrium price. Accordingly, there will be a surplus of the
good (i.e. quantity supplied exceeds quantity demanded). This will put downward pressure on the
market price: as producers see less and less people demanding their goods, they will have an
incentive to decrease the price of the good. As the market price decreases, quantity demanded
increases and quantity supplied decrease, thereby eliminating the surplus progressively. The
decrease in price will occur until the price reaches its equilibrium level at $100. At $100, quantity
demanded equals quantity supplied, the market clears and thus no force will make the price change
further.
3. You are an economist working for the telephone company. You discover that demand for phone
calls during business hours is inelastic and demand for phone calls during evening hours is elastic.
How could your company use this information to increase its total revenue?
ANS:
In order to increase total revenue, the telephone company should increase the cost of phone calls
during business hours and decrease the cost of phone calls during evening hours. Since the demand
during business hours is inelastic, a price increase by X% will lead to a quantity decrease but by
less than X%, causing an increase in revenue. Similarly, since demand during evening hours is
elastic, a price decrease by Y% will lead to a quantity increase but by more than Y%, also causing
to an increase in revenue.
4. Suppose the government was trying to redistribute income from the richer Australians to the
poorer ones. Would a high tax on luxury cars, compared to other cars, be an effective way to
achieve such redistribution?
ANS:
The price elasticity of demand for luxury goods, like these cars, is high relative to the price
elasticity of supply. Hence, when a tax is imposed on luxury cars, there will be a significant
reduction in the quantity demanded and only a slight increase in the equilibrium market price. The
burden of the tax falls mostly on the suppliers, who suffer substantial reductions in the prices they
receive and substantial reductions in the quantities sold and in total revenue. The rich end up
bearing little of the tax burden.

Sample Mid Semester Autumn 2014

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23115 Economics for Business

Faculty of Business (Economics Discipline Group)

5. Suppose there is a price decrease. Assuming that nothing else changes, explain what happens to
producer surplus and illustrate your answer using a supply curve.
ANS:

When the price of a good decreases, producer surplus decreases for two reasons. First, those
sellers who were already selling the good suffer a decrease in producer surplus because the price
they receive is lower (area A). Second, some sellers will exit the market because the price of the
good is now lower than their willingness to sell (area B). The graph should show that as price
decreases from P2 to P1 to P2, producer surplus decreases from area A+B+C to area C.
6. Using demandsupply diagrams, show the difference in deadweight loss (as a result of a tax)
between a market where the supply is more elastic than the demand and a market where the supply is
less elastic than the demand. In each graph, indicate clearly who bears the majority of the tax burden.
ANS:

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23115 Economics for Business

Area A + B represents the total tax revenue made by the government. Area A represents how much
of the tax burden is carried by buyers and Area B represents how much of the tax burden is carried
by sellers. Holding the demand curve constant in Graph (a), when supply is elastic (then demand is
inelastic relative to this curve) buyers will carry the majority of the tax burden. When supply is
inelastic in Graph (b), suppliers will carry the majority of the tax burden. Both parties will share
the tax, but the party that is most inelastic takes on the majority of the tax burden. For a given tax,
the DWL is smaller when the supply is less elastic. Thats because there is a smaller change in the
equilibrium quantity.
7. Consider the following negative production externality as depicted:

Identify the social optimum and explain how Pigovian taxes could be used to achieve this outcome.
ANS:
The social optimum would be for Q1 to be produced and consumed. The market equilibrium means
that too much of the good is being produced at too low a price. If a Pigovian tax, equal in size to the
cost of the externality, was imposed on producers then their new private cost function would equal
the social cost function and they would produce at the social optimum. This way the private incentive
would be aligned to the social incentive.
8. What are the two necessary characteristics that a good must satisfy in order for the good to be
classified as a common resource? Explain the meaning of each of these two characteristics.
ANS:
A common resource is both non excludable and rival. That is, since it is non excludable, it is
available free of charge to anyone that wishes to use it. Since it is also rival, one persons use of the
common resource reduces other peoples use. Examples of a common resource are natural resources
(e.g. clean air, wildlife such as fish, whales and so on) and a less obvious example would be
congested roads (if not congested, it is a public good).
9. Using demandsupply diagrams in the labour market, show what it means that the market clears.
Label the axis carefully.
ANS:

Sample Mid Semester Autumn 2014

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23115 Economics for Business

Faculty of Business (Economics Discipline Group)

Note that here the price is given by the wage. The market will clear at the equilibrium point where
the quantity of labour supplied (by workers) is exactly equal to the quantity of labour demanded (by
firms). The market-clearing wage is the equilibrium wage and the market clearing quantity of labour
is the equilibrium quantity. At the equilibrium point, there is no unemployment (surplus) or
underemployment (shortage).
10. Using demandsupply diagrams in the labour market, show what it means that there is a
minimum wage but it is not binding. Should we have unemployment if it is not binding?
ANS:

The graph above shows an example of where the minimum wage (which is also a price floor) is not
binding, since it lies below the market equilibrium point. The market naturally would clear at the
equilibrium point where the quantity of labour supplied is equal to the quantity of labour demanded
and this is easily achieved because this point lies below the market equilibrium. Because the market
is not affected (it can naturally gravitate to the equilibrium, therefore its not binding), the market
can clear. There is no unemployment (surplus) or underemployment (shortage).

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Sample Mid Semester Autumn 2014