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DEAKIN UNIVERSITY

EXAMINATION PAPER
FACULTY OF BUSINESS AND LAW
Department of Economics

TRIMESTER TWO, 2015


Unit Code: MAE101

Unit Name: ECONOMIC PRINCIPLES

Writing Time: 2 Hours

Reading Time: 15 Minutes

This examination is CLOSED BOOK

Instructions for Candidates:

1. This paper consists of 2 sections.


2. This paper carries 60 marks.
(This is converted to equal 60% of your total
assessment in this unit).
3. All Multiple Choice Questions must be answered on the
answer sheets supplied.
4. Section A contains 35 multiple choice questions. Answer
all. This section is worth 29 marks.
5. Section B contains two parts. Part 1 contains one short
answer question which you must answer worth four
marks. Part 2 contains four short answer questions, of
which you must answer three. Each is worth nine marks.
This section is worth 31 marks, as 4 + 9 + 9 + 9.

THIS PAPER MUST REMAIN IN THE EXAMINATION ROOM.


Materials authorised for this examination must be in
accordance with Deakin University policy
MAE101 Economic Principles
Trimester Two 2015 Examination

1. Economic agents behave rationally. This means that:

a. their decisions always lead to outcomes that are optimal for society.
b. their decisions never lead to outcomes that are optimal for society.
c. they use marginal analysis to determine their optimal activity level.
d. they choose an activity level that maximizes total benefits.

2. In order for scarcity to exist, it must be that:

a. there is a finite amount of a resource.


b. more people want the resource than there is available of it.
c. the resource is non-renewable.
d. nobody wants to purchase the resource.

3. Which of the following is an example of market failure?

a. a firm becomes insolvent and is forced out of the market.


b. a firms research and development fails to develop a new product.
c. a firm closes down a factory due to poor sales.
d. a firms pollution into a river reduces the number of fish that can be
caught.

4. You won a free ticket to see an Eric Clapton concert (the ticket has no
resale value). Bob Dylan is performing on the same night and is your
next-best alternative activity. Tickets to see Dylan cost $40. On any given
day, you would be willing to pay up to $50 to see Dylan. Assume that
there are no other costs of seeing either performer. Based on this
information, what is the opportunity cost of seeing Eric Clapton?

a. $0
b. $10
c. $40
d. $50

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MAE101 Economic Principles
Trimester Two 2015 Examination

5. A developer owns a block of land and is considering either selling the


land or building a new house and selling that. $300,000 was paid for the
land. A further $30,000 was spent on building permits and architect fees
for the new house. Construction cost for the new house is expected to be
$350,000. The selling cost for either the land or just the new house, is
expected to be $20,000.

What is the minimum expected sale price of the new house that the
developer would need to receive in order to decide to build it?

a. $700,000
b. $400,000
c. $350,000
d. Not enough information is provided.

Use the following graph to answer question 6

6. What is the opportunity cost to society of the movement from point B to


point D, given the production possibilities frontier shown?

a. 500 pretzels
b. 250 pretzels
c. 300 potato chips
d. 600 potato chips

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MAE101 Economic Principles
Trimester Two 2015 Examination

Use the following table to answer question 7.

Production possibilities
for Erehwon

Computers Cheese (kg)


250 0
200 500
150 900
100 1200
50 1400
0 1500

7. What is the most accurate statement about the opportunity cost of


producing more cheese in Erehwon?

a. the opportunity cost of additional cheese is increasing.


b. the opportunity cost of additional cheese is constant.
c. the opportunity cost of additional cheese is decreasing.
d. the opportunity cost of additional cheese cannot be determined.

8. Suppose that shoes can be produced relatively cheaply in the


Philippines, China, or other nations. What should Australia do in order to
gain while faced with the cheap overseas production of shoes?

a. Australia should buy its shoes from other nations, using Australian
resources to produce other items.
b. Australia should place a quota on imported shoes sufficient to
maintain desired domestic levels of production.
c. Australia should subsidize its shoe industry, allowing effective
competition with foreign shoemakers.
d. Australia should place a tariff on the import of shoes produced by
cheap foreign labour.

9. The demand for a good tends to be more elastic:

a. the greater the availability of close substitutes.


b. the narrower the definition of the market.
c. the longer the period of time.
d. all of the above are correct.

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MAE101 Economic Principles
Trimester Two 2015 Examination

10. Suppose that a decrease in the price of X results in more of good Y sold.
This would mean that X and Y are:

a. complementary goods
b. substitute goods
c. unrelated goods
d. normal goods

Use the following table to answer questions 11-13:

PX QX PY Income
200 100 150 10000
300 80 150 10000
200 60 210 10000
200 150 150 14000

11. Comparing the first row with the second row, the own-price elasticity of
demand is:

a. 0.55 and inelastic.


b. 0.40 and inelastic.
c. 2.5 and elastic.
d. not valid.

12. Comparing the second row with the third row, the cross-price elasticity of
demand is:

a. -0.84 and the goods are complements.


b. -0.84 and the goods are substitutes.
c. -0.84 but it cannot be determined if the goods are substitutes or
complements.
d. not valid.

13. Comparing the first row with the fourth row, the income elasticity is:

a. -1.2 and X is a normal good.


b. 0.8 and X is an inferior good.
c. 1.2 and X is a normal good.
d. not valid because the price of X has not changed.

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MAE101 Economic Principles
Trimester Two 2015 Examination

14. Amy buys a new dog for $150. She receives consumer surplus of $100
on her purchase. Her willingness to pay is:

a. $50
b. $100
c. $150
d. $250

15. Suppose you make jewellery. If the price of gold falls, we would expect
you to:

a. be willing and able to produce more jewellery than before at each


possible price.
b. be willing and able to produce less jewellery than before at each
possible price.
c. face a greater demand for your jewellery.
d. face a weaker demand for your jewellery.

16. Suppose that the number of buyers in a market increases and a


moratorium (complete ban) is placed on the extraction of a key input to
the production of that good. What would we expect to happen in the
market?

a. the equilibrium price would increase but the impact on the amount
sold in the market would be ambiguous.
b. the equilibrium price would decrease but the impact on the amount
sold in the market would be ambiguous.
c. both equilibrium price and equilibrium quantity would increase.
d. equilibrium quantity would increase but the impact on equilibrium
price would be ambiguous.

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MAE101 Economic Principles
Trimester Two 2015 Examination

The graph below shows supply and demand in a market. Use this to answer
Questions 17, 18, and 19.

17. According to the graph above, a binding price ceiling would exist at a
price of:

a. $15.00
b. $13.00
c. $11.00
d. none of the above

18. In the graph above, suppose that the tax of $4.00 is imposed on sellers.
The amount of the tax that sellers would pay would be:

a. $1.00
b. $2.00
c. $4.00
d. indeterminate

19. According to the graph above, if the tax were imposed on consumers,
then:

a. consumers would bear more of the tax burden than sellers.


b. consumers would bear less of the tax burden than sellers.
c. the new equilibrium quantity would be smaller than if the tax were
imposed on producers since demand is more elastic than supply.
d. consumers and sellers would bear the same tax burden.

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MAE101 Economic Principles
Trimester Two 2015 Examination

20. Some developing countries have used price ceilings to keep rice cheap
to assist the poor. At the ceiling price:

a. the quantity demanded will be greater than the quantity supplied


and a shortage will result.
b. the quantity demanded will be greater than the quantity supplied
and a surplus will result.
c. the quantity demanded will be less than the quantity supplied and a
shortage will result.
d. the quantity demanded will be less than the quantity supplied and a
surplus will result.

21. Firms that shut down in the short run are unable to avoid their:

a. fixed costs
b. intermediate costs
c. variable costs
d. marginal cost

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MAE101 Economic Principles
Trimester Two 2015 Examination

Use the following table to answer questions 22, 23, and 24.

Measures of Production and Cost for Splashy Kayak Factory, which operates
in a perfectly competitive industry. The only variable costs are labor, which
costs $24 per worker. Some of the table has been completed for you, though
you may need to complete more of it to answer the questions.

Quantity Quantity MP FC VC TC AFC AVC ATC MC


Labor Kayaks
0 0 - 100 0 - - - -
1 1 1 24
2 3 2
3 3 8
4 8 96 12
5 1 24
6 9.5
7 9

22. Diminishing returns set after the:

a. the first worker is hired due to the Law of Diminishing Returns.


b. the third worker is hired since the MP begins to decline.
c. the sixth worker since this the MP of the 7th worker is negative.
d. the seventh worker since this is the most workers that Splashy can
fit into its factory.

23. If the price is $11, then Splashy maximises profit by:

a. hiring three workers.


b. hiring six workers.
c. shutting down in the short run and exiting in the long run.
d. there is not enough information provided.

24. If the price is $18, then Splashy maximises profit by:

a. hiring one worker.


b. shutting down in the short run but hiring four workers in the long
run.
c. hiring four workers in the short run but shutting down in the long
run.
d. there is not enough information provided.

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MAE101 Economic Principles
Trimester Two 2015 Examination

25. Collusive agreements usually do not last long because

a. they will be unprofitable.


b. they are immediately discovered by the authorities.
c. all parties agree to disband after a short period of time.
d. all parties have the incentive to cheat on the agreement.

26. Allowing an inventor to have the exclusive rights to market her new
invention will lead to which of the following?

(i) a product that is priced higher than it would be without the exclusive rights
(ii) desirable behaviour in the sense that inventors are encouraged to invent
(iii) higher profits for the inventor

a. (i) and (ii)


b. (ii) and (iii)
c. (i) and (iii)
d. (i), (ii) and (iii)

27. Price discrimination adds to social welfare in the form of which of the
following?

(i) increased profits to the monopolist


(ii) increased consumer surplus
(iii) increased total surplus

a. (i) and (ii)


b. (ii) and (iii)
c. (i) and (iii)
d. (i), (ii) and (iii)

28. Compared to a perfectly competitive industry, a monopolist produces

a. more output at a lower price.


b. more output at a higher price.
c. less output at a higher price.
d. less output at a lower price.

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MAE101 Economic Principles
Trimester Two 2015 Examination

29. Which of the following industries is likely to be monopolistically


competitive?

(i) Italian restaurants


(ii) Sports car production
(iii) Wheat farming

a. (i) only
b. (iii) only
c. (i) and (iii)
d. (ii) and (iii)

30. Four friends decide to meet at a Chinese restaurant for dinner. They
decide that each person will order an item from the menu and they will
share all dishes. When the final bill for the meal comes, they decide they
will split the cost evenly among each of the people at the table. When the
food is delivered to the table, each person faces incentives similar to
those associated with:

a. consumption of a common resource good.


b. production of a public good.
c. consumption of a natural monopoly good.
d. production of a private good.

31. The government attempts to resolve negative externalities caused by


automobile exhaust by:

(i) taxing gasoline to reduce the amount that people drive


(ii) building safer highways
(iii) setting emission standards for automobiles

a. (i), (ii) and (iii) are all used to reduce emissions.


b. only (i) and (iii) are used to reduce emissions.
c. only (ii) and (iii) are used to reduce emissions.
d. only (i) and (ii) are used to reduce emissions.

32. If a uranium mine does not bear the entire cost of cleaning up its waste
then it will:

a. clean up its waste so others are not exposed to it.


b. reduce the volume of waste it produces.
c. generate an acceptable level of waste.
d. generate an excessive level of waste.

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MAE101 Economic Principles
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33. Assume that your housemate is very messy. Suppose she gets a $100
benefit from being messy but imposes a $200 cost on you. The Coase
theorem would suggest that an efficient solution would be for:

(i) your housemate to pay you at least $100 but no more than $200 and you
clean up after her.
(ii) you to pay your housemate at least $100 but no more than $200 to clean up
after herself.
(iii) your housemate to pay you at least $100 but neither of you cleans up.

a. (i) only
b. (ii) only
c. (iii) only
d. (i) or (ii)

34. On the island of Borneo, orangutans live in wild rain forests; many
entrepreneurs are purchasing this land and developing it into palm oil
plantations. Because orangutans can threaten plantation workers, they
kill orangutans that venture onto the plantations; some other human
inhabitants eat the meat of the orangutans; and some poachers capture
baby orangutans to sell in the black market for exotic animals. In short,
the orangutans of Borneo face an indirect threat (habitat loss) and direct
threats.

To combat this, the Indonesian government and non-governmental


organizations have partnered to protect their habitat and to police against
poachers and other killers. Which of the following statements is true
regarding the killing of orangutans that leads to their extinction:

(i) it imposes a negative externality on future generations of humans.


(ii) it is a profitable activity by palm oil plantation owners.
(iii) it can be inhibited by setting aside preserved and protected land.

a. (i) and (ii)


b. (i) and (iii)
c. (ii) and (iii)
d. (i) and (ii) and (iii)

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MAE101 Economic Principles
Trimester Two 2015 Examination

35. The government provides public goods because:

a. private markets are incapable of producing public goods.


b. free-riders make it difficult for private markets to supply the socially
optimal quantity.
c. markets are always better off with some government oversight.
d. external benefits will occur to private producers.

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MAE101 Economic Principles
Trimester Two 2015 Examination

SECTION B

In this section, there are two parts. In Part 1, answer the only question,
number 1, either (a) or (b). In Part 2, answer any three of questions 2, 3, 4,
and 5. Part 1 is worth four (4) marks; Part 2 is worth 27 marks each of
questions 2, 3, 4, and 5 is worth nine (9) marks. This section is worth 31
marks.

Use the space provided.

Part 1

Answer Question 1 Worth Four (4) Marks

1. Short Answer Analysis. Answer either (a) or (b). (4 marks)

(a) A movie critic recently made the following statement:

If each movie studio just cancelled one blockbuster that costs $100
million to make each year and donated that to say education, imagine
how much better off we would be.

What is fallacious in that statement?

OR

(b) Use separate diagrams to illustrate (i) a royalty tax on mining and (ii) a
resource rent tax on mining. Compare the impact of the two taxes on the
level of mining activity.

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MAE101 Economic Principles
Trimester Two 2015 Examination

Part 2

Answer Three (3) of the Following Four (4) Questions Each Is Worth
Nine (9) Marks

2. Principles of Economics

Choose three of the following four statements. State whether it is true or


false; then, explain why in either case. (9 marks)

(a) Bakers sells customers bread because they are kind people.

(b) Doctors often keep their sick patients waiting. This is because sick
people have lower opportunity costs.

(c) When firms increase advertising, they force consumers to move along
their demand curve.

(d) The world will eventually run out of oil.

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MAE101 Economic Principles
Trimester Two 2015 Examination

2. Use this page to continue your answer to Question 2.

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MAE101 Economic Principles
Trimester Two 2015 Examination

3. Comparison of Equilibria and Welfare Analysis (6 + 3 marks)

(a) Answer two of the following three statements. (6 marks)

(i) With the aid of a diagram, discuss why the price of paintings by
famous artists has been rising over time.

(ii) With the aid of a diagram, discuss why the price of laptops has
been falling over time even though demand has been rising.

(iii) Illustrate and discuss the impact of government regulations that


require production and consumption of a good in excess of what
would occur in an unregulated market.

(b) Compare and contrast a price ceiling, a price floor, and a tax.
(3 marks)
Draw a standard supply-and-demand graph and identify the
equilibrium with no intervention -- let the equilibrium price be $5 and
the equilibrium quantity be 15.

Now, suppose that the government imposes a tax of $3; this yields
an equilibrium quantity of 11 in which the price that consumers pay
is $7 and the price that firms receive is $4. Label these on your
graph; then, identify areas that represent consumers' surplus,
producers' surplus, deadweight loss, and tax revenue.

State what would differ if, instead of a tax, the government


implements a price ceiling at a price of $4. Specifically, how, if at all,
do consumers' surplus, producers' surplus, and deadweight loss
change compared with the tax? Which, if any, consumers prefer the
price ceiling to the tax? Which, if any, firms prefer the price ceiling
to the tax?

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MAE101 Economic Principles
Trimester Two 2015 Examination

2. Use this page to continue your answer to Question 3.

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MAE101 Economic Principles
Trimester Two 2015 Examination

4. Types of Goods (2+7=9 marks)

(a) Define rivalrous and excludable. (2 marks)

(b) Consider the following seminar articles and their goods: (7 marks)

the Ganges River;


fake Malian artifacts;
whales;
addictive and currently illegal drugs, such as heroin and cocaine;
cigarettes.

For three of these five goods:

(i) state whether it is rivalrous or not

(ii) state whether it is excludable or not

(iii) state what type of good it is: private good, club good, common
resource, or public good.

(iv) If there is a market failure, identify whether the good is


oveconsumed or underconsumed compared with the socially
efficient level, and identify the source of the market failure.

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MAE101 Economic Principles
Trimester Two 2015 Examination

2. Use this page to continue your answer to Question 4.

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MAE101 Economic Principles
Trimester Two 2015 Examination

5. Trade (9 marks)

The table below shows the production possibilities for Japan and Australia
showing production alternatives for each country per worker per year. Assume
that Japan's population is 50 million and Australia's population is 10 million.

Japan Australia
Steel 120 kg 25 kg
Concrete 20 kg 100 kg

(a) Define opportunity cost, absolute advantage, and comparative


advantage. (1 mark)

(b) State which country has an absolute advantage in production of Steel,


which country has an absolute advantage in the production of Concrete,
which country has a comparative advantage in the production of Steel,
and which country has a comparative advantage in the production of
Concrete. (2 marks)

(c) Assume that each country allocates half of its population to Steel
production and half of its population to Concrete production; what would
be total joint production. (1 mark)

(d) On what concept is trade based? If Japan and Australia were to trade,
what would each produce? Provide an example of production such that
each could consume more than its production in part (c). What price
could they trade at that would get them from their production to such an
allocation? (4 marks)

(e) What concept is implied by the shape of the joint production possibilities
frontier in your graph? (1 mark)

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MAE101 Economic Principles
Trimester Two 2015 Examination

5. Use this page to continue your answer to Question 5.

END OF EXAMINATION

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