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# Fakulti Pengurusan

## PEPERIKSAAN AKHIR SEMESTER I

SESI 2017/2018
(FINAL EXAMINATION- SEMESTER I
2017/2018 SESSION)

(COURSE CODE)

## KURSUS PRINSIP MIKROEKONOMI

(COURSE) (PRINCIPLES OF MICROECONOMICS)

## PROGRAM SARJANA MUDA

(PROGRAMME) (BACHELOR DEGREE)

MASA 3 JAM
(DURATION) (3 HOURS)

## TARIKH JANUARI 2018

(DATE) (JANUARY 2018)

## MARKAII 100 (MENYUMBANG 50 PERATUS KEPADA

(MARKS) MARKAH KESELURUHAN)
(CONTRIBUTING 50 PERCENT TO THE
OVERALL MARKS)

(INSTRUCTION TO CANDIDATES

## BAHAGIAN C Jawab DUA (2) soalan sahaja.

(PARTC) (Answer TWO (2) question only.

## KERTAS PEPERIKSAAN INI TERDIRI DARIPADA 16 MUKA SURAT SAHAJA

(TERMASUK MUKA SURAT INI.
Part A : (30 marks)

1. The question of "What goods and services get produced?" most closely relates to which
of the following issues?
A. The distribution of goods and services in the economy.
B. Producing goods and services in the least costly manner.
C. Building a missile defense system, or putting a computer in every elementary
school classroom.
D. Obtaining specialized training to increase one's income.

## 2. In order to make a rational choice, people must

A. only know what they want.
B. be able to afford the choice decided upon.
C. decide quickly without wasting time.
D. compare marginal costs and marginal benefits.

Figure 1

Paper
(million tons)

## 14 16 19 20 Steel (million tons)

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3. Refer to Figure 1. If the economy is currently producing at point Y, what is the
opportunity cost of moving to point W?
A. 2 million tons of steel
B. zero
C. 9 million tons of paper
D. 16 million tons of paper

Figure 2

4. Refer to Figure 2. Which of the following would be most likely to cause the demand
for Dr. Pepper to shift from D q to D\1

## A. A decrease in income, assuming that Dr. Pepper is a normal good.

B. An increase in the price of 7-UP, assuming 7-UP is a substitute for Dr. Pepper.
C. A decrease in the price of Dr. Pepper.
D. A reduction in the price of sugar used to make Dr. Pepper.

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5. If improvements in technology have reduced the cost of producing personal computers,
you accurately predict that in the market for personal computers, there will be a (n)
A.increase in the quantity supplied of personal computers, a reduction in the price,
and an increase in the quantity demanded.
B. increase in the supply of personal computers, a decrease in the price, and an
increase in the quantity demanded.
C. increase in the supply of personal computers, a reduction in the price, and an
increase in the demand.
D. decrease in the supply of personal computers, an increase in the price, and a
decrease in the demand.

## 6. If increases in government regulations have increased the cost of producing gasoline-

powered lawnmowers, you accurately predict that in the market for gasoline-powered
lawnmowers, there will be a(n)
A. decrease in the quantity supplied of gasoline-powered lawnmowers, a reduction
in the price, and an increase in the quantity demanded.
B. decrease in the supply of gasoline-powered lawnmowers, an increase in the
price, and a decrease in the quantity demanded.
C. decrease in the supply of gasoline-powered lawnmowers, an increase in the
price, and a decrease in the demand.
D. increase in the supply of gasoline-powered lawnmowers, an increase in the
price, and a decrease in the demand.

7. When the supply of chocolate decreases while the demand for chocolate also decreases,
the equilibrium________ o f chocolate will definitely_________ , ceteris paribus.
A. price; increase
B. price; decrease
C. quantity; increase
D. quantity; decrease

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Refer to the information provided in Figure 3 below to answer Questions No. 8 and No. 9 that
follow. Equilibrium in this market occurs at the intersection o f curves S and D.

Figure 3

8. If price goes from equilibrium to PI, producer surplus changes by the area
A. E - C.
B. C + E.
C. E + F.
D. B - F.

## 9. If price goes from equilibrium to P 1, consumer surplus changes by the area

A. E - C.
B. C + E.
C. E + F.
D. B - F.

10. Which o f the following, if true, would most effectively back the argument that raising
cigarette taxes reduces the number of people who smoke cigarettes?
A. The demand for cigarettes is relatively inelastic.
B. The demand for cigarettes is relatively elastic.
C. The supply for cigarettes is relatively inelastic.
D. The supply for cigarettes is relatively elastic.

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11. The income elasticity of demand for low-quality beef is -2. Thus, a 5% increase in the
quantity of low-quality beef demanded
A. is the result of a decrease in income of 2.5%.
B. is the result o f a decrease in income of 10%.
C. is the result of an increase in income of 2.5%.
D. is unrelated to any change in income.

12. The ABC Computer Company spends a lot of money for advertising designed to
convince you that their personal computers are superior to all other personal computers.
If the ABC Company is successful, the demand for ABC personal computers
A. and the demand for other firms' personal computers will become less price
elastic.
B. and the demand for other firms' personal computers will become more price
elastic.
C. will become more price elastic, but the demand for other firms' personal
computers will become less price elastic.
D. will become less price elastic, but the demand for other firms' personal
computers will become more price elastic.

13. Jon is consuming X and Y so that he is spending his entire income and M U X/PX = 8

## A. the same amount of X and Y since he is already maximizing utility.

B. less of both X and Y.
C. more X and less Y.
D. less X and more Y.

## 14. The law of diminishing marginal utility implies that

A. demand curves always slope downward and to the right.
B. supply curves always slope upward and to the right.
C. a consumer will always buy positive amounts of all goods.
D. total utility will always increase by an increasing amount as consumption
increases.

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15. In the long run,
A. a firm can shut down, but it cannot exit the industry.
B. there are no fixed factors of production.
C. a firm can vary all inputs, but it cannot change the mix of inputs it uses.
D. all firms must make economic profits.

## 16. When total product is maximized, marginal product

A. and average product are zero.
B. is positive, but average product is zero.
C. is zero, but average product is positive.
D. and average product are positive.

17. Lauren runs a chili restaurant in Senai Lifestyle Park. Her total revenue last year
equaled RM111 000. The rent on her restaurant totaled RM48 000. Her labor costs
totaled RM43 000. Her materials, food and other variable costs totaled RM19 000. To
Lauren's accountant, Lauren
A. incurred a loss of RM1 000.
B. earned a profit of RM1 000.
C. incurred a loss of RM111 000.
D. earned a profit of RM111 000.

18. You are hired as an economic consultant to The Pampered Pet Shop. The Pampered
Pet Shop operates in a perfectly competitive industry. This firm is currently producing
at a point where market price equals its marginal cost. The Shop's total revenue exceeds
its total variable cost, but is less than its total cost. You should advise the firm to
A. cease production immediately because it is incurring a loss.
B. lower its price so that it can sell more units of output.
C. produce in the short run to minimize its loss, but exit the industry in the long
run.
D. raise its price until it breaks even.

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Refer to the information provided in Figure 4 below to answer Question No. 19.

Figure 4

## 19. Refer to Figure 4. This firm w ill_________if price is \$ 13.

A. earn a positiveeconomic profit
B. suffer an economic loss
C. break even
D. shut down

## Refer to the information provided in Figure 5 below to answer Question No.20.

Figure 5

20. Refer to Figure 5. From the diagram, existing firms in this industry m ake______
economic profits, and as long as this continues,________ .
A. negative; new firms will not enter it and existing firms will leave it
B. zero; new firms will not enter it and existing firms will not leave it either
C. positive; new firms will enter the industry and existing firms will not leave it
D. positive; the industry supply curve will shift to the left

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21. Relative to a profit-maximizing competitively organized industry that is producing
6 000 units of output at a price of RM7 per unit, firms acting collusively under the same
circumstances would produce________ units of output and charge a price o f _______
per unit.
A. 6 000; RM7.
B. more than 6 000; more than RM7.
C. less than 6 000; less than RM7.
D. less than 6 000; more than RM7.

22. When a monopolist incurs a loss in the short run, it will stop producing if
A. demand is greater than marginal revenue.
B. marginal cost equals marginal revenue.
C. total revenue is insufficient to cover variable costs.
D. total revenue is insufficient to cover fixed costs.

23. An oligopoly with a dominant price leader will produce a level of output below that
which would prevail under________ and above that which a ________ would choose
in the same industry.
A. monopoly; cartel
B. competition; monopolist
C. monopoly; competitive industry
D. cartel; competitive industry

24. A colluding oligopoly will face market demand and produce up until the point at which
A. P MR = MC.
B. P ■■ MR = MC.
C. P < MR = MC.
D. P < MR > MC.

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25. Mama Lena's, a frozen food producer, is a monopolistically competitive firm. Mama
Lena's is currently selling frozen lasagna at a price of RM10. Mama Lena's marginal
cost is RM5 and marginal revenue is RM5. This firm should to maximize
profits in the short run.
A. increase output to where price just equals marginal cost
B. decrease output to where price just equals marginal cost
C. continue to produce the same output level
D. Indeterminate from the given information.

26. A perfectly competitive firm is producing 50 units of output and selling at the market
price of RM23. The firm's average total cost is RM20. What is the firm's economic
profit?
A. RM23
B. RM150
C. RM1 000
D. RM1 150

27. Figure 6 below shows the initial demand for labor curve at a Pizza Hut in Canada. The
wage rate is RM6 an hour. If the demand for pizzas increases, so that the price of a
pizza rises,
A. at the wage rate o f RM6 per hour, Pizza Hut hires fewer than 10 workers.
B. Pizza Hut's demand for labor curve shifts rightward.
C. the supply of labor curve shifts rightward.
D. Pizza Hut's demand for labor curve shifts leftward.

Figure 6
Wage rate
RM / hour

LD
II
2 10 Labour (workers)

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28. When production of a good results in an external cost, the unregulated competitive
market equilibrium quantity is
A. the efficient level of output.
B. greater than the efficient level of output.
C. not zero but is less than the efficient level of output.
D. unattainable.

29. Neither the demand nor the supply of sugar is perfectly elastic or inelastic. If the
government imposes a 5 percent tax on sugar, the
A. price of sugar buyers pay falls by 5 percent.
B. price of sugar buyers pay increases by less than 5 percent.
C. price of sugar buyers pay does not change.
D. quantity of sugar increases.

30. Black markets can occur when price ceilings are imposed in a market. Which of the
following explains why sellers participate in a black market?
A. Sellers are able to sell the product for a higher than legal price.
B. There are more buyers in the black market than in the legal market.
C. The demand is perfectly elastic in a black market.
D. The demand is perfectly inelastic in a black market.

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Part B : (30 marks)
Instruction : Answer true (T) or false (F) and explain briefly.

1. (a) The existence of fiscal policy in a mixed economic system and Islamic economic
system is in direct contradiction to the Marginal Productivity Theory of Income
Distribution. According to this theory, income is distributed according to a factor’s
contribution to output and, therefore, income distribution based on Marginal
Revenue Product (or the value of marginal product) is fair and equitable.
(9 marks)
(b) In a conventional free market system, human activities are driven by self-interest
which may or may not be in the broader social interests. In the Islamic economic
system, pursuit of self-interest are constrained within the realms of what is
permitted or forbidden by Islam.
(5 marks)
(c) The difference between diminishing marginal returns and returns to scale can be
illustrated with a set of isoquants.
(4 marks)
(d) Direct and secondary effects of smoking justify the tax imposed on the production
of cigarettes.
(3 marks)
(e) A firm that is a price taker in both the labour market and product market will tend
to increase output and increase demand for labour when wage rate falls.
(3 marks)
(f) The monopolist may be able to raise its price higher than the tax burden when
a specific tax (per unit tax) is imposed.
(3 marks)
(g) Firms in monopolistic competition prolong their short run economic profits through
(3 marks)

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Part C : (40 marks)
Instruction : Answer two (2) questions only.

2. (a) Elegant Roses uses inputs of fertilizers, labour and hothouses to grow roses.
Suppose that when the quantity of labour and hothouses is fixed, the relationship
between fertilizers and roses produced is given as below:
Fertilizers Number of Marginal Average
(tons per roses per product of product of
month) month (Q) fertilizers fertilizers
0 0 - -
1 500
2 1 000
3 1 700
4 2 200
5 2 500
6 2 600
7 2 500
8 2 000

(i) Complete the columns in the table for marginal product and average
product of fertilizers used in the production of roses.
(4 marks)
(ii) Does the production function exhibit increasing and diminishing
marginal returns? At what quantities of fertilizers do they happen?
(3 marks)
(iii) Explain how the firm will determine the optimal amount of fertilizers
needed to maximize profit from the sale of roses.
(3 marks)

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(b) Suppose the production of winter jackets for the American Apparel Company
is described as follows:
q = 10 K°-8L0-2
where q is the number of jackets produced, K is the number of machine hours
and L the number of man-hours of labour. In addition to capital and labour,
RM10 worth o f raw materials is used in the production of each jacket.
(i) Calculate the marginal product of capital and marginal product of labour
for producing a winter coat.
(3 marks)
(ii) If workers are paid RM30 an hour and machines are rented at RM50 an
hour, how many man-hours and machine-hours will be needed to
produce 2 500 jackets? State clearly how you determine the appropriate
number of worker man-hours and machine hours.
(5 marks)
(iii) What is the total cost of producing these jackets? What is the average
cost at this level of output?
(2 marks)

Industry X consists of 20 firms, where each firm has identical short run total cost (STC)
and short run marginal cost (SMC) curves as follows:
STC(Q) = 16 + Q2
SMC{Q) = 2Q
where Q is the annual output of each firm. The market demand curve for product X is
£>(fi) = 1 1 0 - P
where P is the market price.
(a) What is the firm’s short run supply curve, assuming that the fixed cost is
sunk?
(4 marks)
(b) What is the market supply curve?
(2 marks)
(c) Determine the short run equilibrium price and quantity in this industry.
(2 marks)
(d) What is the total surplus obtained in this industry?
(4 marks)
(e) Are the firms in this industry making a profit? Explain.
(4 marks)
(f) What do you suppose will happen in this industry when other things rem aining
unchanged, the supply of an essential input is reduced by 30%? Explain.
(4 marks)

4. (a) In perfect competition, both productive efficiency and allocative efficiency are
achieved. In monopolistic competition, neither is achieved. However, it may be
argued that consumers actually benefit from monopolistic competition. Explain
using appropriate diagram(s) and examples.
(10 marks)
(b) Some firms enjoy considerable monopoly power (MP) while some firms none.
What is monopoly power? How does one measure MP and how is it related to
the mark-up over marginal cost and elasticity? How is it determined by product
differentiation and barriers to entry into the market?
Use a diagram with appropriate examples to illustrate where necessary.
(10 marks)

5. Suppose an industry is described by the demand and supply functions given below:
Qd = 20 - 0.5Pd
Qs = —2 + Ps , when Ps > 2
(a) Calculate the equilibrium price and quantity.
(3 marks)
(b) Suppose a subsidy of RM2 is provided for every unit produced.
(i) Calculate the price that will be paid by the consumer and the price
received by the producer with a subsidy.
(3 marks)
(ii) How much will the subsidy cost the government?
(2 marks)
(iii) What is the economic impact of this policy? Who is more likely to
benefit or lose out from this policy, consumer or producer? Overall
impact of subsidy?
(4 marks)
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(iv) Provide a diagram to show the economic impact of the subsidy on the
market.
(4 marks)
(c) • Although a subsidy is likely to drain the government’s limited resources,
provide an example from your country that justifies the policy.
(3 marks)

## 6. Education is an important aspect of economic development. An integral part of this is

the creation of human capital for the nation.
(a) Use an appropriate diagram that shows the market for higher education in any
country, clearly indicating the consequences of ignoring the positive
externalities associated with gaining a higher education. Explain your diagram.
(6 marks)
(b) What are the benefits of gaining higher education, both to the individual and
society? Use examples and experience from your own country.
(5 marks)
(c) Explain one current policy that aims to exploit these externalities of higher