SEPTEMBER EXAMINATIONS 2010

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1 No. of Pages: (A) 11 No. of Questions: 39 Resit2010 SEPTEMBER EXAMINATIONS 2010 Subject Title of Paper ECONOMICS MICROECONOMICS Time Allowed Two Hours (2 Hours) Instructions to candidates This paper is in two sections. Students should attempt ALL the questions in Section A and ONE in Section B. The maximum mark awarded for Section A is 75 marks. The maximum mark awarded for Section B is 33 marks. The maximum mark for the entire paper is 100 (any marks over 100 are disregarded). SECTION A: Multiple Choice All questions should be attempted. Use the answer sheet provided to record the one response you believe to be the most appropriate for each question. The marking scheme is the following. 3/(1.4) marks (this is 3 divided by 1.4) for each right answer, -1/(1.4) marks (this is 1 negative mark divided by 1.4) for each wrong answer, and Zero mark if no answer is given. Use the following information to answer the following questions. Scenario 18-2 Jerry has two jobs, one for the winter and one for the summer. In the winter, he workers as a lift attendant at a ski resort where he earns $10 per hour. During the summer, Jerry drives a tour bus around the ski resort, earning $12 per hour. 1. Refer to Scenario If Jerry takes fewer hours of leisure in the summer than in the winter, we can assume that his labor supply curve a. is horizontal. b. is vertical. c. slopes upward. d. slopes downward.

2 Figure Refer to Figure Assume the firm in the figure is currently producing 8 units of output and charging $380. The firm a. will increase its profits if it raises its price and reduces its production level. b. will increase its profits if it lowers its price and expands its production level. c. is maximizing profits. d. will increase its profits if it raises its prices and expands its production level. 3. Implicit costs a. do not require an outlay of money by the firm. b. do not enter into the economist's measurement of a firm's profit. c. are also known as variable costs. d. All of the above are correct. Figure Refer to Figure 5-6. If price increases from $10 to $15, total revenue will a. increase by $20, so demand must be inelastic. b. increase by $5, so demand must be inelastic. c. decrease by $20, so demand must be elastic. d. decrease by $10, so demand must be elastic. 2

3 Use the following information to answer the following questions. Scenario 16-4 Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two companies split the market. If they both advertise, they again split the market, but profits are lower, since each company must bear the cost of advertising. Yet if one company advertises while the other does not, the one that advertises attracts customers from the other. 5. Refer to Scenario In 1971, Congress passed a law that banned cigarette advertising on television. If cigarette companies are profit maximizers, it is likely that a. neither company opposed the ban on advertising. b. Brown Inc. sued the federal government on grounds that the ban constitutes a civil rights violation. c. both companies sued the federal government on grounds that the ban constitutes a civil rights violation. d. both companies retaliated with black-market operations. 6. Over time, housing shortages caused by rent control a. increase, because the demand and supply curves for housing are more elastic in the long run. b. increase, because the demand and supply curves for housing are more inelastic in the long run. c. decrease, because the demand and supply curves for housing are more inelastic in the long run. d. change very little since price is not allowed to adjust. 7. Suppose Lauren, Leslie and Lydia all purchase bulletin boards for their rooms for $15 each. Lauren's willingness to pay was $35, Leslie's willingness to pay was $25, and Lydia's willingness to pay was $30. Which of the three receives the most consumer surplus from her purchase? a. Lauren b. Leslie c. Lydia d. They each received the same consumer surplus since they each paid the same for the bulletin board. 8. A firm that exits its market a. still has to pay its variable costs, but not its fixed costs. b. still has to pay its fixed costs, but not its variable costs. c. still has to pay both its variable costs and its fixed costs. d. has to pay neither its variable costs nor its fixed costs. 9. When a relevant variable that is not named on either axis changes, a. there will be a movement along the curve. b. the curve may or may not change. It depends on how the variables are related. c. the curve will be unaffected since only the variables on the axis affect the curve. d. the curve will shift. 3

4 10. In a monopolistically competitive industry, firms' demand curves also represent a. marginal revenue. b. marginal cost. c. average revenue. d. profit. Use the accompanying table to answer the following questions: Table 3-5 Labor hours needed to make one unit of Amount produced in 40 hours Cheese Bread Cheese Bread England Spain Refer to Table 3-5. The opportunity cost of 1 unit of cheese in Spain is a. 2 breads. b. 1 bread. c. 1/2 bread. d. 1/4 bread. 12. One reason an individual labor supply curve may be backward sloping is a. a person may devote more time to her golf game after she is promoted and receives a raise. b. a person who wins the lottery may then quit work. c. that work hours decline as technology raises worker productivity. d. All of the above can be reasons. 13. When marginal revenue equals marginal cost, the firm a. should increase the level of production to maximize its profit. b. may be minimizing its losses, rather than maximizing its profit. c. must be generating economic profits. d. must be generating economic losses. 14. As some incumbent firms exit a monopolistically competitive market, profits of existing firms a. decline and product diversity in the market decreases. b. decline and product diversity in the market increases. c. rise and product diversity in the market decreases. d. rise and product diversity in the market increases. 15. Competitive firms that maximize profit will hire workers until the value of the marginal product of labor a. equals the wage. b. equals the price of the final good. c. begins to fall. d. begins to rise. 4

5 16. Total revenue equals a. total output multiplied by price per unit of output. b. total output divided by profit. c. (total output multiplied by sales price) - inventory surplus. d. (total output multiplied by sales price) - inventory shortage. Figure Refer to Figure Which of the graphs shown represent indifference curves for perfect substitutes? a. graph (a) b. graph c. graph (c) d. All of the above are correct. 18. Without trade a. a country is better off because it will become self-sufficient. b. a country's production possibilities frontier is also its consumption possibilities frontier. c. a country can still benefit from international specialization. d. more product variety is available in a country. 5

6 19. Suppose an economy produces two goods, food and machines. This economy always operates on its production possibilities frontier. Last year, it produced 50 units of food and 30 machines. This year it experienced a technological advance in its machine-making industry. As a result, this year the society wants to produce 55 units of food and 30 machines. Which of the following statements is true? a. Because the technological advance occurred in the machine-making industry, it will not be possible to increase food production without reducing machine production below 30. b. Because the technological advance occurred in the machine-making industry, increases in output can only occur in the machine industry. c. In order to increase food production in these circumstances without reducing machine production, the economy must reduce inefficiencies. d. The technological advance reduced the amount of resources needed to produce 30 machines. These resources could be used to produce more food. The table shows individual demand schedules for a market. Table 4-1 Price of the Good Aaron Angela Austin Alyssa $ Refer to Table 4-1. If the price increases from $1.00 to $1.50, a. the market demand increases by 20 units. b. the quantity demanded in the market decreases by 2 units. c. individual demands will increase. d. the quantity demanded in the market decreases by 7 units. 21. If Japan can produce each unit of steel using fewer resources than Canada does, a. Canada has an absolute advantage in steel production. b. Japan has an absolute advantage in steel production. c. Japan has a comparative advantage in steel production. d. Canada has a comparative advantage in steel production. 6

7 Figure Refer to Figure The consumer is likely to select the consumption bundle associated with a. point B b. point C c. point D d. point E 23. Which of the following statements is correct? a. Hidden actions and hidden characteristics are both associated with the moral-hazard problem. b. Hidden actions and hidden characteristics are both associated with the adverse-selection problem. c. Hidden actions are associated with the moral-hazard problem, whereas hidden characteristics are associated with the adverse-selection problem. d. Hidden actions are associated with the adverse-selection problem, whereas hidden characteristics are associated with the moral-hazard problem. 24. If Brock is willing to pay $400 for a new suit, but is able to buy the suit for $350, his consumer surplus is a. $50. b. $150. c. $350. d. $ Marginal cost is equal to average total cost when a. average variable cost is falling. b. average fixed cost is rising. c. marginal cost is at its minimum. d. average total cost is at its minimum. 26. Goods that are not excludable may be socially desirable a. but not privately profitable. b. and therefore will be provided by both the government and as a private good. c. and have a lower price so more consumers will be able to afford them. d. but are still generally taxed by the government. 7

8 Figure Refer to Figure The price that will be paid after the tax is a. P 0. b. P 1. c. P 2. d. impossible to determine. 28. An important difference between the situation faced by a profit-maximizing monopolistically competitive firm in the short run and the situation faced by that same firm in the long run is that in the short run, a. price may exceed marginal revenue; in the long run, price equals marginal revenue. b. price may exceed marginal cost; in the long run, price equals marginal cost. c. price may exceed average total cost; in the long run, price equals average total cost. d. there are many firms in the market; in the long run, there are only a few firms in the market. 29. For a firm, the production function represents the relationship between a. implicit costs and explicit costs. b. quantity of inputs and total cost. c. quantity of inputs and quantity of output. d. quantity of output and total cost. Table 5-1 Income Quantity of Good X Purchased Quantity of Good Y Purchased $30, $40, Refer to Table 5-1. Using the midpoint method, what is the income elasticity of good Y? a b c d

9 31. What is the monopolist's profit under the following conditions? The profit-maximizing price charged for goods produced is $12. The intersection of the demand curve and the marginal cost curve occurs where output is 15 units and marginal cost is $6. a. $90 b. $100 c. $180 d. Not enough information is given to determine the answer. 32. Economist use graphs to a. find how variables are related in the real world. b. express economic ideas that cannot be expressed with equations or words. c. visually express ideas more clearly than might be the case if they are expressed with equations or words. d. Both a and c are correct. e. All of the above are correct. 33. Whether a tax is levied on the buyer or seller of the good does not matter because a. sellers always bear the full burden of the tax. b. buyers always bear the full burden of the tax. c. buyers and sellers will share the burden of the tax. d. sellers bear the full burden if the tax is levied on them, and buyers bear the full burden if the tax is levied on them. 34. In a particular town, Metrovision and Cableview are the only two providers of cable TV service. Metrovision and Cableview constitute a a. duopoly, whether they collude or not. b. cartel, whether they collude or not. c. Nash industry, whether they collude or not. d. All of the above are correct. 35. Causes of market failure include a. externalities and market power. b. market power and incorrect forecasts of consumer demand. c. externalities and foreign competition. d. incorrect forecasts of consumer demand and foreign competition. 9

10 SECTION B Answer one and only one of the questions numbered 35 to 38. Do NOT answer more than one question from this section. The maximum number of marks awarded for this Section is Use the graph shown to answer the following questions. Put the correct letter in the blank. a. The elastic section of the graph is represented by section. b. The inelastic section of the graph is represented by section. c. The unit elastic section of the graph is represented by section. d. The portion of the graph in which a decrease in price would cause total revenue to fall would be. e. The portion of the graph in which a decrease in price would cause total revenue to rise would be. f. The portion of the graph in which a decrease in price would not cause a change in total revenue would be. g. The section of the graph in which total revenue would be at a maximum would be. h. The section of the graph in which elasticity is greater than 1 is. i. The section of the graph in which elasticity is equal to 1 is. j. The section of the graph in which elasticity is less than 1 is. 37. Answer both (a) and (a) Describe the difference between average revenue and marginal revenue. Why are both of these revenue measures important to a profit-maximizing firm? What effect, if any, does diminishing marginal product have on the shape of the marginal cost curve? Explain your answer. 10

11 38. Answer both questions. (a) In many college towns, private independent bookstores typically locate on the periphery of the college campus. However, in some college towns, the University has used political power to restrict private bookstores near campus through community zoning laws. Use your knowledge of markets to predict the price and quality of service difference in the market for college textbooks under these two different market regimes. John has been in the habit of mowing Willa's lawn each week for $20. John's opportunity cost is $15, and Willa would be willing to pay $25 to have her lawn mowed. What is the maximum tax the government can impose on lawn mowing without discouraging John and Willa from continuing their mutually beneficial arrangement? 39. Answer both (a) and. (a) What are the four ways that government policymakers can respond to the problem of monopoly? Give two reasons why the long-run industry supply curve may slope upward. Use an example to demonstrate your reasons. 40. Answer both questions (a) Use a graph to demonstrate the circumstances that would prevail in a competitive market where firms are earning economic profits. Can this scenario be maintained in the long run? Carefully explain your answer. While on vacation in Berserkistan, you are arrested and accused of spying for your country. You are, of course, innocent. Your captors inform you that if you confess, you will receive a sentence of six months while your co-conspirator (whom you have never heard of) will receive a sentence of thirty years. If you both confess you will each receive a sentence of three years. You are also told that your co-conspirator is being offered the same option. You suspect that there is not enough evidence to convict you (and you will be allowed to leave Berserkistan immediately) unless your alleged co-conspirator confesses. What should you choose to do and why? 41. Answer both questions (a) Explain the practice of resale price maintenance and discuss why it is controversial. If identical firms that remain in a competitive market over the long run make zero economic profit, why do these firms choose to remain in the market? 11

12 ID: A Resit2010 Answer Section MULTIPLE CHOICE 1. C 2. D 3. A 4. A 5. A 6. A 7. A 8. D 9. D 10. C 11. D 12. D 13. B 14. C 15. A 16. A 17. A 18. B 19. D 20. D 21. B 22. B 23. C 24. A 25. D 26. A 27. C 28. C 29. C 30. B 31. D 32. D 33. C 34. A 35. A 1

13 ID: A SHORT ANSWER 36. a. A b. C c. B d. C e. A f. B g. B h. A i. B j. C 37. (a) Average revenue is total revenue divided by the amount of output. Marginal revenue is the change in total revenue from the sale of each additional unit of output. Marginal revenue is used to determine the profit-maximizing level of production and average revenue is used to help determine the level of profits. Diminishing marginal product causes the marginal cost curve to rise. 38. (a) In monopoly markets, price will be higher and the quality of service will be lower than in monopolistically competitive markets. If the tax is less than $10, there will exist a price at which both John and Willa will still benefit from the lawn-mowing arrangement. If the tax is $10, a price can be set which will leave John and Willa neither better off nor worse off from the lawn-mowing arrangement. If the tax is greater than $10, all possible prices will leave at least one of the parties worse off from the lawn-mowing arrangement. 39. (a) Trying to make monopolized industries more competitive. Regulating the behavior of monopolies. Turning some private monopolies into public enterprises. Do nothing. Some resource used in production may be available only in limited quantities and firms may have different cost structures. The example provided in the text for the first reason is the market for farm products. As more people become farmers, the price of land is bid up since its supply is limited. As the price of farm land is bid up, the cost of all farmers in the market rises. The example used to support the second reason is the market for painters. Anyone can enter the market for painting services, but not everyone has the same costs because some painters work faster than others. 2

14 ID: A 40. (a) In a competitive market where firms are earning economic profits, new firms will have an incentive to enter the market. This entry will expand the number of firms, increase the quantity of the good supplied, and drive down prices and profits. If the co-conspirator "confesses" your options are three years if you confess or thirty years if you don't confess. If the co-conspirator does not "confess" your options are six months if you confess or freedom if you don't confess. In this case there is not a dominant strategy. Your choice will depend on your assessment about the subjective probabilities you place on the choice of your "co-conspirator." 41. (a) Resale price maintenance is a requirement by producers that retailers sell their product for a price specified by the manufacturer. It is controversial because on the surface it appears to limit the ability of retailers to compete on the basis of price. However, if the manufacturer does not exercise retail-price maintenance a free-rider problem may become evident among the retailers and ultimately lead to lower profits for the manufacturer. Because a normal rate of return on their investment is included as part of the opportunity cost of production. 3

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