DBA10MIC - SECTION A

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1 DBA10MIC - SECTION A You must write one essay from the three topics provided here. Each essay must be written in a separate Section A examination booklet. Request extra booklets if required. Please complete the front of each booklet indicating the number of the question attempted. Question 1 (20 Marks) Explain what you understand by the term oligopoly. Using the kinked demand curve, show why firms operating in this type of market are unlikely to alter output and price. Evaluate the merits and limitations of this market structure from an economic efficiency perspective. OR Question 2 (20 Marks) Show how the demand curve for labour can be derived from the Marginal Revenue Product of labour. Using the demand and supply for labour, explain how wages are determined in a competitive labour market. Explain how the competitive equilibrium can be altered by the actions of governments or other forms of intervention. As a minimum you should refer to at least three of the following: Monopsony Featherbedding or demarcation Exclusive or craft union Bilateral monopoly Minimum wage legislation OR Question 3 (20 Marks) Explain in detail the efficiency implications of pure monopoly. In answering this question you should, as a minimum, discuss: The structure of the market place for monopolistic firms The short run behaviour of the monopoly firm Long run equilibrium for monopoly relative to that of competitive firms The implications for productive and allocative efficiency The concept of dynamic efficiency and highlight limitations to the comparative analysis of monopoly and competitive firms.

2 SECTION B Choose the single most correct answer and indicate on the separate answer sheet. Each question is worth eight tenths (0.8) of a mark. 1. In the long-run, a pure monopolist will maximise profits by producing that output at which marginal cost is equal to: A) average total cost. B) marginal revenue. C) average variable cost. D) price. The following is demand and cost data for a pure monopolist: DEMAND DATA COST DATA Price Demand Output Cost $ $ Refer to the above information. Equilibrium price for the monopolist will be: A) $2.90. B) $3.35. C) $3.85. D) $ The term "dynamic efficiency" refers to: A) the speed with which firms can enter or exit an industry B) the technological progressiveness of a firm. C) the absence of X-inefficiency. D) a firm's ability to realise all existing economies of scale. 4. If a regulatory commission wants to provide a natural monopoly with a "fair return," it should establish that price which is equal to: A) minimum average fixed cost. B) average total cost. C) marginal cost. D) marginal revenue.

3 5. Oligopolistic industries are characterised by: A) a few dominant firms and substantial entry barriers. B) a few dominant firms and no barriers to entry. C) a large number of firms and low entry barriers. D) a few dominant firms and low entry barriers. The following are demand and cost data for a specific firm: DEMAND DATA COST DATA (1) (2) (3) Price Price Quantity Output Total Cost $11 $ $61 $9.99 $ $62 $9 $8 8 8 $64 $8 $7 9 9 $67 $7.1 $ $72 $6 $ $79 $5.15 $ $86 6. Refer to the above information. If columns (1) and (3) of the demand data are this firm's demand schedule, the profit-maximising price will be: A) $9. B) $7. C) $11. D) $6. 7. A purely monopolistic industry: A) is characterised by significant entry barriers. B) is characterised by a downward sloping demand curve. C) produces a product or service for which there are no close substitutes. D) is characterised by all of the above. 8. Pure monopolists may earn economic profits in the long-run because: A) of advertising. B) marginal revenue is constant as sales increase. C) of barriers to entry. D) of rising average fixed costs.

4 9. What do economies of scale, the ownership of essential raw materials, and patents have in common? A) They must all be present before price discrimination can be practised. B) They are all barriers to entry. C) They all help explain why a monopolist's demand and marginal revenue curves coincide. D) They all help explain why the long-run average cost curve is U-shaped. 10. For an imperfectly competitive firm: A) total revenue is a straight, upward sloping line because a firm's sales are independent of product price. B) the marginal revenue curve will lie above the demand curve because any reduction in price applies to all units sold. C) the marginal revenue curve will lie below the demand curve because any reduction in price applies to all units sold. D) the marginal revenue curve will lie below the demand curve because any reduction in price applies only to the extra unit sold. 11. When total revenue is increasing: A) marginal revenue may be either positive or negative. B) the demand curve is relatively inelastic. C) marginal revenue is positive. D) marginal revenue is negative. 12. A non-discriminating monopolist: A) will never produce in the output range where marginal revenue is positive. B) will never produce in the output range where demand is inelastic. C) will never produce in the output range where demand is elastic. D) may produce where demand is either elastic or inelastic, depending upon the level of production costs.

5 The following table showing the demand schedule facing a non-discriminating monopolist: Price Quantity Demanded $10 1 $7 2 $5 3 $3 4 $ Refer to the above information, the monopolist will select its profit-maximising level of output somewhere within the: A) 3-5 unit range of output. B) 1-3 unit range of output. C) 1-4 unit range of output. D) 2-4 unit range of output. 14. Refer to the above information, the price elasticity of demand coefficient when the price falls from $3 to $1 is: A) 0.44 B) 1.2 C) 2.25 D) If an oligopoly is faced with a kinked demand curve, which is relatively elastic above and relatively inelastic below the going price, then it will: A) increase total revenue by increasing price, but lower total revenue by decreasing price. B) decrease total revenue by either increasing or decreasing price. C) increase total revenue by either increasing or decreasing price. D) increase total revenue by decreasing price, but lower total revenue by increasing price. 16. The Schumpeter-Galbraith view is that: A) oligopolistic firms will withhold the use of new productive techniques until existing capital equipment is fully depreciated. B) collusive pricing by oligopolists breaks down during recessions. C) large oligopolistic firms are conducive to a rapid rate of technological progress. D) competitive firms are more progressive than oligopolistic firms.

6 17. Which of the following statements best illustrates the concept of derived demand? A) As income goes up, the demand for farm products will increase by a smaller relative amount. B) A decline in the price of margarine will reduce the demand for butter. C) A decline in the demand for shoes will cause the demand for leather to decline. D) When the price of gasoline goes up, the demand for motor oil will decline. 18. Marginal revenue product measures the: A) amount by which the extra production of one more worker increases a firm's total revenue. B) decline in product price which a firm must accept in order to sell the extra output of one more worker. C) increase in total resource cost which results from the hire of one extra unit of a resource. D) increase in total revenue which results from the production of one more unit of a product. 19. Assume labour is the only variable input and that an additional input of labour increases total output from 72 to 78 units. If the product sells for $6 per unit in a purely competitive market, the MRP of this additional worker: A) is $12. B) is $36. C) is $72. D) cannot be determined from the information given. 20. The real wage will rise if the nominal wage: A) falls by more than does the general price level. B) increases at the same rate as does labour productivity. C) increases by more than does the general price level. D) falls by more than does the general price level.

7 The following incomplete information is for Wayne's Window Washing. Assume Wayne hires labour, its only variable input, under purely competitive conditions. Window Washes are also sold competitively. Units of labour Total Product Marginal Product Total Revenue $ $ $117 6 $ $ Refer to the above information. What is the marginal product of the fifth worker? A) 2 units. B) 3 units. C) 4 units. D) Answer cannot be determined from the information given. The following data represents the Marginal Product and Marginal Revenue Product of Labour and Capital. Quantity of Labour MP of Labour MRP of Labour ($) Quantity of Capital MP of Capital MRP of Capital Refer to the above data. If the prices of labour and capital are $18 and $6 respectively, the firm will hire: A) 5 units of labour and 3 of capital. B) 5 units of labour and 2 of capital. C) 4 units of labour and 6 of capital. D) none of the above.

8 23. This firm is most likely to be selling its output in a: A) Perfectly competitive market B) Monopolistically competitive market C) Monopoly market D) It cannot be determined from these data 24. Marginal resource cost refers to the: A) increase in total revenue resulting from the sale of the extra output of one more worker. B) price at which additional units of a resource can be hired in an imperfectly competitive resource market. C) increase in total cost resulting from the production of one more unit of output. D) amount by which a firm's total resource cost increases as the result of hiring one more unit of the resource. The following table represents the labour demand and supply data. Employment MP Product Price Wage Rate ($/Hr) Refer to the above data. The firm is hiring labour: A) at a wage rate which exceeds labour's MRP. B) under purely competitive conditions. C) in an imperfectly competitive market. D) as a monopsonist. 26. Economic rent or pure rent is: A) a payment made for the use of housing, factory buildings, or capital goods. B) a payment for resources used in the production of free goods. C) a payment for the use of the resources where supply is perfectly elastic. D) the price paid for the use of land and other non-reproducible resources. 27. To say that land rent performs no incentive function means that: A) higher rental payments will not bring forth a larger quantity of land. B) rent is not a cost to specific firms and industries, but it is a cost from the standpoint of the economy as a whole. C) rent does not allocate land in terms of productive efficiency. D) rent tends to allocate land into the most productive uses.

9 28. A bank charges one borrower (A): 8 per cent interest per year and another borrower (B): 10 per cent interest per year. Which of the following is a reason for the higher interest rate for B? A) A is borrowing the money for a longer period than B. B) A is borrowing a larger amount than B. C) B is using the money for a less risky project than A. D) B has a better credit rating than A. 29. If the nominal rate of interest is 13 per cent and the rate of inflation is 4 per cent: A) the real rate of interest cannot be determined. B) then the real rate of interest is approximately 7 per cent. C) then the real rate of interest is 9 per cent. D) then the real rate of interest is 17 per cent. 30. Economic profits are most closely associated with: A) the process of saving and investing. B) monopoly, innovation, and uninsurable risks. C) long-run competitive equilibrium. D) a static economy. The following two schedules show the amounts of additional satisfaction (marginal utility) which a consumer would get from successive quantities of products J and K. Units of J Marginal Utility of J Units of K Marginal Utility of K Refer to the above information. If the consumer has a money income of $52 and the price of J and K is $8 and $4 respectively, the consumer will maximise her utility by purchasing: A) 2 units of J and 7 units of K. B) 5 units of J and 5 units of K. C) 4 units of J and 5 units of K. D) 6 units of J and 3 units of K.

10 32. When a consumer is in the utility-maximising position: A) the average utility from each dollar spent is the same. B) total utility cannot be increased by reallocating expenditures among various products. C) the total utility obtainable from each product is at a maximum. D) the marginal utility of the last unit of each product purchased is zero. 33. If a good's production entails substantial spillover benefits and no spillover costs, then: A) too much of the good will be produced, unless firms are subsidised. B) too much of the good will be produced, unless firms are taxed. C) too little of the good will be produced, unless firms are subsidised. D) too little of the good will be produced, unless firms are taxed. 34. Suppose a product entails substantial spillover costs, if government adopts a policy that forces producers to pay these costs, the: A) equilibrium quantity of the product will decrease. B) initial misallocation of resources will be intensified. C) equilibrium quantity of the product will increase. D) price of the product will decrease. 35. Pollution: A) should be corrected by the subsidisation of offending firms. B) is not an economic problem because it is external to the market system. C) is an example of private production costs. D) is an example of a spillover or external cost. 36. The market system fails to produce public goods because: A) there is no need or demand for such goods. B) private firms cannot restrict the benefits of such goods to consumers who are willing to pay for them. C) public enterprises can produce such goods at a lower cost than private enterprises. D) their production seriously distorts the distribution of income. 37. Economies of scale refer to: A) the notion that small firms are less bureaucratic and, therefore, more efficient than corporations. B) public investments in highways, schools, utilities, etc. C) the fact that large producers may be able to use more efficient technologies. D) the reallocation of labour from less-productive to more-productive uses.

11 38. To economists, the main difference between "the short-run" and "the long-run" is that: A) the law of diminishing returns applies in the long-run, but not in the short-run. B) in the long-run all resources are variable, while in the short run at least one resource is fixed. C) fixed costs are more important to decision-making in the long-run, than they are in the short-run. D) in the short-run all resources are fixed, while in the long-run all resources are variable. 39. Normal profit is: A) determined by subtracting implicit costs from total revenue. B) determined by subtracting explicit costs from total revenue. C) the return to the entrepreneur when economic profits are zero. D) the average profitability of an industry over the preceding 10 years. 40. The demand schedule, or curve, confronted by the individual purely competitive firm is: A) relatively elastic, that is, the elasticity coefficient is greater than unity. B) perfectly elastic. C) relatively inelastic, that is, the elasticity coefficient is less than unity. D) perfectly inelastic. 41. If a firm raises price and its customers are inelastic we would expect that: A) total revenue would fall B) total revenue will remain unchanged C) total revenue will rise D) the firm will absorb the majority of any future tax impost 42. If a firm, in a purely competitive industry, is confronted with an equilibrium price of $5. Its marginal revenue: A) may be either greater or less than $5. B) will also be $5. C) will be less than $5. D) will be greater than $5.

12 43. Assume the XYZ Corporation is producing 20 units of output. It is selling this output in a purely competitive market at $10 per unit. Its total fixed costs are $100 and its average variable cost is $3 at 20 units of output. On the basis of this information we can say that the corporation: A) should close down in the short-run. B) is maximising its profits. C) is realising a loss of $60. D) is realising an economic profit of $ In a purely competitive industry: A) there will be no economic profits in either the short-run or the long-run. B) economic profits may persist in the long-run, if consumer demand is strong and stable. C) there may be economic profits in the short-run, but not in the long-run. D) there may be economic profits in the long-run, but not in the short-run. 45. Which of the following will not hold true for a competitive firm in long-run equilibrium? A) P equals AFC. B) P equals AC. C) MC equals AC. D) P equals MC. 46. "Allocative efficiency" is achieved when the production of a good occurs at that point where: A) P = minimum ATC. B) P = MC. C) P = minimum AVC. D) total revenue is equal to TFC. 47. Under monopolistic competition, entry to the industry is: A) completely free of barriers. B) more difficult than under pure competition, but not nearly as difficult as under pure monopoly. C) more difficult than under pure monopoly. D) blocked.

13 48. If the number of firms in a monopolistically competitive industry increases, and the degree of product differentiation diminishes: A) the likelihood of realising economic profits in the long run would be enhanced. B) individual firms would now be operating at outputs where their average total costs would be higher. C) the industry would more closely approximate pure competition. D) the likelihood of collusive pricing would increase. 49. Monopolistically competitive firms: A) realise normal profits in the short run, but losses in the long run. B) tend to incur persistent losses in both the short run and long run. C) may realise either profits or losses in the short run, but tend to realise a normal profit in the long run. D) persistently realise economic profits in both the short run and long run. 50. The possibility of a long-run equilibrium for a monopolistically competitive firm, wherein economic profits are zero, is based upon the assumption of: A) rising marginal costs. B) a perfectly elastic product demand curve. C) the weakness of barriers to entry. D) product differentiation and development. There are no more examination questions