JANUARY EXAMINATIONS 2006

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1 No. of Pages: (A) 10 No. of Questions: 29 EC1000A ' JANUARY EXAMINATIONS 2006 Subject Title of Paper ECONOMICS EC1000 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. Each correct answer will be given three marks. An incorrect answer will be given one negative mark. 1. If the relative price of a ticket to a concert is 3 times the price of a meal at a good restaurant, the opportunity cost of a concert ticket is the a. slope of the budget constraint. b. slope of the indifference curve. c. intercept on the concert axis. d. intercept on the restaurant axis. 2. If marginal cost is greater than average total cost then a. profits are increasing. b. economies of scale are becoming greater. c. average total cost remains constant. d. average total cost is increasing. 1

2 EC1000 A - Microeconomics I EC1000 A 3. Suppose that scientists find evidence that proves chocolate pudding lowers cholesterol. We would expect to see a. no change in the demand for chocolate pudding. b. a decrease in the demand for chocolate pudding. c. an increase in the demand for chocolate pudding. d. a decrease in the supply of chocolate pudding. Figure Refer to Figure The movement from point A to point B is a a. shift of the curve. b. change in preferences. c. movement along the curve. d. All of the above are correct. Table 3-4 Hours needed to make one unit of: Amount produced in 2400 hours: Cars Airplanes Cars Airplanes U.S Japan Refer to Table 3-4. If the United States and Japan trade based on the principle of comparative advantage, the United States will export a. cars and Japan will export airplanes. b. airplanes and Japan will export cars. c. cars and Japan will export cars. d. airplanes and Japan will export airplanes. 2

3 EC1000 A - Microeconomics I EC1000 A 6. Critics of free trade sometimes argue that allowing imports from foreign countries costs jobs domestically. An economist would argue that a. foreign competition may cause unemployment in import-competing industries, but the effect is temporary because other industries, especially exporting industries, will be expanding. b. foreign competition may cause unemployment in import-competing industries, but the increase in consumer surplus due to free trade is more valuable than the lost jobs. c. the critics are correct, so countries must protect their industries with tariffs or quotas. d. foreign competition may cause unemployment in import-competing industries, but the increase in the variety of goods consumers can choose from is more valuable than the lost jobs. 7. Suppose the price of Teletubbies dolls is reduced from 1.45 to 1.25 and, as a result, the quantity of Teletubbies dolls demanded increases from 2,000 to 2,200. Using the midpoint method, the price elasticity of demand for Teletubbies dolls in the given price range is a b c d..64. Scenario 8-2 Sheila offers to do Stephanie's housework for $20 per week. Stephanie's opportunity cost of doing housework is $30 per week, and Sheila's opportunity cost of doing housework is $10 per week. 8. Refer to Scenario 8-2. What will be Stephanie's gain in consumer surplus as a result of the proposed transaction? a. Stephanie will gain $30 per week. b. Stephanie will gain $20 per week. c. Stephanie will gain $10 per week. d. Stephanie will gain no consumer surplus. 9. Factors of production are a. used to produce goods and services. b. owned by firms. c. abundant in most economies. d. used by both firms and households. 3

4 EC1000 A - Microeconomics I EC1000 A Figure Refer to Figure 9-8. Total surplus in this market before trade is a. A + B. b. A + B + C. c. A + B + C + D. d. B + C + D. 11. When something of value has no price attached to it such as a public good a. externalities will be present. b. the good will be completely used up. c. only those who are better off have to pay. d. private companies will eventually produce the product and the good will no longer be free. Figure Refer to Figure 8-1. Total economic surplus would be represented by area a. A + B. b. B + C. c. C + D. d. A + D. 4

5 EC1000 A - Microeconomics I EC1000 A 13. A decrease in population can be expected to a. raise land rent. b. increase the supply of land. c. decrease the demand for land. d. increase the demand for land. 14. Price ceilings and price floors a. are desirable because they make markets more efficient as well as equitable. b. cause surpluses and shortages to persist since price cannot adjust to the market equilibrium price. c. can be enacted to restore a market to equilibrium. d. are imposed because they can make the poor in the economy better off without causing adverse effects. 15. Suppose a producer is able to separate customers into two groups, one having a price inelastic demand and the other having a price elastic demand. If the producer's objective is to increase total revenue, she should a. increase the price charged to customers with the price elastic demand and decrease the price charged to customers with the price inelastic demand. b. decrease the price charged to customers with the price elastic demand and increase the price charged to customers with the price inelastic demand. c. charge the same price to both groups of customers. d. increase the price for both groups of customers. 5

6 EC1000 A - Microeconomics I EC1000 A Use the following information to answer the following questions. Imagine a small town in Wales in which only two residents, Rhys and Bethan, own wells that produce water for safe drinking. Each Saturday, Rhys and Bethan work together to decide how many gallons of water to pump, bring the water to town, and sell it at whatever price the market will bear. To keep things simple, suppose that Rhys and Bethan can pump as much water as they want without cost; therefore, the marginal cost of water equals zero. The weekly town demand schedule and total revenue schedule for water is reflected in the table below. Table 16-2 Weekly Quantity (in gallons) Weekly Total Revenue (and Total Profit) Price Refer to Table As long as Rhys and Bethan operate as a profit-maximizing monopoly, what will their weekly revenue equal? a. 200 b. 270 c. 350 d Consider the following information about cricket bats at Woolworm Factory: Worker Marginal Product Woolworm pays all its workers the same wage and labour is his only variable cost. From this information we can conclude that Woolworm's average variable cost decreases a. as output rises from 0 to 10, but rises after that. b. as output rises from 0 to 26, but rises after that. c. as output rises from 0 to 33, but increases after that. d. continually as output rises. 6

7 EC1000 A - Microeconomics I EC1000 A Table 3-1 Labor Hours Needed to Make 1 Pound of: Pounds produced in 40 hours: Meat Potatoes Meat Potatoes Farmer Rancher Refer to Table 3-1. The Rancher has a comparative advantage in a. neither good, and the Farmer has a comparative advantage in both goods. b. both goods, and the Farmer has a comparative advantage in neither good. c. meat, and the Farmer has a comparative advantage in potatoes. d. potatoes, and the Farmer has a comparative advantage in meat. Use the following information to answer the following questions. Two cigarette manufacturers (Firm A and Firm B) are faced with lawsuits from states to recover the health care related expenses associated with cigarette smoking. Both cigarette firms have evidence that indicates that cigarette smoke causes lung cancer (and other related illness). State prosecutors do not have access to the same data used by cigarette manufacturers and thus will have difficulty recovering full costs without the help of at least one cigarette firm study. Each firm has been presented with an opportunity to lower their liability in the suit if they cooperate with attorneys representing the states. In the Table, a profit of $-20b is a loss of 20 billion US dollars. Table 16-3 Firm A Concede that cigarette smoke causes lung cancer Firm B Concede that cigarette smoke causes lung cancer Argue that there is no evidence that smoke causes cancer Firm A profit = $ 20 b Firm B profit = $ 15 b Firm A profit = $ 5 b Firm B profit = $ 50 b 19. Refer to Table This particular game a. features a dominant strategy for Firm A. b. features a dominant strategy for Firm B. c. is a version of the prisoners' dilemma game. d. All of the above are correct. Argue that there is no evidence that smoke causes cancer Firm A profit = $ 50 b Firm B profit = $ 5 b Firm A profit = $ 10 b Firm B profit = $ 10 b 20. What happens to the price and quantity sold of a drug when its patent runs out? (i) The price will fall. (ii) The quantity sold will fall. (iii) The marginal cost of producing the drug will rise. a. (i) only b. (i) and (ii) c. (ii) and (iii) d. All of the above are correct. 7

8 EC1000 A - Microeconomics I EC1000 A 21. The adage, "There is no such thing as a free lunch," is used to illustrate the concept of a. tradeoffs. b. scarcity. c. productivity. d. efficiency. Figure Refer to Figure 9-4. If this country allows free trade in wagons a. consumers will gain more than producers will lose. b. producers will gain more than consumers will lose. c. producers and consumers will both gain equally. d. producers and consumers will both lose equally. 23. Consumer surplus is a. a buyer's willingness to pay minus the price. b. a buyer's willingness to pay plus the price. c. the price of the product minus the buyer's willingness to pay. d. when the buyer's willingness to pay and the price of the product are equal. 24. If the quantity supplied responds only slightly to changes in price, then a. supply is said to be elastic. b. increases in supply resulting from an increase in price will not shift the supply curve very much. c. supply is said to be inelastic. d. supply is said to be unit elastic. 8

9 EC1000 A - Microeconomics I EC1000 A 25. Tesco stores are ubiquitous in the UK. Tesco buys their goods in large quantities and therefore at cheaper prices. Tesco also locates its stores where land prices are low, usually outside of the community business district. Many customers shop at Tesco because of low prices and free parking. Local retailers, like the corner shop in the Main Street, often go out of business because they lose customers. This story demonstrates that a. consumers are boycotting local retailers whose prices are relatively higher. b. there are diseconomies of scale in retail sales. c. there are economies of scale in retail sales. d. there are diminishing returns to producing and selling retail goods. SECTION B Answer one and only one of the questions numbered 26 to 29. Do NOT answer more than one question from this section. The maximum number of marks awarded for this Section is Answer both (a) and (b) below. (a) Illustrate on three demand and supply graphs how the size of a tax (small, medium and large) can alter total revenue and deadweight loss. (b) Using demand and supply diagrams, show the difference in deadweight loss between a market with inelastic demand and supply curves and a market with elastic demand and supply curves. 27. Answer both (a) and (b) below. For both answers, carefully explain your diagrams. (a) Illustrate on three demand and supply graphs how the size of a tax (small, medium and large) can alter total revenue and deadweight loss. (b) Using a supply-demand diagram, show a labor market with a binding minimum wage. Now, use the diagram to show those who are helped by the minimum wage, and those who are hurt by the minimum wage. 9

10 EC1000 A - Microeconomics I EC1000 A 28. Answer (a) (b) and (c) below. (a).what is the difference between a "change in demand" and a "change in quantity demanded"? Graph your answer. (b). For each of the following changes, determine whether there will be a movement along the demand curve (a change in quantity demanded) or a shift in the demand curve (a change in demand). a. a change in the price of a related good b. a change in tastes c. a change in the number of buyers d. a change in price e. a change in expectations f. a change in income (c). Next repeat for the supply side: what is the difference between a "change in supply" and a "change in quantity supplied"? Changes in which variables are likely to affect the supply of a given good. Again distinguish between movements along the supply curve and movements of the supply curve. 29. Describe carefully the characteristics of each of the following market types. Give an example of each market type. a. perfectly competitive b. a monopoly c. an oligopoly d. monopolistic competition Next consider a perfectly competitive market. Use a graph to demonstrate the circumstances that would prevail in a perfectly competitive market where firms are experiencing economic losses. Identify costs, revenue, and the economic losses on your graph. Using your graph, determine whether this firm will shut down in the short run, or choose to remain in the market. Explain your answer. 10

11 ID: A ' Answer Section MULTIPLE CHOICE 1. A 2. D 3. C 4. C 5. A 6. B 7. D 8. C 9. A 10. B 11. A 12. B 13. C 14. B 15. B 16. D 17. C 18. C 19. D 20. A 21. A 22. A 23. A 24. C 25. C 1

12 ID: A SHORT ANSWER 26. a) b) 2

13 ID: A 27. (a) (b) 3

14 ID: A 28. Those helped by the minimum wage are the workers who are still employed, but now receive the higher wage. In the diagram, those would be measured by the quantity of labor demanded at the minimum wage. Those who are hurt by the minimum wage are those who are now unemployed. These workers are measured as the difference between the quantity of labor supplied and the quantity demanded at the minimum wage. The perceptive student might note that the unemployed group can be divided into those who lose their jobs as a result of the minimum wage (the competitive equilibrium quantity of labor minus the quantity demanded at the minimum wage), and those who enter the market as a result of the higher wage, but cannot find employment (quantity of labor supplied at the minimum wage minus the competitive equilibrium quantity). The buyers of the labor (employers) are also worse off because they have to pay a higher wage for labor, hence, hire a smaller quantity. a. A change in demand refers to a shift in the demand curve. A change in quantity demanded refers to a movement along a fixed demand curve. b. A change in price causes a change in quantity demanded. All of the other changes listed shift the demand curve. 4

15 ID: A 29. a. The goods being offered for sale must all be the same. The buyers and sellers must be so numerous that no single buyer or seller influences the market price. Buyers and sellers are price takers. An example would be the wheat market. b. A monopoly is a market in which there is only one seller and the seller sets the price of the product, given the demand curve for that product. An example would be a local cable television company. c. An oligopoly is a market in which there are only a few sellers, and the sellers do not always compete aggressively. An example would be airline routes. d. Monopolistic competition is a market containing many sellers offering slightly different products. Because the products are not the same, sellers have some ability to set price. An example would be the software industry. The loss and revenue are identified on the individual firm's graph. Total cost is equal to the sum of the losses and revenue. The decision about whether this firm shuts down or remains in the market depends upon the position of average variable cost. If average variable cost is below P 0 at output level Q 0, the firm will remain in the market. If average variable cost is above P 0 at output level Q 0 the firm will shut down in the short run. 5

16 No. of Pages: (B) 10 No. of Questions: 29 EC1000 B ' JANUARY EXAMINATIONS 2006 Subject Title of Paper ECONOMICS EC1000 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. Each correct answer will be given three marks. An incorrect answer will be given one negative mark. Scenario 8-2 Sheila offers to do Stephanie's housework for $20 per week. Stephanie's opportunity cost of doing housework is $30 per week, and Sheila's opportunity cost of doing housework is $10 per week. 1. Refer to Scenario 8-2. What will be Stephanie's gain in consumer surplus as a result of the proposed transaction? a. Stephanie will gain $30 per week. b. Stephanie will gain $20 per week. c. Stephanie will gain $10 per week. d. Stephanie will gain no consumer surplus. 1

17 EC1000 B - Microeconomics I EC1000 B Figure Refer to Figure 9-8. Total surplus in this market before trade is a. A + B. b. A + B + C. c. A + B + C + D. d. B + C + D. 3. If marginal cost is greater than average total cost then a. profits are increasing. b. economies of scale are becoming greater. c. average total cost remains constant. d. average total cost is increasing. 4. Suppose the price of Teletubbies dolls is reduced from 1.45 to 1.25 and, as a result, the quantity of Teletubbies dolls demanded increases from 2,000 to 2,200. Using the midpoint method, the price elasticity of demand for Teletubbies dolls in the given price range is a b c d If the relative price of a ticket to a concert is 3 times the price of a meal at a good restaurant, the opportunity cost of a concert ticket is the a. slope of the budget constraint. b. slope of the indifference curve. c. intercept on the concert axis. d. intercept on the restaurant axis. 2

18 EC1000 B - Microeconomics I EC1000 B Table 3-4 Hours needed to make one unit of: Amount produced in 2400 hours: Cars Airplanes Cars Airplanes U.S Japan Refer to Table 3-4. If the United States and Japan trade based on the principle of comparative advantage, the United States will export a. cars and Japan will export airplanes. b. airplanes and Japan will export cars. c. cars and Japan will export cars. d. airplanes and Japan will export airplanes. 7. When something of value has no price attached to it such as a public good a. externalities will be present. b. the good will be completely used up. c. only those who are better off have to pay. d. private companies will eventually produce the product and the good will no longer be free. Table 3-1 Labor Hours Needed to Make 1 Pound of: Pounds produced in 40 hours: Meat Potatoes Meat Potatoes Farmer Rancher Refer to Table 3-1. The Rancher has a comparative advantage in a. neither good, and the Farmer has a comparative advantage in both goods. b. both goods, and the Farmer has a comparative advantage in neither good. c. meat, and the Farmer has a comparative advantage in potatoes. d. potatoes, and the Farmer has a comparative advantage in meat. 3

19 EC1000 B - Microeconomics I EC1000 B Figure Refer to Figure The movement from point A to point B is a a. shift of the curve. b. change in preferences. c. movement along the curve. d. All of the above are correct. 10. Price ceilings and price floors a. are desirable because they make markets more efficient as well as equitable. b. cause surpluses and shortages to persist since price cannot adjust to the market equilibrium price. c. can be enacted to restore a market to equilibrium. d. are imposed because they can make the poor in the economy better off without causing adverse effects. 11. The adage, "There is no such thing as a free lunch," is used to illustrate the concept of a. tradeoffs. b. scarcity. c. productivity. d. efficiency. 12. Consumer surplus is a. a buyer's willingness to pay minus the price. b. a buyer's willingness to pay plus the price. c. the price of the product minus the buyer's willingness to pay. d. when the buyer's willingness to pay and the price of the product are equal. 13. Suppose that scientists find evidence that proves chocolate pudding lowers cholesterol. We would expect to see a. no change in the demand for chocolate pudding. b. a decrease in the demand for chocolate pudding. c. an increase in the demand for chocolate pudding. d. a decrease in the supply of chocolate pudding. 4

20 EC1000 B - Microeconomics I EC1000 B 14. Consider the following information about cricket bats at Woolworm Factory: Worker Marginal Product Woolworm pays all its workers the same wage and labour is his only variable cost. From this information we can conclude that Woolworm's average variable cost decreases a. as output rises from 0 to 10, but rises after that. b. as output rises from 0 to 26, but rises after that. c. as output rises from 0 to 33, but increases after that. d. continually as output rises. Use the following information to answer the following questions. Two cigarette manufacturers (Firm A and Firm B) are faced with lawsuits from states to recover the health care related expenses associated with cigarette smoking. Both cigarette firms have evidence that indicates that cigarette smoke causes lung cancer (and other related illness). State prosecutors do not have access to the same data used by cigarette manufacturers and thus will have difficulty recovering full costs without the help of at least one cigarette firm study. Each firm has been presented with an opportunity to lower their liability in the suit if they cooperate with attorneys representing the states. In the Table, a profit of $-20b is a loss of 20 billion US dollars. Table 16-3 Firm A Concede that cigarette smoke causes lung cancer Firm B Concede that cigarette smoke causes lung cancer Argue that there is no evidence that smoke causes cancer Firm A profit = $ 20 b Firm B profit = $ 15 b Firm A profit = $ 5 b Firm B profit = $ 50 b 15. Refer to Table This particular game a. features a dominant strategy for Firm A. b. features a dominant strategy for Firm B. c. is a version of the prisoners' dilemma game. d. All of the above are correct. Argue that there is no evidence that smoke causes cancer Firm A profit = $ 50 b Firm B profit = $ 5 b Firm A profit = $ 10 b Firm B profit = $ 10 b 5

21 EC1000 B - Microeconomics I EC1000 B Figure Refer to Figure 9-4. If this country allows free trade in wagons a. consumers will gain more than producers will lose. b. producers will gain more than consumers will lose. c. producers and consumers will both gain equally. d. producers and consumers will both lose equally. 17. Factors of production are a. used to produce goods and services. b. owned by firms. c. abundant in most economies. d. used by both firms and households. 18. If the quantity supplied responds only slightly to changes in price, then a. supply is said to be elastic. b. increases in supply resulting from an increase in price will not shift the supply curve very much. c. supply is said to be inelastic. d. supply is said to be unit elastic. 6

22 EC1000 B - Microeconomics I EC1000 B Use the following information to answer the following questions. Imagine a small town in Wales in which only two residents, Rhys and Bethan, own wells that produce water for safe drinking. Each Saturday, Rhys and Bethan work together to decide how many gallons of water to pump, bring the water to town, and sell it at whatever price the market will bear. To keep things simple, suppose that Rhys and Bethan can pump as much water as they want without cost; therefore, the marginal cost of water equals zero. The weekly town demand schedule and total revenue schedule for water is reflected in the table below. Table 16-2 Weekly Quantity (in gallons) Weekly Total Revenue (and Total Profit) Price Refer to Table As long as Rhys and Bethan operate as a profit-maximizing monopoly, what will their weekly revenue equal? a. 200 b. 270 c. 350 d Tesco stores are ubiquitous in the UK. Tesco buys their goods in large quantities and therefore at cheaper prices. Tesco also locates its stores where land prices are low, usually outside of the community business district. Many customers shop at Tesco because of low prices and free parking. Local retailers, like the corner shop in the Main Street, often go out of business because they lose customers. This story demonstrates that a. consumers are boycotting local retailers whose prices are relatively higher. b. there are diseconomies of scale in retail sales. c. there are economies of scale in retail sales. d. there are diminishing returns to producing and selling retail goods. 7

23 EC1000 B - Microeconomics I EC1000 B 21. Suppose a producer is able to separate customers into two groups, one having a price inelastic demand and the other having a price elastic demand. If the producer's objective is to increase total revenue, she should a. increase the price charged to customers with the price elastic demand and decrease the price charged to customers with the price inelastic demand. b. decrease the price charged to customers with the price elastic demand and increase the price charged to customers with the price inelastic demand. c. charge the same price to both groups of customers. d. increase the price for both groups of customers. 22. Critics of free trade sometimes argue that allowing imports from foreign countries costs jobs domestically. An economist would argue that a. foreign competition may cause unemployment in import-competing industries, but the effect is temporary because other industries, especially exporting industries, will be expanding. b. foreign competition may cause unemployment in import-competing industries, but the increase in consumer surplus due to free trade is more valuable than the lost jobs. c. the critics are correct, so countries must protect their industries with tariffs or quotas. d. foreign competition may cause unemployment in import-competing industries, but the increase in the variety of goods consumers can choose from is more valuable than the lost jobs. 23. A decrease in population can be expected to a. raise land rent. b. increase the supply of land. c. decrease the demand for land. d. increase the demand for land. Figure Refer to Figure 8-1. Total economic surplus would be represented by area a. A + B. b. B + C. c. C + D. d. A + D. 8

24 EC1000 B - Microeconomics I EC1000 B 25. What happens to the price and quantity sold of a drug when its patent runs out? (i) The price will fall. (ii) The quantity sold will fall. (iii) The marginal cost of producing the drug will rise. a. (i) only b. (i) and (ii) c. (ii) and (iii) d. All of the above are correct. SECTION B Answer one and only one of the questions numbered 26 to 29. Do NOT answer more than one question from this section. The maximum number of marks awarded for this Section is Answer both (a) and (b) below. (a) Illustrate on three demand and supply graphs how the size of a tax (small, medium and large) can alter total revenue and deadweight loss. (b) Using demand and supply diagrams, show the difference in deadweight loss between a market with inelastic demand and supply curves and a market with elastic demand and supply curves. 27. Describe carefully the characteristics of each of the following market types. Give an example of each market type. a. perfectly competitive b. a monopoly c. an oligopoly d. monopolistic competition Next consider a perfectly competitive market. Use a graph to demonstrate the circumstances that would prevail in a perfectly competitive market where firms are experiencing economic losses. Identify costs, revenue, and the economic losses on your graph. Using your graph, determine whether this firm will shut down in the short run, or choose to remain in the market. Explain your answer. 9

25 EC1000 B - Microeconomics I EC1000 B 28. Answer (a) (b) and (c) below. (a).what is the difference between a "change in demand" and a "change in quantity demanded"? Graph your answer. (b). For each of the following changes, determine whether there will be a movement along the demand curve (a change in quantity demanded) or a shift in the demand curve (a change in demand). a. a change in the price of a related good b. a change in tastes c. a change in the number of buyers d. a change in price e. a change in expectations f. a change in income (c). Next repeat for the supply side: what is the difference between a "change in supply" and a "change in quantity supplied"? Changes in which variables are likely to affect the supply of a given good. Again distinguish between movements along the supply curve and movements of the supply curve. 29. Answer both (a) and (b) below. For both answers, carefully explain your diagrams. (a) Illustrate on three demand and supply graphs how the size of a tax (small, medium and large) can alter total revenue and deadweight loss. (b) Using a supply-demand diagram, show a labor market with a binding minimum wage. Now, use the diagram to show those who are helped by the minimum wage, and those who are hurt by the minimum wage. 10

26 ID: B ' Answer Section MULTIPLE CHOICE 1. C 2. B 3. D 4. D 5. A 6. A 7. A 8. C 9. C 10. B 11. A 12. A 13. C 14. C 15. D 16. A 17. A 18. C 19. D 20. C 21. B 22. B 23. C 24. B 25. A 1

27 ID: B SHORT ANSWER 26. a) b) 2

28 ID: B 27. a. The goods being offered for sale must all be the same. The buyers and sellers must be so numerous that no single buyer or seller influences the market price. Buyers and sellers are price takers. An example would be the wheat market. b. A monopoly is a market in which there is only one seller and the seller sets the price of the product, given the demand curve for that product. An example would be a local cable television company. c. An oligopoly is a market in which there are only a few sellers, and the sellers do not always compete aggressively. An example would be airline routes. d. Monopolistic competition is a market containing many sellers offering slightly different products. Because the products are not the same, sellers have some ability to set price. An example would be the software industry. The loss and revenue are identified on the individual firm's graph. Total cost is equal to the sum of the losses and revenue. The decision about whether this firm shuts down or remains in the market depends upon the position of average variable cost. If average variable cost is below P 0 at output level Q 0, the firm will remain in the market. If average variable cost is above P 0 at output level Q 0 the firm will shut down in the short run. 28. a. A change in demand refers to a shift in the demand curve. A change in quantity demanded refers to a movement along a fixed demand curve. b. A change in price causes a change in quantity demanded. All of the other changes listed shift the demand curve. 3

29 ID: B 29. (a) (b) 4

30 ID: B Those helped by the minimum wage are the workers who are still employed, but now receive the higher wage. In the diagram, those would be measured by the quantity of labor demanded at the minimum wage. Those who are hurt by the minimum wage are those who are now unemployed. These workers are measured as the difference between the quantity of labor supplied and the quantity demanded at the minimum wage. The perceptive student might note that the unemployed group can be divided into those who lose their jobs as a result of the minimum wage (the competitive equilibrium quantity of labor minus the quantity demanded at the minimum wage), and those who enter the market as a result of the higher wage, but cannot find employment (quantity of labor supplied at the minimum wage minus the competitive equilibrium quantity). The buyers of the labor (employers) are also worse off because they have to pay a higher wage for labor, hence, hire a smaller quantity. 5

31 No. of Pages: (C) 11 No. of Questions: 29 EC1000C ' JANUARY EXAMINATIONS 2006 Subject Title of Paper ECONOMICS EC1000 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. Each correct answer will be given three marks. An incorrect answer will be given one negative mark. 1. When something of value has no price attached to it such as a public good a. externalities will be present. b. the good will be completely used up. c. only those who are better off have to pay. d. private companies will eventually produce the product and the good will no longer be free. 1

32 EC1000 C - Microeconomics I EC1000 C Figure Refer to Figure 9-8. Total surplus in this market before trade is a. A + B. b. A + B + C. c. A + B + C + D. d. B + C + D. Figure Refer to Figure 9-4. If this country allows free trade in wagons a. consumers will gain more than producers will lose. b. producers will gain more than consumers will lose. c. producers and consumers will both gain equally. d. producers and consumers will both lose equally. Scenario 8-2 Sheila offers to do Stephanie's housework for $20 per week. Stephanie's opportunity cost of doing housework is $30 per week, and Sheila's opportunity cost of doing housework is $10 per week. 4. Refer to Scenario 8-2. What will be Stephanie's gain in consumer surplus as a result of the proposed transaction? a. Stephanie will gain $30 per week. b. Stephanie will gain $20 per week. c. Stephanie will gain $10 per week. d. Stephanie will gain no consumer surplus. 2

33 EC1000 C - Microeconomics I EC1000 C 5. If the relative price of a ticket to a concert is 3 times the price of a meal at a good restaurant, the opportunity cost of a concert ticket is the a. slope of the budget constraint. b. slope of the indifference curve. c. intercept on the concert axis. d. intercept on the restaurant axis. 6. Suppose that scientists find evidence that proves chocolate pudding lowers cholesterol. We would expect to see a. no change in the demand for chocolate pudding. b. a decrease in the demand for chocolate pudding. c. an increase in the demand for chocolate pudding. d. a decrease in the supply of chocolate pudding. 7. Suppose the price of Teletubbies dolls is reduced from 1.45 to 1.25 and, as a result, the quantity of Teletubbies dolls demanded increases from 2,000 to 2,200. Using the midpoint method, the price elasticity of demand for Teletubbies dolls in the given price range is a b c d

34 EC1000 C - Microeconomics I EC1000 C Use the following information to answer the following questions. Imagine a small town in Wales in which only two residents, Rhys and Bethan, own wells that produce water for safe drinking. Each Saturday, Rhys and Bethan work together to decide how many gallons of water to pump, bring the water to town, and sell it at whatever price the market will bear. To keep things simple, suppose that Rhys and Bethan can pump as much water as they want without cost; therefore, the marginal cost of water equals zero. The weekly town demand schedule and total revenue schedule for water is reflected in the table below. Table 16-2 Weekly Quantity (in gallons) Weekly Total Revenue (and Total Profit) Price Refer to Table As long as Rhys and Bethan operate as a profit-maximizing monopoly, what will their weekly revenue equal? a. 200 b. 270 c. 350 d If marginal cost is greater than average total cost then a. profits are increasing. b. economies of scale are becoming greater. c. average total cost remains constant. d. average total cost is increasing. 4

35 EC1000 C - Microeconomics I EC1000 C Table 3-4 Hours needed to make one unit of: Amount produced in 2400 hours: Cars Airplanes Cars Airplanes U.S Japan Refer to Table 3-4. If the United States and Japan trade based on the principle of comparative advantage, the United States will export a. cars and Japan will export airplanes. b. airplanes and Japan will export cars. c. cars and Japan will export cars. d. airplanes and Japan will export airplanes. 11. Factors of production are a. used to produce goods and services. b. owned by firms. c. abundant in most economies. d. used by both firms and households. 12. Critics of free trade sometimes argue that allowing imports from foreign countries costs jobs domestically. An economist would argue that a. foreign competition may cause unemployment in import-competing industries, but the effect is temporary because other industries, especially exporting industries, will be expanding. b. foreign competition may cause unemployment in import-competing industries, but the increase in consumer surplus due to free trade is more valuable than the lost jobs. c. the critics are correct, so countries must protect their industries with tariffs or quotas. d. foreign competition may cause unemployment in import-competing industries, but the increase in the variety of goods consumers can choose from is more valuable than the lost jobs. 5

36 EC1000 C - Microeconomics I EC1000 C Use the following information to answer the following questions. Two cigarette manufacturers (Firm A and Firm B) are faced with lawsuits from states to recover the health care related expenses associated with cigarette smoking. Both cigarette firms have evidence that indicates that cigarette smoke causes lung cancer (and other related illness). State prosecutors do not have access to the same data used by cigarette manufacturers and thus will have difficulty recovering full costs without the help of at least one cigarette firm study. Each firm has been presented with an opportunity to lower their liability in the suit if they cooperate with attorneys representing the states. In the Table, a profit of $-20b is a loss of 20 billion US dollars. Table 16-3 Firm A Concede that cigarette smoke causes lung cancer Firm B Concede that cigarette smoke causes lung cancer Argue that there is no evidence that smoke causes cancer Firm A profit = $ 20 b Firm B profit = $ 15 b Firm A profit = $ 5 b Firm B profit = $ 50 b 13. Refer to Table This particular game a. features a dominant strategy for Firm A. b. features a dominant strategy for Firm B. c. is a version of the prisoners' dilemma game. d. All of the above are correct. Argue that there is no evidence that smoke causes cancer Firm A profit = $ 50 b Firm B profit = $ 5 b Firm A profit = $ 10 b Firm B profit = $ 10 b 14. Tesco stores are ubiquitous in the UK. Tesco buys their goods in large quantities and therefore at cheaper prices. Tesco also locates its stores where land prices are low, usually outside of the community business district. Many customers shop at Tesco because of low prices and free parking. Local retailers, like the corner shop in the Main Street, often go out of business because they lose customers. This story demonstrates that a. consumers are boycotting local retailers whose prices are relatively higher. b. there are diseconomies of scale in retail sales. c. there are economies of scale in retail sales. d. there are diminishing returns to producing and selling retail goods. 15. Suppose a producer is able to separate customers into two groups, one having a price inelastic demand and the other having a price elastic demand. If the producer's objective is to increase total revenue, she should a. increase the price charged to customers with the price elastic demand and decrease the price charged to customers with the price inelastic demand. b. decrease the price charged to customers with the price elastic demand and increase the price charged to customers with the price inelastic demand. c. charge the same price to both groups of customers. d. increase the price for both groups of customers. 6

37 EC1000 C - Microeconomics I EC1000 C Figure Refer to Figure 8-1. Total economic surplus would be represented by area a. A + B. b. B + C. c. C + D. d. A + D. 17. What happens to the price and quantity sold of a drug when its patent runs out? (i) The price will fall. (ii) The quantity sold will fall. (iii) The marginal cost of producing the drug will rise. a. (i) only b. (i) and (ii) c. (ii) and (iii) d. All of the above are correct. 18. Consider the following information about cricket bats at Woolworm Factory: Worker Marginal Product Woolworm pays all its workers the same wage and labour is his only variable cost. From this information we can conclude that Woolworm's average variable cost decreases a. as output rises from 0 to 10, but rises after that. b. as output rises from 0 to 26, but rises after that. c. as output rises from 0 to 33, but increases after that. d. continually as output rises. 7

38 EC1000 C - Microeconomics I EC1000 C 19. A decrease in population can be expected to a. raise land rent. b. increase the supply of land. c. decrease the demand for land. d. increase the demand for land. 20. Consumer surplus is a. a buyer's willingness to pay minus the price. b. a buyer's willingness to pay plus the price. c. the price of the product minus the buyer's willingness to pay. d. when the buyer's willingness to pay and the price of the product are equal. Table 3-1 Labor Hours Needed to Make 1 Pound of: Pounds produced in 40 hours: Meat Potatoes Meat Potatoes Farmer Rancher Refer to Table 3-1. The Rancher has a comparative advantage in a. neither good, and the Farmer has a comparative advantage in both goods. b. both goods, and the Farmer has a comparative advantage in neither good. c. meat, and the Farmer has a comparative advantage in potatoes. d. potatoes, and the Farmer has a comparative advantage in meat. 22. Price ceilings and price floors a. are desirable because they make markets more efficient as well as equitable. b. cause surpluses and shortages to persist since price cannot adjust to the market equilibrium price. c. can be enacted to restore a market to equilibrium. d. are imposed because they can make the poor in the economy better off without causing adverse effects. 8

39 EC1000 C - Microeconomics I EC1000 C Figure Refer to Figure The movement from point A to point B is a a. shift of the curve. b. change in preferences. c. movement along the curve. d. All of the above are correct. 24. If the quantity supplied responds only slightly to changes in price, then a. supply is said to be elastic. b. increases in supply resulting from an increase in price will not shift the supply curve very much. c. supply is said to be inelastic. d. supply is said to be unit elastic. 25. The adage, "There is no such thing as a free lunch," is used to illustrate the concept of a. tradeoffs. b. scarcity. c. productivity. d. efficiency. 9

40 EC1000 C - Microeconomics I EC1000 C SECTION B Answer one and only one of the questions numbered 26 to 29. Do NOT answer more than one question from this section. The maximum number of marks awarded for this Section is Answer (a) (b) and (c) below. (a).what is the difference between a "change in demand" and a "change in quantity demanded"? Graph your answer. (b). For each of the following changes, determine whether there will be a movement along the demand curve (a change in quantity demanded) or a shift in the demand curve (a change in demand). a. a change in the price of a related good b. a change in tastes c. a change in the number of buyers d. a change in price e. a change in expectations f. a change in income (c). Next repeat for the supply side: what is the difference between a "change in supply" and a "change in quantity supplied"? Changes in which variables are likely to affect the supply of a given good. Again distinguish between movements along the supply curve and movements of the supply curve. 27. Answer both (a) and (b) below. For both answers, carefully explain your diagrams. (a) Illustrate on three demand and supply graphs how the size of a tax (small, medium and large) can alter total revenue and deadweight loss. (b) Using a supply-demand diagram, show a labor market with a binding minimum wage. Now, use the diagram to show those who are helped by the minimum wage, and those who are hurt by the minimum wage. 28. Describe carefully the characteristics of each of the following market types. Give an example of each market type. a. perfectly competitive b. a monopoly c. an oligopoly d. monopolistic competition Next consider a perfectly competitive market. Use a graph to demonstrate the circumstances that would prevail in a perfectly competitive market where firms are experiencing economic losses. Identify costs, revenue, and the economic losses on your graph. Using your graph, determine whether this firm will shut down in the short run, or choose to remain in the market. Explain your answer. 10

41 EC1000 C - Microeconomics I EC1000 C 29. Answer both (a) and (b) below. (a) Illustrate on three demand and supply graphs how the size of a tax (small, medium and large) can alter total revenue and deadweight loss. (b) Using demand and supply diagrams, show the difference in deadweight loss between a market with inelastic demand and supply curves and a market with elastic demand and supply curves. 11

42 ID: C ' Answer Section MULTIPLE CHOICE 1. A 2. B 3. A 4. C 5. A 6. C 7. D 8. D 9. D 10. A 11. A 12. B 13. D 14. C 15. B 16. B 17. A 18. C 19. C 20. A 21. C 22. B 23. C 24. C 25. A 1

43 ID: C SHORT ANSWER 26. a. A change in demand refers to a shift in the demand curve. A change in quantity demanded refers to a movement along a fixed demand curve. b. A change in price causes a change in quantity demanded. All of the other changes listed shift the demand curve. 2

44 ID: C 27. (a) (b) 3

45 ID: C Those helped by the minimum wage are the workers who are still employed, but now receive the higher wage. In the diagram, those would be measured by the quantity of labor demanded at the minimum wage. Those who are hurt by the minimum wage are those who are now unemployed. These workers are measured as the difference between the quantity of labor supplied and the quantity demanded at the minimum wage. The perceptive student might note that the unemployed group can be divided into those who lose their jobs as a result of the minimum wage (the competitive equilibrium quantity of labor minus the quantity demanded at the minimum wage), and those who enter the market as a result of the higher wage, but cannot find employment (quantity of labor supplied at the minimum wage minus the competitive equilibrium quantity). The buyers of the labor (employers) are also worse off because they have to pay a higher wage for labor, hence, hire a smaller quantity. 4

46 ID: C 28. a. The goods being offered for sale must all be the same. The buyers and sellers must be so numerous that no single buyer or seller influences the market price. Buyers and sellers are price takers. An example would be the wheat market. b. A monopoly is a market in which there is only one seller and the seller sets the price of the product, given the demand curve for that product. An example would be a local cable television company. c. An oligopoly is a market in which there are only a few sellers, and the sellers do not always compete aggressively. An example would be airline routes. d. Monopolistic competition is a market containing many sellers offering slightly different products. Because the products are not the same, sellers have some ability to set price. An example would be the software industry. The loss and revenue are identified on the individual firm's graph. Total cost is equal to the sum of the losses and revenue. The decision about whether this firm shuts down or remains in the market depends upon the position of average variable cost. If average variable cost is below P 0 at output level Q 0, the firm will remain in the market. If average variable cost is above P 0 at output level Q 0 the firm will shut down in the short run. 5

47 ID: C 29. a) b) 6

48 No. of Pages: (D) 10 No. of Questions: 29 EC1000D ' JANUARY EXAMINATIONS 2006 Subject Title of Paper ECONOMICS EC1000 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. Each correct answer will be given three marks. An incorrect answer will be given one negative mark. 1. Suppose that scientists find evidence that proves chocolate pudding lowers cholesterol. We would expect to see a. no change in the demand for chocolate pudding. b. a decrease in the demand for chocolate pudding. c. an increase in the demand for chocolate pudding. d. a decrease in the supply of chocolate pudding. 2. Factors of production are a. used to produce goods and services. b. owned by firms. c. abundant in most economies. d. used by both firms and households. 1