SET 1

END-OF-SEMESTER EXAMINATION
SEMESTER II, 2008/2009 SESSION

KULLIYYAH OF ECONOMICS AND MANAGEMENT SCIENCES

Programme : B.ENGINEERING Level of Study : 2 - 4

Time : 2.30 p.m. - 5.00 p.m. Date : 5/4/2009

Duration : 2 Hr(s) 30 Min(s)

Course Code : ECON 1550 Section(s) : 1-9

Course Title : Introductory Economics for Engineering

(This Question Paper Consists of 12 Printed Pages With 3 Sections)

INSTRUCTION (S) TO CANDIDATES

DO NOT OPEN UNTIL YOU ARE ASKED TO DO SO

1. Section A: Answer ALL Questions.

2. Section B: Answer any ONE (1) Question.
3. Section C : Answer any TWO (2) Questions.

Any form of cheating or attempt to cheat is a serious

offence which may lead to dismissal

APPROVED BY
 SET: 1

SECTION A ( 40 marks)
Answer all questions.

1. Economics involves marginal analysis because:

A) most decisions involve changes from the present situation.
B) marginal benefits always exceed marginal costs.
C) marginal costs always exceed marginal benefits.
D) much economic behavior is irrational.

2. The fallacy of composition states that:

A) because economic systems are composed of so many diverse economic units,
economic laws are necessarily inexact.
B) the anticipation of a particular event can affect the composition of that event when
it occurs.
C) what is true for the individual must necessarily be true for the group.
D) because event A precedes event B, A is necessarily the cause of B.

3. Which of the following best describes the invisible hand concept?

A) The desires of resource suppliers and producers to further their own self-interest
will automatically further the public interest.
B) The nonsubstitutability of resources creates a conflict between private and public
interests and calls for government intervention.
C) The market system is the best system for overcoming the scarce resources-
unlimited wants problem.
D) Central direction by the government will improve resource allocation in a
capitalistic economy.

4. Broadly defined, competition involves:

A) private property and freedom of expression.
B) independently acting buyers and sellers and freedom to enter or leave markets.
C) increasing opportunity costs and diminishing marginal utility.
D) capital goods and division of labor.

5. An increase in the price of a product will reduce the amount of it purchased because:
A) supply curves are upsloping.
B) the higher price means that real incomes have risen.
C) consumers will substitute other products for the one whose price has risen.
D) consumers substitute relatively high-priced for relatively low-priced products.

6. A shift to the right in the demand curve for Nike shoes can be most reasonably
explained by saying that:
A) consumer incomes have declined and they now want to buy less of Nike shoes at
each possible price.
B) the price of Nike shoes has increased and, as a result, consumers want to purchase
less of it.
C) consumer preferences have changed in favor of Nike shoes so that they now want
to buy more at each possible price.
D) the price of Nike shoes has declined and, as a result, consumers want to purchase
more of it.

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7. At the equilibrium price:
A) quantity supplied may exceed quantity demanded or vice versa.
B) there are no pressures on price to either rise or fall.
C) there are forces that cause price to rise.
D) there are forces that cause price to fall.

8. There will be a surplus of a product when:

A) price is below the equilibrium level.
B) the supply curve is downward sloping and the demand curve is upward sloping.
C) the demand and supply curves fail to intersect.
D) consumers want to buy less than producers offer for sale.

9. Suppose the price elasticity of demand for bread is 0.20. If the price of bread falls by
10 percent, the quantity demanded will increase by:
A) 2 percent and total expenditures on bread will rise.
B) 2 percent and total expenditures on bread will fall.
C) 20 percent and total expenditures on bread will fall.
D) 20 percent and total expenditures on bread will rise.

10. If the demand for rice is price inelastic, a good harvest will cause rice revenues to:
A) increase.
B) decrease.
C) be unchanged.
D) either increase or decrease, depending on what happens to supply.

11. Suppose that when your income increases from RM28,000 to RM30,000 per year,
your purchases of X increase from 4 to 5 units because of that income increase. Thus:
A) X is an inferior good.
B) X is a substitute good.
C) the income effect exceeds the substitution effect.
D) the demand for X is elastic with respect to income.

12. Jamaliah buys a piece of costume jewelry for RM33 for which she was willing to pay
RM42. The minimum acceptable price to the seller, Nahar, was RM30. Jamaliah
experiences:
A) a consumer surplus of RM12 and Nahar experiences a producer surplus of RM3.
B) a producer surplus of RM9 and Nahar experiences a consumer surplus of RM3.
C) a consumer surplus of RM9 and Nahar experiences a producer surplus of RM3.
D) a producer surplus of RM9 and Nahar experiences a producer surplus of RM12.

13. To the economist total cost includes:

A) explicit and implicit costs, including a normal profit.
B) neither implicit nor explicit costs.
C) implicit, but not explicit, costs.
D) explicit, but not implicit, costs.

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14. If Ahmad operated a small bakery, which of the following would be a variable cost
in the short run?
A) baking ovens C) annual lease payment for use of the building.
B) interest on business loans D) baking supplies (flour, salt, etc.)

15. Marginal cost:

A) equals both average variable cost and average total cost at their respective
minimums.
B) is the difference between total cost and total variable cost.
C) rises for a time, but then begins to decline when diminishing returns set in.
D) declines continuously as output increases.

16. Daud is concerned that his firm is experiencing diseconomies of scale. It means that:
A) a firm's long-run average total cost curve is declining.
B) a firm's long-run average total cost curve is rising.
C) the advantages of specialization are being more fully realized.
D) a given increase in inputs results in a more-than-proportionate increase in output.

17. The MR = MC rule can be restated for a purely competitive seller as P = MC because:
A) each additional unit of output adds exactly its price to total revenue.
B) the firm's average revenue curve is downsloping.
C) the market demand curve is downsloping.
D) the firm's marginal revenue and total revenue curves will coincide.

18. In the short run the individual competitive firm's supply curve is that segment of the:
A) average variable cost curve lying below the marginal cost curve
B) marginal cost curve lying above the average variable cost curve.
C) marginal revenue curve lying below the demand curve.
D) marginal cost curve lying between the average total cost and average variable cost
curves.

Use the following to answer question 19

19. Refer to the above diagram for a purely competitive producer. The lowest price at
which the firm should produce (as opposed to shutting down) is:
A) P1. B) P2. C) P3. D) P4.

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Use the following to answer question 20:

20. Refer to the above diagram. To maximize profit or minimize losses this firm will
produce:
A) K units at price C.
B) D units at price J.
C) E units at price A.
D) E units at price B.

21. 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 practiced.
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.

Use the following to answer question 22:

22. Refer to the above diagram. If price is reduced from P1 to P2, total revenue will:
A) increase by A minus C.
B) increase by C minus A
C) decrease by A minus C.
D) decrease by C minus A..

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Use the following to answer question 23:

23 If the firm in the above diagram lowers price from P1 to P2, it will:
A) lose P1P 2ba in revenue from the price cut but increase revenue by Q1bcQ2 from
the increase in sales.
B) lose P1P 2ca in revenue from the price cut but increase revenue by Q1acQ2 from
the increase in sales.
C) incur a decline in total revenue because it is operating on the elastic segment of the
demand curve.
D) incur an increase in total revenue because it is operating on the inelastic segment
of the demand curve.

Use the following to answer question 24:

24. Which of the above diagrams correctly portray a nondiscriminating pure monopolist's
demand (D) and marginal revenue (MR) curves?
A) A B) B C) C D) D

25. A significant difference between a monopolistically competitive firm and a purely

competitive firm is that the:
A) former does not seek to maximize profits.
B) latter recognizes that price must be reduced to sell more output
C) former sells similar, although not identical, products.
D) former's demand curve is perfectly inelastic.

26. The mutual interdependence that characterizes oligopoly arises because:

A) the products of various firms are homogeneous..
B) the products of various firms are differentiated
C) a small number of firms produce a large proportion of industry output.
D) the demand curves of firms are kinked at the prevailing price.

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27. Suppose the total market value of all final goods and services produced in Malaysia in
2006 is US$500 billion and the total market value of final goods and services
sold is US$450 billion. We can conclude that:
A) GDP in 2006 is US$450 billion.
B) NDP in 2006 is US$450 billion.
C) GDP in 2006 is US$500 billion.
D) inventories in 2006 fell by US$50 billion.

28. GDP can be calculated by summing:

A) consumption, investment, government purchases, exports, and imports.
B) investment, government purchases, consumption, and net exports.
C) consumption, investment, wages, and rents..
D) consumption, investment, government purchases, and imports.

Use the following to answer question 29:

Answer the next question(s) on the basis of the following data. All figures are in billions of
dollars.

Government purchases $20

Consumption 95
Gross investment 25
Consumption of fixed capital 5
Exports 13
Imports 17

29. Refer to the above data. GDP is:

A) $116. B) $136. C) $125. D) $150.

30. Assume a manufacturer of stereo speakers purchases $40 worth of components for
each speaker. The completed speaker sells for $70. The value added by the
manufacturer for each speaker is:
A) $110. B) $30. C) $40. D) $70.

31. Nury Maryam has paid the income tax for this year and she is interested to know her
disposable income. Which of the following best defines her disposable income?
A) income received by households less personal taxes
B) the before-tax income received by households
C) all income earned by resource suppliers for their current contributions to
production.
D) the market value of the annual output net of consumption of fixed capital.

32. For a nation's real GDP per capita to rise during a year:
A) consumption spending must increase.
B) real GDP must increase more rapidly than population.
C) population must increase more rapidly than real GDP..
D) investment spending must increase.

33. A recession is a period in which:

A) cost-push inflation is present. C) demand-pull inflation is present.
B) nominal domestic output falls. D) real domestic output falls.

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34. Fatimah has lost her job in a Terengganu textile plant because of import competition.
She intends to take a short course in electronics and move to Selangor where she
anticipates that a new job will be available. We can say that Fatimah is faced with:
A) secular unemployment.
B) cyclical unemployment.
C) structural unemployment.
D) frictional unemployment.

35. The consumer price index was 177.1 in 2007 and 179.9 in 2008. Therefore, the rate of
inflation in 2008 was about:
A) 6.7 percent. B) 3.4 percent. C) 1.6 percent. D) 4.1 percent.

36. During a period of hyperinflation:

A) creditors gain because their loans are repaid with dollars of higher value.
B) people tend to hold goods rather than money.
C) income is redistributed away from borrowers.
D) real value of the national currency rises.

Use the following to answer question 37

37. The consumption schedule in the above diagram indicates that:

A) consumers will maximize their satisfaction where the consumption schedule and
45° line intersect.
B) up to a point consumption exceeds income, but then falls below income.
C) the MPC falls as income increases.
D) households consume as much as they earn.

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Use the following to answer question 38

38. Suppose the economy's saving schedule shifts from S1 to S 2 as shown in the above
diagram. We can say that its:
A) MPC has increased.
B) MPS has increased.
C) APS has increased at all levels of disposable income.
D) APS has decreased at all levels of disposable income.

Use the following to answer question 39:

Disposable
income Consumption
$ 200 $ 205
225 225
250 245
275 265
300 285

39. Refer to the above data. The marginal propensity to consume is:
A) .25. B) .75. C) .20. D) .80.

40. A decline in the real interest rate will:

A) increase the amount of investment spending.
B) shift the investment schedule downward.
C) shift the investment demand curve to the right.
D) shift the investment demand curve to the left.

______________________________________________________________________

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SECTION B (Answer any one question) ( 20 marks).

Question 1

I. Draw a graph of the short-run cost curves for a purely competitive firm that shows a
short-run supply curve for the individual firm. Identify the shutdown point, the
break-even point, the profit-maximizing point, and the levels of output associated
with those points.
(8 Marks)

II. How will the marginal and average cost curves of the typical pure competitor shift or
change as a result of the following events:
(a) an increase in wages of all labor;
(b) an increase in the rental payments on office machinery;
(c) a technological advance;
(d) an increase in sales taxes;
(e) an increase in property taxes; and
(f) a decline in the price of a basic raw material?
(6 x 2 =12 Marks)
Question 2

The demand and average cost data for a firm producing product X.

Q P ATC TR TC MR MC
0 35 -
1 32 48
2 29 30
3 26 23.34
4 23 21
5 20 20
6 17 19.5
7 14 19.29
8 11 19.25
9 8 19.33
10 5 19.5

Base on the data given,

i. Fill in the blank columns. (4 marks)

ii. Determine the type of market structure of this firm. (4 marks)
iii. Find the optimum output and price level of this firm. (4 marks)
iv. Find the amount of profit or loss this firm is making. (4 marks)
v. Draw a graph illustrating price and output maximizing profit as well as profit or loss.
(4 marks)

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SECTION C (Answer any two questions) ( 40 marks).

Question 1

a) Illustrate your answer with diagram; explain how consumption and saving are related to
disposal Income? (4 marks)

b) Explain why an upward shift of the consumption schedule typically involves an equal
downshift of the saving schedule. What is the exception to this relationship? (8 Marks)

c) Using a diagram, evaluate four factors that might shifts investment demand curve?
(8 Marks)

Question 2 (GROWTH’S CHAPTER)

a) Explain why even small changes in the rate of economic growth are significant. (5 marks)

b) Which is more important—increasing inputs of resources or increasing the productivity

of those inputs—as the main source of economic growth. (5 marks)

c) Define the term business cycle and illustrate all its phases. (5 marks)

d) What are two criticisms of the unemployment rate? (5 marks)

Question 3

The following is a list of figures for a given year in billions of dollars.

Transfer payments..................................$ 16
Government purchases...............................80
Personal taxes ............................................38
Corporate income taxes .............................28
Indirect business taxes ...............................15
Social security contributions........................8
Undistributed corporate profits..................19
Proprietor’s income....................................25
Compensation of employees....................258
Personal consumption expenditures.........322
Consumption of fixed capital.......................4
Rents ..........................................................10
U.S. exports................................................14
Corporate profits ........................................70
Interest .......................................................12
Dividends ...................................................23
Imports to U.S............................................17
Gross private domestic investment ............63
Net foreign factor income earned in the U.S.....10

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Using this data, compute:

(a) GDP; (4 Marks)

(b) NDP; (3 Marks)
(c) NI; (4 Marks)
(d) PI; (3 Marks)
(e) DI; (3 Marks)
(f) Net exports. (3 Marks)

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