SI

THE UNIVERSITY OF NEW SOUTH WALES

SCHOOL OF ECONOMICS
SESSION 2, 2009

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ECONllOl MICROECONOMICS I
FINAL EXAMINATION

TIME ALLOWED - 2 HOURS

THIS PAPER IS WORTH 50% OF THE TOTAL SUBJECT MARK
This examination paper consists of two parts - Part A and Part B
Part A consists of 30 multiple choice questions each worth one (1) mark.
Answer all the questions in Part A on the answer sheet provided, using pencil only:
(a) Print your student number, name and initials in the space provided and mark
the appropriate boxes below your student number, name and initials.
(b) For each question, mark the appropriate response (a), (b), (c), or (d).

There is only one correct response to each question in Part A. There is no negative
marking.

Part B consists of two (2) essay-type questions, each worth TWENTY (20) marks.
Answer only ONE (1) question from Part B.

Answers to questions in Part B must be written in ink. Pencil may be used in answers to
Part B for drawing, sketching or graphical work only.
This question paper may be retained by the candidate.
Students may bring non programmable hand held calculators.
There are nine (9) pages in this paper

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PART A

This section is worth 30 marks

Mark your answer on the Answer Sheet provided

Question 1
In the competitive market model, the supply curve for a commodity will shift upwards to the
left if:
(a) The productivity of inputs increases
Cb) The price of the commodity rises
(c) The number of producers increase
(d) The price of inputs increases
Question 2
In the competitive market model, the demand curve for a commodity will shift upwards to the
right if:
(a) Income of consumers increase
Cb) The price ofa complement good rises
(c) The price ofa substitute good falls
(cl) The level of technology rises
Question 3
Veal and Beef are considered substitute goods for consumers. In a competitive market model
for Veal, a fall in the price of Beefwill cause:
(a) A movement downward along the demand curve for Veal
(b) A movement upward along the demand curve for Veal
(c) A shift leftwards of the demand curve for Veal
(d) A shift rightwards of the demand curve for Veal.

Question 4
Sausages and tomato sauce are considered to be complementary goods for consumers. In a
competitive market model for sausages and tomato sauce, a rise in the price of sausages will
cause:
(a) A movement downward along the demand curve for sausages
(b) A shift leftwards of the demand curve for sausages
(c) A shift leftwards of the demand curve for tomato sauce
(d) A shift rightwards of the demand curve for tomato sauce
Question 5
Assume that there are only two counuies in the world and they produce two goods, Cars and
Cotton. The opportunity cost of a car in Country A is 50 units of cotton and the opportunity
cost of a car in country B is 300 units of cotton. The maximum amount of cotton country A
can possibly produce is 100,000 units of cotton and the maximum amount of cotton country
B can produce is 300,000. In this example:
(a) Country A has a comparative advantage in cotton
(b) Country B has a comparative advantage in cars
(c) Country A has an absolute advantage in cotton
(d) Countl:)' B has an absolute advantage in cotton

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Question 6
Assume there are two types of land in a small country on which either wheat or corn may be
grown, There are 10 acres ofland (Type A) more suitable for growing wheat and 10 acres of
land (Type B) more suitable for growing corn. Type A land will give 4 tons per acre if used
for wheat and I tons per acre ifused for corn. Type B land will give 4 tons per acre if used
for corn and I tons per acre ifused for wheat. If they allocate land efficiently which of the
following output combinations will be on their production possibilities curve?
(a) 24 tons of wheat and 46 tons of corn
(b) 50 tons of wheat and 50 tons of corn
(c) 45 tons of wheat 25 tons of corn
(d) 40 tons of wheat and 40 tons of corn

Question 7
Which statement about the "substitution effect" is true?
(a) It is the effect of a percentage decrease in quantity substituted equal to the percentage
decrease'in price of a commodity.
(b) It forms the basis of the "rational spending rule"
(c) It refers to the extent to which consumers of substitute commodities are better off as a
result of a price change,
(d) Always causes demand for the good to increase following a decrease in the price of
the good.
Question 8
Assume that the demand for alcoholic drinks is inelastic. The competitive market model
predicts that the effect of a restriction of supply of this commodity by introducing early
closing hours on clubs and hotels is, ceteris paribus
(a) A higher price and lower total expenditure on the commodity by drinkers
(b) A lower price and lower total expenditure on the commodity by drinkers
(c) A lower price and higher total expenditure on commodity by drinkers
(d) A higher price and higher total expenditure on the commodity by drinkers
Question 9
Which of the following statements about a monopolist is true?
(a) The supply curve for a monopolist is the Short-run Marginal Cost Curve above the
minimum point on the Average Variable Cost Curve
(b) It is possible for a monopolist to produce an efficient level of output
(c) A monopoHst will always produce an output level where Long- run Average Costs are
falling
(d) A monopoIist will always make an economic profit.

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Question 10
The diagram below illustrates two parallel demand curves for a commodity. Price elasticity
of supply for this commodity is:
;

Price
$

(
Supply

Demand

Dema
Litres per Week
(a) The same at B as at A and equal to I
(b) The same at B as at A and greater than 1
(c) Greater at A than at B
(d) Greater at B than at A

Question 11
Which of the following statements about an oligopolistic market is true?
(a) The market is characterised by a large number of rival finns each selling a slightly
differentiated product
(b) The typical firm tends to operate at the minimum point of the Long -run Average Cost
curve.
(c) In the long run, surviving finns charge a price which is equal to Average Cost and
make zero economic profit.
(d) The finns operating in the market are mutually dependent

Question 12
A perfectly competitive firm will, in the short-run:
(a) Shut-down if price falls below the minimum point of the Average Total Cost Curve
but lies above the minimum point of the Average Variable Cost Curve
(b) Make a nonnal profit ifprice equals its Average Variable Costs
(c) Maximise profit if price is above Marginal Costs but equal to the Marginal Revenue
(d) Shut down if Marginal Revenue is below the minimum point of the Average Variable
Cost curve.

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Question 13
The Ground used for the NRL Grand Final between the Bulldogs and the Titans can hold
50,000 people. The downward sloping demand curve for tickets for the event intersects the
supply curve at a very high price. The NRL organisers decide to make the game more
affordable for the low income fans by placing a price ceiling below the equilibrium price.
This action will result in:
(a) A decrease in consumer surplus
(b) No change in quantity sold
(c) An increase in consumer surplus
(d) No change in producer surplus

Question 14
The deadweight loss created by a per unit sales tax imposed on the producer of a good, ceteris
paribus:
(a) Increases as the demand for the good becomes less price elastic.
(b) Decreases as the demand for the good becomes less price elastic.
(c) Decreases as the elasticity of supply becomes more price elastic
(d) Increases as the elasticity of supply becomes less price elastic

Question 15
Which of the following statements is true for a firm operating in an imperfectly
competitive market in which the firm has some market power?
(a) The demand curve facing the finn is perfectly inelastic at the current market price
(b) The demand curve facing the firm is significantly less elastic for price increases than
for price decreases
(c) Marginal Revenue is less than Average Revenue
(d) Average Revenue is less than Marginal Revenue

Question 16
The Coase theorem says that
(a) Government action is required to correct an externality
(b) Where Bargaining costs are high an efficient outcome may notbe achieved in the
presence of an externality
(c) The level of output will depend upon how property rights are assigned
(d) If the two parties involved are the same size, an efficient outcome can be achieved

Question 17
If a per-unit sales tax is imposed on a commodity for which the price elasticity of demand is
equal to one (in absolute vale) and the price elasticity of supply is greater than I:
(a) The incidence of the tax will fall entirely on consumers
(b) The incidence of the tax will fall more on producers than on consumers
(c) The incidence of the tax will fall more on consumers than on producers
(d) The incidence of the tax will be shared equally by consumers and producers

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Question 18
The minimum point on the Short-run Average Total Cost curve:
(a) Is the point where the Law of Diminishing returns sets in
(h) Is the point where the profit earned hy the firm is normal
(c) Is the output level where the firm is using both the fixed and variable factors in the
optimum combination
(d) Shows the price level where the firm's Marginal Cost Curve becomes the firm's
short-run Supply curve
Question 19
Which of the following statements about a monopoHst is true?
(a) A profit maximising monopolist will always set price and output at a level where demand
is price-elastic.
(b) A profit maximising monopohst always produces where Average Revenue equals
Average Cost
(c) A profit maximising monopolist will, in long run equilibrium, always use a scale of plant
that minimises Long- run Average Costs.
(d) A profit maximising monopolist will produce where Marginal Cost equals price.
Question 20
In the competitive market for wool, the imposition of a legally enforced minimum price
above the market equilibrium price will, ceteris paribus:
(a) Create more excess supply of wool, the higher the elasticity of supply,
(b) Create more excess demand for wool, the greater the elasticity of demand,
(c) Create more excess supply of wool, the lower the elasticity of supply,
(d) Create more excess demand for wool, the greater the elasticity of supply
Question 21
Assume that demand and supply curves for a pal1icular chemical product are given by the
following equations:
Demand:
Qd ~ 150 15 P
Supply:
Qs ~ 5 P . 30
Price is measured in $ per ton; quantity is measured in tons
The equilibrium price and quantity is:
(3) $5, 30 tons
(b) $9, 15 tons
(c) $6, 50 tons
(d) $10, 50 tons
Question 22
If consumption of a commodity generates a favourable externality,
(a) Marginal social cost of production is greater than marginal private cost of product
(b) Marginal social benefit is greater than marginal private benefit
(c) The commodity will be under-priced and over-supplied in a competitive market
(d) The commodity will be over-priced and over-supplied in a competitive market

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Question 23
The equation of the demand curve for a product has been reliably estimated as:
Qd ~
48 - 0.6 P
P is measured in $
The point elasticity of demand when the price is $20 can be estimated as
(a) -0.6
(b) -0.8
(c) -1.33
(d) -0.33

Question 24
Which of the following may not be a cause of "market failure"?
(a) The presence of barriers to entry
(b) The presence of economies of scale
(c) The presence of government intervention in the market
(d) The presence of externalities in production and consumption
Question 25
The publishers of two rival newspapers, Thymes and Oobe are consideling their pricing
strategies.
Assume that their strategy choices can be modelled as a choice between two alternative
strategies: High Price or Low Price.
The following pay-off matrix gives the expected monthly profits (in $'000) for each
magazine (rhymes, Oobe) under alternate strategies:
GOBE

High Price

THYMES

Low Price

High Price

Low Price

(25, 29)

(I 7, 35)

(37, is)

(23, 19)

Which of the following statements is true?

(a) The Nash equilibrium is for both to set a high price.
Cb) The collusive (co-operative) equilibrium is for both to set a low price
(c) Setting a low price is a dominant strategy for lHYMES
(d) Setting a high price is a dominant strategy for GOBE
Question 26
A public good is one that
(a) Is non-rival but mayor may not be non-excludable
(b) Has some degree of being both non-rival and non-excludable
(c) Is non-excludable but may or may not be non-rival
(d) Has some degree of being either non-rival or non- excludable

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Question 27
In the case of a regulated natural monopoly with high fixed costs, a price set by the
government to equal long -run Average Cost will result in:
(a) An efficient outcome because Marginal Revenue equals Marginal Cost
(b) An economic profit for the producer
(c) A loss equal to average fixed costs for the producer
(d) An inefficient outcome because price is greater than Marginal Cost

Question 28
Frank: is considering moving to Perth. There is a 70 per cent chance that he will find ajob that
pays $1000 a month more than what he currently earns, and a 30 per cent chance that he will
find one that pays $3000 a month less. The expected value per month of moving to Perth is;
(a) $200
(b) - $200
(c) $700
(d) $900

Question 29
Dave is risk averse while Scat! is risk neutral. Both are confronted with the following
gamble: win $5000 with the probability of 65 per cent or lose $9000 with the probability of
35 per cent. One can predict that:
(a) Both might accept the gamble
(b) Only Scat! will accept the gamble
(c) Only Dave will accept the gamble
(d) Neither will accept the gamble

Question 30
A cinema charges a lower admission price for oon- working patrons over the age of 60
(seniors) than for other adults seeking entry to see a movie. This price discrimination might
be profitable for the cinema if:
(a) The demand for admission by seniorS is less elastic than the demand by other adults
(b) The demand for admission by seniors is more elastic than the demand by other adults
(c) TIle demand for admission by seniors increases at all price level for all movies
(d) The demand curve for admission by seniors shifts to the left

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PARTB
Each question in this part is worth 20 marks

Answer only ONE (1) question from this part

Question Bl
1. Construct a diagrammatic model of a market which is supplied by a single fmn with
monopoly power, showing the Average and Marginal Cost curves and the Average
and Marginal Revenue curves for the monopolist. (5 marks)
2. Use your diagram to help you to explain the firm's pricing and production decisions
if:

a. The aim is to maximise profit

b. The aim is to maximise revenue
c. The aim of the fum is to maximise the volume of sales, subj eet to making at

least "normal profit." (3marks)

3. Explain why the profit maximising behaviour by the monopalist results in an
inefficient allocation of resources from society's point of view. (6 marks)
4. Under what circumstances might a monopoly provide a better outcome from society's
point of view than a more competitive market structure? (6 marks)

OR

Question B2
1. Consider an industry whose production process releases chemicals into a large river in

a heavily populated area.

Use the competitive market model to show that in the absence of any regulation, the
industry will over produce from the point of view of allocative efficiency. Use a
diagram to illustrate your answer. (8 marks)

2. Explain the Coase Theorem. Will the Coase Theorem be applicable in this case? Give

reasons for your answer. (6 marks)

3. Discuss other fonns of intervention by government aimed at correcting the market
failure problem in this case. (6 marks)

This is the end of the exam.

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