UNIVERSITY OF BRADFORD

PRINCIPLES AND APPLICATIONS OF ECONOMICS (MICROECONOMICS)

SPECIMEN EXAM PAPER 2012/3

Time allowed: 2 hours

Answer SECTION A, ONE question from SECTION B and ONE question from
SECTION C
Cm graph paper is provided
All sections carry equal marks

PRINCIPLES AND APPLICATIONS OF ECONOMICS (MICROECONOMICS)

SECTION A
1. Using examples and diagrams where appropriate answer FOUR of the
following:

(a) Explain the factors that influence the price elasticity of demand.
1) Change in Tastes Over a period of time, consumers can change their tastes
in the goods they consume.
2) Price- the price of the goods affect the demand. The higher the price, the
more elastic the demand of the goods
3) Expectations of the future- If consumers
4)

(b) Why does the marginal cost curve intersect the average cost curve at its
lowest point?
(c) What is mark-up pricing?
Mark-up pricing is when the firm sets the price by adding a profit mark up
to the average costs
(d) What is the principal-agent problem and how can it be tackled?
The principal-agent problem is when the principals are not sure of what is
in their best interests because of lack of information. For example, if a
person wants to travel abroad, they would most likely to go to a travelling
agent rather do it themselves. They probably feel this would save them
time and effort. However agents are highly skilled and therefore the travel
agent will probably act in a way that is not in the best interests of their
principals.
The problem can be tackled by agents being more transparent with
principals. This way, principals will have more information about what is in
their best interests and therefore be able to make better decisions for
themselves.
(e) What is the Gini coefficient?
The gini coefficient is the area between the 45* degree line and the Lorenz
curve divided by the total area below the 45* degree line

one

(f) Explain the main characteristics of public goods.

SECTION B
Answer ONE question from SECTION B
2. Sally, a first-year degree student, lives in lodgings and pays a fixed amount for
food and accommodation. The money she has left over she spends on books
and compact discs. Her preferences between various combinations of books
and CDs are shown in the following table. She is indifferent between the
combinations in each of the five sets shown, but has preferences between
sets.
Set 1

Books
CDs

Set 2

Books
CDs
Books
CDs
Books
CDs
Books
CDs

Set 3
Set 4
Set 5

40
3
33
7
40
1
27
6
30
1

30
5
22
14
30
2
20
10
20
3

23
8
16
20
22
4
11
20
16
4

16
14
13
25
20
5
5
33
12
6

12
19
7
37
17
7

10
22
4
45
14
10

6
30

4
37

2
46

11
13

6
20

2
30

6
10

3
14

1
20

1
37

(a) Draw an appropriate diagram to show Sallys indifference curves

corresponding to each of the five sets above.

(b) What is Sallys marginal rate of substitution of books for CDs in set 5 for the
fourth and the sixth CD? Explain your answer.
(c) If Sally has 300 per year to spend on a combination of books and CDs, and
if all the books and CDs she wants cost 10 each, what combination will
Sally choose to maximise her utility? Show this in your diagram and explain
your answer.
(d) If CDs rise to 20 each, what combination will Sally now choose? Show this
on your diagram.
(e) On your diagram, identify clearly the income and substitution effects
following the change in price of CDs.
(f) Explain the meaning of income effect and substitution effect in your
answerbook.
(g) Are CDs a normal good for Sally? Explain your answer.

3.
4.

The data below show cost data for the Pemberton Printing Company.
Unfortunately some of the figures have been smudged and are missing.

Output

TC ()

AC ()

55

55

85

110

130

85
55
43

40

160
210

280

370
480

46.6
52.8
60
67.7
76

8
9
10

610

760

42

MC ()

30
25.
20.
30.
50.
70.
90
110
130.
150

(a) Reproduce the table of costs in your answer book and complete it by
calculating the missing values. (Note: enter the figures in the MC column
between outputs of 0 and 1, 1 and 2, 2 and 3, etc.)
(b) Plot the AC and MC curves on graph paper.

(c) Explain the concept of marginal cost (MC).

(d) Explain why the MC curve passes through the lowest point of the AC curve.

(e) If the price faced by Pemberton Printing is 25 per unit of output, identify the
profit maximising level of output on your diagram. Explain in your
answerbook why you have chosen this point.

(f) Calculate the amount of profit at this point.

(g) Comment on whether this position is sustainable in the long-run, stating any
assumptions you are making about market structure.

SECTION C
Answer ONE question from SECTION C
4. How are wages determined in a monopsonistic labour market? Compare the
results with those of a perfectly competitive labour market. Is there a role for
policy interventions in a monopsonistic labour market?

5. Compare and contrast pricing and output decisions under perfect competition
and monopoly. To what extent can and should government regulate
monopolies?

6. Using examples and diagrams where necessary, discuss appropriate policies

for tackling externalities.

There are different ways to tackle externalities. Externalities can be good or bad for the
society and therefore the government has a duty to either reward or punish those who let out
these externalities. Lets assume that there is a chemical factory near schools. The chemical
factory lets off smoke that pollutes the air and this is likely to cause health problems for the
children nearby because they will be breathing in polluted air. In this case, the government
needs to impose a tax on the company for the marginal social cost they are imposing on
society
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