College of Business, Hospitality and Tourism Studies

School of Economics, Banking and Finance

ECN502 Microeconomics I
Final Examination: Trimester I, 2016
QUESTION PAPER AND ANSWR BOOKLET
FINAL EXAM
This examination constitutes 60% of total assessment of this unit and students must score 40/100 in
this examination in order to pass this unit.
Instructions

1 Time Allowed: 3 HOURS with additional 10 MINUTES reading time.

2 All answers are to be written in the Answer Booklet provided.
3 Write your ID Number on ALL pages of your Answer Booklet and any extra sheets that you use.
4 This is a closed book examination. You are not permitted to access any books, notes or other
forms of written or electronic materials.
5 Attach the extra sheets securely at appropriate place before handing-in the Answer Booklet to the
supervisor.
6 Non programmable calculators are allowed.
Sections Question Marks

Section A: Multiple Choice 15 Questions. All compulsory 15

Section B: Short Answer Questions 9 Questions. All compulsory 20

Section C: Calculation and
10 Questions. All compulsory 55
Graphical Analysis
Section D: Essay 2 Questions. One compulsory 10
TOTAL/WEIGHT 100/60%

Section A Multiple Choice [15 marks]

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There are 15 Questions in this Section and all are Compulsory. Each question is worth 1 mark.
Circle the letter that represents the BEST Answer.

1. Which of the following is not part of the opportunity cost of going on holiday?
A. The money you spent on a theatre show there.
B. The money you could have made if you had stayed at home and worked.
C. The money you spent on food.
D. The money you spent on airline tickets.

2. Which of the following statements is true about a market economy?

A. With a large enough computer, central planners could guide production more efficiently
than markets.
B. In a market the self-interested actions of market participants are co-ordinated in such a
way as to bring about an outcome from which everybody benefits.
C. The strength of a market system is that it tends to distribute resources evenly across
consumers.
D. Taxes help prices communicate costs and benefits to producers and consumers.

3. Economic growth is depicted by

A. a shift in the production possibilities frontier outward.
B. a movement from inside the curve toward the curve.
C. a shift in the production possibilities frontier inward.
D. a movement along a production possibilities frontier toward capital goods.

4. If a nation has a comparative advantage in the production of a good,

A. it can produce that good at a lower opportunity cost than its trading partner.
B. it can benefit by restricting imports of that good.
C. it can produce that good using fewer resources than its trading partner.
D. it must be the only country with the ability to produce that good.
5. If an increase in the price of blue jeans leads to an increase in the demand for tennis shoes,
then blue jeans and tennis shoes are
A. complements.
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 B. inferior goods.
C. normal goods
D. substitutes.

6. If the price of a good is above the equilibrium price,

A. there is a surplus (i.e. an excess supply) and the price will rise.
B. there is a shortage (i.e. an excess demand) and the price will fall.
C. there is a shortage (i.e. an excess demand) and the price will rise.
D. there is a surplus (i.e. an excess supply) and the price will fall.

7. In general, a flatter demand curve is more likely to be

A. price elastic.
B. unit price elastic.
C. none of these answers.
D. price inelastic.

8. Consumer surplus is the area

A. below the demand curve and above the price.
B. above the supply curve and below the price.
C. above the demand curve and below the price.
D. below the supply curve and above the price.

9. A buyer's willingness to pay is that buyer's

A. minimum amount they are willing to pay for a good.
B. producer surplus.
C. consumer surplus.
D. maximum amount they are willing to pay for a good.

10. Accounting profit is equal to total revenue minus

A. implicit costs.
B. variable costs.

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 C. the sum of implicit and explicit costs.
D. explicit costs.

11. When marginal costs are below average total costs,

A. average fixed costs are rising.
B. average total costs are rising.
C. average total costs are falling.
D. average total costs are minimized.

12. The efficient scale of production is the quantity of output that minimizes
A. average fixed cost.
B. average variable cost.
C. average total cost.
D. marginal cost.

13. For a competitive firm, marginal revenue is

A. total revenue divided by the quantity sold.
B. equal to the quantity of the good sold.
C. average revenue divided by the quantity sold.
D. equal to the price of the good sold.

14. A monopoly is able to continue to generate economic profits in the long run because
A. there is some barrier to entry to that market.
B. potential competitors sometimes don't notice the profits.
C. the monopolist is financially powerful.
D. antitrust laws eliminate competitors for a specified number of years.

15. Deadweight loss is greatest when

A. supply is elastic and demand is perfectly inelastic.
B. demand is elastic and supply is perfectly inelastic.
C. both supply and demand are relatively inelastic.

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 D. both supply and demand are relatively elastic.

Section B Short Answer Questions [20 marks]

(Provide brief explanation to the questions. All questions in this section are compulsory.)

1. Explain why firms in perfect competition are price takers. (2 marks)

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2. When should a perfectly competitive firm shutdown, explain why? (2 marks)

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3. Explain competition policy. (2 marks)

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4. List and explain two ways that government can use to regulate Monopoly. (2 marks)
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5. Explain why wealth is more unequally distributed than income. (2 marks)

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6. Explain how production efficiency is achieved using a Production Possibility Frontier.

(2 marks)

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7. Discuss Adam Smiths invisible hand idea that he had described in his book - Wealth of
Nations? (2 marks)
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8. Discuss how elasticity of demand and changes in price has an influence on the changes in
total revenue. (3 marks)
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9. Discuss how a Sales Tax and an Import Quota can create inefficiency in a market. (Note:
You do not need to draw a diagram for this question). (3 marks)
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Section C Calculation and Graphical Analysis [55 marks]
(There are 10 questions in this section and all are compulsory. Clearly show all working in the
Answer Booklet)

Question 1 (2.5 marks)

Refer to the Production Possibility Frontier and answer the following questions:

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A. Explain why the production possibility frontier is concave to its origin? (1.5 marks)
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B. Suppose the economy is currently producing 2000 cars and 30,000 gallons of milk. What is
the opportunity cost of producing additional 20,000 gallons of milk? (1 mark)

Question 2 (3 marks)

The table below shows the production capabilities for Australia and NZ in Food and Cars. Show
your working in the table provided for the questions given below to obtain full marks for each
question.

Food Cars

Australia 15 5

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 NZ 10 4

A. Which country has absolute advantage in the production of Cars? (0.5 marks)
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B. Which country has absolute advantage in the production of Food? (0.5 marks)
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C. Which country has a comparative advantage in the production of Food? (1 mark)

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D. Which country has a comparative advantage in the production of Cars? (1 mark)

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Question 3 (4.5 marks)

According to a Honda press release on October 23, 2006, sales of the fuel-efficient four-cylinder
Honda Civic rose by 10% from 2005 to 2006. Over the same period, according to data from the
U.S. Energy Information Administration, the average price of regular gasoline rose from $2.27
per gallon to $2.57 per gallon. Using the midpoint method, calculate the cross-price elasticity of
demand between Honda Civics and regular gasoline. According to your estimate of the cross-
price elasticity, are the two goods gross complements or gross substitutes?

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Question 4 (6 marks)

Illustrate each of the following events using a demand and supply diagram for capital. Label
your graphs clearly and identify the changes in the demand or the supply curves in your diagram.

A. There is a decrease in population growth by 10%. (2 marks)

B. Civil servants have an increase in their salaries by 10%. (2 marks)

C. The invention of new machines will increase productivity in manufacturing firms; therefore,
firms plan to buy these machines. (2 marks)

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Question 5 (5.5 marks)

Assume that a certain natural monopolist has the following demand and cost related curves:

Demand: P = 100 - Q
Marginal Revenue: MR = 100 - 2Q
Average Cost: AC = 15 + (400/Q)
Marginal Cost: MC = 15

A. Calculate the price and output that this monopolist can charge. (2 marks)

B. What is the profit that will be made by this monopolist? (2 marks)

C. What will be the firms output if it uses a Marginal Cost Pricing rule? (1.5 marks)

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Question 6 (7.5 marks)

A. Discuss the type of market structure that is depicted in the above graph. (1 mark)
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B. What is the profit maximizing quantity and price? (1 mark)

C. Calculate the following:

I. Total Revenue. (1 mark)

II. Total Cost. (1 mark)

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 III. Total Profit. (1 mark)

D. What is the minimum price for which the firm will operate in short run? Explain.
(1 mark)
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E. Is a monopoly market efficient? Answer this question by comparing the perfectly

competitive market output and price with monopoly market output and price. (1.5 marks)
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Question 7 (10 marks)

Given that labour is the only variable cost at $200 per Labour Day and fixed costs are $200 per
day, using your knowledge complete the following table. (10 marks)

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 Units Total Marginal Total Total Total Average Average Average Marginal
of product product fixed variabl cost fixed variable cost cost
labour ($) cost e cost ($) cost cost ($) ($)
($) ($) ($) ($)
0 0 200 - 200 - - -
-
1 100 200
2 200 200
3 400 200
4 800 200
5 1000 200
6 1100 200
7 1150 200
8 1150 200

Question 8 (5 marks)
Refer to the diagram below for questions A, B and C.

A. At the equilibrium price, what is the magnitude of total surplus in the market? (2 marks)

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B. If the price rose to $16, what would happen to consumer surplus? Give reason for change in
consumer surplus. (1.5 marks)
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C. If the price falls to $6, what would happen to producer surplus? Give reason for change in
producer surplus. (1.5 marks)
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Question 9 (5 marks)
Tropical cyclone Winston has recently destroyed 80% of rural homes. How would the housing
market cope with such a devastating reduction in the supply of housing? Discuss this with the aid
of appropriate graph(s) indicating the impact on equilibrium rent and quantity in an unregulated
housing market in the short run and long run. (5 marks)

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Question 10 (6 marks)

Analyze the following statement: It doesn't matter whether a tax is levied on sellers or buyers
of a good as far as amount paid by buyer, amount received by seller, tax incidence on buyer and
on seller are concerned as the outcome is the same regardless of who pays the tax. (Note: Your
response should include a graphical and a welfare analysis) (6 marks)

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Section D Essay [10 marks]

There are two Questions in this Section and you are required to answer only one. Write an
essay of approximately 250-300 words to answer the questions. Graphical illustrations are
required to substantiate your answers. Note: that 1 mark is allocated to the style and
structure of the Essay.

Question 1

Differentiate between perfect competition and monopoly under the following guidelines:

Three distinguishing features of each market structure. (5 marks)

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 Explain the profit maximizing price and output of each of the above market structure using
graph. (4 marks)

Question 2

Economists have model or concept known as perfect competition. Discuss:

The characteristics of a perfect competition: (4 marks)

Explain the types of profit it can achieve in the short run and long run with the help of
graphs. (5 marks)

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The End.

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