THE UNIVERSITY OF NEW SOUTH WALES

SCHOOL OF ECONOMICS
SESSION 2, 2008
ECONll01 MICROECONOMICS I
FINAL EXAMINATION

TIME ALLOWED - 2 HOURS

THIS PAPER IS WORTH 60% OF THE TOTAL SUBJECT MARK

This examination paper consists of two parts - Part A and Part B

Part A consists of 20 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.

Part B consists of four (4) essay-type questions, each worth TWENTY (20)
marks.

Answer only TWO (2) questions from Part B.

ANSWER EACH PART B QUESTION IN A SEPARATE EXAMINATION

BOOKLET

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.

Page 1
 PART A

This section is worth 20 marks

Mark your answer on the Answer Sheet provided

Question 1
In an imperfectly competitive market, in which a firm has some market power:
(a) The demand curve faced by a typical firm is perfectly elastic at the current market
pnce
(b) Marginal Revenue is less than Average Revenue at all levels of production.
(c) The demand curve faced by the typical firm is significantly more elastic for price
increases than for price decreases.
(d) For the typical firm, price equals Marginal Cost at the profit-maximising output
level.

Question 2
At the level of production at which short run average variable cost is minimized:
(a) Marginal Cost equals Average Variable Cost
(b) Marginal Cost is decreasing.
(c) Average variable cost is less than Marginal Cost.
(d) Average Cost is less than Average Variable Cost.

Question 3
In a perfectly competitive market, the Marginal Revenue curve faced by a typical
[]fm;

(a) is horizontal but lies above the demand curve

(b) is horizontal but lies below the Average Revenue curve
(c) Marginal Revenue is less than Average revenue at all output levels
(d) is the same curve as the Average Revenue curve

Page 2
Question 4
A fIrm operating in a perfectly competitive market will break-even in the short run
when:
(a) Price equals Average Cost
Cb) Price equals Average Fixed cost
(c) Price equals Average Variable Cost
(d) Price equals Total Cost

Question 5
Which of the following statements 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 monopolist always produces where Average Revenue equals
Average Co~t

(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 6
Which of the following statements about the Monopolistic Competition market model
is true?
(a) The market is characterised by a small number of interdependent rival fIrms each
selling a slightly differentiated product.
(b) The typical fIrm tends to operate with excess capacity and unexploited economies
of scale in the long-run.
(c) In the long run, surviving fIrms charge a price which equals Average Cost and
make economic profIts.
(d) The demand for each fIrm's product is inelastic at all price levels.

Page 3
Question 7
A monopolist estimates that at the current price being charged for the product,
Marginal Revenue is greater than Marginal Cost, and the absolute price elasticity of
demand is 1.2. To increase profit the monopolist should:
(a) Increase price and sell less
(b) Increase price and sell more
(c) Decrease price and sell less
(d) Decrease price and sell more

Question 8
Assume two rival airline companies (Gold Air and Silver Air) are considering whether
to discount their fares as a method of increasing market share.
The following pay-off matrix gives the expected monthly profits (in $'000) of each
company (Gold, Silver) under alternate strategies:

SILVER
Discount Do Not Discount
Discount (24,20) (48, 12)
K;OLD

Do Not Discount (16,40) (32,28)

a) The Nash equilibrium is for Silver to discount and Gold to not discount.
b) The Nash equilibrium is for both firms to discount
c) The Nash equilibrium is for Gold to discount and Silver to not discount.
d) The Nash equilibrium is for neither firm to discount.

Page 4
Question 9

Which of the following has the "non rivalry" characteristic that defines a pure public
good?
(a) A local council car park
(b) Suburban street lighting
(c) A toll road
(d) School education

Question 10
If consumption of a commodity generates a favourable externality, then compared to
social optimum;
a) Marginal Social Benefit of consumption is less than Private Marginal Benefit of
consumption.
b) Marginal Social Benefit of production is less than Private Marginal Benefit of
consumption
c) The commodity will be under-priced and under-supplied in a competitive market.
d) The commodity will be over-priced and under-supplied in a competitive market.

Question 11
Which of the following statements about the Oligopolistic market model is true?
a) The market is characterised by a small number of rival firms who recognise their
interdependence.
b) The typical firm tends to match rivals price increases but not price decreases
c) The demand for each firm's product is perfectly elastic
d) The market is characterised by a small number of independent rival firms each
selling slightly differentiated product

Page 5
Question 12
The table below shows the input of the variable factor Labour and the output of the
product for a fIrm operating in a perfectly competitive market.
Q of Variable Input (labour) Output Tonnes of Corn
0 0
1 14
2 30
3 42
4 52
5 68
6 65

At what output level does the Law of Diminishing Marginal Returns set in?

a) 2
b) 3
c) 4
d) 6

Question 13
If the demand for a commodity is given by the demand curve is given by the equation
Qd = 150 -3P
and the supply curve is given by the equation
Qs=5P-IO
The absolute value of point Elasticity of demand at the equilibrium (market price) is
equal to
a) 3.0
b) 1.5
c) 0.67
d) 0.067

Page 6
Question 14
Using the information from question 13 and state which ofthe following answers is
true:
a) In equilibrium, the absolute value of elasticity of supply equals the absolute
value 0 f elasticity 0 f demand
b) In equilibrium, the absolute value elasticity of supply is greater than the
absolute value of elasticity of demand
c) In equilibrium, the absolute value elasticity of supply is smaller than the
absolute value elasticity of demand
d) In equilibrium, the absolute value elasticity of demand cannot be compared
with the absolute value elasticity of supply

Question 15
In the case of a regulated na~ural monopoly, a price set to equal long run Marginal
Cost will result in:
a) an efficient outcome because price equals Marginal Cost
b) a normal profit for the producer
c) a loss equal to average total costs for monopolist
d) an inefficient outcome because price is greater than Average Cost

Question 16
The Short-Run Average Cost curve reaches its minimum point at an output level
where:
a) The perfectly competitive firm is making a normal profit.
b) The Average Product curve equals the Marginal Product curve.
c) Diseconomies of scale start to set in.
d) The fIrm is combining both the fixed and variable factors at the most efficient
level.

Page 7
Question 17
The quantity demanded of a product per month decreases from 400 units to 240
units as a result of a rise in price from $60 to $68. The loss in consumer surplus
is equal to
I a) $2560
b) $1920
c) $640
d) $960

Question 18
Which ofthe following is a necessary condition for the Coase Theorem to hold
a) There are a large number of people involved
b) Transactions costs are high
c) Property Rights are clearly defined
d) There are economies of scale present in the production process

Question 19
Public goods are usually provided by the government because:
a) There are "spill-over" benefits involved in their production
b) They usually invo1ve large economies of scale
c) Because the free rider problem means that consumers will not reveal their
willingness to pay.
d) Because there is rivalry in consumption consumers are not willing to pay for
them.

Page 8
Question 20
Olympic PIL produces cotton T Shirts. Olympic is a price taker and must decide on its
hourly production rate. The costs of production are:
T Shirts Total Cost
(per hour) (per hour)

0 6
1 10
2 12
3 21
4 38
5 56
6 82
7 112
(Only compbted shiIts are counted)

The price below which Olympics should shut down operations in the short run
(the "shut-down price") is:

a) $3.00
b) $5.00
c) $7.50
d) $2.00

Page 9
 PARTB
Each question in this part is worth 20 marks

Answer only TWO (2) questions from this part

ANSWER EACH QUESTION IN A SEPARATE EXAMINATION BOOK

Question 1

a) What is meant by the term Comparative Advantage? Explain the reason for its
existence. ( 4 marks)
b) Assume that each of two counties Japan and Korea, have constant opportunity
costs in the production of cars and computers. Draw a production possibilities
curves for each of these two countries assuming that Japan has a comparative
advantage in car production while Korea has a comparative advantage in
computer production. ( 6 marks)
c) On the same diagram show how if these countries specialise and trade, they
can gain from trade. (4 marks)
d) Assuming that free trade leads to an increase in world output explain why
some countries may impose barriers to trade. (4 marks)
e) Which of these reasons for protection have economic justification? (2 marks)

Page 10
Question 2

a) Explain and give an example of a favourable externality in production. ( 2

marks)
b) Explain and give an example of a unfavourable externality in consumption.(2
marks)
c) Use a Supply and Demand diagram to explain how the presence of pollution in
a firm's production process leads to an inefficient allocation of resources. ( 4
marks)
d) Show clearly on your diagram the efficient and inefficient output levels and
explain why the firm's output level is inefficient. ( 4 marks)
e) How might the government correct the inefficient working ofthe market in
the face of a;
a. Positive externality in consumption
b. Negative externality in production ( 8 marks)

Question 3

a) What are the reasons for the existence of a monopoly? (4 marks)

b) What distinguishes a "natural monopoly" market structure from other
monopoly market structures? (2 marks)
c) Show how a monopolist result is inefficient when compared with a perfectly
competitive result. Use an appropriate diagram to illustrate your answer. (8
marks)
d) Use a diagram to show how when trying to regulate the natural monopoly the
regulation might lead to a loss for the firm. (3 marks)
e) What policy could the government use to achieve a more efficient outcome
without the monopolist making a loss? (3 marks)

Page 11
Question 4

a) Draw a Supply and Demand model carefully labelling your diagram and show
how the imposition of an indirect sales tax will affect the equilibrium price
and output ofthe product. ( 4 marks)
b) Show on your diagram, how the incidence of the tax is shared between the
producer and the consumer and explain what determines the relative shares of
the tax paid by the producer and the consumer (5 marks)
c) Explain why the tax is inefficient and leads to a distortion in the allocation of
resources. (3 marks)
d) Use your diagram to explain how the inefficiency of the tax is measured? (2
marks)
e) What determines the size ofthis inefficiency? (2 marks)
f) Ifthe intention ofthe government in imposing the tax was to discourage
consumption of a particular good. On what type of good would this tax be
successful? Why? (2 marks)
g) If the intention ofthe government is to raise a large amount of revenue with a
minimum distortion to resource allocation, on what type of good should the
tax be imposed? Why? (2 marks)

END OF EXAM

Page 12