SPECIAL/RESIT EXAMINATION IN

SEMESTER 1, 2003/2004 SESSION

KULLIYYAH OF ECONOMICS AND MANAGEMENT SCIENCES

Programme : B.ENGINEERING Level of Study : 2, 3 & 4

Time : 9:00 a.m. – 12:00 noon Date : 30/6/2003

Duration : 3Hr(s) 0 Min(s)

Course Code : ECON 1550 Section : 1

Course Title : Introductory Economics for Engineering

(This Question Paper Consists of 7 Printed Pages With 2 Parts)

INSTRUCTION (S) TO CANDIDATES

DO NOT OPEN UNTIL YOU ARE ASKED TO DO SO

PART A : ANSWER ALL QUESTIONS.

PART B : ANSWER ANY THREE (3) OUT OF FIVE QUESTIONS

ANY FORM OF CHEATING OR ATTEMPT TO CHEAT IS A SERIOUS

OFFENCE WHICH MAY LEAD TO DISMISSAL.

APPROVED BY
PART A : Answer All Questions. (2 marks each)
Mutiple Choice

1. The most important factor in determining the long-run profit potential in

monopolistic competition is
a. free entry and exit.
b. the elasticity of the market demand curve.
c. the elasticity of the firm’s demand curve.
d. the reaction of rival firms to a change in price.

2. Excess capacity in monopolistically competitive results because in equilibrium

a. each firm’s output rate is too small to minimize average cost.
b. each firm’s output rate is too small to minimize average cost.
c. firms make positive economic profit.
d. price equals marginal cost.

3. Negatives externalities are examples of

a. positive market coordination.
b. negative market coordination.
c. economic inefficiency.
d. economic efficiency.

4. When a negative externality exists in the market place, which of the following is
true?
a. There is no market inefficiency.
b. Marginal social costs of production are greater than marginal private costs
to the firm.
c. Marginal social costs of production are less than then marginal private
costs to the firm.
d. Marginal social costs of production are the same as the marginal private
costs of production to the firm.

5. When a positive externality exists in the market place,

a. there is economic efficiency.
b. there is economic inefficiency.
c. market coordination works efficiently.
d. too much of the product in question is produced.

6. For a purely competitive firm :

a. marginal revenue will graph as an upsloping line.
b. the demand curve will lie above the marginal revenue curve.
c. the marginal revenue curve will lie above the demand curve.
d. the demand and marginal revenue curves will coincide.

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7. Which of the following statements is correct?
a. The demand curve for a purely competitive firm is perfectly elastic, but
the demand curve for a purely competitive industry is downsloping.
b. The demand curve for a purely competitive firm is downsloping, but the
demand curve for a purely industry is perfectly elastic.
c. The demand curves are downsloping for both of a purely competitive firm
and a purely competitive industry.
d. The demand curves are perfectly elastic for both a purely competitive
form and a purely competitive industry.

8. Which of the following is not valid generalization concerning the relationship

between price and costs of a purely competitive seller in the short run?
a. Price must be at least equal to average total cost.
b. Price times quantity produced must be equal to or greater than total
variable cost for some level of output or the firm will close down in the
short run.
c. Price may be equal to, greater than, or less than average total cost.
d. Price must be equal to or greater than average variable cost for the firm to
continue producing.

9. The lowest point on a purely competitive firm’s short-run supply curve

corresponds to :
a. the minimum point on its ATC curve.
b. the minimum point on its AVC curve.
c. the minimum point on its AFC curve.
d. the minimum point on its MC curve.

Answer the next question on the basis on the following diagram :

10. In equilibrium the firm will realize :

a. a loss equal to BCFG.
b. a loss equal to ACFH.
c. an economic profit of ACFH.
d. an economic profit of ABGH.

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Answer the next four questions on the basis of the following diagram.

11. Given P2, this firm will :

a. produce 44 units and realize an economic profit.
b. produce 44 units and break even.
c. produce 66 units and break even.
d. close down in the short run.

12. Given P1, this firm will produce :

a. 47 units and break even.
b. 47 units and realize an economic profit.
c. 66 units and break even.
d. 24 units and break even.

13. Given P4, this firm will :

a. close down in the short run.
b. produce 30 units and realize a loss.
c. produce 30 units and break even.
d. produce 10 units and break even.

14. Given P3, this firm will :

a. produce 14 units and realize an economic profit.
b. produce 62 units and break even.
c. produce 40 units and realize a loss.
d. close down in the short run.

15. If a firm is a price taker;

a. the demand curve faced by the firm is a horizontal straight line.
b. the demand curve faced by the firm is perfectly elastic.
c. the average revenue curve for the firm is a horizontal straight line.
d. the firm’s marginal revenue curve is a horizontal straight line.
e. all of the above.

16. Profit is maximized at an output rate at which

a. a price is equal to marginal revenue.
b. marginal revenue is equal to the marginal cost of production.

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 c. average revenue is equal to marginal cost of production.
d. both (b) and (d).

Use the following diagram to answer the next 2 questions.

17. In the short run, the competitive firm maximized profit by choosing output :
a. q1. d. q4.
b. q2. e. q5.
c. q3.

18. At the profit maximizing level of output, the firm :

a. incurs a loss.
b. breaks even.
c. earns a profit.
d. more information is needed to determine whether the firm incurs a loss,
breaks even, or earns a profit.

19. At its current level of output, a competitive firm finds that its price is RM34,
average cost is RM64, average fixed cost is RM20, marginal cost is RM34 :
a. the firm is maximizing short run profit.
b. the firms should shut down immediately.
c. the firm should increases output.
d. the firm should decrease output.

20. The competitive firm’s short-run supply curve is the

a. average cost curve above the minimum of the marginal cost curve.
b. marginal cost curve above its minimum point.
c. marginal cost curve above the minimum of the average total cost curve.
d. marginal cost curve above the minimum of the average variable cost
curve.

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PART B : Answer Three out of Five Questions (20 marks each)

QUESTION 1

(a) Explain market failures related to public goods, positive and negative externalities
and imperfect information.
(10 marks)

(b) Briefly explain the following questions :

(i) self-liquidating project
(ii) mutiple-purpose project
(iii) describe how engineering economy studies that involve public
projects differ from those that are conducted by private
organizations.
(10 marks)

QUESTION 2

(a) Explain the differences between normal profit under perfect competition and zero
economic profit under imperfect competition.
(10 marks)

(b) Discuss some of the considerations that go into determining the interest rate to be
used in evaluating alternatives in the public sector.
(10 marks)

QUESTION 3

(a) Explain the difference between demand side inflation and supply side inflation.

(10 marks)

(b) Explain how the following policies could overcome the economic inflation in the
country.
(i) Fiscal policy
(ii) Monetary policy
(iii) Direct controls
(iv) Supply side policy.
(10 marks)

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QUESTION 4

(a) Discuss the concepts of socially optimal price (P = MC), fair return price (P =
ATC) and monopoly price (P > MC) in market structure.
(10 marks)

(b) Discuss the major barriers to market entry for monopoly and oligopolistic
markets.
(10 marks)

QUESTION 5

(a) Explain in detail four (4) definitions of inflation.

(10 marks)

(b) Explain how fiscal, monetary and supply side policies can overcome inflation in a
country.
(10 marks)