END-OF-SEMESTER EXAMINATION SEMESTER II, 2003/2004 SESSION KULLIYYAH OF ECONOMICS AND MANAGEMENT SCIENCES

Programme Time Duration : : : B.Engineering 2.30 - 5.00 p.m. 2 Hr(s) 30 Min(s) ECON 1550 Level of Study : 2-4 Date : 23/2/2004

Course Code : Course Title :

Section(s)

: 1-3

Introductory Economics for Engineering (This Question Paper Consists of 14 Printed Pages With 75 Questions)

INSTRUCTION (S) TO CANDIDATES DO NOT OPEN UNTIL YOU ARE ASKED TO DO SO

Answer ALL the questions in the answer sheet provided.

Any form of cheating or attempt to cheat is a serious offence which may lead to dismissal

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Semester II, 2003/04 Introductory Economics for Engineering Econ 1550

Instruction: Answer all the questions in the answer sheet provided. (1 mark each)

1. Economics can best be described as the study of: A) how to profitably invest one's income in stocks and bonds. B) how to use scarce productive resources efficiently. C) how government policies affect businesses and labor. D) managing business enterprises for profit.

2. The money payments made to owners of land, labor, capital, and entrepreneurial ability are: A) interest, wages, rent, and profits respectively. B) rent, wages, dividends, and interest respectively. C) rent, profits, wages, and interest respectively. D) rent, wages, interest, and profits respectively.

3. A nation's production possibilities curve is "bowed out" from the origin because: A) resources are not equally efficient in producing every good. B) the originator of the idea drew it this way and modern economists follow this convention. C) resources are scarce. D) wants are virtually unlimited.

4. Any point inside the production possibilities curve indicates: A) the realization of allocative efficiency. B) that resources are imperfectly shiftable among alternative uses. C) the presence of inflationary pressures. D) that more output could be produced with available resources.

5. The simple circular flow model shows that: A) households are on the buying side of both product and resource markets. B) businesses are on the selling side of both product and resource markets. C) households are on the selling side of the resource market and on the buying side of the product market. D) businesses are on the buying side of the product market and on the selling side of the resource market.

6. Which of the following statements is correct? A) An increase in the price of C will decrease the demand for complementary product D. B) A decrease in income will decrease the demand for an inferior good. C) An increase in income will reduce the demand for a normal good. D) A decline in the price of X will increase the demand for substitute product Y.

7. The demand for most products varies directly with changes in consumer incomes. Such products are known as: A) complementary goods. B) competitive goods. C) inferior goods. D) normal goods.

8. "Because of unseasonably cold weather, the supply of oranges has substantially decreased." This statement indicates that: A) the demand for oranges will necessarily rise. B) the equilibrium quantity of oranges will rise. C) the amount of oranges that will be available at various prices has declined. D) the price of oranges will fall.

9. Suppose product X is an input in the production of product Y. Product Y in turn is a substitute for product Z. An increase in the price of X can be expected to: A) decrease the demand for Z. B) increase the demand for Z. C) have no effect on the demand for Z. D) decrease the supply of Z.

Use the following to answer question 10:

(1) Qd 70 60 80 90 100 (2) Qd 60 50 60 70 80 (3) Price $10 9 8 7 6 (4) Qs 70 60 50 40 30 (5) Qs 80 70 60 50 40

10. Refer to the above table. Suppose that demand is represented by columns (3) and (2) and supply is represented by columns (3) and (5). If the price were artificially set at $9, a: A) the market would clear. B) a surplus of 20 units would occur. C) a shortage of 20 units would occur. D) demand would change from columns (3) and (2) to columns (3 and (1).

Use the following to answer question 11:

11. Refer to the above diagram. A surplus of 160 units would be encountered if price was: A) $1.10, that is, $1.60 minus $.50. B) $1.60. C) $1.00. D) $.50.

12. At the point where the demand and supply curves for a product intersect: A) the "selling price" and the "buying price" need not be equal. B) the market may, or may not, be in equilibrium. C) either a shortage or a surplus of the product might exist, depending on the degree of competition. D) the quantity that consumers want to purchase and the amount producers choose to sell are the same.

Use the following to answer questions 13-14:

13. Refer to the above diagram, which shows demand and supply conditions in the competitive market for product X. Given D0, if the supply curve moved from S0 to S1 , then: A) supply has increased and equilibrium quantity has decreased. B) supply has decreased and equilibrium quantity has decreased. C) there has been an increase in the quantity supplied. D) supply has increased and price has risen to 0G.

14. Refer to the above diagram, which shows demand and supply conditions in the competitive market for product X. A shift in the demand curve from D0 to D1 might be caused by a(n): A) decrease in income if X is an inferior good. B) increase in the price of complementary good Y. C) increase in money incomes if X is a normal good. D) increase in the price of substitute product Y.

15. If the supply and demand curves for a product both decrease, then equilibrium: A) quantity must fall and equilibrium price must rise. B) price must fall, but equilibrium quantity may either rise, fall, or remain unchanged. C) quantity must decline, but equilibrium price may either rise, fall, or remain unchanged. D) quantity and equilibrium price must both decline.

16. If the demand for product X is inelastic, a 4 percent increase in the price of X will: A) decrease the quantity of X demanded by more than 4 percent. B) decrease the quantity of X demanded by less than 4 percent. C) increase the quantity of X demanded by more than 4 percent. D) increase the quantity of X demanded by less than 4 percent.

17. The price of product X is reduced from $100 to $90 and, as a result, the quantity demanded increases from 50 to 60 units. Therefore demand for X in this price range: A) has declined. B) is of unit elasticity. C) is inelastic. D) is elastic.

18. Accounting profits are typically: A) greater than economic profits because the former do not take explicit costs into account. B) equal to economic profits because accounting costs include all opportunity costs. C) smaller than economic profits because the former do not take implicit costs into account. D) greater than economic profits because the former do not take implicit costs into account.

19. Which of the following represents a long-run adjustment? A) a farmer uses an extra dose of fertilizer on his corn crop B) unable to meet foreign competition, a U.S. watch manufacturer sells one of its branch plants C) a steel manufacturer cuts back on its purchases of coke and iron ore D) a supermarket hires four additional clerks

20. Which of the following statements concerning the relationships between total product (TP), average product (AP), and marginal product (MP) is not correct? A) AP continues to rise so long as TP is rising. B) AP reaches a maximum before TP reaches a maximum. C) TP reaches a maximum when the MP of the variable input becomes zero. D) MP cuts AP at the maximum AP.

21. The first, second, and third workers employed by a firm add 24, 18, and 9 units to total product respectively. Therefore, the: A) marginal product of the third worker is 9. B) total product of the three workers is 54. C) average product of the three workers is 18. D) marginal product of the second worker is 18.

22. The total output of a firm will be at a maximum where: A) MP is at a maximum. B) AP is at a minimum. C) MP is zero. D) AP is at a maximum.

Marginal and average product

23.

Marginal product Average product

Q1

Q2 Inputs of labor

Q3

In the above diagram the range of diminishing marginal returns is: A) 0Q3. B) 0Q2. C) Q1Q2. D) Q1Q3.

Use the following to answer question 24:

24. Refer to the above diagram. At output level Q total cost is: A) 0BEQ. B) BCDE. C) 0BEQ plus BCDE. D) 0AFQ plus BCDE.

25. Assume that in the short run a firm is producing 100 units of output, has average total costs of $200, and average variable costs of $150. The firm's total fixed costs are: A) $5,000. B) $500. C) $.50. D) $50.

26. In which of the following industry structures is the entry of new firms the most difficult? A) pure monopoly B) oligopoly C) monopolistic competition D) pure competition

27. An industry comprised of a very large number of sellers producing a standardized product is known as: A) monopolistic competition B) oligopoly C) pure monopoly D) pure competition

28. The demand schedule or curve confronted by the individual purely competitive firm is: A) relatively elastic, that is, the elasticity coefficient is greater than unity. B) perfectly elastic. C) relatively inelastic, that is, the elasticity coefficient is less than unity. D) perfectly inelastic.

Use the following to answer question 29:

29. Refer to the above diagram, which pertains to a purely competitive firm. Curve C represents: A) total revenue and marginal revenue. B) marginal revenue only. C) total revenue and average revenue. D) average revenue and marginal revenue.

30. In the short run the individual competitive firm's supply curve is that segment of the: A) average variable cost curve lying below the marginal cost curve. B) marginal cost curve lying above the average variable cost curve. C) marginal revenue curve lying below the demand curve. D) marginal cost curve lying between the average total cost and average variable cost curves.

Answer questions 31-34 on the basis of the following data confronting a firm:
Marginal revenue -$16 16 16 16 16 Marginal cost -$10 9 13 17 21

Output 0 1 2 3 4 5

31. Refer to the above data. If the firm's minimum average variable cost is $10, the firm's profit-maximizing level of output would be: A) 2. B) 3. C) 4. D) 5.

32. Refer to the above data. At the profit-maximizing output the firm's total revenue is: A) $48. B) $32. C) $80. D) $64.

33. Refer to the above data. At the profit-maximizing output the firm's total cost is: A) $48. B) $32. C) $80. D) $64.

34. Refer to the above data. The firm's: A) economic profit is $12. B) economic profit is $16. C) loss is $14. D) economic profit is $3.

35. A pure monopolist should never produce in the: A) elastic segment of its demand curve because it can increase total revenue and reduce total cost by lowering price. B) inelastic segment of its demand curve because it can increase total revenue and reduce total cost by increasing price. C) inelastic segment of its demand curve because it can always increase total revenue by more than it increases total cost by reducing price. D) segment of its demand curve where the price elasticity coefficient is greater than one.

36. A pure monopolist is producing an output such that ATC = $4, P = $5, MC = $2, and MR = $3. This firm is realizing: A) a loss that could be reduced by producing more output. B) a loss that could be reduced by producing less output. C) an economic profit that could be increased by producing more output. D) an economic profit that could be increased by producing less output.

Answer questions 37-39 on the basis of the following demand and cost data for a pure monopolist:

Demand Data Quantity demanded Price $5.50 3 5.00 4 4.50 5 3.85 6 3.35 7 2.90 8 2.50 9

Cost Data Total Output cost 3 $ 5 4 6 5 6.50 6 7.50 7 9 8 11 9 14

37. Refer to the above data. Equilibrium price for the monopolist will be: A) $5.00 B) $2.90. C) $3.35. D) $4.50.

38. Refer to the above data. The equilibrium level of output will be: A) 4 units. B) 7 units. C) 6 units. D) 5 units.

39. Refer to the above data. The monopolist will realize a: A) profit of $8.50. B) profit of $7.50. C) profit of $16. D) loss of $14.

40. Which of the following is not a basic characteristic of monopolistic competition? A) the use of trademarks and brand names B) recognized mutual interdependence C) product differentiation D) a relatively large number of sellers

41. Monopolistically competitive and purely competitive industries are similar in that: A) both are assured of short-run economic profits. B) both produce differentiated products. C) the demand curves facing individual firms are perfectly elastic in both industries. D) there are few, if any, barriers to entry.

42. Which of the following is an illustration of differentiated oligopoly? A) the aluminum industry B) the steel industry C) the soft drink industry D) retail stores in large cities

43. The term oligopoly indicates: A) a one-firm industry. B) many producers of a differentiated product. C) a few firms producing either a differentiated or a homogeneous product. D) an industry whose four-firm concentration ratio is low.

44. The GDP is the: A) monetary value of all final goods and services produced within a nation in a particular year. B) national income minus all nonincome charges against output. C) monetary value of all economic resources used in producing a year's output. D) monetary value of all goods and services, final and intermediate, produced in a specific year.

45. The term "final goods and services" refers to: A) goods and services that are unsold and therefore added to inventories. B) goods and services whose value has been adjusted for changes in the price level. C) goods and services purchased by ultimate users, as opposed to resale or further processing. D) the excess of U.S. exports over U.S. imports.

46. GDP includes: A) neither intermediate nor final goods. B) both intermediate and final goods. C) intermediate, but not final, goods. D) final, but not intermediate, goods.

47. GDP is equal to: A) C + Ig + G + X n. B) C + Ig + G - X n. C) C + In + G + X n. D) C + In + G - X n.

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48. If depreciation exceeds gross investment: A) the economy's stock of capital may be either growing or shrinking. B) the economy's stock of capital is shrinking. C) the economy's stock of capital is growing. D) net investment is zero.

49. Consumption of fixed capital (depreciation) can be determined by: A) adding indirect business taxes to NDP. B) subtracting NDP from GDP. C) subtracting net investment from GDP. D) adding net investment to gross investment.

50. GDP excludes: A) the market value of unpaid work in the home. B) the production of services. C) the production of nondurable goods. D) positive changes in inventories.

51. Assume a manufacturer of stereo speakers purchases $40 worth of components for each speaker. The completed speaker sells for $70. The value added by the manufacturer for each speaker is: A) $110. B) $30. C) $40. D) $70.

52. The total income earned in any year by U.S. resource suppliers is measured by: A) DI. B) NI. C) PI. D) GDP.

53. Which of the following best defines disposable income? A) income received by households less personal taxes B) the before-tax income received by households C) all income earned by resource suppliers for their current contributions to production D) the market value of the annual output net of consumption of fixed capital

54. Economic growth is best defined as an increase in: A) either real GDP or real GDP per capita. B) nominal GDP. C) total consumption expenditures. D) wealth in the economy.

55. Real GDP per capita is found by: A) adding real GDP and population. B) subtracting population from real GDP. C) dividing real GDP by population. D) dividing population by real GDP.

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56. Recurring upswings and downswings in an economy's real GDP over time are A) recessions. B) business cycles. C) output yo-yos. D) total product oscillations.

called:

57. During a serious recession, we would expect output to fall the most in: A) the health-care industry. B) the clothing industry. C) agriculture. D) the construction industry.

58. The phase of the business cycle in which real GDP is at a minimum is called: A) the peak. B) recession. C) the trough. D) the pits.

59. The labor force includes: A) employed workers and persons who are officially unemployed. B) employed workers, but excludes persons who are officially unemployed. C) full-time workers, but excludes part-time workers. D) permanent employees, but excludes temporary employees.

60. The unemployment rate is the: A) ratio of unemployed to employed workers. B) number of employed workers minus the number of workers who are not in the labor force. C) percentage of the labor force which is out of work. D) percentage of the total population which is out of work.

61. Cyclical unemployment results from: A) a deficiency of aggregate spending. B) the decreasing relative importance of goods and the increasing relative importance of services in the U.S. economy. C) the everyday dynamics of a free labor market. D) technological change.

62. Unemployment involving a mismatch of the skills of unemployed workers and the skills required for available jobs is called: A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) compositional unemployment.

63. The GDP gap measures the: A) difference between NDP and GDP. B) amount by which potential GDP exceeds actual GDP. C) amount by which actual GDP exceeds potential GDP. D) amount by which nominal GDP exceeds real GDP.

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64. Full-employment output is also called: A) zero-unemployment output. B) equilibrium output. C) potential output. D) zero-savings output.

65. Inflation means that: A) all prices are rising, but at different rates. B) all prices are rising and at the same rate. C) prices in the aggregate are rising, although some particular prices may be falling. D) real incomes are rising.

66. "Too much money chasing too few goods" best describes: A) the GDP gap. B) demand-pull inflation. C) the inflation premium. D) cost-push inflation.

67. Inflation initiated by increases in wages or other resource prices is labeled: A) demand-pull inflation. B) demand-push inflation. C) cost-push inflation. D) cost-pull inflation.

68. Inflation is undesirable because it: A) arbitrarily redistributes real income and wealth. B) invariably leads to hyperinflation. C) usually is accompanied by declining real GDP. D) reduces everyone's standard of living.

69. Who is least likely to be hurt by unanticipated inflation? A) a disabled laborer who is living off accumulated savings B) an owner of a small business C) a secretary D) a pensioned steelworker

70. Public goods are those for which: A) there is no free-rider problem. B) there are no externalities. C) the exclusion principle does not apply. D) there is neither an adverse selection nor moral hazard problem.

71. Cost-beneifit analysis is attempts to: A) compare the real worth, rather than the market values, of various goods and services. B) compare the relative desirability of alternative distributions of income. C) determine whether it is better to cut government expenditures or reduce taxes. D) compare the benefits and costs associated with any economic project or activity.

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72. An important problem in evaluating public projects through the use of cost-benefit analysis is that: A) real costs cannot be stated in monetary terms. B) one must decide whether to compare total costs and total benefits or marginal costs and marginal benefits. C) spillover costs and benefits associated with such projects may be difficult to measure. D) the funding of such projects is inherently inflationary.

73. A negative externality or spillover cost occurs when: A) firms fail to achieve allocative efficiency. B) firms fail to achieve productive efficiency. C) price exceeds marginal cost. D) the total cost of producing a good exceeds the costs borne by the producer.

74. Government can promote workplace safety by: A) breaking up concentrations of monopoly power. B) reducing monopsony power. C) promoting the use of recycled inputs. D) providing workers information about workplace hazards.

75. The Coase theorem: A) applies only to circumstances in which externalities are extensive and bargaining costs are high. B) holds that the median voter will decide the outcome of elections. C) states that in some circumstances majority voting can yield inconsistent results. D) suggests that in some circumstances government intervention is not needed to resolve externality problems.

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