END-OF-SEMESTER EXAMINATION SEMESTER III, 2004/2005 SESSION KULLIYYAH OF ECONOMICS AND MANAGEMENT SCIENCES

Programme Time Duration : : : B.Engineering 9.00 a.m. - 11.30 a.m. 2 Hr(s) 30 Min(s) ECON 1550 Level of Study : 1-2 Date : 20/6/2005

Course Code : Course Title :

Section(s)

: 1

Introductory Economics for Engineering (This Question Paper Consists of 16 Printed Pages With 2 Sections)

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

1. Section A: Answer ALL questions. 2. Section B: Answer ALL questions.

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

APPROVED BY

Final Examination Introductory Economics for Engineering ECON 1550 Sem. III, 2004/05 SECTION A: Answer all questions.

Use the following to answer question 1: Answer the next question(s) on the basis of the following cost data for a purely competitive seller:
Total product 0 1 2 3 4 5 6 Total fixed cost $50 50 50 50 50 50 50 Total variable cost $ 0 70 120 150 220 300 390 Total cost $ 50 120 170 200 270 350 440

1.

The above data are for: A) the long run. B) the short run. C) both the short run and the long run. D) the intermediate market period only.

Use the following to answer question 2:

2.

Refer to the above diagram. The short-run supply curve for this firm is the: A) entire MC curve. B) segment of the AVC curve lying to the right of the MC curve. C) segment of the MC curve lying above the ATC curve. D) segment of the MC curve lying above the AVC curve.

3.

Assume a purely competitive increasing-cost industry is initially in long-run equilibrium and that an increase in consumer demand occurs. After all economic adjustments have been completed product price will be: A) lower, but total output will be larger than originally. B) higher and total output will be larger than originally. C) lower and total output will be smaller than originally. D) higher, but total output will be smaller than originally.

4.

For a purely competitive firm total revenue: A) is price times quantity sold. B) increases by a constant absolute amount as output expands. C) graphs as a straight upsloping line from the origin. D) has all of the above characteristics.

Use the following to answer question 5: Answer the next question(s) on the basis of the following cost data for a purely competitive seller:
Output 0 1 2 3 4 5 6 7 Total cost $ 50 90 120 140 170 210 260 330

5.

Refer to the above data. If product price is $60, the firm will: A) shut down. B) produce 4 units and realize a $120 economic profit. C) produce 6 units and realize a $100 economic profit. D) produce 3 units and incur a $40 loss.

6.

In the short run a pure monopolist: A) always earns an economic profit. B) always earns a normal profit. C) always realizes a loss. D) may realize an economic profit, a normal profit, or a loss.

Use the following to answer question 7:

7.

Refer to the above diagram for a pure monopolist. Monopoly output will be: A) between f and g. B) h. C) g. D) f .

8.

Purely competitive firms and pure monopolists are similar in that: A) the demand curves of both are perfectly elastic. B) significant entry barriers are common to both. C) both are price makers. D) both maximize profit where MR = MC.

9.

Suppose that a pure monopolist can sell 10 units of output at $5 per unit and 11 units at $4.90 per unit. The marginal revenue of the eleventh unit is: A) $3.90. B) $.10. C) $53.90. D) $4.90.

10.

A profit-maximizing monopolist will set its price: A) as far above ATC as possible. B) along the elastic portion of its demand curve. C) where the marginal cost curve intersects the demand curve. D) as close as possible to the minimum point of ATC.

11.

If the number of firms in a monopolistically competitive industry increases and the degree of product differentiation diminishes: A) the likelihood of realizing economic profits in the long run would be enhanced. B) individual firms would now be operating at outputs where their average total costs would be higher. C) the industry would more closely approximate pure competition. D) the likelihood of collusive pricing would increase.

12.

The larger the number of firms and the smaller the degree of product differentiation the: A) greater the divergence between the demand and the marginal revenue curves of the monopolistically competitive firm. B) larger will be the monopolistically competitive firm's fixed costs. C) less elastic is the monopolistically competitive firm's demand curve. D) more elastic is the monopolistically competitive firm's demand curve.

13.

The demand curve of a monopolistically competitive producer is: A) less elastic than that of either a pure monopolist or a pure competitor. B) less elastic than that of a pure monopolist, but more elastic than that of a pure competitor. C) more elastic than that of a pure monopolist, but less elastic than that of a pure competitor. D) more elastic than that of either a pure monopolist or a pure competitor.

14.

When a monopolistically competitive firm is in long-run equilibrium: A) P = MC = ATC. B) MR = MC and minimum ATC > P. C) MR > MC and P = minimum ATC. D) MR = MC and P > minimum ATC.

15.

Inefficiencies occur under monopolistic competition because: A) each firm's demand curve becomes more elastic as we move down the curve. B) each firm's marginal revenue curve coincides with its demand curve. C) each firm's downsloping demand curve is tangent to the ATC curve in the long run. D) entry barriers greatly restrict the entry of new firms.

Use the following to answer question 16: Assume an economy that is producing only one product. Output and price data for a threeyear period are as follows. Answer the next question(s) on the basis of these data.
Year 1 2 3 Units of output 20 25 30 Price per unit $ 4 4 6

16.

Refer to the above data. If year 2 is chosen as the base year, in years 1 and 3 the price index values, respectively, are: A) 4 and 6. B) 6 and 4. C) 120 and 100. D) 100 and 150.

17.

Which of the following do national income accountants consider to be investment? A) the purchase of an automobile for private, nonbusiness use B) the purchase of a new house C) the purchase of corporate bonds D) the purchase of gold coins

Use the following to answer question 18: Answer the next question(s) on the basis of the following national income data for the economy. All figures are in billions.
Personal consumption expenditures Government purchases Gross private domestic investment Net exports Net foreign factor income earned in the U.S. Consumption of fixed capital Indirect business taxes Compensation of employees Rents Interest Proprietors' income Corporate income taxes Dividends Undistributed corporate profits $400 128 88 7 0 43 50 369 12 15 52 36 24 22

18.

Refer to the above data. The national income is: A) $561. B) $573. C) $580. D) $530.

19.

The total amount of income earned by U.S. resource suppliers in a year is measured by: A) gross domestic product. B) national income. C) personal income. D) disposable income.

20.

Suppose that GDP was $200 billion in year 1 and that all other components of expenditures remained the same in year 2 except that business inventories increased by $10 billion. GDP in year 2 is: A) $180 billion. B) $190 billion. C) $200 billion. D) $210 billion.

Use the following to answer question 21: Economy A: gross investment equals depreciation Economy B: depreciation exceeds gross investment Economy C: gross investment exceeds depreciation

21.

Refer to the above information. Positive net investment is occurring in: A) economy A only. B) economy B only. C) economy C only. D) economies A and B only.

22.

The fact that nominal GDP has risen faster than real GDP: A) suggests that the base year of the GDP price index has been shifted. B) tells us nothing about what has happened to the price level. C) suggests that the general price level has fallen. D) suggests that the general price level has risen.

23.

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

Use the following to answer question 24: Answer the next question(s) on the basis of the following data. All figures are in billions of dollars.
Gross investment National income Net exports Personal income Personal consumption expenditures Saving Government purchases Net domestic product $ 18 100 2 85 70 5 20 105

24.

The gross domestic product for the above economy is: A) $100. B) $95. C) $110. D) $107.

25.

Which of the following activities is excluded from GDP, causing GDP to understate a nation's well-being? A) the services of used-car dealers B) the child-care services provided by stay-at-home parents C) the construction of new houses D) government expenditures on military equipment

26.

Given the annual rate of economic growth, the "rule of 70" allows one to: A) determine the accompanying rate of inflation. B) calculate the size of the GDP gap. C) calculate the number of years required for real GDP to double. D) determine the growth rate of per capita GDP.

10

Use the following to answer question 27: Answer the next question(s) on the basis of the following information for a specific year in a hypothetical economy for which Okun's law is applicable: Potential Real GDP = $200 billion Natural rate of unemployment = 6 percent Actual rate of unemployment = 12 percent

27.

If the unemployment rate in the above economy declined to 6 percent, we could conclude that: A) only structural unemployment remained. B) the economy's production possibilities curve shifted outward. C) the economy had moved from a point inside its production possibilities curve to a point on or near the curve. D) nominal GDP would rise but real GDP would fall.

28.

Cost-push inflation: A) is caused by excessive total spending. B) shifts the nation's production possibilities curve leftward. C) moves the economy inward from its production possibilities curve. D) is a mixed blessing because it has positive effects on real output and employment.

29.

If the economy's real GDP doubles in 18 years, we can: A) not say anything about the average annual rate of growth. B) conclude that its average annual rate of growth is about 5.5 percent. C) conclude that its average annual rate of growth is about 2 percent. D) conclude that its average annual rate of growth is about 4 percent.

30.

Given the annual rate of inflation, the "rule of 70" allows one to: A) determine whether the inflation is demand-pull or cost-push. B) calculate the accompanying rate of unemployment. C) determine when the value of a real asset will approach zero. D) calculate the number of years required for the price level to double.

31.

The GDP gap measures the difference between: A) NDP and GDP. B) NI and PI. C) actual GDP and potential GDP. D) nominal GDP and real GDP.

11

32.

Structural unemployment: A) is also known as frictional unemployment. B) is the main component of cyclical unemployment. C) is said to occur when people are waiting to be called back to previous jobs. D) may involve a locational mismatch between unemployed workers and job openings.

33.

If potential GDP is $400 billion and there is a negative GDP gap of $15 billion, real GDP is: A) $415 billion. B) $385 billion. C) $15 billion. D) $785 billion.

34.

A lender need not be penalized by inflation if the: A) long-term rate of inflation is less than the short-term rate of inflation. B) short-term rate of inflation is less than the long-term rate of inflation. C) lender correctly anticipates inflation and increases the nominal interest rate accordingly. D) inflation is unanticipated by both borrower and lender.

35.

For a nation's real GDP per capita to rise during a year: A) consumption spending must increase. B) real GDP must increase more rapidly than population. C) population must increase more rapidly than real GDP. D) investment spending must increase.

12

Use the following to answer question 36:

Money market mutual fund balances Currency and coins in banks Currency and coins in circulation Saving deposits, including money market deposit accounts Large ($100,000 or more) time deposits Small (less than $100,000) time deposits Checkable deposits $220 10 60 50 180 80 70

36.

Refer to the above information. Money supply M1 for this economy is: A) $60. B) $70. C) $130. D) $140.

Use the following to answer question 37:

M1 Currency and coins in circulation Currency and coins in banks Small (less than $100,000) time deposits M2 Savings deposits, including money market deposit accounts Large (more than $100,000) time deposits $300 30 10 15 350 20 40

37.

Refer to above information. Checkable deposits in this economy are: A) $320. B) $230. C) $270. D) $260.

38.

When the money market is in equilibrium: A) the quantity of money demanded equals the quantity of money supplied. B) the interest rate is increasing. C) bond prices are falling. D) the interest rate is declining.

13

Use the following to answer question 39: Answer the next question(s) on the basis of the following table:
Interest rate 2% 4 6 8 10 Transaction demand for money $220 220 220 220 220 Asset demand for money $300 280 260 240 220 Money supply $460 460 460 460 460

39.

All else equal, the transaction demand for money in the above table would increase if: A) nominal GDP increased. B) the interest rate fell. C) the supply of money increased. D) the economy's MPC declined.

Use the following to answer question 40: Answer the next question(s) on the basis of the following table in which columns (1) and (2) indicate the transactions demand (Dt) for money and columns (1) and (3) show the asset demand (Da) for money:
(1) Interest rate 12% 10 8 6 4 2 (2) Dt $100 100 100 100 100 100 (3) Da $ 0 20 40 60 80 100

40.

Refer to the above data. If the money supply is $160, the equilibrium interest rate will be: A) 10 percent. B) 8 percent. C) 6 percent. D) 4 percent.

SECTION B: Answer all questions

1. Suppose an economys real GDP is $30,000 in year 1 and $31,200 in year 2.

14

a. What is the growth rate of its real GDP? (5 marks) b. Assume that population was 100 in year 1 and 102 in year 2. What is the growth rate of GDP per capita? (5 marks) 2. Assume that in a particular year the natural rate of unemployment is 5 percent and the actual rate of unemployment is 9 percent. a. Determine the size of the GDP gap in percentage-point terms. (5 marks) b. If the nominal GDP is $500 billion in that year, how much output is being foregone because of cyclical unemployment? (5 marks)

3. a.

Assuming free entry into, and free exit from, the market, identical cost and constant-cost industry, draw a diagram to illustrate the long-run equilibrium of a firm operating in a perfectly competitive industry. (5 marks) Does in the long-run, a perfectly competitive firm achieve efficiency? Briefly, elaborate.(5 marks)

b.

15

4.

Use this diagram to answer the following questions. (10 marks)

a. Refer to the above diagram. How much output and at what price should the firm choose to maximize its profit? b. From the diagram, determine the economic profit area. c. From the diagram, at the profit maximizing output level, determine the total cost area. d. From the diagram, at the profit maximizing output level, determine the total revenue area. e. From the diagram, distance JH measures ________________ .

16