END-OF-SEMESTER EXAMINATION SEMESTER II, 2005/2006 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 : 28/3/2006

Course Code : Course Title :

Section(s)

: 1-9

Introductory Economics for Engineering (This Question Paper Consists of 17 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 THREE (3) questions only. All questions carry 20 marks.

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

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SECTION A: Answer all questions. 1. Unemployment and/or productive inefficiencies: A) cause the production possibilities curve to shift outward. B) can exist at any point on a production possibilities curve. C) are both illustrated by a point outside the production possibilities curve. D) are both illustrated by a point inside the production possibilities curve.

Use the following to answer question 2:

2. Refer to the above diagram. This production possibilities curve is constructed so that: A) resources are presumed to be perfectly shiftable between bread and tractors. B) the opportunity cost of bread diminishes as more bread is produced. C) the opportunity cost of tractors diminishes as more bread is produced. D) the opportunity cost of both bread and tractors increases as more of each is produced.

3. The law of increasing opportunity costs exists because: A) resources are not equally efficient in producing various goods. B) the value of the dollar has diminished historically because of persistent inflation. C) wage rates invariably rise as the economy approaches full employment. D) consumers tend to value any good more highly when they have little of it.

4. In terms of the circular flow diagram, households make expenditures in the _____ market and receive income through the _____ market. A) product; financial B) resource; product C) product; resource D) capital; product

5. One reason that the quantity of a good demanded increases when its price falls is that the: A) price decline shifts the supply curve to the left. B) lower price shifts the demand curve to the left. C) lower price shifts the demand curve to the right. D) lower price increases the real incomes of buyers, enabling them to buy more.

6. If Z is an inferior good, a decrease in money income will shift the: A) supply curve for Z to the left. B) supply curve for Z to the right. C) demand curve for Z to the left. D) demand curve for Z to the right.

Use the following to answer question 7:

x Price

S1

S2

Quantity

7. A decrease in supply is depicted by a: A) move from point x to point y. B) shift from S1 to S2. C) shift from S2 to S1. D) move from point y to point x.

8. A product market is in equilibrium: A) when there is no surplus of the product. B) when there is no shortage of the product. C) when consumers want to buy more of the product than producers offer for sale. D) where the demand and supply curves intersect.

9. Which of the following is not characteristic of the demand for a commodity that is elastic? A) The relative change in quantity demanded is greater than the relative change in price. B) Buyers are relatively sensitive to price changes. C) Total revenue declines if price is increased. D) The elasticity coefficient is less than one.

10. Suppose we find that the price elasticity of demand for a product is 3.5 when its price is increased by 2 percent. We can conclude that quantity demanded: A) increased by 7 percent. B) decreased by 7 percent. C) decreased by 9 percent. D) decreased by 12 percent.

Use the following to answer question 11:

Price $10 8 6 4 2 Quantity supplied 10 9 8 7 6

11. Over the $8-$6 price range, supply is: A) inelastic. B) elastic. C) perfectly inelastic. D) perfectly elastic.

Use the following to answer question 12:

12. Refer to the above diagrams. The case of substitute goods is represented by figure: A) A. B) B. C) C. D) D.

13. Economic profits are calculated by subtracting: A) explicit costs from total revenue. B) implicit costs from total revenue. C) implicit costs from normal profits. D) explicit and implicit costs from total revenue.

14. The law of diminishing returns describes the: A) relationship between total costs and total revenues. B) profit-maximizing position of a firm. C) relationship between resource inputs and product outputs in the short run. D) relationship between resource inputs and product outputs in the long run.

Use the following to answer question 15:

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

Use the following to answer question 16: Answer the next question(s) on the basis of the accompanying table that shows average total costs (ATC) for a manufacturing firm whose total fixed costs are $10:
Output 1 2 3 4 5 ATC $40 27 29 31 38

16. Refer to the above data. The total cost of producing 4 units of output is: A) $31. B) $87. C) $124. D) $108.

Use the following to answer question 17:

17. 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.

Use the following to answer question 18:

18. Refer to the above diagram. At the profit-maximizing output, total variable cost is equal to: A) 0AHE. B) 0CFE. C) 0BGE. D) ABGH.

19. Long-run competitive equilibrium: A) is realized only in constant-cost industries. B) will never change once it is realized. C) is not economically efficient. D) results in zero economic profits.

Use the following to answer question 20:

20. Refer to the above diagram. Line (1) reflects the long-run supply curve for: A) a constant-cost industry. B) a decreasing-cost industry. C) an increasing-cost industry. D) technologically progressive industry.

21. The nondiscriminating pure monopolist's demand curve: A) is the industry demand curve. B) shows a direct or positive relationship between price and quantity demanded. C) tends to be inelastic at high prices and elastic at low prices. D) is identical to its marginal revenue curve.

Use the following to answer question 22:

22. Which of the above diagrams correctly portray a nondiscriminating pure monopolist's demand (D) and marginal revenue (MR) curves? A) A B) B C) C D) D

23. A pure monopolist: A) will realize an economic profit if price exceeds ATC at the equilibrium output. B) will realize an economic profit if ATC exceeds MR at the equilibrium output. C) will realize an economic loss if MC intersects the downsloping portion of MR. D) always realizes an economic profit.

24. Economic profit in the long run is: A) possible for both a pure monopoly and a pure competitor. B) possible for a pure monopoly, but not for a pure competitor. C) impossible for both a pure monopolist and a pure competitor. D) only possible when barriers to entry are nonexistent.

Use the following to answer question 25:

25. Refer to the above long-run cost diagram for a firm. If the firm produces output Q2 at an average cost of ATC3, then the firm is: A) producing the potentially profit-maximizing output, but is failing to minimize production costs. B) incurring X-inefficiency, but is realizing all existing economies of scale. C) incurring X-inefficiency and is failing to realize all existing economies of scale. D) producing that output with the most efficient combination of inputs and is realizing all existing economies of scale.

26. 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.

27. Monopolistically competitive firms: A) realize normal profits in the short run but losses in the long run. B) incur persistent losses in both the short run and long run. C) may realize either profits or losses in the short run, but realize normal profits in the long run. D) persistently realize economic profits in both the short run and long run.

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Use the following to answer questions 28-29:

28. Refer to the above diagram for a monopolistically competitive firm in short-run equilibrium. This firm's profit-maximizing price will be: A) $10. B) $13. C) $16. D) $19.

29. Refer to the above diagram for a monopolistically competitive firm in short-run equilibrium. This firm will realize an economic: A) loss of $320. B) loss of $280. C) profit of $480. D) profit of $600.

30. If some firms leave a monopolistically competitive industry, the demand curves of the remaining firms will: A) be unaffected. B) shift to the left. C) become more elastic. D) shift to the right.

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Use the following to answer questions 31-33: Answer the next question(s) on the basis of the following data. All figures are in billions of dollars.
Personal taxes Social Security contributions Indirect business taxes Corporate income taxes Transfer payments U.S. exports Undistributed corporate profits Government purchases Gross private domestic investment U.S. imports Personal consumption expenditures Consumption of fixed capital Net foreign factor income earned in the U.S. $ 40 15 20 40 22 24 35 90 75 22 250 25 10

31. Refer to the above data. GDP is: A) $390. B) $417. C) $422. D) $492.

32. Refer to the above data. NDP is: A) $370. B) $402. C) $392. D) $467.

33. Refer to the above data. NI is: A) $364. B) $372. C) $447. D) $362.

34. 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

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35. If nominal GDP in some year is $280 and real GDP is $160. The GDP price index for that year is: A) 175. B) 57. C) 160. D) 280.

Use the following to answer question 36:

Alta (real GDP) $ 2,000 2,100 2,200 Zorn (real GDP) $ 150,000 152,000 154,000 Alta (population) 200 202 210 Zorn (population) 500 505 508

Year 1 2 3

36. Refer to the above table. Between years 1 and 2, real GDP per capita grew by __________ percent in Alta: A) 3 B) 4 C) 5 D) 10

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

38. 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 that is out of work. D) percentage of the total population that is out of work.

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39. Demand-pull inflation: A) occurs when prices of resources rise, pushing up costs and the price level. B) occurs when total spending exceeds the economy's ability to provide output at the existing price level. C) occurs only when the economy has reached its absolute production capacity. D) is also called cost-push inflation.

40. 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

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SECTION B: ANSWER THREE (3) QUESTIONS ONLY. ALL QUESTIONS CARRY 20 MARKS.

Question 1 a) Explain the law of demand and the concept of price elasticity of demand. Provide example(s) in your answer. (6 marks) b) The president of the F & N Corporation asks you, as the company economist, to forecast changes in consumer canned drinks associated with a proposed price change. You conduct a survey and find that if the price of a six-pack increases from $5.50 to $7.50, the quantity demanded will decrease from 2,200 units to 1,800 units a month. Should the F & N Corporation raise its price? Explain the economic basis for this recommendation to the president. (8 marks)

c) Differentiate between a price floor and a price ceiling for a product in a market. Explain the objective of the government in introducing each of the price control. (6 marks)

Question 2 a) Draw the long-run average total cost curve of a firm and Show the area of economies of scale, constant return to scale and diseconomies of scale. What factors explain economies of scale and diseconomies of scale? (10 marks) b) Name three barriers to entry and explain how they can keep sellers out of a market. (6 marks) c) What are some different ways a firm can engage in non price competition? (4 marks)

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Question 3 In the table below are demand and cost data for a natural monopolist. Quantity demanded 0 1 2 3 4 5 6 7 8 9 10 Marginal revenue $32.00 26.00 20.00 14.00 8.00 2.00 4.00 10.00 16.00 -22.00 Average cost $48.00 30.00 23.34 21.00 20.00 19.50 19.29 19.25 19.33 19.50 Marginal cost $48.00 12.00 10.00 14.00 16.00 17.00 18.00 19.50 20.00 21.00

Price $35.00 32.00 29.00 26.00 23.00 20.00 17.00 14.00 11.00 8.00 5.00

a) What is the level of price, output, and amount of profit for an unregulated monopolist? (3 marks) b) Using the data in the table, what are the price, output, and profit for a regulated monopolist that sets price equal to marginal cost compared with an unregulated monopolist? (3 marks) c) Using the data in the table, what are the price, output, and profit for a regulated monopolist that charges a fair-return price compared with an unregulated monopolist? (3 marks)

d) Draw a graph indicating different levels of price in a regulated and unregulated monopolist. (3 marks) e) Analyze the effect of regulation on the allocation of resources. Which situation is most efficient? Which situation is most likely to be chosen by government and why? (8 marks)

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Question 4 a) Define GDP and discuss the importance of measuring GDP. (5 marks)

b) Explain the shortcomings of GDP as a measure of social welfare of people in a country. (5 marks) c) Refer to the following price and output data over a five-year period for an economy that produces only one good. Assume that year 2 is the base year. Units of output 16 20 30 36 40 Price per unit $2 3 4 5 6 (2 marks) (2 marks) (2 marks)

Year 1 2 3 4 5

(i) What is the price index for year 3? (ii) What is the nominal GDP for year 4? (iii)What is the real GDP for year 4?

(iv)Tell which years you would deflate nominal GDP and which years you would inflate nominal GDP in finding real GDP. Justify your answer. (4 marks)

Question 5 a) What is meant by the term business cycle? b) List and explain the four phases of the business cycle. c) Which types of industries are hit hardest by a recession? Explain. (4 marks) (8 marks) (8 marks)

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