EC1301

NATIONAL UNIVERSITY OF SINGAPORE

EC1301 PRINCIPLES OF ECONOMICS Semester 1 AY 2009/2010 MID-TERM EXAM (MAKE-UP) 9th October 2009 Time Allowed: 1 Hour

INSTRUCTIONS TO CANDIDATES 1. 2. 3. 4. 5. This examination paper comprises ELEVEN (11) printed pages, including this page. There are FORTY (40) multiple choice questions. Answer ALL questions. The total mark for this exam is 30 marks. This is a CLOSED book examination. Use the bubble form for your answers. You must submit this examination question and the bubble forms. NAME: ___________________________________________ MATRICULATION NUMBER: ______________________

EC1301

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1.

Ben says that An increase in the tax on beer will raise its price. Susan argues that Taxes should be increased on beer because college students drink too much. We can conclude that A. Bens statement is normative, but Susans is positive. B. Susans statement is normative, but Bens is positive. C. both statements are normative. D. both statements are positive. Taxes can adversely affect the efficiency in allocation of resources in society because A. they do not always fall more heavily on the rich. B. the taxes collected are not enough to finance government. C. they distort prices and thus the decisions of households and firms. D. not everyone pays taxes. Thinking at the margin is sort of like thinking at the edge because A. you risk making small errors. B. you are interested in learning how things would change if circumstances were to vary ever so slightly. C. you are only interested in thinking about the big picture. D. you only consider large changes in variables. In economics we learn that A. sometimes there is such a thing as a free lunch. B. tradeoffs allow us to avoid the problem of opportunity cost. C. opportunity costs are all of the possible alternatives given up when we make a choice. D. None of the above answers are correct. All of the following are examples of voluntary exchanges EXCEPT A. buying flowers. B. purchasing a movie ticket. C. betting in a casino. D. paying a traffic ticket. Diminishing returns can be avoided if A. all factors of production are increased simultaneously. B. the variable factor of production is increased in small amounts. C. the fixed factor of production is reduced by half. 2

2.

3.

4.

5.

6.

EC1301 D. 7. None of the above.

If real salaries decrease but nominal salaries do not, this means A. the purchasing power of money has increased. B. prices have not changed. C. prices have risen. D. prices have fallen.

Using the following data to answer questions 8-10

TABLE 1 North Cantina Production Possibilities A Capital goods Consumer goods 5 0 B 4 10 C 3 18 D 2 24 E 1 28 F 0 30

TABLE 2 South Cantina Production Possibilities A Capital goods Consumer goods 5 0 B 4 8 C 3 15 D 2 21 E 1 25 F 0 27

8.

Refer to TABLE 1 and TABLE 2. Suppose that North Cantina is producing 2 units of capital goods and 17 units of consumer goods while South Cantina is producing 2 units of capital goods and 21 units of consumer goods. We can conclude that A. North Cantina is fully and efficiently using its resources, but South Cantina is not. B. South Cantina is fully and efficiently using its resources, but North Cantina is not. C. neither South Cantina nor North Cantina is fully and efficiently using their resources.

EC1301 D. both South Cantina and North Cantina are fully and efficiently using their resources.

9.

Refer to TABLE 1 and TABLE 2. Suppose that resources in North Cantina and South Cantina are identical in quantity and quality. We can conclude that A. South Cantina has better technology than North Cantina in producing both capital and consumer goods. B. North Cantina has better technology than South Cantina in producing both capital and consumer goods. C. North Cantina is growing more rapidly than South Cantina. D. North Cantina has better technology than South Cantina in producing consumer goods, but not capital goods. Refer to TABLE 1 and TABLE 2. The opportunity cost of the fifth unit of capital goods A. is higher in North Cantina than in South Cantina. B. is the same in North Cantina and South Cantina. C. is lower in North Cantina than in South Cantina. D. cannot be determined from the information provided. Suppose Singapore discovers a way to produce clean nuclear fuel. The effect of this discovery would be to A. lead Singapore to produce less nuclear fuel. B. force Singapore to produce at a point inside its Production Possibilities Curve (PPC). C. shift the Singapores Production Possibilities Curve (PPC) outward. D. shift the Singapores Production Possibilities Curve (PPC) inward. You have the choice of going to Hawaii for a week, staying at work for the week, or spending the week skiing. If you decide to go to Hawaii, the opportunity cost is A. the value of working and skiing. B. the value of working or skiing, depending on which you would have done rather than go to Hawaii. C. working, because you would be giving up a weeks pay. D. None of the above if you enjoy the time spent in Hawaii. Suppose that the demand for pizza is given by Q = 40 2P and the supply is given by Q = P 8. If the price of pizza is $18, which of the following is TRUE? A. There will be an excess supply of 6 pizzas. B. There will be an excess demand of 8 pizzas. C. There will be an excess demand of 10 pizzas. D. The market is in equilibrium.

10.

11.

12.

13.

EC1301

14.

Assume product A is an input in the production of product B. In turn product B is a complement to product C. We can expect a decrease in the price of A to A. increase the supply of B and increase the demand for C. B. decrease the supply of B and increase the demand for C. C. decrease the supply of B and decrease the demand for C. D. increase the supply of B and decrease the demand for C. Between 1982 and 2003, the market price of a Personal Computer (PC) fell and the quantity of PCs sold increased. Which of the explanations below is consistent with these facts? A. The demand for PCs increased by more than the supply of PCs increased. B. The supply of PCs increased by more than the demand for PCs increased. C. The demand for PCs decreased by more than the supply of PCs decreased. D. Both the supply of PCs and the demand for PCs decreased. The quantity sold of a product is 200 at the unit price of $10. Suppose the price elasticity of demand for the product by the initial value method is 3.0, and you would like to increase the quantity to 240. Then the new price must be A. $9.70. B. $9.33. C. $9.12. D. $8.82. If the demand curve facing a firm had a price elasticity of demand equal to infinity and the firm raised its price, its total revenue would A. decreased slightly. B. fall to zero. C. not change. D. increase. An antidrug policy which reduces the supply of heroin might A. increase street crime because the addicts demand for heroin is highly inelastic. B. reduce street crime because the addicts demand for heroin is highly elastic. C. reduce street crime because the addicts demand for heroin is highly inelastic. D. increase street crime because the addicts demand for heroin is highly elastic. Suppose that you are in charge of pricing at a local ski rental shop. The business needs to increase revenue. If the supply of skis is elastic A. you should increase the rental price of skis. B. you should decrease the rental price of skis. C. you should not change the rental price of skis.

15.

16.

17.

18.

19.

EC1301 D. 20. you could not determine what to do with rental price until you determine whether demand is elastic or inelastic.

Which of the following would cause the equilibrium price and equilibrium quantity of potatoes (an inferior good) to increase? A. An increase in consumer income. B. Greater government restrictions on agricultural chemicals. C. A decrease in consumer income. D. Fewer government restrictions on agricultural chemicals. What is the effect on the price of wooden desks and quantity of wooden desks sold if the price of wood, a resource used to produce wooden desks, rises? A. The equilibrium quantity of wooden desks increases and the equilibrium price falls. B. The equilibrium quantity of wooden desks increases and the equilibrium price rises. C. The equilibrium quantity of wooden desks decreases and the equilibrium price falls. D. The equilibrium quantity of wooden desks decreases and the equilibrium price rises. The production costs of aspirin increase and at the same time, doctors find that one aspirin per day reduces the risk of heart attacks. Supply and demand for aspirin will A. both increase, so that the equilibrium price and equilibrium quantity will increase. B. decrease and increase, respectively, so that the equilibrium price will increase, but the equilibrium quantity can decrease, increase, or remain constant. C. increase and decrease, respectively, so that the equilibrium price will decrease, increase, or remain constant, but the equilibrium quantity will increase. D. both decrease so that the equilibrium price falls and the equilibrium quantity will decrease, increase, or remain constant. Suppose that a 10 percent increase in the price of normal good Y causes a 20 percent increase in the quantity demanded of normal good X. The cross elasticity of demand is A. negative and therefore these goods are substitutes. B. negative and therefore these goods are complements. C. positive and therefore these goods are substitutes. D. positive and therefore these goods are complements.

21.

22.

23.

EC1301

24.

The marketing people at Ben and Jerrys Ice Cream Company in Singapore believe that if they lower the price of their Cherry Garcias flavor ice cream by 25 percent, the quantity sold will increase by 5 percent. If they are correct in their belief, then A. the demand for Cherry Garcia flavor ice cream is price elastic. B. their total revenue from Cherry Garcia flavor ice cream will increase if they lower the price. C. the demand for Cherry Garcia flavor ice cream is income elastic. D. their total revenue from Cherry Garcia flavor ice cream will decrease if they lower the price. The price elasticity of demand for gasoline is 0.5 and the price elasticity of supply for gasoline is 1.1. If demand rises by 25 percent, the price of gasoline will A. rise by 15.6 percent. B. fall by 15.6 percent. C. rise by 6.4 percent. D. fall by 6.4 percent. Ceterius paribus (that is, other things being equal), if the average fixed cost curve shifts upward, A. the marginal cost curve shifts upward at all output levels. B. the average variable cost curve shifts upward at all output levels. C. the average total cost remains unchanged at all output levels. D. the vertical distance between the average total cost curve and the average variable cost curve increases at all output levels. In comparing the changes in total costs and total variable costs associated with an additional unit of output, we find that A. the change in total variable costs is equal to marginal cost, while the change in total costs is equal to total fixed costs. B. the change in total costs exceeds the change in total variable costs. C. the change in total variable costs exceeds the change in total costs. D. both are equal to marginal cost. A change in technology that shifts the firms total product curve upward without changing the quantity of capital used A. shifts the average total cost curve upward. B. shifts the average total cost curve downward. C. does not change the cost curves. D. shifts the marginal cost curve upward.

25.

26.

27.

28.

EC1301

Using the following figure to answer question 29

FIGURE 1

29. maximum profit is A. 0$1,800. B. 0$600. C. 0$1,800. D. 0$600. 30.

Refer to FIGURE 1. The monopolists

Suppose that newspapers companies are now required to use recycled paper, which is more expensive than new paper. Which of the following is more likely to result if the newspaper industry is highly perfect competitive? A. The firms cost will rise, resulting in positive economic profit in the short run and, hence, the industry supply curve will shift rightward in the long run. B. The firms cost will rise, resulting in economic losses in the short run and, hence, the industry supply curve will shift rightward in the long run. C. The firms cost will rise, resulting in economic losses in the short run and, hence, the industry supply curve will shift leftward in the long run.

EC1301 D. The industry supply curve will shift leftward in the short run, causing permanent long-run economic losses.

31.

The irrelevance of sunk costs is best described by which of the following business decisions? A. Airlines continue to sell tickets even though they are reporting losses. B. Airlines exit the market when they report losses. C. New airlines enter the market and earn profits. D. All of the above.

Using the following data to answer questions 32-33

TABLE 3 Quantity (pizzas per hour) 0 1 2 3 4 5 6 Total Cost (dollars per hour) 10 18 30 48 70 98 120

32.

Refer to TABLE 3 above. Peters Pizza is a perfectly competitive firm. The firms costs are shown in the table. If the market price is $15, how much economic profit does the firm make? A. $0 B. $30 C. -$10 D. -$15

EC1301 33. Refer to TABLE 3 above. Peters Pizza is a perfectly competitive firm. The firms costs are shown in the table. If the market price is $15, the firm will A. shut down. B. leave the industry in the long run. C. stay in the industry in the long run. D. incur an economic loss. To maximize profit, the monopolist produces on the _________ portion of the demand curve where _________. A. elastic; price equals marginal cost B. elastic; marginal revenue equals marginal cost C. inelastic; price equals marginal revenue D. inelastic; marginal revenue equals marginal cost Which of the following statements is NOT a characteristic of a monopolist? A. The ability to set its price. B. The fact that producing where MR=MC gives the firm the maximum profit. C. The ability to raise its price without causing total revenue to decrease. D. The ability to set its price above marginal cost. A firm that is a natural monopoly A. is not likely to be concerned about new entrants eroding its monopoly power. B. is not enjoying economies of scale. C. can achieve a lower average total cost if more firms enter the market. D. All of the above. Which of the following would NOT be considered price discrimination? A. Charging more money for long distance telephone calls during business hours than on weekends. B. Charging a lower price for dry cleaning mens shirts than womens shirts. C. Charging higher rates for oil delivery to people who live farther from your business. D. Charging less money to wash a small economy car than a large luxury car. 38. In monopolistically competitive industries, A. non-price competition through product differentiation is vigorous. B. the amount of variety in products is the same as in perfectly competitive industries. C. firms are not sensitive to changes in consumer demand. D. firms produce where marginal cost exceeds the marginal benefit to consumers. In the long run, a monopolistically competitive firm can earn

34.

35.

36.

37.

39.

10

EC1301 A. B. C. D. an economic profit, and so can a monopoly. an economic profit, but a monopoly cannot. no economic profit, but a monopoly might. no economic profit, and neither can a monopoly.

40.

Suppose in the city of SEMBAWANG music stores operate in a monopolistically competitive market. If the price of CDs in SEMBAWANG is currently equal to $20 per CD and the average cost of CDs is $15, in the long run we expect the price of CDs to A. increase. B. stay the same. C. decrease, and the average cost of producing CDs to decrease. D. decrease, and the average cost of producing CDs to increase.

THE END

11