TIME ZONE ONE

SCHOOL OF SOCIAL SCIENCES

Economics

INTRODUCTORY ECONOMICS
Course Code: C27OA

December 2017

Duration – TWO hours

INSTRUCTIONS

The examination is in THREE sections

Section A: Multiple Choice Questions

Answer ALL questions in this section
(30 marks)

Section B: Short Answer Questions

Answer ALL question in this section
(40 marks)

Section C: Essay Style Questions

Answer ONE questions in this section
(30 marks)

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SECTION A (30 marks)

Answer ALL questions in this section.

Each question is worth 1½ marks.

1. Which of the following is the best definition of economics?

(a) The study of how the government allocates tax.

(b) The study of how individuals and societies choose to use the scarce
resources that nature and previous generations have provided.
(c) The study of how business firms decide what inputs to hire and what
outputs to produce.
(d) The study of how consumers spend their income.

2. Which of the following is most characteristic of a pure monopoly?

(a) There is a dominant firm in a multiform industry.

(b) The firm produces a good or a service for which there are no close
substitutes.
(c) Exit from the industry is blocked but entry into the industry is relatively
easy.
(d) The firm has considerable control over the quantity of the output
produced, but not over price.

3. A decrease in demand for cameras is likely to be caused by:

(a) an increase in the price of a complementary good.

(b) an increase in the price of cameras.
(c) an increase in the price of a substitute good.
(d) a decrease in the price of cameras.

4. The total of consumer surplus plus producer surplus is greatest:

(a) when consumer surplus is maximised.

(b) at the market equilibrium.
(c) when producer surplus is maximised.
(d) all of the above.

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5. If improvements in technology have reduced the cost of producing personal

computers, one can predict that in the market for personal computers, there will
not be a(n):

(a) increase in the supply of personal computers, a decrease in the price, and
an increase in the quantity demanded.
(b) increase in the supply of personal computers, a reduction in the price, and
an increase in the demand.
(c) decrease in the supply of personal computers, an increase in the price, and
a decrease in the demand.
(d) increase in the quantity supplied of personal computers, a reduction in the
price, and an increase in the quantity demanded.

6. The more time that elapses, the:

(a) more price elastic is the demand for a product.

(b) greater the income elasticity of demand for a product.
(c) less price elastic is the demand for a product.
(d) smaller the income elasticity of demand for a product.

7. Perfectly competitive firms must make all of the following decisions except:

(a) how much output to supply.

(b) which production technology to use.
(c) what price to charge for its output.
(d) how much of each input to use.

8. Economic costs:

(a) are equal to the direct costs of hiring all factors of production.
(b) include both a normal rate of return on investment and the opportunity cost
of each factor of production.
(c) are equal to total revenue minus accounting profit.
(d) are the opportunity cost of each factor of production minus any interest
charges paid on borrowed funds.

9. If labour is a variable input in production, the law of diminishing marginal returns

implies that in the short run:

(a) total product is negative.

(b) labour's marginal product decreases after a certain point.
(c) labour's marginal product is constant.
(d) total product is negative after a certain point has been reached.

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10. Both Kate and John own saltwater taffy factories. Kate's factory has low fixed
costs and high variable costs. John's factory has high fixed costs and low variable
costs. Currently, each factory is producing 1,000 boxes of taffy at the same total
cost. Which of the following statement is correct?

(a) If each produces less, the costs of Kate's factory will exceed those of
John's factory.
(b) If each produces less, their costs will be equal.
(c) If each produces more, their costs will be equal.
(d) If each produces more, the costs of Kate's factory will exceed those of
John's factory.

11. Which set of events would most likely decrease aggregate demand?

(a) A reduction in the excess capital of the existing capital stock.

(b) A reduction in business and personal tax rates.
(c) An increase in investment spending.
(d) An increase in personal income tax rates.

12. To decrease output, the government could:

(a) adopt policies that discourage immigration and increase government

spending.
(b) adopt policies that encourage immigration and decrease government
spending.
(c) adopt policies that encourage technological advancement and increase
government spending.
(d) adopt policies that discourage technological advancement and decrease
government spending.

13. Gross national product is the total market value of:

(a) all final goods and services produced in a country in each year, regardless
of who owns the resources.
(b) all final goods and services produced by resources owned by a country,
regardless of where production takes place.
(c) all final and intermediate goods and services produced by resources
owned by a country in each year.
(d) all final and intermediate goods and services produced in a country,
regardless of who owns the resources.

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14. If the number of unemployed equals 30,000, the number of employed equals
60,000, and the number not in the labour force is 10,000, the labour-force
participation rate:

(a) is 90%.
(b) is 88.9%.
(c) is 67%.
(d) cannot be determined from this information.

15. The money supply can rise if:

(a) the non-bank private sector chooses to hold less cash.

(b) there is a decrease in public sector deficit.
(c) banks choose to hold a higher liquidity ratio.
(d) none of the above.

16. The unemployment that occurs during recessions and depressions is called:

(a) normal unemployment.

(b) cyclical unemployment.
(c) structural unemployment.
(d) frictional unemployment.

17. In an economy, when the price level falls, consumers and firms buy more goods
and services. This relationship is represented by the:

(a) long-run aggregate supply curve.

(b) short-run aggregate supply curve.
(c) aggregate expenditures curve.
(d) aggregate demand curve.

18. Which of the following decreases the price of the dollar relative to the British
pound?

(a) An increase in the supply of dollars.

(b) A decrease in the supply of dollars.
(c) A decrease in the demand for pounds.
(d) An increase in the demand for dollars.

19. Which of the following is likely to increase the exports of a country?

(a) An increase in income in foreign countries.

(b) A decrease in income in foreign countries.
(c) An increase in income in the domestic country.
(d) A decrease in income in the domestic country.

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20. The balance of payments is divided into two major accounts, the:

(a) current account and the trade account.

(b) current account and the reserve account.
(c) current account and the capital account.
(d) trade account and the capital account.

Section Total: 30 marks

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SECTION B: Short Answer Questions (40 marks)

Answer ALL questions in this section.

Question B1 - Demand and supply

The table below shows information about the market for cheeseburgers.

Price per Quantity Demanded Quantity Supplied

Cheeseburger (Cheeseburgers per Month) (Cheeseburgers per Month)
£5 1,500 500
£6 1,200 700
£7 900 900
£8 600 1,100
£9 300 1,300

(a) What are the equilibrium price and the quantity demanded of
cheeseburgers?
(2 marks)
Require quantity demanded and supplied to be equal.
£7 and 900 cheeseburgers

(b) Explain what is likely to happen to price, quantity demanded and quantity
supplied if the price of a cheeseburger is initially £6.
(4 marks)
Price will rise, eliminating excess demand by decreasing demand and
increasing supply

(c) Calculate the arc price elasticity of demand between £5 and £8.
(4 marks)
Proportional change in demand -900/1,150 = -6/7
Proportional change in price 3/6.5 = 6/13
Price elasticity of demand is ratio of proportional changes – so -13/7

(Total: 10 marks)

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Question B2 - Production Costs

We have the following information on the production costs of a firm that is producing
good X.

Quantity Total Cost Average Total Cost

(unit) £ £
0 100 -
1 130
2 150
3 160
4 172
5 37
6 35
7 240
8 280
9 330
10 390

(a) How much is the total fixed cost and the total cost at an output of 5?
(2 marks)
100; and 185

(b) How much is the average variable cost at an output of 3?

(2 marks)
20

(c) Calculate the marginal costs.

(4 marks)
30, 20, 10, 12, 13, 25, 30, 40, 50 ,60

(d) Suppose this firm is in a perfectly competitive market. If the market price of
good X is £25, what would be this firm’s profit maximising level of output?
(2 marks)
So that there is marginal cost pricing, 6 units

(Total: 10 marks)

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Question B3 - Money and inflation

(a) Explain the functions of money.

(5 marks)
Means of payment, store of value, unit of account

(b) Suppose the Bank of England increases the money supply. What are the
likely impacts on the GDP and price level?
(5 marks)
Assuming no change in demand for money, then expansion of supply will
lead to lower interest rates, enabling increased investment (and consumer
borrowing), which increases national income.

(Total: 10 marks)

Question B4 - Unemployment

(a) Define unemployment rate.

(2 marks)
Proportion of labour force not in a job (and seeking one)

(b) In each of the following cases, identify which type of unemployment exists.
Explain your answers.

(i) Maya just graduated from a top medical school and is currently
deciding which hospital emergency room job she will accept.
(ii) Ruby lost her job as an assembly line worker due to the recession.
(iii) Alex, an advertising executive, quit his job one month ago to look for
a more prestigious advertising job in London. He is still looking for a
job.
(iv) Taylor lost his job as a welder due to the introduction of robotic welding
machines.
(8 marks)

Frictional (would accept search, since finding fit between skills,

opportunities); cyclical (job loss appears to be temporary, due to
decrease in demand), voluntary (choosing to leave job – with
elements of search), structural (since reflects change in production
techniques in industry)

(Total: 10 marks)

Section Total: 40 marks

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Section C: Essay Questions (30 marks)

Answer ONE question only.

Question C1 - Market Structures

(a) Compare and contrast the key characteristics of a perfect competitive

market with those of an oligopoly market.
(10 marks)
Expect mention of assumptions of perfect competition, (many firms, able
to enter and exit market freely, with perfect information among all market
participants, ensuring that all firms can use the same production
technology – and awareness that we expect an upward sloping marginal
cost curve, which is the firm supply curve at low costs.
Oligopoly has many different forms, but expect awareness that there will
not be ease of entry and exit, and that this may be related to firms facing a
downward sloping marginal cost curve across a wide range of outputs,
reflecting substantial economies of scale.

(b) Explain how a firm’s pricing and output decision in perfect competition is
different from that of a firm in oligopoly.
(10 marks)
With the assumptions of perfect competition, firm demand curves are
horizontal, so that firms must take the market price, and setting output to
ensure marginal cost pricing.
This can occur in oligopoly, but only making the assumptions of Bertrand
competition.
In other cases, where there is downward sloping demand curve, profit
maximisation requires marginal cost to be equal to marginal revenue,
which is less than the price which the firm is able to set.

.
(c) Use the Kinked Demand Curve theory to explain why price tends to be
stable in an oligopoly market.
(10 marks)
While we have not discussed this in class, a little bit of reading should tell
you that we expect there to be a kinked demand curve when the demand
curve is more elastic in response to price increases than to price cuts.
It then follows that there is a downward discontinuity in the marginal
revenue curve, and so given that for profit maximisation, we require
marginal revenue and marginal cost to be equal, there is a range of
values of marginal cost which is consistent with firms maintaining their
current outputs. Firm prices will remain constant as costs change.
(Total: 30 marks)

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Question C2 - Growth

(a) Define economic growth and explain how it is measured.

(8 marks)
Economic growth is an increase in the capacity of the economy to
generate goods and services, which are valued by consumers, so that the
total value added by factors of production increases. This leads naturally
to income, expenditure, and output measures of national income.

(b) Identify some of the major determinants of economic growth. Which of

these do you think is the most important?
(12 marks)
We observe economic growth either because the quantity of factors of
production in the economy increases, or because their coordination is
improved. May define factors of production as land, labour, and capital,
with entrepreneurship sometimes listed as the ability to coordinate other
factors.
Population growth increases the quantity of labour; education and training
its quality; investment increases the quantity of capital and research and
development expenditures increase its quality. Improvements in quality
are important for growth.

(c) Discuss the benefits and costs of economic growth.

(10 marks)
Benefits come through higher standards of living; costs are best
understood by thinking about what economic growth does not measure –
and I would expect consideration of externalities, especially environmental
issues to be there, as well as noting the adjustment costs of employment
and firm destruction as the structure of the economy changes.
(Total: 30 marks)

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Question C3 - Market Failures

(a) What is market failure? Explain the main causes of market failure.
(15 marks)
Define market failure as anything which leads to variation from marginal
cost pricing, which ensures the maximum economic surplus in markets.
Then expect explanations of market failure to include market power,
possibly associated with economies of scale and scope, intellectual
property rights, control of raw materials; externalities in production and
consumption; and imperfect information, especially as it prevents firms
from asserting the quality of goods and services

(b) For each type of market failure, discuss what policies and regulations the
government can employ to mitigate the impact; and evaluate the
effectiveness of government policies and regulations.
There are a variety of policies which governments can impose, based
around regulation of price and output, taxation, including Pigovian taxes
which are intended to ensure alignment of private and social costs, enabling
the socially optimal outcome to emerge, the creation of new markets, in
rights to generate an externality (as with carbon trading), and the public
provision of information, including the certification of quality of products.
Evaluation is a little tricky in general, so expect to see some discussion of
examples, but expect awareness that there are set up costs for any
intervention, so that there should be a cost-benefit analysis conducted.
(15 marks)
(Total: 30 marks)

Section Total: 30 marks

- END OF EXAM PAPER -

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