END-OF-SEMESTER EXAMINATION

SEMESTER I, 2004/2005 SESSION

KULLIYYAH OF ECONOMICS AND MANAGEMENT SCIENCES
Programme

B.ENGINEERING

Level of Study : 2-4

Time
Duration

:
:

3.00 p.m. - 5.30 p.m.

2 Hr(s) 30 Min(s)

Date

: 22/10/2004

Course Code :

ECON 1550

Section(s)

: 1-5

Course Title

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.

Part A: Multiple-choice questions

Answer all 50 questions. Each question carries 1 point.

2.

Part B: Subjective questions

There are 2 major questions. Answer both questions. Each
question has a total of 15 points.

Any form of cheating or attempt to cheat is a serious

offence which may lead to dismissal

APPROVED BY

FINAL EXAM-ECON 1550

Part A: Multiple-choice questions
Answer all 50 questions. Each question carries 1 point.
1. Suppose an economist says that "Other things equal, the lower the price of bananas, the
greater the amount of bananas purchased." This statement indicates that:
A) the quantity of bananas purchased determines the price of bananas.
B) all factors other than the price of bananas (for example, consumer tastes and
incomes) are assumed to be constant.
C) economists can conduct controlled laboratory experiments.
D) one cannot generalize about the relationship between the price of bananas and
the quantity purchased.
2. Which of the following statements pertains to macroeconomics?
A) Because the minimum wage was raised, Mrs. Olsen decided to enter the labor
force.
B) A decline in the price of soybeans caused farmer Wanek to plant more land in
wheat.
C) The national productivity rate grew by 2.7 percent last year.
D) The Pumpkin Center State Bank increased its interest rate on consumer loans by
1 percent.
3. Which of the following lists includes only capital resources (and therefore, no labor or
land resources)?
A)
B)
C)
D)

an ice arena; a professional hockey player; hockey uniforms.

the owner of a new startup firm; a chemistry lab; a researcher.
a hydroelectric dam; water behind the dam; power lines.
autos owned by a car rental firm; computers at the car rental agency; the vans
that shuffle rental customers to and from the airport.

4. Assume that a change in government policy results in greater production of both

consumer goods and investment goods. We can conclude that:
A) the economy was suffering from unemployment and/or the inefficient use of
resources before the policy change.
B) the economy's production possibilities curve has been shifted to the left as a
result of the policy decision.
C) this economy's production possibilities curve is convex (bowed inward) to the
origin.
D) the law of increasing opportunity costs does not apply in this society.

5. Which of the following statements, if any, is correct for a nation that is producing
only consumption and capital goods?
A) Other things equal, the more consumer goods a nation produces, the greater will
be its future growth rate.
B) Other things equal, the more capital goods a nation produces, the greater will be
its future growth rate.
C) There is no general relationship between the current division of output between
consumer and capital goods and the future growth rate.
D) None of the above statements is correct.
6. The demand curve shows the relationship between:
A)
B)
C)
D)

money income and quantity demanded.

price and production costs.
price and quantity demanded.
consumer tastes and the quantity demanded.

7. When the price of a product increases, a consumer is able to buy less of it with a given
amount of money income. This describes:
A)
B)
C)
D)

the cost effect.

the inflationary effect.
the income effect.
the substitution effect.

8. Products A and B are complements. What will happen when the price of B decreases?
A) The demand curves for both A and B will shift to the left.
B) The amount of B purchased will increase, but the demand curve for A will not
shift.
C) The demand for A will increase and the amount of B demanded will increase.
D) The demand for A will decline and the demand for B will increase.
9. In moving along a stable supply curve which of the following is not held constant?
A)
B)
C)
D)

the number of firms producing this good.

expectations about the future price of the product.
techniques used in producing this product.
the price of the product for which the supply curve is relevant.

10. Assume in a competitive market that price is initially below the equilibrium level. To
achieve equilibrium position, we can predict that price will:
A)
B)
C)
D)

decrease, quantity demanded will decrease, and quantity supplied will increase.
decrease and quantity demanded and quantity supplied will both decrease.
decrease, quantity demanded will increase, and quantity supplied will decrease.
increase, quantity demanded will decrease, and quantity supplied will increase.

11. 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 or fall or remain
unchanged.
C) quantity must decline, but equilibrium price may either rise or fall or remain
unchanged.
D) quantity and equilibrium price must both decline.
12. Suppose that as the price of Y falls from $2.20 to $1.80, the quantity of Y demanded
increases from 245 to 255. By using the midpoint formula, the price elasticity of
demand is:
A)
B)
C)
D)

4.00
2.09
0.20
3.94

13. The more time consumers have to adjust to a change in price:

A)
B)
C)
D)

the smaller will be the price elasticity of demand.

the greater will be the price elasticity of demand.
the more likely the product is a normal good.
the more likely the product is an inferior good.

14. A manufacturer of frozen pizzas found that total revenue decreased when price was
lowered from $5 to $4. It was also found that total revenue decreased when price was
raised from $5 to $6. Thus,
A)
B)
C)
D)

the demand for pizza is elastic above $5 and inelastic below $5.
the demand for pizza is elastic both above and below $5.
the demand for pizza is inelastic above $5 and elastic below $5.
$5 is not the equilibrium price of pizza.

15. 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 coefficient of cross
elasticity of demand is:
A)
B)
C)
D)

negative and therefore these goods are substitutes.

negative and therefore these goods are complements.
positive and therefore these goods are substitutes.
positive and therefore these goods are complements.

Refer to figure 1 to answer question number 16.

Figure 1
MP,
AP

AP
MP
A

Quantity of labor

16. At what point in figure 1 does the law of diminishing returns start to set in?
A) Point A.
B) Point B.
C) Point C.
D) Point D.
17. Which statement is correct?
A) Marginal cost is the change in average cost when there is a change in
output of 1 unit.
B) The marginal cost curve cuts the average variable cost curve at its
lowest point.
C) In the long-run view of the firm, all costs are fixed.
D) If average variable cost is increasing, then average total cost must be
increasing too.
5

Refer to table 1 to answer question number 18.

Table 1
Output
0
1
2
3
4
5
6

Total Cost ($)

10
20
28
38
53
73
98

18. Refer to table 1, the total variable cost of producing 5 units of output is:
A) $10
B) $14.60
C) $63
D) $73
Refer to figure 2 to answer question number 19.
Figure 2
Costs

TC
TVC

E
D
C
B
A

TFC

0
Q1

Q2

Q3

Quantity

19. Refer to figure 2. The total fixed cost is measured by the distance of:
A) 0B
B) AC
C) CD
D) DE

20. If long-run average total cost decreases as output increases, this is due to:
A) declining average fixed costs.
B) the law of diminishing returns.
C) economies of scale.
D) externalities.
Refer to table 2 to answer question number 21.
Table 2
Total Product
10
20
30
40
50

Long-run Total Cost ($)

200
300
450
600
1000

21. Refer to table 2. Diseconomies of scale starts between:

A) 0 and 10 units of output.
B) 40 and 50 units of output.
C) 20 and 30 units of output.
D) 30 and 40 units of output.
22. Sam owns a firm that produces tomatoes in a purely competitive market. The
firms demand curve is:
A) a vertical line.
B) an upward sloping line.
C) a horizontal line.
D) a down sloping line.
23. A firm should always continue to operate at a loss in the short-run if:
A) the firm will show a profit.
B) the owner enjoys helping her customers.
C) it can cover its variable costs and some of its fixed costs.
D) the firm cannot produce any other products more profitably.

Refer to table 3 to answer question number 24.

Table 3
Output
25
30
35
40
45
50

Total Cost ($)

75
85
100
125
155
190

24. Refer to table 3. Assume the price of the product sold by a purely competitive
firm is $5. The profit-maximizing output level is:
A) 25 units.
B) 30 units.
C) 40 units.
D) 50 units.
25. Which statement is true for a firm that is productively efficient?
A) It is making economic profit in the long run.
B) Its marginal cost equals average variable cost.
C) It produces at the minimum of average total cost.
D) Its marginal revenue is less than average revenue.
26. One defining characteristic of a pure monopoly market structure is that:
A) the monopolist is a price taker.
B) the monopolist uses advertising heavily.
C) the monopolist produces a product with no close substitutes.
D) there is relatively easy entry into the industry.
27. One of the major barriers to entry under pure monopoly arises from:
A) the availability of close substitutes for a product.
B) ownership of essential resources.
C) the price taking ability of the firm.
D) diseconomies of scale.

Refer to figure 3 to answer question number 28.

Figure 3
MC

$
ATC

D
C

AVC

A
0

Quantity

28. Refer to figure 3, which of the four points is definitely not on a competitive firms
short-run supply curve?
A) A
B) B
C) C
D) D
29. Given a downsloping demand curve, when total revenue is decreasing, marginal
revenue is:
A) positive and demand is elastic.
B) negative and demand is elastic.
C) positive and demand is inelastic.
D) negative and demand is inelastic.
30. A pure monopolist firm will never charge a price in the inelastic range of its
demand curve because lowering price to get into this region will:
A) increase total revenue, increase total cost, and decrease profit.
B) decrease total revenue, increase total cost, and decrease profit.
C) increase total revenue, decrease total cost, and decrease profit.
D) decrease total revenue, total cost, and profit.
31. Which statement does not necessarily apply to a pure monopoly?
A) The product produced must have no close substitutes.
B) The firm must be a sole producer of the product.
C) The firm must earn economic profit.
D) Entry must be blocked.

Refer to figure 4 to answer question number 32.

Figure 4
Costs

MC

K
ATC
J
H
G

DD
MR
0
T

Quantity

32. Refer to figure 4. A pure monopolist will set its price and output at:
A) OJ and OV, respectively.
B) OG and OY, respectively.
C) OK and OT, respectively.
D) OH and OX, respectively.
33. To practice price discrimination, a monopolist must:
A) be a natural monopoly.
B) charge one price to all buyers.
C) permit the resale of the product by the original buyers.
D) be able to separate buyers into different markets with different price
elasticities.
34. The representative firm in a purely competitive industry:
A) will always earn a profit in the short-run.
B) may either earn a profit or a loss in the long-run.
C) will always earn an economic profit in the long-run.
D) will earn an economic profit of zero in the long-run.
35. A monopolistically competitive industry is like a purely competitive industry in
the sense that:
A) each industry produces a standardized product.
B) nonprice competition is a feature in both industries.
C) neither industry has significant barriers to entry.
D) firms in both industries face a horizontal demand curve.

10

Refer to figure 5 to answer question number 36.

Figure 5
$

MC

ATC
P3
P2

P1
DD
0

MR
Q3 Q2 Q1

Quantity

36. Refer to figure 5. If the monopolist is practicing perfect price discrimination, the
profit-maximizing quantity is:
A) Q3.
B) Q2.
C) Q1.
D) indeterminate based on the information given.
37. Monopolistic competition is characterized by excess capacity because:
A) firms are always profitable in the long-run.
B) firms charge a price that is less than marginal cost.
C) firms produce at an output level less than the least-cost output.
D) the demand for a product is perfectly elastic in this type of industry.
38. A major distinct between a monopolistically competitive firm and an oligopolistic
firm is that:
A) one is a price taker while the other is a price maker.
B) a recognized interdependence exists between firms in one industry but not
in the other.
C) one always produces differentiated products and the other always produces
a homogenous product.
D) one is facing a downward sloping demand curve while the other a
horizontal demand curve.

11

Refer to figure 6 to answer question number 39.

Figure 6
$

MC
16

14
8
MR

DD

0
90

160 195

Quantity

39. Refer to figure 6. Find the difference in the levels of output produced by purely
competitive and purely monopolist industries.
A) 0.
B) 35.
C) 70.
D) 105.
Refer to figure 7 to answer question number 40.
Figure 7
Price

B
A

0
Quantity

40. Refer to figure 7. A successful advertising campaign by a monopolistically

competitive firm will cause the demand curve to shift from:
A) A to B and become more elastic.
B) A to B and become more inelastic.
C) B to A and become more elastic.
D) B to A and become more inelastic.

12

41. The immediate determinant of the volume of output and employment is the:
A)
B)
C)
D)

composition of consumer spending.

ratio of public goods to private goods production.
level of total spending.
size of the labor force.

42. Assume that Hernandez is temporarily unemployed because he has voluntarily quit his
job with company A and will begin a better job next week with company B. Hernandez
will be considered as:
A)
B)
C)
D)

cyclically unemployed.
frictionally unemployed.
secularly unemployed.
employed.

43. If the unemployment rate is 9 percent and the natural rate of unemployment is 5 percent,
then the:
A) frictional unemployment rate is 5 percent.
B) cyclical unemployment rate and the frictional unemployment rate together are 5
percent.
C) cyclical unemployment rate is 4 percent.
D) natural rate of unemployment will eventually increase.
44. Cost-push inflation:
A)
B)
C)
D)

is caused by excessive total spending.

shifts the nation's production possibilities curve leftward.
moves the economy inward from its production possibilities curve.
is a mixed blessing because it has positive effects on real output and employment.

45. Which one of the followings is a final good or service?

A)
B)
C)
D)

Diesel fuel bought for a delivery truck.

Fertilizer purchased by a farm supplier.
A haircut.
Chevrolet car windows purchased by a Proton assembly plant.

13

46. Unlike a private good, a public good:

A)
B)
C)
D)

has no opportunity cost.

has benefits available to all, including nonpayers.
produces no spillover benefits or spillover costs.
is characterized by rivalry and excludability.

47. The Coase theorem states that:

A) government should levy excise taxes on firms that generate spillover or external
costs.
B) taxes should be levied such that they change private behavior as little as possible.
C) bargaining between private parties will remedy externality problems where property
rights are clearly defined, the numbers of people involved are few, and bargaining
costs are small.
D) trading of votes to secure favorable voting outcomes may increase efficiency.
Answer questions number 48 and 49 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

48. Refer to the above data. Gross domestic product (GDP) is:
A)
B)
C)
D)

$390.
$417.
$422.
$492.

14

49. Refer to the above data. National income (NI) is:

A)
B)
C)
D)

$364.
$372.
$447.
$362.

50. Which of the following activities is excluded from GDP, causing GDP to understate a
nation's well-being?
A)
B)
C)
D)

The services of used-car dealers.

The child-care services provided by stay-at-home parents.
The construction of new houses.
Government expenditures on military equipment.

15

Part B: Subjective questions

There are 2 major questions. Answer both questions. Each question has a total of 15
points.
Figure 8
Price
$

MC

ATC

S0
MR0

P0

D0
0
0
Quantity
(A)

Q0
(B)

Quantity

Question 1
Consider the above two diagrams. Diagram A represents a typical firm in a purely
competitive industry. Diagram B represents the supply and demand conditions in that
industry. Note that P0 and Q0 are the equilibrium price and quantity, respectively.
a) Relate the diagrams above and describe how price and output are determined. Is
the firm making an economic profit or loss?
[5 points]
b) In the long run, will the firm under pure competition earn economic profit?
Explain your answer through graphical illustration(s) in your answer sheet.
[10 points]
Question 2
a) What is meant by the term business cycle? List the four phases of the business
cycle.
[5 points]
b) What phase of the business cycle is the Malaysian economy experiencing at the
present time? Justify your answer.
[4 points]
c) There are two types of inflation. Describe both of them.

[6 points]

May Allah grant you success.

THE END

16