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# SET 1

END-OF-SEMESTER EXAMINATION
SEMESTER 2, 2012/2013 SESSION
KULLIYYAH OF ECONOMICS AND MANAGEMENT SCIENCES
Programme

B.ENGINEERING

Level of Study

: 2-4

Time
Duration

:
:

3 Hr(s) 0 Min(s)

Date

: 1/06/2013

Course Code :

ECON 1550

Section(s)

: 1-3

Course Title

## INSTRUCTION (S) TO CANDIDATES

DO NOT OPEN UNTIL YOU ARE ASKED TO DO SO
PART B : Answer ALL Questions

## Any form of cheating or attempt to cheat is a serious

offence which may lead to dismissal

APPROVED BY

1.

## Total cost minus total variable cost equals:

A. average fixed cost.
B. total fixed cost.
C. average variable cost.
D. marginal cost.

2.

Other things equal, if the fixed costs of a firm were to increase by \$100,000 per year, which
of the following would happen?
A. Marginal costs and average variable costs would both rise.
B. Average fixed costs and average variable costs would rise.
C. Average fixed costs and average total costs would rise.
D. Average fixed costs would rise, but marginal costs would fall.

Answer the next question(s) on the basis of the following cost data:

3.

Refer to the above data. The marginal cost of the fifth unit of output is:
A. \$3.
B. \$62.
C. \$80.
D. \$78.

4.

## Which of the following best expresses the law of diminishing returns?

A. Because large-scale production allows the realization of economies of scale, the real
costs of production vary directly with the level of output.
B. Population growth automatically adjusts to that level at which the average product per
worker will be at a maximum.
C. As successive amounts of one resource (labor) are added to fixed amounts of other
resources (capital), beyond some point the resulting extra output will decline.
D. Proportionate increases in the inputs of all resources will result in a less-thanproportionate increase in total output.
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5. Refer to the above diagram. For output level Q, per unit costs of C are:
A. unattainable and imply the inefficient use of resources.
B. unattainable, given resource prices and the current state of technology.
C. attainable, but imply the inefficient use of resources.
D. attainable and imply that resources are being combined efficiently.

6. Refer to the above diagram. This firm's average fixed costs are:
A. not shown.
B. the vertical distance between AVC and MC.
C. the vertical distance between AVC and ATC.
D. equal to the per unit change in MC.

## 7. In the above diagram it is assumed that:

A. some costs are fixed and other costs are variable.
B. all costs are variable.
C. the law of diminishing returns determines the shape of the cost curve.
D. marginal product first falls, but ultimately rises as output is increased.

8. The firm represented by the above diagram would maximize its profit where:
A. curves (2) and (1) intersect.
B. curve (1) touches the horizontal axis for the second time.
C. the vertical distance between curves (3) and (4) is the greatest.
D. curves (3) and (4) intersect.

9. Which of the following conditions is true for a purely competitive firm in long-run
equilibrium?
A. P > MC = minimum ATC.
B. P > MC > minimum ATC.
C. P = MC = minimum ATC.
D. P < MC < minimum ATC.
10. If a purely competitive firm shuts down in the short run:
A. its loss will be zero.
B. it will realize a loss equal to its total variable costs.
C. it will realize a loss equal to its total fixed costs.
D. it will realize a loss equal to its total costs.
Answer the next question(s) on the basis of the following cost data for a purely competitive
seller:

11. 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.
12. Assume the XYZ Corporation is producing 20 units of output. It is selling this output in a
purely competitive market at \$10 per unit. Its total fixed costs are \$100 and its average
variable cost is \$3 at 20 units of output. This corporation:
A. should close down in the short run.
B. is maximizing its profits.
C. is realizing a loss of \$60.
D. is realizing an economic profit of \$40.

13.

Refer to the above diagram. At the profit-maximizing output, total revenue will be:
A. 0AHE.
B. 0BGE.
C. 0CFE.
D. ABGE.

14.

Suppose that the MR = MC condition cannot be completely met for a firm because there is
no level of output at which MR and MC are equal. In that case the firm should:
A. produce up to and including the last unit for which MR exceeds MC.
B. produce up to and including the last unit for which MC exceeds MR.
C. shut down.
D. continue to produce as long as MR is positive.

15.

## The profit-maximizing output of a pure monopoly is economically inefficient because in

equilibrium:
A. price equals minimum average total cost.
B. marginal revenue equals marginal cost.
C. marginal cost exceeds price.
D. price exceeds marginal cost.

16. Refer to the above diagrams. The demand for Firm B's product is:
A. perfectly elastic over all ranges of output.
B. perfectly inelastic over all ranges of output.
C. elastic for prices above \$4 and inelastic for prices below \$4.
D. inelastic for prices above \$4 and inelastic for prices below \$4.
17. If a regulatory commission imposes upon a nondiscriminating natural monopoly a price that
is equal to marginal cost and below average total cost at the resulting output, then:
A. the firm will realize an economic profit.
B. the firm will earn only a normal profit.
C. allocative efficiency will be worsened.
D. the firm must be subsidized or it will go bankrupt.

## 18. Refer to the above diagram. Demand is relatively inelastic:

A. at price P 3 .
B. at any price below P 2 .
C. in the P 2 P 4 price range.
D. in the P 2 P 3 price range.

## 19. Refer to the above diagrams. Firm A is a:

A. pure competitor and Firm B is a pure monopoly.
B. pure competitor, as is Firm B.
C. pure monopoly and Firm B is a pure competitor.
D. pure monopoly, as is Firm B.
20. Assume a pure monopolist is currently operating at a price-quantity combination on the
inelastic segment of its demand curve. If the monopolist is seeking maximum profits, it
should:
A. retain its current price-quantity combination.
B. increase both price and quantity sold.
C. charge a lower price.
D. charge a higher price.

21. Refer to the above diagrams. The price will be _______ and the quantity will be _______
with the industry structure represented by diagram (B) compared to the one represented in
(A).
A. higher; higher
B. higher; lower
C. lower; lower
D. lower; higher
22. Monopolistic competition means:
A. a market situation where competition is based entirely on product differentiation and
B. a large number of firms producing a standardized or homogeneous product.
C. many firms producing differentiated products.
D. a few firms producing a standardized or homogeneous product.

## 23. Under monopolistic competition entry to the industry is:

A. completely free of barriers.
B. more difficult than under pure competition but not nearly as difficult as under pure
monopoly.
C. more difficult than under pure monopoly.
D. blocked.
24. A monopolistically competitive firm has a:
A. highly elastic demand curve.
B. highly inelastic demand curve.
C. perfectly inelastic demand curve.
D. perfectly elastic demand curve.

25. 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.
26. The automobile, household appliance, and automobile tire industries are all illustrations of:
A. homogeneous oligopoly.
B. monopolistic competition.
C. pure monopoly.
D. differentiated oligopoly.

## 27. Barriers to entry in oligopolistic industries may consist of:

A. diseconomies of scale.
B. diminishing returns.
C. ownership of essential resources.
D. patent expirations.
28. If there are significant economies of scale in an industry, then:
A. a firm that is large may be able to produce at a lower unit cost than can a small firm.
B. a firm that is large will have to charge a higher price than will a small firm.
C. entry to that industry will be easy.
D. firms must differentiate their products to earn economic profits.
29. Nominal GDP was \$130 and \$150 in years 1 and 2 respectively. Real GDP was \$100 and
\$110 in years 1 and 2 respectively. On the basis of this information we can conclude that:
A. the price level increased between years 1 and 2.
B. more intermediate goods were produced in year 1 than in year 2.
C. the increase in nominal GDP between years 1 and 2 understated the increase in
production
which occurred.
D. the price level declined between years 1 and 2.
Answer the next question(s) on the basis of the following national income data. All figures are in
billions of dollars.

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A. \$229.
B. \$253.
C. \$274.
D. \$243.

## 31. If nominal GDP rises:

A. real GDP may either rise or fall.
B. we can be certain that the price level has risen.
C. real GDP must fall.
D. real GDP must also rise.
32. Consumption of fixed capital (depreciation) can be determined by:
A. adding taxes on production and imports to NDP.
B. subtracting NDP from GDP.
C. subtracting net investment from GDP.
D. adding net investment to gross investment.
Answer the next question(s) on the basis of the following national income data for the economy.
All figures are in billions of dollars.

## 33. Refer to the above data. Net domestic product is:

A. \$520.
B. \$580.
C. \$623.
D. \$573.

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34. In 1933 net private domestic investment was a minus \$6.0 billion. This means that:
A. gross private domestic investment exceeded depreciation by \$6.0 billion.
B. the economy was expanding in that year.
C. the production of 1933's GDP used up more capital goods than were produced in that
year.
D. the economy produced no capital goods at all in 1933.
35. GDP can be calculated by summing:
A. consumption, investment, government purchases, exports, and imports.
B. investment, government purchases, consumption, and net exports.
C. consumption, investment, wages, and rents.
D. consumption, investment, government purchases, and imports.
36. If the Consumer Price Index rises from 300 to 333 in a particular year, the rate of inflation
in that year is:
A. 11 percent.
B. 33 percent.
C. 91 percent.
D. 10 percent.
37. Suppose there are 10 million part-time workers and 90 million full-time workers in an
economy. Five million of the part-time workers switch to full-time work. As a result:
A. the official unemployment rate will fall.
B. the official unemployment rate will rise.
C. the official unemployment rate will remain unchanged.
D. the size of the labor force will increase.
38. If Fred's annual real income rises by 8 percent each year, his annual real income will double
A. 8-9 years.
B. 10-11 years.
C. 5-6 years.
D. 19-20 years.
39. In 2005, Tatum's nominal income rose by 4.6 percent and the price level rose by 1.6
percent. We can conclude that Tatum's real income:
A. may have either increased or decreased.
B. rose by approximately 6.2 percent.
C. rose by approximately 3 percent.
D. fell by approximately 13 percent.
40. Inflation initiated by increases in wages or other resource prices is labeled:
A. demand-pull inflation.
B. demand-push inflation.
C. cost-push inflation.
D. cost-pull inflation.
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## 41. The natural rate of unemployment is:

A. higher than the full-employment rate of unemployment.
B. lower than the full-employment rate of unemployment.
C. that rate of unemployment occurring when the economy is at its potential output.
D. found by dividing total unemployment by the size of the labor force.
42. If actual GDP is \$340 billion and there is a positive GDP gap of \$20 billion, potential GDP
is:
A. \$360 billion.
B. \$660 billion.
C. \$320 billion.
D. \$20 billion.
43. Dissaving occurs where:
A. income exceeds consumption.
B. saving exceeds consumption.
C. consumption exceeds income.
D. saving exceeds income.

44. Suppose the economy's saving schedule shifts from S 1 to S 2 as shown in the above diagram.
We can say that its:
A. MPC has increased.
B. MPS has increased.
C. APS has increased at all levels of disposable income.
D. APS has decreased at all levels of disposable income.
45. The 45-degree line on a graph relating consumption and income shows:
A. all points where the MPC is constant.
B. all points at which saving and income are equal.
C. all the points at which consumption and income are equal.
D. the amounts households will plan to save at each possible level of income.

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46. For all levels of income to the left of the intersection of the 45-degree line and the
consumption schedule, the APC is:
A. greater than 100 percent.
B. less than the APS.
C. equal to the MPC.
D. equal to 100 percent.
47. Suppose a family's consumption exceeds its disposable income. This means that its:
A. MPC is greater than 1.
B. MPS is negative.
C. APC is greater than 1.
D. APS is positive.
48. The multiplier effect means that:
A. consumption is typically several times as large as saving.
B. a change in consumption can cause a larger increase in investment.
C. an increase in investment can cause GDP to change by a larger amount.
D. a decline in the MPC can cause GDP to rise by several times that amount.
49. Which one of the following will cause a movement up along an economy's saving schedule?
A. an increase in household borrowing
B. an increase in disposable income
C. an increase in stock prices
D. an increase in interest rates

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50. Refer to the above graph. A movement from a to b along C 1 might be caused by a:
A. recession.
B. wealth effect of an increase in stock market prices.
C. increase in income tax rates.
D. increase in real GDP.
51. Fiscal policy is carried out primarily by:
A. the Federal government.
B. state and local governments working together.
C. state governments alone.
D. local governments alone.
52. Discretionary fiscal policy refers to:
A. any change in government spending or taxes that destabilizes the economy.
B. the authority that the President has to change personal income tax rates.
C. changes in taxes and government expenditures made by Congress to stabilize the
D. the changes in taxes and transfers that occur as GDP changes.
53. Fiscal policy refers to the:
A. manipulation of government spending and taxes to stabilize domestic output,
employment, and the price level.
B. manipulation of government spending and taxes to achieve greater equality in the
distribution of income.
C. altering of the interest rate to change aggregate demand.
D. fact that equal increases in government spending and taxation will be contractionary.
54. An economist who favored expanded government would recommend:
A. tax cuts during recession and reductions in government spending during inflation.
B. tax increases during recession and tax cuts during inflation.
C. tax cuts during recession and tax increases during inflation.
D. increases in government spending during recession and tax increases during inflation.
55. Which of the following best describes the built-in stabilizers as they function in the United
States?
A. The size of the multiplier varies inversely with the level of GDP.
B. Personal and corporate income tax collections automatically fall and transfers and
subsidies automatically rise as GDP rises.
C. Personal and corporate income tax collections and transfers and subsidies all
automatically vary inversely with the level of GDP.
D. Personal and corporate income tax collections automatically rise and transfers and
subsidies automatically decline as GDP rises.

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## 56. The transactions demand for money will shift to the:

A. Left when nominal GDP increases
B. Left when nominal GDP decreases
C. Right when nominal GDP decreases
D. Right when the interest rate increases
57. A decrease in the interest rate will cause a(n):
A. Increase in the transactions demand for money
B. Decrease in the transactions demand for money
C. Decrease in the amount of money held as an asset
D. Increase in the amount of money held as an asset
58. There is an asset demand for money primarily because of which function of money?
A. Legal tender
B. Store of value
C. Measure of value
D. Medium of exchange
59. An increase in the money supply is likely to decrease:
A. Prices
B. Nominal income
C. Money demand
D. Interest rates
60. The Federal Reserve could increase the money supply by:
A. Selling government bonds on the open market
B. Buying government bonds on the open market
C. Raising interest rates
D. Raising the discount rate

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## PART B: SHORT ESSAY (40 marks)

QUESTION ONE (10 marks)
Assume the following cost data are for a purely competitive producer:

a.

Total
Product

Average
fixed
cost

Average
variable
cost

Average
total
cost

0
1
2
3
4
5
6
7
8
9
10

\$60.00
30.00
20.00
15.00
12.00
10.00
8.57
7.50
6.67
6.00

\$45.00
42.50
40.00
37.50
37.00
37.50
38.57
40.63
43.33
46.50

\$105.00
72.50
60.00
52.50
49.00
47.50
47.14
48.13
50.00
52.50

Marginal
cost
\$45
40
35
30
35
40
45
55
65
75

At a product price of \$56, will this firm produce in the short run? Why or why not?
(1 + 2 marks)

b.

## If it is preferable to produce, what will be the profit-maximizing or loss-minimizing output?

Explain.
(2 marks)

c.

At the profit-maximizing or loss-minimizing output (as you have identified above), what economic
profit or loss will the firm realize?
(2 marks)

d.

Based on your answer above (profit-maximizing or loss-minimizing), draw a diagram to show the
situation of the firm. Hint: Roughly sketch the position of the ATC, AVC, MC, MR and demand
curves in the diagram.
(3 marks)

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## QUESTION TWO (10 marks)

Suppose a pure monopolist is faced with the demand schedule shown below and the cost data is as in
question 1 above (the cost data is the same as faced by the pure competitive firm)

Price

Quantity
demanded

\$115
100
83
71
63
55
48
42
37
33
29

a.

0
1
2
3
4
5
6
7
8
9
10

total
revenue

Marginal
revenue

\$____
\$____
\$____
\$____
\$____
\$____
\$____
\$____
\$____
\$____
\$____

\$____
\$____
\$____
\$____
\$____
\$____
\$____
\$____
\$____
\$____

Calculate the total revenue and marginal revenue for the monopolist.
(3 marks)

b.

Determine the profit-maximizing price and profit-maximizing output for this monopolist.
(2 marks)

c.

## What is the monopolists profit?

(2 marks)

d.

Based on your answer above (profit-maximizing or loss-minimizing), draw a diagram to show the
situation of the firm. Hint: Roughly sketch the position of the ATC, AVC, MC, MR and demand
curves in the diagram.
(3 marks)

18

## QUESTION THREE (10 marks)

The following table shows nominal GDP and an appropriate price index for a group of selected years.

a.

Year

Nominal GDP,
Billions

Price index
(2000 = 100)

Real GDP,
Billions

1964
1974
1984
1994
2004

\$663.6
1500.0
3933.2
7072.2
11734.3

22.13
34.73
67.66
90.26
109.10

\$ ______
\$ ______
\$ ______
\$ ______
\$ ______

(2 marks)

b.

## What is the level of inflation from 1994 to 2004?

(2 marks)

c.

Based on the computed real GDP, discuss the business cycle trend of the economy from
1964 to 2004.
(6 marks)

a.

## Discuss the determinants of the consumption and saving schedules.

(5 marks)

b.

Say that the economy is in a recession. Suggest and discuss the appropriate discretionary
fiscal policy for this problem.
(5 marks)

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