THE UNIVERSITY OF NEW SOUTH WALES

SCHOOL OF ECONOMICS

ECON5103 BUSINESS ECONOMICS

Session 1 2014
MIDSESSION EXAMINATION
SAMPLE PAPER

Time allowed: 60 minutes

This paper consists of 20 multiple choice questions. One (1) mark will be given for
each correct answer. No marks will be deducted for incorrect answers.
On the answer sheet, using pencil only
(a)

Print your name, initials and student number in the spaces provided and
blacken the appropriate circles below your name, initials and student
number.

(b)

To answer a question indicate the correct answer by blackening circles a, b,

c or d. There is one and only one correct answer to each question.

FORMULAE
Elasticity
Price elasticity of Demand
=

% Qd
% P

Qd/Qd
P/P
=

P . Q
Q P

P .
1__
Q slope of D curve

( means change in)

For two observations on Demand Curve (Q1, P1) and (Q2, P2)

Arc Elasticity =

QD / av Q1,Q2
P / av P1, P2

(Average elasticity using the midpoint formula)

If equation of Demand Curve is given:

Qd = - P
Point elasticity = P/Q . (- )

Costs and Productivity

MC

= Pf / MPf

AVC =

Pf / APf

(Pf is the price of the factor input)

Question 1
The demand curve for a commodity will shift to the left if
(a) the price of the commodity rises
(b) the price of the commodity falls
(c) the price of a complement commodity falls
(d) the price of a substitute commodity falls

Question 2
The quantity demanded of a product per month decreases from 420 units to 380 units
as a result of a rise in price from $18 to $22. The absolute value of the arc (average)
elasticity of demand for this change is.
(a) 0.2
(b) 0.5
(c) 2.5
(d) 5.0
Question 3.
If the cross elasticity of demand for Good X with respect to the price of Good Y is
negative this indicates that :
(a) one of the goods is an inferior good
(b) both of the goods are inferior goods
(c) Good X and Good Y are complements in consumption
(d) Good X and Good Y are substitutes consumption

Question 4
Assume that a country produces two goods, Autos and Rice.
The combination 15 m Autos and 20m tonnes of rice is on the countrys production
possibilities frontier. Which of the following production combinations is also on the
production possibilities frontier?
(a) 12m Autos and 18 tonnes of rice
(b) 15m Autos and 25 tonnes of rice
(c) 20m Autos and 18 tonnes of rice
(d) 18m Autos and 25 tonnes of rice

Question 5
The demand curve for a product is given by the equation
Qd = 200 - 4 P
If the price of this product were to rise from $10 to $15 the loss in consumer surplus
would be:
(a) $180
(b) $240
(c ) $750
(d) $2450

Question 6
If

Output = 100 units

Average Total cost = $60
Total Fixed Cost = $4000

then

Average Variable Cost equals

(a) $10
(b) $20
(c) $40
(d) $200

Question 7
Which of the following statements about the Monopolistic Competition market model
is false
(a) The market is characterised by a large number of rival firms each selling a slightly
differentiated product
(b) The typical firm tends to operate with excess capacity and unexploited economies
of scale
(c) In the long run, surviving firms charge a price which is higher than marginal cost
and make economic profits.
(d) The elasticity of demand for each firms product is finite but relatively high.

Question 8
The diagram below depicts the Production Possibilities Frontiers for two countries,
Westland and Eastland which can each produce two types of commodities,
Manufactures and Agricultures. Outputs of each type of commodity are
measured in tonnes per month.

WESTLAND
Manufactures

EASTLAND
Manufactures

80m

70m

100m Agricultures

40m

Agricultures

Which of the following statements is True?

(a) Westland has a comparative advantage in producing Manufactures
(b) The Opportunity Cost of producing a ton of Manufactures in Westland is 0.8 tons
of Agricultures
(c) The Opportunity Cost of producing a ton of Agricultures in Eastland is 1.75
tonnes of Manufactures
(d) Westland has a comparative advantage in producing both goods.

Question 9
The income effect of a fall in the price of a commodity is:
(a) the effect of a percentage decrease in income equal to the percentage decrease in
price.
(b) the effect on demand for the commodity of the increase in consumers purchasing
power
(c) the extent to which consumers of substitute commodities are worse off
(d) the effect of the decrease in the income of suppliers

Question 10
A student is considering alternative activities for a Saturday evening.
The student could choose to go to the cinema. A cinema ticket costs $18.
Alternatively, the student has the opportunity for part-time work at a fast food
restaurant for three hours at $20 per hour.
The third alternative is to baby-sit a neighbours child for the evening for $50.
Assuming there are no other costs and benefits associated with these alternatives, for
choosing to go to the cinema to be rational, the value to the student of going to the
cinema must be more than:
(a)
(b)
(c)
(d)

$18
$60
$78
$128

Question 11
The equations of the demand and supply curves for a product have been reliably
estimated as:
=
44 - 2P
QD
QS
=
3P - 16
P is measured in $, Q is measured in Kg.
The absolute value of the point elasticity of demand at the equilibrium price and
quantity can be estimated as:
(a) 0.60
(b) 1.20
(c) 2.75
(d) 3.33

Question 12
Research provided to the publisher of a monthly magazine suggests that the priceelasticity of demand for its product is 1.5.
This implies that if the company were to raise the price of the magazine by 10%
(a) the number of magazines sold would fall by 1.5%
(b) the number of magazines sold would increase by 15%
(c) Sales revenue would increase by 15%
(d) Sales revenue would fall

Question 13.
Which of the following statements explains why the typical competitive firms Short
Run Average Cost is Ushaped?
(a) As production increases, at low levels of production average fixed costs are
significant and fall as production increases; at higher levels of production, rising
marginal costs become the dominant influence on per-unit costs of production.
(b) Firms typically experience initial increasing returns to scale in production, but as
the size of the firm increases, management and control inefficiencies bring
about eventual decreasing returns to scale.
(c) Increasing output will decrease per-unit costs by spreading overhead costs, but
eventually increased demand for inputs will drive up their price and per unit costs
of production will rise.
(d) The Law of Diminishing Marginal Returns is the dominant influence on costs at
low levels of production, but as output increases, economies of scale eventually
dominate.

Question 14
Sweatshop P/L produces denim shirts. Sweatshop is a price taker and must decide on
its hourly production rate. The costs of production are:
Quantity of Shirts
Total Cost
(per hour)
(per hour)
0
10
1
16
2
21
3
25
4
38
5
60
6
92
(only completed shirts are counted)
If the price of shirts is $25-per shirt, Sweatshops profit maximising production rate
is:
(a) 2 shirts per hour
(b) 3 shirts per hour
(c) 4 shirts per hour
(d) 5 shirts per hour

Question 15
Consider the data of Question 14
Sweatshop should shut down operations in the short run only if the market price falls
below
(a) $3.50
(b) $5.00
(c) $7.00
(d) $11.00

Question 16.
If a per unit sales tax is imposed on a commodity for which the price elasticity of
demand for a commodity is greater (in absolute value) than the price-elasticity of
supply:
(a) the burden of the tax will fall entirely on consumers
(b) the burden of the tax will be shared equally by consumers and producers
(c) the burden of the tax will fall more on consumers than on producers
(d) the burden of the tax will fall more on producers than on consumers

Question 17
Suppose the government conducts a successful advertising campaign which
discourages the consumption of a commodity, and at the same time imposes an
indirect tax on production.
The competitive model predicts that
(a) The quantity sold will be greater but we cannot predict the effect on price
(b) The price will be higher but we cannot predict the effect on the quantity sold.
(c) The quantity sold will be lower but we cannot predict the effect on price
(d) The price will be lower but we cannot predict the effect on the quantity sold.

Question 18
The following table gives the demand schedule for a monopolist
Price ($)

Quantity Demanded

30

26

22

18

14

10

The Marginal Cost of Production is constant at $16 per unit.

The profit maximizing level of output is
(a) 2 units
(b) 3 units
(c) 4 units
(d) 5 units
Question 19
Assume two rival car rental companies (Ace Rentals and Bobs Rentals) are
considering whether to discount their rates as a method of increasing market share.
The following pay-off matrix gives the expected monthly profits (in $000) of each
company (Ace, Bobs) under alternate strategies:
BOBS
Discount

Do Not Discount

Discount

(12, 10)

(24, 6)

Do Not Discount

(8, 20)

(16, 14)

ACE

(a) The Nash equilibrium is for neither firm to discount.

(b) The Nash equilibrium is for both firms to discount
(c) The Nash equilibrium is for Ace to discount and Bobs to not discount.
(d) The Nash equilibrium is for Bobs to discount and Ace to not discount.

Question 20.
Which of the following statements is True?
(a) A profit maximising monopolist sets price and output at a level where demand is
price-inelastic.
(b) A profit maximising monopolist produces where Average Revenue equals
Average Cost
(c) A profit maximising monopolist will, in long run equilibrium, use a scale of plant
that minimises long run Average Costs.
(d) A profit maximising monopolist will produce at an output level at which marginal
cost is less than price.

ANSWERS
1. d

11. b

2. b

12. d

3. c

13. a

4. c

14. d

5. c

15. b

6. b

16. d

7. c

17. c

8. c

18. a

9. b

19. b

10.c

20. d