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The University of New South Wales

School of Economics

ECON 1101 MICROECONOMICS I

Final Examination

November 2007

Time Allowed: Two (2) Hours

This paper is worth 60% of the total course mark

This exam is comprised of Two Parts.

Part A - 20 Multiple-choice questions - worth 1 mark each.

Answer all questions. Answer this Part on the Computer Answer Sheet.

Part B - Four short-answer/essay type questions - worth 20 marks each.

Only answer Two (2) of these questions

Write in the answer books provided.


Answer each question in a separate book.
Indicate the question number in the space provided
on the cover of the answer book.

This paper may be retained by the candidate.

Answers to Part B must be written in ink. Except where they are expressly required, pencils may be
used only for drawing, sketching or graphical work.

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Part A - 20 Multiple Choice Questions

You should attempt all Questions. Select the best answer from the alternatives provided. Any double
answers will count as being incorrect. No marks will be deducted for an incorrect response.

Answer must be written in pencil on the Computer Answer Sheet. Write your name and Student 10
number in the spaces provided.

1) The short-run market supply curve for a perfectly competitive market is the

A) horizontal sum of each firm's AVC curve that lies above MC.
B) vertical sum of each firm's MC curve that lies above AVC.
C) horizontal sum of each firm's MC curve that lies above AVC.
D) vertical sum of each firm's AVC curve that lies above MC.

2) As firms leave an industry because they are incurring an economic loss, the economic
loss of each remaining firm

A) decreases and the price of the product falls.


B) increases and the price of the product rises.
C) increases and the price of the product falls.
D) decreases and the price of the product rises.

3) In a perfectly competitive market with no external economies or diseconomies, an


increase in market demand will

A) have no effect on price since firms are price takers.


B) generate long-run economic profits for the firms in the industry.
C) raise the price in the short run and attract new firms in the long-run.
D) raise the price in the short run and the long-run.

4) If a monopoly were regulated so that a socially efficient solution prevails, production


would be set at the point where

A) the MC curve intersects the AVC curve


B) the MC curve intersects the ATC curve
C) the MC curve intersects the AR curve
D) the MC curve intersects the MR curve

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5) Any attempt to capture a consumer surplus, a producer surplus, or an economic profit is
called
A) efficiency gain.
B) profit-maximising.
C) price discriminating.
D) rent-seeking.

6) Which of the following is FALSE regarding a profit maximising monopolistically


competitive firm in long run equilibrium?

A) Output is produced at minimum average cost.


B) Marginal cost equals average cost.
C) Economic profits can exist because of differentiation.
D) All of the above.

7) Which of the following is not a characteristic of long run equilibrium under monopolistic
competition?

A) price exceeds marginal cost


B) price equals average variable cost
C) marginal costs equals marginal revenue
D) price equals minimum average cost.

8) Price competition in oligopoly will

A) reduce industry profit.


B) hurt consumers.
C) increase industry profit if demand is inelastic.
D) damage technical efficiency.

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9) According to the kinked demand curve theory of oligopoly, each firm thinks that the
demand curve just below the existing price is

A) steeper than the curve just above the existing price.


B) flatter than the curve just above the existing price.
C) has the same slope as the curve just above the existing price.
D) None of the above, because in the kinked demand curve theory, the firms are
concerned with how the kink in their supply curve affects their consumers' demands.

Table 10.1

-~--,. __..., ..
Firm A
R&D NoR&D
R&D A: $25 A: -$3
FirmB B: $15 B: $60
A: $60 A: $50
R&D B: -$3 B: $35

10) Firms A and B can conduct research and development (R&D) or not conduct it. R&D is
costly but can increase the quality of the product and thus possibly increase sales. The
payoff matrix (see Table 10.1) is the economic profits of the two firms, where the
numbers are millions of dollars. The Nash equilibrium occurs when

A) both A and B conduct R&D.


B) only B conducts R&D.
C) only A conducts R&D.
D) neither A nor B conduct R&D.

11) Because of diminishing marginal returns to labour,

A) marginal revenue product declines as output increases.


B) marginal product is negative.
C) the law of supply will not hold.
D) output declines as more labour is hired.

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12) A firm's demand curve for labour shifts

A) rightward when the wage rate decreases.


B) rightward when the price of the firm's output decreases.
C) leftward when the wage rate decreases.
D) leftward when the price of the firm's output decreases.

13) If a firm finds that MRP > W, it will

A) decrease the amount of labour it hires.


B) be minimising profits.
C) increase the amount of labour it hires.
D) be maximising profits.

14) Which of the following DOES NOT affect the elasticity of demand for labour?

A) The elasticity of demand for the good.


B) The labour intensity of the production process.
C) The elasticity of supply for labour.
D) The substitutability of capital for labour.

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Comfeet PIL produces leather sandals. Comfeet is a price taker and must decide on its hourly
production rate. The costs of production are:
Pairs of Sandals Total Cost
(per hour) (per hour)

o 20
1 26
2 31
3 35
4 48
5 70
6 102
(only completed pairs are counted)

15) If the price of a pair of sandals is $15-per pair, Comfeet's profit maximising production rate
is:

A) 3 pairs per hour


B) 4 pairs per hour
C) 5 pairs per hour
D) 6 pairs per hour

16) Consider the data of Question 15


The price below which Comfeet should shut down operations in the short run
(the "shut-down price") is:
A) $3.00
B) $5.00
C) $5.50
D) $7.00

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The table below presents data on the productivity of workers in a meat processing factory. The
meat processing industry can be assumed to be competitive.
Number of workers Quantity of meat processed per day (kg)
1 40
2 100
3 180
4 240
5 290
6 330
7 ~O

8 380

17) The market price of processed meat is $2.50 per kilo.


The wage rate for meat processors is $90 per day
The Marginal Revenue Product from employing the 4th worker is:
A) $60
B) 60 kg
C) $150
D) 150 kg

Consider the data for Question 17


18) To maximise profit the factory should employ:
A) 5 workers
B) 6 workers
C) 7 workers
D) 8 workers

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19 )The market demand curve for a public good is found by

A) horizontally summing the marginal benefit curves for all individuals.


B) horizontally summing the total benefit curves for all individuals.
C) vertically summing the marginal benefit curves for all individuals.
D) vertically summing the total benefit curves for all individuals.

20) The quantity demanded of a product per month decreases from 525 units to 475 units as
a result of a price rise from $ 9 to $ 11, the elasticity of demand for this change is

A) 0.5
B) 0.2
C) 2.5
D) 5.0

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Part B

Answer only Two (2) of the following questions.


Each question in this part is worth 20 marks

ANSWER EACH QUESTION IN A SEPARATE ANSWER BOOK

Question 1.

According to the ABC news website 31 August, 2007 the Chinese


Government has declared the Olympic Games in Beijing next year as
'smoke free'. Some 100,000 people are thought to die from passive
smoking in China every year, with about 45 per cent of those deaths
from chronic lung disease.

Researchers from Birmingham University estimate that this year almost


two million people in China over the age of 50 will die of bronchitis and
emphysema caused by passive smoking.

The researchers estimate that treatment for passive smokers in China


costs about $4 billion in medical costs a year. They say bad air pollution
and dangerous working conditions intensify the problem.

a. (5 marks) Explain what is meant by an externality in the production


or consumption of a good. Passive smoking is an example of a negative
externality. Give two examples of positive externalities.

b. (5 marks) Use supply and demand diagrams to demonstrate how a


negative externality prevents a competitive market from allocating resources
efficiently.

c. (5 marks) Explain how an externality can be eliminated by assigning


property rights, refer to Coase theorem. Do you think this would work in the
case of passive smoking? Why/ Why not?

d. (5 marks) Discuss other forms of intervention by government that


could be used to correct this type of market failure.

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Question 2.

(a) (5 marks) Explain the characteristics of perfect competition and how


they differ from those of a single priced monopoly firm. Draw two diagrams,
one showing a single price monopolist the other showing a perfectly
competitive firm in the long run.

(b) (5 marks) Why does a single price monopoly produce a smaller


output and charge a higher price than would prevail if the industry was
perfectly competitive?

(c) (5 marks) What are the options available for government in


regulating the pricing behaviour of a monopolist?

(d) (5 marks) Distinguish between a price discriminating and single


price monopoly and explain what prevents all monopolies from price
discrimination.

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Question 3.

a. (5 Marks) Both monopolistic competition and oligopoly are


examples of imperfect competition. What are the distinguishing characteristics
of monopolistic competition? Use a diagram to explain the price and output
decisions of this type of firm in the long run.

b. (5 marks) Explain how the advertising expenditure of a


monopolistically competitive firm affects both its cost and demand curves.

c. (5 marks) What does the kinked demand curve model of oligopoly


predict and what are the models main weakness?

d. (5 marks) Explain why firms in an oligopolistic industry have an


incentive to collude, but also an incentive to cheat on any collusive
agreement.

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Question 4.

a. (5 Marks) Illustrate a Lorenz curve and explain how we use it to


gauge the degree of income inequality.

b. (5 marks) One source of income inequality is skill differentials. Use


a diagram to illustrate and explain the difference in equilibrium wage rates in
the market for low skill workers compared to highly skilled workers.

c. (5 marks) Explain and illustrate how a minimum wage law will lead
to inefficiency in the labour market.

d. (5 marks) Using a diagram to explain and illustrate the equilibrium


wage and employment outcome in a monopsony labour market. What
happens to employment in this market if a minimum wage law is introduced?

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