University of Newcastle

School of Business

Practice Test on basic microeconomic principles

for GSBS6410 (Questions only)

INSTRUCTIONS

Time Allowed = 50 minutes

Total Marks for this test add to 100
This test consists of two Sections, A and B that are of equal value (50 marks each).

Section A is made up of 20 multiple choice questions, each worth 2.5 marks.

1. Answers to Section A MUST be written in the Answer Table at the bottom of this
page.
2. Do NOT detach the front page from the test paper.

Section B is made up of five short answer questions, each worth a total of 10 marks.
Answers to Section B should be written in the spaces provided in this paper.

Students may use their own non-programmable calculators

Students must return the whole paper at the end of the test

SECTION A: ANSWERS

Please write your answers to Section A in the following table.

PLEASE USE CAPITAL LETTERS A, B C or D

Q No. 1 2 3 4 5 6 7 8 9 10

ANS

Q No.

ANS

Course Coordinator:Andrew Nadolny

 SECTION A
Select either A, B, C or D that most fully and correctly answers the question.
REMEMBER to write your answers to this section on the cover page of this test.

1. In which market model would the number of firms be the fewest?

A. Monopolistic competition.
B. Pure competition.
C. Pure monopoly.
D. Oligopoly.

2. The scarcity problem:

A. persists only because countries have failed to achieve continuous full employment.
B. persists because material wants exceed available productive resources.
C. has been solved in all industrialised nations.
D. has been eliminated in affluent societies such as Australia.

3. Which of the following would not be considered as non-price competition?

A. Cadbury offers two chocolate bars for the price of one.
B. Qantas offers upgrade certificates to certain frequent flyer members.
C. ANZ Bank offers a new, lower, home loan rate.
D. Target stores offer a money-back guarantee on all purchases.

4. Two goods are complements if a decrease in the price of one good:

A. increases the quantity demanded of the other good.
B. reduces the demand for the other good.
C. reduces the quantity demanded of the other good.
D. raises the demand for the other good.

5. Suppose the income elasticity of demand for toys is +2.00.This means that:
A. a 10% increase in income will increase the purchase of toys by 20%.
B. a 10% increase in income will increase the purchase of toys by 2%.
C. a 10% increase in income will decrease the purchase of toys by 2%.
D. toys are an inferior good.

6. A normative statement is one that:

A. is based on the law of averages.
B. pertains only to microeconomics.
C. pertains only to macroeconomics.
D. is based upon value judgments.

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7. The demand schedule, or curve, confronted by the individual purely competitive firm
is:
A. relatively elastic; that is, the elasticity coefficient is greater than unity.
B. perfectly elastic.
C. relatively inelastic; that is, the elasticity coefficient is less than unity.
D. perfectly inelastic.

8. Any point inside the production possibilities curve indicates that:

A. the resources of an economy are fully employed, and productive efficiency is
achieved.
B. as the production of one good increases, larger and larger sacrifices of other goods
will be required.
C. least-cost production has been realised.
D. more output could be produced with available resources.

9. Which of the following is a correct statement?

A. Economic concepts or laws that are valid during depression are necessarily valid
during prosperity.
B. Though not quantitatively exact, economic laws are useful because they allow us to
make predictions that are meaningful and useful.
C. Economics is as scientific as physics and chemistry because economic laws are as
quantitatively precise as the laws of physics or chemistry.
D. Since economics is concerned with questions of ought', it is a branch of applied
ethics and is not scientific.

10. Lead is an important input in the production of crystal. If the price of lead decreases,
all else equal, we would expect the supply of:
A. crystal to be unaffected.
B. crystal to decrease.
C. crystal to increase.
D. lead to increase

11. If a firm, in a purely competitive industry, is confronted with an equilibrium price of $5.
Its marginal revenue:
A. may be either greater or less than $5.
B. will also be $5.
C. will be less than $5.
D. will be greater than $5.

12. If the income elasticity of demand for coffee at a local Starbucks was 0.5, then one
would expect a 10% increase in regular customers incomes to result in:
A. 5% increase in coffee sales
B. 10% increase in coffee sales
C. 12.5% increase in coffee sales
D. 20% increase in coffee sales

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13. The price elasticity of demand coefficient indicates:
A. buyer responsiveness to price changes.
B. the extent to which a demand curve shifts when incomes change.
C. the slope of the demand curve.
D. how far business executives can stretch their fixed costs.

14. Suppose that a 20% increase in the price of normal good Y causes a 10% decline in
the quantity demanded of normal good X. The coefficient of cross elasticity of demand
is:
A. negative, and therefore, these goods are substitutes.
B. negative, and therefore, these goods are complements.
C. positive, and therefore, these goods are substitutes.
D. positive, and therefore, these goods are complements.

15. Other things being the same, the shortage associated with a price ceiling will be
greater, the:
A. smaller the elasticity of both demand and supply.
B. greater the elasticity of both demand and supply.
C. greater the elasticity of supply and the smaller the elasticity of demand.
D. greater the elasticity of demand and the smaller the elasticity of supply.

16. The basic characteristic of the short run is that:

A. barriers to entry' prevent new firms from entering the industry.
B. the firm does not have sufficient time to change the size of its plant.
C. the firm does not have sufficient time to cut its rate of output to zero.
D. the firm does not have sufficient time to change the amounts of any of the resources it
employs.

17. The law of diminishing returns indicates that:

A. as extra units of a variable resource are added to a fixed resource, the extra or
marginal product will decline beyond some point.
B. because of economies and diseconomies of scale, a competitive firm's long-run
average cost curve will be U-shaped.
C. the demand for goods produced by purely competitive industries is down sloping.
D. beyond some point, the extra utility derived from additional units of a product will yield
for the consumer smaller and smaller extra amounts of satisfaction.

Page No. 4 of 8
18. The following is the total output and cost data for a firm.

Total Total
Output Cost($)
0 24
1 33
3 41
3 48
4 54
5 61
6 69

Refer to the above cost data. The average total cost of producing 3 units of output:
A. is $14.00.
B. is $16.00.
C. is $13.50.
D. cannot be determined from the information given.

19. Alyssa rents 5 movies per month when the price is $3.00 each and 7 movies per
month when the price is $2.50. Alyssa has demonstrated the:
A. law of price.
B. law of supply.
C. actions of an irrational consumer.
D. law of demand.

20. An oligopolistic market is consistent with:

A. all firms making economic profits.
B. a small number of firms in the industry.
C. the existence of barriers to entry'.
D. all of the above.

Page No. 5 of 8
SECTION B (Version B)

This section is made up of five questions (10 marks each). Write your answers in
the spaces provided.

Question One

[a] If the cross-price elasticity of demand for Products A and B is +3.6, and for Products
C and D is -5.4, what can you conclude about how these pairs of products are related?
(5 marks).

[b] What is a bilateral monopoly? Provide an example. (2 marks)

[c] What is a oligopsony? Provide an example. (3 marks)

Question Two

[a] Explain why average total cost curve is U-shaped. (5 marks)

[b] Distinguish between an increase in demand and an increase in quantity demanded.

[c] What is the profit maximising rule? (3 marks)

Page No. 6 of 8
Question Three

[a] The cross elasticity of demand for Pauls Pizzas with respect to his major competitor
Pams Pizzas is + 0.5. This means that if Pam offers a 10% discount on her pizzas, and
Paul leaves the price of his unchanged, he will experience a 5 % decrease in demand.
(4 marks)

[b] If the cross elasticity of demand between pizzas and garlic bread (assuming they are
complementary products) was -1, Paul could restore the demand for his pizzas to the
original level by offering a 5% discount on garlic bread. (3 marks)

[c] A mans income has increased from $3000 to $5000. This has resulted in him
increasing his consumption of meat pies from 4 to 8 a week. What is this mans income
elasticity for meat pies? (3 marks)

Question Four
Complete the table below (5 marks) and then complete Figure 1 (5 marks). Label all
components correctly.
Quantity Demanded Price Total Revenue
MR = TR / Q
Q P
0 8

1 7

2 6

3 5

4 4

5 3

6 2

Page No. 7 of 8
 Figure 1 Demand and total revenue and marginal revenue curves

20
18
16
14
12
10
8
6
Price

4
2
0
0 163542
-2
-4
-6
-8
-10
Quantity
Question Five

[a] From the Figure 1 previously, explain:

The relationship between TR and MR curves (3 marks)

The relationship between demand and MR (2 marks)

[b] What is the difference between microeconomics and macroeconomics? Is

macroeconomics simply microeconomic units added up? Explain. (3 marks)

[c] Give an example of how diseconomies of scale can occur in the long run for the firm. (2
marks)

End of Practice Class Test

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