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FINALTERM EXAMINATION
FALL 2006 Marks: 60
ECO402 - MICROECONOMICS (Session - 3 ) Time: 120min

StudentID/LoginID: ______________________________

Student Name: ______________________________

Center Name/Code: ______________________________

Exam Date: Thursday, February 01, 2007

INSTRUCTIONS:

Please read the following instructions carefully before attempting any question:

• All questions are compulsory.

• This exam consists of 15 Multiple Choice Questions (MCQ’s) carrying 1 mark


each,5 fill in the blanks carrying 1 mark each,5 true false carrying 1 mark each, 5
Short questions carrying 3 marks each and 2 Descriptive questions carrying 10
marks each.

• For each Multiple Choice Question, read the options available and select which
you consider is correct option.

• You are required to show all the working of short questions as well as Descriptive
question.

• This examination is closed book, closed notes and closed neighbors.

• Do not ask any questions about the contents of this examination from anyone.

• You may wish to pace yourself with your own watch, but the Supervisor will be the
official timekeeper of the test.

• Failure to comply with the Supervisor’s directions will result in your test being
cancelled. Please comply with supervisor’s directions to avoid any unpleasant
event.

For Teacher's use only


Question 1 2 3 4 5 6 7 8 9 10 Total
Marks
Question 11 12 13 14 15 16 17 18 19 20
Marks
Question 21 22 23 24 25 26 27 28 29 30
Marks
Question 31 32
Marks

Question No: 1 ( Marks: 1 ) - Please choose one

Compared to the equilibrium price and quantity sold in a competitive market, a monopolist
will charge a ______________ price and sell a ______________ quantity.

► Higher; larger

► Lower; larger

► Higher; smaller

► All of the given options

Question No: 2 ( Marks: 1 ) - Please choose one

The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 +
5Q. What is the marginal cost?

► 200

► 5Q

► 5

► 5 + (200/Q)
Question No: 3 ( Marks: 1 ) - Please choose one

Marginal profit is equal to:

► Marginal revenue minus marginal cost.

► Marginal revenue plus marginal cost.

► Marginal cost minus marginal revenue.

► Marginal revenue times marginal cost.

Question No: 4 ( Marks: 1 ) - Please choose one

An improvement in technology would result in:

► Upward shifts of MC and reductions in output.

► Upward shifts of MC and increases in output.

► Downward shifts of MC and reductions in output.


Downward shifts of MC and increases in output.

Question No: 5 ( Marks: 1 ) - Please choose one

An increasing-cost industry is so named because of the positive slope of which curve?

► Each firm's short-run average cost curve

► Each firm's short-run marginal cost curve

► Each firm's long-run average cost curve

► The industry's long-run supply curve

Question No: 6 ( Marks: 1 ) - Please choose one


As the manager of a firm you calculate the marginal revenue is $152 and marginal cost is
$200. You should:

► Expand output.

► Do nothing without information about your fixed costs.

► Reduce output until marginal revenue equals marginal cost.

► Expand output until marginal revenue equals zero.

Question No: 7 ( Marks: 1 ) - Please choose one

The _____ elastic a firm's demand curve, the greater its _____:

► Less; monopoly power

► Less; output

► More; monopoly power

► More; costs

Question No: 8 ( Marks: 1 ) - Please choose one

An electric power company uses block pricing for electricity sales. Block pricing is an
example of:

► First-degree price discrimination.

► Second-degree price discrimination.

► Third-degree price discrimination.

► Block pricing is not a type of price discrimination.

Question No: 9 ( Marks: 1 ) - Please choose one


The maximum price that a consumer is willing to pay for each unit bought is the
______________ price:

► Market

► Reservation

► Consumer surplus

► Auction

Question No: 10 ( Marks: 1 ) - Please choose one

When a company introduces new audio products, it often initially sets the price high and
about a year later it lowers the price. This is an example of:

► A two-part tariff.

► Second-degree price discrimination.

► Intertemporal price discrimination.

► First-degree price discrimination.

Question No: 11 ( Marks: 1 ) - Please choose one

The market structure in which there is interdependence among firms is:

► Monopolistic competition.

► Oligopoly.

► Perfect competition.


Monopoly.

Question No: 12 ( Marks: 1 ) - Please choose one

In the long run, the monopolistically competitive firm earns zero economic profit because:

► Of free entry and exit.

► It has excess capacity.

► It has the ability to set price.

► Other firms produce a perfect substitute.

Question No: 13 ( Marks: 1 ) - Please choose one

Indifference curves are convex to the origin because of:

► Transitivity of consumer preferences.

► The assumption of a diminishing marginal rate of substitution.

► The assumption that more is preferred to less.

► The assumption of completeness.

Question No: 14 ( Marks: 1 ) - Please choose one

Which of the following is true regarding income along a price consumption curve?

► Income is increasing.

► Income is decreasing.

► Income is constant.
► The level of income depends on the level of utility.

Question No: 15 ( Marks: 1 ) - Please choose one

A supply curve reveals:

► The quantity of output consumers are willing to purchase at each possible market
price.

► The difference between quantity demanded and quantity supplied at each price.

► The maximum level of output an industry can produce, regardless of price.

► The quantity of output that producers are willing to produce and sell at each
possible market price.

Question No: 16 ( Marks: 1 ) - Please choose one

Discrimination based upon the quantity consumed is referred to as second degree price
discrimination.

► True

► False

Question No: 17 ( Marks: 1 ) - Please choose one

Restricted entry is another characteristic of monopolistic competition.

► True

► False

Question No: 18 ( Marks: 1 ) - Please choose one

In a perfectly competitive labor market, a firm hires labor until the marginal revenue product of
labor equal the wage rate.

► True

► False

Question No: 19 ( Marks: 1 ) - Please choose one

According to kinked-demand-curve model, oligopolists match price cuts and price increases.
► True

► False

Question No: 20 ( Marks: 1 ) - Please choose one

The shut down point for the firm is where price equals average cost.

► True

► False

Question No: 21 ( Marks: 1 )

Each seller has a very small share of the market in the ______________.

Question No: 22 ( Marks: 1 )

Total revenue = ______________.

Question No: 23 ( Marks: 1 )

In long-run equilibrium, economic profits are _____________.

Question No: 24 ( Marks: 1 )

Many countries use ___________and ____________to keep the domestic price of a product above
world levels.

Question No: 25 ( Marks: 1 )

Government intervention without a market failure creates __________.

Question No: 26 ( Marks: 3 )

How oligopoly is different from perfect competition, monopoly and monopolistically


competitive market?

Question No: 27 ( Marks: 3 )

Differentiate between consumer surplus and producer surplus.

Question No: 28 ( Marks: 3 )


If the elasticity of demand for the product is –2, find the marginal cost of the last unit
produced.

Question No: 29 ( Marks: 3 )

When do competitive markets generate an inefficient allocation of resources or market


failure? How can be the efficiency of these markets increased?

Question No: 30 ( Marks: 3 )

How can monopoly power of a monopolist be measured? What is the basic incentive behind
monopoly power?

Question No: 31 ( Marks: 10 )

Examine this information for a monopoly product.

Price ($) Quantity


10 1,000
8 2,000
6 3,000
4 4,000
2 5,000
.50 6,000

(a) Calculate total revenue.


(b) Calculate marginal revenue.
(c) What is the maximum output that the producer of this product would ever produce?
(d) Why would this firm never produce more than the output amount in part c?
(3+3+2+2)

Question No: 32 ( Marks: 10 )

a. Define demand curve. Briefly explain non price determining variables of


demand. (2+4)
b. If the market price is above and below the equilibrium level how will market
adjust to reach the equilibrium point? (2+2)
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ECO402 Microeconomics
Final Term Examination – Spring 2005
Time Allowed: 150 Minutes

INSTRUCTIONS:

All questions are compulsory.


This exam consists of 5 Multiple Choice Questions (MCQ's) and 5 descriptive
questions.
Each MCQ carries 2 Marks each and Descriptive Questions carry 10 Marks each.
You should try to complete MCQ's in 10 - 15 minutes in order to give yourself 135 -
140 minutes for descriptive questions.
For each MCQ question, read the choices available and select the choice which you
consider is the correct answer, by clicking on the appropriate check box.
Save your answer before proceeding to the next question.
Do not click the "Finish button" while solving your paper. Once you clicked the
"Finish" button, you will not be able to access your paper again. Click it at the end of
your paper. That means you have submitted your complete paper.
A clock is given in the exam software. Software will automatically be closed at the end
of 90 minutes.
Remember not to spend too much time on any one MCQ. Since all MCQ's carry equal
marks, it is important to manage your time and responses to test questions effectively.
Failure to comply with the Supervisor's directions will result in your test being
cancelled. Please comply with supervisor's directions to avoid any unpleasant event.

Total Marks: 60 Total Questions: 10

Question No. 1 Marks : 10


Suppose that you are the manager of watch making firm operating in a
competitive market your cost of production is given by C = 100 +Q2 , where
Q is the level of output and C is total cost. The marginal cost of
production is 2Q .The fixed cost of production is $100. If the price of
watches is $ 60, how many watches should you produce to maximize
profit?

Question No. 2 Marks : 02

The kink in the kinked demand curve arises because:


o there is a sharp, abrupt change in the price elasticity of demand
o entry into the industry is relatively easy
o monopoly profits are being made by some firms but not by
others
o the products sold by each firm are different

Question No. 3 Marks : 10

Can perfectly competitive firms earn economic profit? Explain.

Question No. 4 Marks : 02

When an industry is classified as oligopolistic, it consists of:

o only one seller


o many sellers with similar products
o only a few sellers with either standardized or differentiated
products
o only a few buyers

Question No. 5 Marks : 10

Suppose that the market demand function of a perfectly competitive


industry is given by QD = 4,750 – 50P and the market supply function is
given by QS = 1,750 +50P, and P is expressed in dollars. Find the market
equilibrium price.

Question No. 6 Marks : 02

In the short run, the supply curve for a perfectly competitive industry:

o shifts to the right if new firms enter the industry


o is the sum of all individual firms' average total cost curves
o is horizontal
o does not change if firms leave the industry

Question No. 7 Marks : 10

Do you agree or disagree with each of the following statement. Explain


your reasons.

(a) Average fixed cost does not change as the output change.
(b) Firms will never sells its product for less than it costs to produce
it.

Question No. 8 Marks : 02

When the monopolistic producer practices price discrimination:

o different prices are used to ration different goods among


different consumers
o different groups of consumers are charged different prices for
the same good
o social welfare is improved
o all consumers are charged different prices for different goods

Question No. 9 Marks : 10

A sales tax of $1 per unit of output is placed on one firm whose product
sells for $5 in a competitive industry.

(a) How will this tax affect the cost curves for the firm?
(b)Will there be entry or exit?

Question No. 10 Marks : 02

The monopolistic producer:

o is not concerned with the cost of production since higher cost


can be passed on to consumers
o tries to maximize total revenue
o usually produces in the inelastic range of the demand curve
o tries to minimize the cost of producing a given level of output
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ECO402 Microeconomics
Final Term Examination – Spring 2006
Time Allowed: 150 Minutes

Question No. 1 Marks :1

Economies of scale and economies of scope are synonymous.


 True
 False

Question No. 2 Marks : 1

Refer to the graph below. The marginal revenue curve is represented by curve:

 A
 B
 C
 D

Question No. 3 Marks : 1

Government intervention without market failure creates________________.


Question
tion No. 4 Marks : 1

If the market supply of labor increased relative to demand (baby boomers or


female entry), a surplus of labor would exist and the wage rate would:
 Fall
 Rise
 No effect
 All of the given options

Question No. 5 Marks : 3

State the main consequence of product differentiation? Write down the characteristics
of monopolistic competition.

Question No. 6 Marks : 1

Diminishing returns to labor occur at the ______________ unit of input:

 7th
 2nd
 5th
 4th
Question No. 7 Marks : 1

Monopoly can charge any price that it wishes regardless to the market trend
or the demand for the good.
 True
 False

Question No. 8 Marks : 1

The short run supply curve of a monopolist is:

 The rising portion of the MC curve,


 The rising portion of the MC curve above AVC,
 The rising portion of the MC curve above AC,
 None of the given option.
Question No. 9 Marks : 1

Total profit= Total revenue ________________.

Question No. 10 Marks : 1

Opportunity cost, most broadly defined, is:


 The additional cost of producing an additional unit of output,
 What we forgo, or give up, when we make a choice or a decision,
 A cost that cannot be avoided, regardless of what is done in the future,
 The additional cost of buying an additional unit of a product,

Question No. 11 Marks :


10

Define oligopoly. How oligopoly market equilibrium is different from perfect


competition and monopolistic competition?
How is oligopoly different from?
a) Perfect competition?
b) Monopolistic competition?
c) Monopoly?

Question No. 12 Marks : 1

The MRP for firms with market power is equal to:


 MP x W
 MP x MR
 MP x P
 MP x MC

Question No. 13 Marks :


3

Define price discrimination. Why 1st degree price discrimination is practically difficult?

Question No. 14 Marks : 1

Which of the following characteristics is common to both perfect competition


and monopolistic competition?
 Average total cost is minimized in the long run.
 Marginal revenue equals price.
 Economic profits are zero in the long run.
 Price equals marginal cost.

Question No. 15 Marks : 1


The price of a good is $100, and the marginal cost of the good is $90. A
competitive firm should produce that unit.
 True
 False

Question No. 16 Marks : 1

Slope of total revenue is ________________.

Question No. 17 Marks : 1


One characteristic often seen in real world oligopolies is:
 Fluctuating prices.
 Zero economic profit.
 Low barriers to entry.
 Price rigidity.

Question No. 18 Marks : 3

What type of difference is shown by economic rent?

Question No. 19 Marks : 1

Different combinations of labor and capital that have the same total costs can
be shown by a(n):
 Isoquant line
 Isocost line
 Production function.
 Total cost curve.

Question No. 20 Marks : 1

In an oligopoly, there are only a few firms and a firm can control price,
regardless of the actions of other firms in the industry.
 True
 False

Question No. 21 Marks : 1

If factor prices rise as industry output expands in the long run, we have:
 A constant-cost industry,
 A decreasing-cost industry,
 An increasing cost industry,
 Any of the given option

Question No. 22 Marks : 1


The difference between what consumer is willing to pay for an item and what he actually
pays is called ______________.

Question No. 23 Marks : 1

Demand for a product is elastic when:


 A fall in the price of the product causes total expenditures by consumers on the product to
fall
 The percentage change in quantity demanded equals the percentage change in price.
 Total expenditures by consumers for the product increase when the product's price falls.
 A fall in the price of the product does not affect the firm's revenue.

Question No. 24 Marks :


10

Use the table below to answer the following questions.

# of Total Product Marginal Average


Workers Product Product
per day
0 0
1 4
2 10
3 18
4 22
5 24
6 22

a) Fill in the table above.

b) At what point (number of workers) does the firm experience diminishing


returns? Explain.

Question No. 25 Marks : 1

The total variable costs of producing no output are:


 0
 100
 400
 Incalculable from the information given in this question.
Question No. 26 Marks :
3

Differentiate between Natural monopoly and artificial monopoly?

Question No. 27 Marks : 1

Who lose from import quotas?


 Consumers of imported goods.
 Consumers of exported goods.
 Producers of imported goods.
 Firms that hold import licenses.

Question No. 28 Marks : 1

OPEC is best example of cartel:


 True
 false
Question No. 29 Marks : 1

______________________measures the percentage change in quantity demanded


resulting from a one percent change in income.

Question No. 30 Marks : 1

A monopsony is a situation where there is a (n):


 Single buyer.
 Single seller.
 Oligopoly.
 Competitor with a monopolist.

Question No. 31 Marks : 3

Differentiate between import tariff and import quotas?

Question No. 32 Marks : 1

The general shape of the marginal cost curve is that it ______________ and
then ________________:

 is horizontal, declines
 is horizontal, rises
 rises, declines
 declines, rises
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MIDTERM EXAMINATION
FALL 2006 Marks: 40
ECO402 - MICROECONOMICS (Session - 3 ) Time: 60min

StudentID/LoginID: ______________________________

Student Name: ______________________________

Center Name/Code: ______________________________

Exam Date: Wednesday, November 22, 2006

• All questions are compulsory.

• This exam consists of 10 Multiple Choice Questions (MCQ’s) carrying 1 mark


each,5 fill in the blanks carrying 1 mark each, 5 Short questions carrying 3 marks
each and 1 Descriptive questions carrying 10 marks.

• You are required to show all the working of short questions as well as Descriptive
question.

• This examination is closed book, closed notes, closed neighbors.

• Use of calculator is allowed in the examination.

• Do not ask any questions about the contents of this examination from anyone.

• You may wish to pace yourself with your own watch, but the Supervisor will be the
official timekeeper of the test.

• Failure to comply with the Supervisor’s directions will result in your test being
cancelled. Please comply with supervisor’s directions to avoid any unpleasant
event.
For Teacher's use only
Question 1 2 3 4 5 6 7 8 9 10 Total
Marks
Question 11 12 13 14 15 16 17 18 19 20
Marks
Question 21
Marks

Question No: 1 ( Marks: 1 ) - Please choose one

Alvin's preferences for good X and good Y are shown in the diagram below.

Based on given Figure, it can be inferred that:

► Alvin does not consider good X as "good."

► Alvin will never purchase any of good Y.

► Alvin regards good X and good Y as perfect substitutes.

► Alvin regards good X and good Y as perfect complements.

Question No: 2 ( Marks: 1 ) - Please choose one

An increase in income, holding prices constant, can be represented as:


► A change in the slope of the budget line.

► A parallel outward shift in the budget line.

► An outward shift in the budget line with its slope becoming flatter.

► A parallel inward shift in the budget line.

Question No: 3 ( Marks: 1 ) - Please choose one

The short run, as economists use the phrase, is characterized by:

► A period where the law of diminishing returns does not hold.

► At least one fixed factor of production, and firms neither leaving nor
entering the industry.

► All inputs being variable.

► No variable inputs - that is all of the factors of production are fixed.

Question No: 4 ( Marks: 1 ) - Please choose one

Which of the following inputs are variable in the long run?

► Labor.

► Capital and equipment.

► Plant size.

► All of the given options.


Question No: 5 ( Marks: 1 ) - Please choose one

An isoquant:

► Must be linear.

► Cannot have a negative slope.

► Is a curve that shows all the combinations of inputs that yield the
same total output.

► Is a curve that shows the maximum total output as a function of


the level of labor input.

Question No: 6 ( Marks: 1 ) - Please choose one

Coffee and cream:

► Are both luxury goods.

► Are complements.

► Are both more inelastic in demand in the long run than in the
short run?

► Have a positive cross price elasticity of demand.

Question No: 7 ( Marks: 1 ) - Please choose one

Although there are many reasons why a market can be non-competitive, the
principal economic difference between a competitive and a non-competitive market
is:

► The number of firms in the market.

► The extent to which any firm can influence the price of the product.
► The size of the firms in the market.

► The annual sales made by the largest firms in the market.

Question No: 8 ( Marks: 1 ) - Please choose one

The theory of consumer behavior is based on certain assumptions. It includes at


least the assumption(s) that preferences are:

► Complete.

► Transitive.

► Intransitive.

► Complete and Transitive.

Question No: 9 ( Marks: 1 ) - Please choose one

Which of following is a key assumption of a perfectly competitive market?

► Firms can influence market price

► Commodities have few sellers

► It is difficult for new sellers to enter the market.

► Each seller has a very small share of the market.

Question No: 10 ( Marks: 1 ) - Please choose one

What does it mean when the consumer price index CPI is higher this year than
last?
► The rate of inflation has increased.

► There has been inflation since last year.

► Real prices have increased.

► Real prices have decreased.

Question No: 11 ( Marks: 1 )

Two goods are considered ______________if an increase (decrease) in the price of one
leads to an increase (decrease) in the quantity demanded of the other.

Question No: 12 ( Marks: 1 )

Shape of isoquant is______________.

Question No: 13 ( Marks: 1 )

_____________ = TFC/Q + TVC/Q.

Question No: 14 ( Marks: 1 )

In _________________increase in output is greater than the increase in inputs.

Question No: 15 ( Marks: 1 )

The marginal rate of technical substitution (MRTS) is ___________at all points on the
isoquant.

Question No: 16 ( Marks: 3 )

What are the advantages of joint production?

Question No: 17 ( Marks: 3 )

Define isocost line. What is the slope of isocost line?


Question No: 18 ( Marks: 3 )

Differentiate between increasing returns to cost and decreasing returns to cost.

Question No: 19 ( Marks: 3 )

If there is 10% chance of a $10,000 loss from a home burglary, what will be the
expected loss?

Question No: 20 ( Marks: 3 )

Differentiate between positive and negative network externalities.

Question No: 21 ( Marks: 10 )

a. Differentiate b/w elasticity of demand and supply with the help of formula.

b. Calculate income elasticity of demand with the help of example.


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ECO402 Microeconomics
Mid Term Examination – Spring 2006
Time Allowed: 90 Minutes
INSTRUCTIONS:

Please read the following instructions carefully before attempting any question:

• All questions are compulsory.

• This exam consists of 10 Multiple Choice Questions (MCQ’s) carrying 1


mark each,5 fill in the blanks carrying 1 mark each, 5 Short questions
carrying 3 marks each and 1 Descriptive questions carrying 10 marks.

• You are required to show all the working of short questions as well as
Descriptive question.

• This examination is closed book, closed notes, closed neighbors.

• Do not ask any questions about the contents of this examination from
anyone.

• You may wish to pace yourself with your own watch, but the Supervisor will
be the official timekeeper of the test.

Failure to comply with the Supervisor’s directions will result in your test being
cancelled. Please comply with supervisor’s directions to avoid any unpleasant
event.

Question No. 1 Marks : 1

Which best expresses the law of demand?


 A higher price reduces demand
 A lower price reduces demand
 A higher price reduces quantity demanded
 A lower price shifts the demand curve to the right

Question No. 2 Marks : 3

If a consumer starts in equilibrium in their consumption of apples and chocolate bars,


and the price of apples rises, what will happen to the quantity demanded of apples, and
why?

Question No. 3 Marks : 1

_____________is the additional utility gained from consuming one extra unit of a good or
service.

Question No. 4 Marks : 1

A firm will earn an economic profit if:

 Its total sales revenue equals the cost of labor and raw materials
 It produces its output utilizing the least-cost production method
 It is regulated by government
 Its total sales revenue exceeds the sum of all its economic costs

Question No. 5 Marks : 10

a). Define equilibrium.

b). If
– QS = 1,800 + 240P
– QD = 3,550 - 266P
Find out the equilibrium quantity and price. Also find out the elasticity of
demand and supply and show that elasticities are elastic or inelastic?
Question No. 6 Marks : 1

A market is characterized by:

 Either down sloping demand or up sloping supply but not both


 The exchange of goods and services, but not resources
 Exchange between buyers and sellers
 Face-to-face contact between buyers and sellers

Question No. 7 Marks : 1

The_________________shows how much firms wish to sell at different prices.

Question No. 8 Marks : 1

Two variables have a positive relationship if ___________________:

 They move in opposite directions


 They move in the same direction
 One decreases when the other increases
 One increases when the other decreases

Question No. 9 Marks : 3

What does production possibility frontier show?

Question No. 10 Marks : 1

The numerical measurement of a consumer’s preference is called_______________:

 Satisfaction
 Use
 Pleasure
 Utility

Question No. 11 Marks : 3

Does the Laspeyres index always overstate the true cost of living index?

Question No. 12 Marks : 1

The two main branches of economics are _____________ and____________.

Question No. 13 Marks : 1

Profit is maximized at that point where total revenue is equal to--------------------_

Question No. 14 Marks : 1

If the supply of a product decreases and the demand for that product simultaneously
increases, then equilibrium:

 Price must rise


 Price must fall
 Quantity must rise
 Quantity must fall

Question No. 15 Marks : 3

Define elasticity. In which case elasticity is greater than 1?

Question No. 16 Marks : 1

Suppose that a 2% increase in income in the economy decreases the quantity demandedof
gadgets by 1% at every possible price. This implies that:

 The supply of gadgets is elastic


 Income elasticity is positive and gadgets are a normal good
 Income elasticity is negative and gadgets are a normal good
 Income elasticity is negative and gadgets are an inferior good

Question No. 17 Marks : 1

Moving from left to right, the typical production possibilities curve has:

 an increasingly steep negative slope


 a decreasingly steep negative slope
 an increasingly steep positive slope
 a constant and negative slope

Question No. 18 Marks : 1

The price elasticity of demand measures the responsiveness of quantity demanded


to_____________.

Question No. 19 Marks : 1

Microeconomics:

 Is particularly subject to the "fallacy of composition"


 Is concerned with the economy as a whole
 Studies how supply and demand determine prices in individual markets
 Describes the aggregate flows of output and income

Question No. 20 Marks : 1

When movie ticket prices increase, families tend to spend more time at home watching
videos instead. This best reflects:

 Diminishing marginal utility


 The income effect
 The rationing function of markets
 The substitution effect

Question No. 21 Marks : 3

Define supply curve. What is the relationship between price and quantity supplied?
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MIDTERM EXAMINATION
SPRING 2007 Marks: 40
ECO402 - MICROECONOMICS (Session - 6 ) Time: 90min

StudentID/LoginID: ______________________________

Student Name: ______________________________

Center Name/Code: ______________________________

Exam Date: Saturday, May 12, 2007

Please read the following instructions carefully before attempting any question:
ƒ All questions are compulsory.
ƒ This exam consists of 10 Multiple Choice Questions (MCQs) of 1 mark each, 5 fill in
the blanks of 1 mark each, 3 Short questions of 5 marks each and one Descriptive
question of 10 marks.
ƒ For each Multiple Choice Question, read the options available and select which you
consider are the correct one.
ƒ You are required to show all the working of short as well as practical question.
ƒ Use of calculator is allowed.
ƒ This examination is closed book, closed notes and closed neighbors.

ƒ Do not ask question about the contents of this examination from anyone.

ƒ You may wish to pace yourself with your own watch, but the Supervisor will be the
official timekeeper of the test.

ƒ Failure to comply with the Supervisor’s directions will result in your test being
cancelled. Please comply with supervisor’s directions to avoid any unpleasant event

For Teacher's use only


Question 1 2 3 4 5 6 7 8 9 10 Total
Marks
Question 11 12 13 14 15 16 17 18 19
Marks
Question
Marks

Question No: 1 ( Marks: 1 ) - Please choose one

What does it mean when the consumer price index (CPI) is higher this year than
last?

► The rate of inflation has increased.

► There has been inflation since last year.

► Real prices have increased.

► Real prices have decreased.

Question No: 2 ( Marks: 1 ) - Please choose one

Which of the following is NOT an assumption regarding people's preferences in the


theory of consumer behavior?

► Preferences are complete.

► Preferences are transitive.

► Consumers prefer more of a good to less.

► None of the given options.

Question No: 3 ( Marks: 1 ) - Please choose one

If indifference curves cross, then:

► The assumption of a diminishing marginal rate of substitution is violated.

► The assumption of transitivity is violated.


► The assumption of completeness is violated.

► Consumers minimize their satisfaction.

Question No: 4 ( Marks: 1 ) - Please choose one

Which of the following is true concerning the income effect of a decrease in price?

► It will lead to an increase in consumption only for a normal good.

► It always will lead to an increase in consumption.

► It will lead to an increase in consumption only for an inferior good.

► It will lead to an increase in consumption only for a Giffen good.

Question No: 5 ( Marks: 1 ) - Please choose one

Assume that two investment opportunities have identical expected values of


$100,000. Investment A has a variance of 25,000, while investment B's variance is
10,000. We would expect most investors (who dislike risk) to prefer investment
opportunity

► A because it has less risk.

► A because it provides higher potential earnings.

► B because it has less risk.

► B because of its higher potential earnings.

Question No: 6 ( Marks: 1 ) - Please choose one


When the average product is decreasing, marginal product

► Equals average product.

► Is increasing.

► Is decreasing.

► Is less than average product.

Question No: 7 ( Marks: 1 ) - Please choose one

The law of diminishing returns applies to

► The short run only.

► The long run only.

► Both the short and the long run.

► Neither the short nor the long run.

Question No: 8 ( Marks: 1 ) - Please choose one

The rate at which one input can be reduced per additional unit of the other input,
while holding output constant, is measured by the

► Marginal rate of substitution.

► Marginal rate of technical substitution.

► Slope of the isocost curve.

► Average product of the input.


Question No: 9 ( Marks: 1 ) - Please choose one

Fixed costs are fixed with respect to changes in

► Output.

► Capital expenditure.

► Wages.

► Time.

Question No: 10 ( Marks: 1 ) - Please choose one

The diagram below contains _____ cost curves.

► short run

► Intermediate run

► long run

Both short run and long run.

Question No: 11 ( Marks: 1 )

The _____________shows the possible combination of goods and services available in


an economy.

Question No: 12 ( Marks: 1 )

Generally ________is a measure of the sensitivity of one variable to another.

Question No: 13 ( Marks: 1 )

A ____________indicates all combinations of two commodities for which total money


spent equals total income.

Question No: 14 ( Marks: 1 )

The market demand will shift to the_______ as more consumers enter the market.

Question No: 15 ( Marks: 1 )

Actual expenses plus depreciation charges for capital equipment is known


as______________.

Question No: 16 ( Marks: 5 )

Define utility. Differentiate between ordinal and cardinal utility function; which one
is better? (1+3+1)

Question No: 17 ( Marks: 5 )

(a) Differentiate between risk averse and risk loving people.


(b) How consumer can attempt to reduce risk? (3+2)

Question No: 18 ( Marks: 5 )

a. Define elasticity of demand. What are the two extreme case of elasticity of
demand?
b. Define cross elasticity of demand; also write down its formula. What will be
the cross elasticity of demand for substitutes and for complements. (2+3)
Question No: 19 ( Marks: 10 )

Define a market basket.Onwhich assumptions consumers preferences are based?


Why an indifference curve is convex to origin.(2+6+2)