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EC102.DFL.Sem.2.2007 - The University of the South Pacific...

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Unformatted text preview: The University of the South Pacific Serving the Cook islands, Fiji. Kiribati, Morshnll islands, Nauru, Nine, Samoa, Solomon islands, Tokelau. Tonga, Tuvalu. and Vanuntu. FACULTY OF BUSINESS AND ECONOMICS SCHOOL OF ECONOMICS EC102: MICROECONOMICS I DISTANCE AND FLEXIBLE LEARNING FINAL EXAMINATION ~ SEMESTER II, 2007 Total Marks = 100 Duration of Examination: 3 hours (10 minutes allowed for reading the paper) Instructions to Candidates 1. There are three sections in this exam. 2. Section A: Multiple Choice; (20 Marks). ANSWER ALL QUESTIONS 3. Section 13: Definitions; and Paragraph Writing; (30 Marks). ANSWER ANY _S_I_X_ QUESTIONS 4. Section C: Calculations, Graphical Analysis and Interpretations. ANSWER ALL QUESTIONS (50 marks) Answer the questions in the ANSWER BOOKLET provided Read instructions properly. Present answers well. Write legibly. This examination contributes 60 percent towards your final grade You may use calculators 9°99)?” Section A: Multiple Choice (20 marks) Write the letter that best corresponds to the answer of each of the multiple choice questions in the Answer booklet provided. Select one answer per question. Answer all questions. Each question is worth 1 mark. 1. The basic choices of What, How, and for Whom to produce: A. exist in every economic system B. are never really addressed by most economies C. cannot be addressed until scarcity is eliminated D. do not arise in a market economy but are important in a planned economy 2. Suppose the price of milk rises by 20% the quantity of milk sold falls by 10% and the sale of breakfast cereal also falls by 10%. This set of facts indicates that the demand for breakfast cereals is price elastic the cross price elasticity between milk and cereal is negative so the two are complements A. B. C. the cross price elasticity between milk and cereal is positive so the two are D. complements the demand for milk is price elastic 3. Flaming Fernandez is a restaurant that sells French Fries. Fernando charges Flaming Fernandez $10,000 annually for use of his name. If Fernando increases the fee for use of his name, then A. the restaurant’s average fixed cost, average variable cost, average total cost, and marginal cost curves will all shift upward . only the restaurant’s average variable cost, average total cost, and marginal B cost curves will shift upward C. only the restaurant’s average fixed cost and average total cost curves will shift upward D. only the restaurant’s average fixed cost, average total cost, and marginal cost curves will shift upward 4. It is easier for a monopolist to price discriminate between groups for a service than for a product because A. it is easier to calculate average willingness-to-pay for services B. it is easier for consumers to resell products than services C. it is easier to distinguish between groups of customers for services than customers for products D. customers for products usually do not differ with respect to their average willingness-to-pay An example of a good produced by the government that does NOT have features of a public good is? A. national defense B. postal delivery C. thejudicial and legal system D. police protection Assume that the firm is producing 600 units in the diagram presented below. What should the firm do in order to maximize profit? Privr: 5m - -- - sis -- — . 5|; .. .. . .l'l't'.‘ Mir: (5} H ..... \ Dmmmi' ' MR CI Gm] 909 ll'nils orolllplll.0 A. The firm should increase the level of output because at 600 units, marginal revenue is greater than marginal cost B. The firm should increase output because at 600 units price is above marginal cost C. The firm should maintain output at 600 units, because at this output level, marginal revenue is greater than marginal cost, marginal cost is minimized, and price is the highest D. The firm should increase the level of output until it reaches the minimum average cost Monopolistically competitive industries are made up of a number of firms while oligopolistic industries are made up of a number of firms. Product differentiation is how industries acquire price- setting power. Which is the correct set of fillers? small; large; perfectly competitive large; small; monopoiist small; large; oligiopoiistic large; small; monopolistically competitive new? Economists describe the relationship between output and cost using which three cost concepts? A. diminishing cost, constant cost, and increasing cost B. long run cost, intermediate run cost, and short run cost C. opportunity cost, implicit cost, and explicit cost D. total cost, marginal cost, and average cost 10. ll. 12. 13. A student cricket team manager at the University of Sunshine examined potential variables influencing the team's winning of games. The manager concludes that the best scores resulted when the third team played the most minutes, and therefore recommended that the third team should become the first team. This conclusion was probably erroneous because the manager has A confused positive and normative analysis B. committed the fallacy of composition C. failed to recognize that what is true for the individual must also be true for the D. group confused the direction of causal relationships In order to observe a "chan e in uantity su plied" there would have to be g q P A. a shift of an entire supply curve B. a movement along a given supply curve C. a shift of an entire demand curve D. both B and C above Suppose you plot the number of hours you spend studying EC102 on the x-axis and the number of hours you spend watching cricket on TV on the y—axis. As you move up the y-axis along the PPF, the marginal cost of A. watching more TV increases B. studying more hours and watching more TV is equal at the midpoint of the PPF C. watching more TV decreases D. studying more hours increases Which of the following is true regarding marginal analysis? 1. People will compare the total benefits and total costs of a choice before making a decision. II. If marginal benefit is greater than marginal cost, there are no opportunity costs. III. A person will undettake an activity if the marginal benefit exceeds the marginal cost A. I only B. I and II only C. I and III only D. III only Which of the following conditions exist when a perfectly competitive system leads to an efficient allocation of resources A. the system produces the things that people want B. final products are distributed among households efficiently C. resources are allocated among firms efficiently D. all of the above are correct 14. On the indifference map given below, the consumer is currently at point B. What should the consumer do in order to achieve consumer equilibrium? Goal? xv max A. Increase income level; B. Choose bundle A on the same indifference curve, U; C. Choose bundle E and mOVe to the higher indifference curve, U2 D. Choose bundle W and move to the higher indifference curve, U; 15. For a price-taking firm in both the input and output markets, the MRP curve for labour slopes downward because: A. of the diminishing marginal productivity of labour B. the output price falls as the output level rises C. the wage rate rises as the amount of labour rises D. Both A and B are correct 16. Which of the following is an example of an externality? A. An abandoned house that is restored and improves neighborhood appearance B. Traffic congestion C. Acid rain D. All ofthe above. 17. Which of the following statements about the provision of public goods is correct? A. The optimal level of production of a public good is the level at which society’s willingness to pay for an additional unit is equal to the marginal cost of producing the good B. People’s preferences and demands for public goods are different than their preferences and demands for private goods C. To arrive at market demand for a public good, we sum the quantities demanded by each individual at various price levels D. All of the above ES. The marginal cost of educating a student at the University of Sunshine is $4000 and is constant. The figure below shows the marginal private benefit curve. The external benefit from education is $2000 per year. Assuming that the universities are competitive and that the government provides an efficient amount of education, wmnun-w-mnI-r _ my». .7. . , how many student places does the university offer and what is the tuition fees per student per year? CostaziiPi-jee (fimmtfls ddoflm minded-M a D D D DID DD DD DD 40D!) 3000 2000 1000 0 1|] 20 30 4D 60 Quantityfllmuufis mfstudexfls per year) A. 10,000 students per year; $6000 per student per year B. 50,000 students per year; $4000 per student per year C. 30,000 students per year; $4000 per student per year I). 50,000 students per year; $2000 per student per year 19. Given the following information about an individual’s consumption possibilities between two goods, X and Y. Inocme = $150; Price ofgood X = $5 each; and Price ofgood Y is $1.61 each, The equation for the budget line and the price relative is given by: A. Y=I.61X+150; 16% B. X=5Y+]SO; 5150 c. Y=30—0.32X; VIM D. Y=93.2—-—3.1X; yrs] 20. Which of the following resembles the shape of the indifference curve that has the cross elasticity of demand between the two goods equal to positive infinity: A B II: J;- ' ‘f L I. 'L 9i 5 4 ' a 4 l a ! -hqutgn‘pJ M-hflhflw‘» # Emfimri‘tmu‘qf-qugaa—uznn‘ 0 °"—‘ 2 4‘ e- \l IO 2 a it lo I- a. t.) n n 1. n u. Section B: Definitions and Paragraph Writing (30 marks) Answer any six questions in this section. Present ideas and illustrations clearly. 21. Andrea has an income of $150 per week. She consumes goods Y at $15 and X at $3 each per week. Assume that the price good X increases to $6. Using a diagram, show clearly how this increase under can‘t: paribus conditions can be decomposed into (i) (ii) a substitution effect; and an income effect. What is the basic idea behind this hypothetical decomposition? (5 marks) 22. This question has three parts. Answer all three (5 marks) (iii) (W) (V) Differentiate between constant cost, increasing cost and decreasing cost industries under a perfectly competitive market structure in the long run. Use diagrams to illustrate your answer (2 marks) What determines the short run equilibrium output for a perfectly competitive firm? (1.5 marks) How is the competitive equilibrium achieved in the long run? (1.5 marks) 23. This question has three parts. Answer all three (5 marks) (vi) (vii) (viii) Explain why consumer equilibrium requires that the marginal utility per dollar spent on all goods needs to be equal. Illustrate using examples. (2 marks) Explain the fundamental axioms of Transitivity, Monotonicity, Rationality and Continuity in consumer preference theory. (2 marks) Explain why indifference curves cannot intersect. (] mark) 24. This question has three parts. Answer all three (5 marks) (0 (ii) (iii) Compare and contrast between the levels of efficiency in a perfectly competitive industry with that in a monopoly. Use the marginal cost, marginal revenue and the marginal benefit curves for the comparison. (2 marks) What factors give rise to a natural monopoly? (1 mark) Discuss the relationship between a monopolist’s marginal revenue curve and its demand curve (2 marks) 25. This question has three parts. Answer all three (5 marks) (0 Explain what is meant by the prisoners’ dilemma. Use Game theory to explain your answer (2 marks) (ii) In an oligopolistic setup, why do collusive agreements such as a cartel, create a game like the prisoners’ dilemma? (1.5 marks) (iii) Provide three main characteristics of monopolistically competitive firms and explain why such firms operate with excess capacity in the long-run. (1.5 marks) 26. This question has three parts. Answer all three (5 marks) (i) Why do high skilled workers receive higher pay at any given level of employment relative to unskilled workers? Use a labour market model to explain your answer (2 marks) (ii) What are the effects of a minimum wage rate in a monopsony and a competitive labour market? Comment on similarities or differences between the two setups. (2 marks) (iii) Why is labour demand known as derived demand? (1 mark) 27. This question has three parts. Answer all three (5 marks) (i) Discuss the differences between a pure public good and a pure private good (1 mark) (ii) What are market failures? Identify three primary sources of market failures with sufficient examples (2.5 marks) (iii) Explain the term “free—rider” and discuss why such a behaviour makes the private provision of public goods inefficient (1.5 marks) 28. This question has two parts. Answer both (5 marks) (i) Define the following terms. Substantiate with examples (2.5 marks) (a) Coase theorem (K mark) (b) Marketable permits (% mark) (0) Intellectual property rights (% mark) (d) Marginal social benefit (% mark) (e) Patents (/2 mark) (ii) Explain how knowledge creates external benefits and how the government can achieve an efficient allocation of resources in the presence of such external benefits. (2.5 marks) Section C: Calculations, Graphical Analysis and Interpretations (50 marks) Answer afl the questions in this section. Present your illustrations well. 29. The demand curve for a margarines is given by: QM 2 24 ' 4PM Where PIn is the price of margarines given in dollars and Q.n is the quantity of margarines given in boxes. (i) Draw the demand curve (2 mark) (ii) What is the total consumers’ surplus if the quantity is 12 boxes? (3 marks) (iii) What is the price elasticity of demand at this quantity (hint: use the point elasticity method)? (3.5 marks) (iv) Suppose the government puts a tax on margarine which raises the price of margarine to $4. If the supply curve is perfectly elastic, what is the deadweight loss resulting from the tax? Show the deadweight loss using demand and supply diagram (4 marks) 30. Assume that the cabbage industry is competitive. Farmer Joe cultivates cabbage and prepares it for export and for this he employs labourers. He pays his workers $15 an hour and sells one bundle of cabbage at $0.50. His labourers can pack the following amount of cabbage in 1 hour. —— __— -_ .- (i) Calculate the marginal product of the labourers and draw the marginal product curve (3 marks) (ii) Calculate the marginal revenue product of the labourers (3 marks) (iii) Determine Farmer Joe’s demand curve for cabbage and draw the demand curve for cabbage (3 marks) (iv) How many workers should Farmer Joe employ and what quantity should he sell? (2 marks) (v) Provide some characteristics of such industries (1.5 marks) 31. This question has two parts. Answer both. (25 marks) (i) Mercury Energy is a monopoly supplier of hydr0~electricity. The demand (ii) curve facing the monopoly takes the following form: Q1; 3325—0513,; (where PE is the price of electricity in dollars and Q5 is the quantity of electricity). Mercury Energy’s total cost takes the following forms: TFC = 100 and TVC = 2Q+4Q2. (a) Determine Mercury Energy’s Total Cost (1 mark) (h) Calculate the profit maximizing level of output and price (3 marks) (c) Determine the profit/loss at the profit maximizing level (2 marks) (d) Draw Mercury Energy’s demand curve, Marginal Revenue Curve and Marginal Cost Curve, clearly labeling the levels in (a) — (c) (3 marks) The Clean Water Company bottles and sells distilled water. Given below is the total product schedule showing the amount of workers and the number of crates of bottled water they produce in one day. The fixed cost of the company is $50 per day and the wage paid to each worker per day is $50. -Quantity Produaed per Day (crates per day) ——m- n— I.— III (a) Draw the total product curve and the average product curves (2 marks) (b) Calculate the total cost; total variable cost; total fixed cost for each level of output. Present your answers in a tabular form. Draw all of these short run total cost curves (4 marks) (c) Determine the average total cost; average fixed cost; average variable cost and the marginal cost at each level of output. Present your answers in a tabular form. Draw all of these short run average and marginal cost curves (4 marks) (d) Assume that the price of labour increases to $70 per worker per day. Discuss and show how the average and marginal cost schedules change (6 marks) 10 ...
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