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Principle of Economics Final Examination Time Allowed Examination time: Reading time: Total time:

3 hours 10 minutes 3hours 10 minutes

Instructions You will have 10 minutes to read the paper. In this time you may make notes on the scribble paper provided but you may not write on the answer paper until instructed to do so by the invigilator. The examination time listed above includes all additional time given to international students and students from culturally and linguistically diverse backgrounds. • •

All answers are to be completed in the answer booklet provided. There are 3 parts to the examination paper. Part A Part B Part C

• • •

50 marks 20 marks 30 marks

The exam is worth 45 % of the total course. Students are not allowed to bring a dictionary – these will be provided in the exam hall Please hand up the examination paper at the end of the exam.

Special additional information • • • • • • •

Write your answers in the examination answer booklet provided. This is a closed-book examination. Notes are not permitted. Non-programmable calculators are permitted. Electronic dictionaries and programmable calculators are not permitted. No writing is allowed in the examination booklet during reading time, however, notes may be made on the scribble paper provided. Be sure to hand this question booklet, your answer booklet and your scribble sheet to the invigilators prior to leaving the examination room. The exam book contains 16 papers.

SECTION A: 50 Multiple Choice Questions

(50 marks)

1. The economising problem is essentially one of deciding how to make the best use of: A. virtually unlimited resources, to satisfy virtually unlimited wants. B. limited resources, to satisfy virtually unlimited wants. C. unlimited resources, to satisfy limited wants. D. limited resources, to satisfy limited wants.

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. Refer to the above data. If the economy is producing at production option C, the opportunity cost of the tenth unit of consumer goods will be: A. B. C. D.

4 units of capital goods. 2 units of capital goods. 3 units of capital goods. 1/3of a unit of capital goods.

4. The difference between production possibilities curves that are bowed out and those that are linear is that: A. bowed out production possibilities curves illustrate trade-offs where linear production possibilities frontiers do not. B. bowed out production possibilities curves show increasing opportunity cost where linear ones show constant opportunity cost. C. bowed out production possibilities curves are the result of perfectly shiftable resources where linear production possibilities frontiers are not. D. linear production possibilities curves illustrate real-world conditions more than bowed out production possibilities frontiers.

5. The production possibilities curve illustrates the basic principle that: A. as the production of one good increases, smaller and smaller sacrifices of other goods will be required. B. an economy will automatically achieve that level of output at which all its resources are fully employed. C. if all the resources of an economy are employed, and productive efficiency is achieved, more of one good can be produced only if less of another good is produced. D. combinations of goods and services indicated by points outside the frontier will never be achieved over time.

6. Which of the following will not cause the demand for product K to change? A. A change in the price of close-substitute product J. B. An increase in consumer incomes. C. A change in the price of K. D. A change in consumer tastes.

7. If goods A and B are complements, an increase in the price of A will result in: A. more of good A sold. B. more of good B sold. C. less of good B sold. D. no difference in the quantity sold of either good.

8. An increase in the price of oranges would lead to: A. an increased supply of oranges. B. a reduction in the prices of inputs used in orange production. C. an increased demand for oranges. D. a movement up the supply curve for oranges.

9. Which of the following statements is incorrect? A. If demand increases and supply decreases, equilibrium price will rise. B. If supply increases and demand decreases, equilibrium price will fall. C. If demand decreases and supply increases, equilibrium price will rise. D. If supply declines and demand remains constant, equilibrium price will rise.

10. If a smaller quantity is supplied at each price. Then: A. supply has decreased. B. supply has increased. C. demand has decreased. D. demand has increased.

11. In the following question you are asked to determine, other things being equal, the effects of a given change in a determinant of demand or supply for product X upon: (i) the demand (D) for, or supply (S) of, X, (ii) the equilibrium price (P) of X and (iii) the equilibrium quantity (Q) of X. An increase in the tastes and preferences for X will: A. increase S, decrease P, and increase Q. B. decrease S, decrease P, and decrease Q. C. increase D, increase P, and increase Q. D. decrease D, decrease P, and decrease Q.

12. 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.

13. Suppose that, as the price of Y falls from $2.00 to $1.90, the demanded quantity of Y increases from 110 to 118. It can be concluded that the price elasticity of demand is: A. 4.00. B. 2.09. C. 1.37. D. 3.94.

14. Price elasticity of demand is generally: A. greater in the long run than in the short run. B. greater in the short run than in the long run. C. the same in both the short run and the long run. D. greater for ‘necessities' than it is for ‘luxuries'.

15. Suppose that the price of product X rises by 20%, and the quantity supplied of X increases by 18%. The coefficient of price elasticity of supply for good X is: A. negative and, therefore, X is an inferior good. B. positive and, therefore, X is a normal good. C. less than 1 and, therefore, supply is inelastic. D. more than 1 and, therefore, supply is elastic.

16. 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.

17. The larger the positive cross elasticity coefficient of demand between products X and Y, the: A. stronger their complementariness. B. greater their substitutability. C. smaller the price elasticity of demand for both products. D. the less sensitive purchases of each are to increases in income.

18. 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.

19. Assume the demand for a product is perfectly inelastic. If government establishes a price floor which is $2 above the equilibrium price, the resulting: A. shortage will be greater, the more elastic the supply. B. shortage will be greater, the less elastic the supply. C. surplus will be greater, the more elastic the supply. D. surplus will be greater, the less elastic the supply.

20. An effective price floor on wheat will: A. force otherwise profitable farmers out of business. B. result in a shortage of wheat. C. result in a surplus of wheat. D. clear the market for wheat.

21. If a legal ceiling price is set above the equilibrium price: A. a shortage of the product will occur. B. a surplus of the product will occur. C. a black market will evolve. D. neither the equilibrium price nor the equilibrium quantity will be affected.

22. A. B. C. D.

When government imposes price ceilings and floors in a market: price no longer serves as a rationing device. efficiency in the market is increased. shortages and surpluses are eliminated. buyers and sellers are both better off.

23. A $2.00 tax placed on the sellers of mailboxes will shift the supply curve: A. left (upward) by exactly $2.00. B. left (upward) by less than $2.00. C. right (downward) by exactly $2.00. D. right (downward) by less than $2.00.

24. A. B. C. D.

‘Economies of scale' refers to: the notion that small firms are less bureaucratic and, therefore, more efficient than corporations. public investments in highways, schools, utilities etc. the fact that large producers may be able to use more efficient technologies. the reallocation of labour from less productive to more productive uses.

25. 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.

26. The following is output data for a firm. Assume that the amounts of all non-labour resources are fixed.

Refer to the above information. Diminishing returns become evident with the addition of: A. the fourth worker. B. the third worker. C. the second worker. D. the first worker.

27. Marginal cost may be defined as the: A. rate of change in total fixed cost which results from producing one more unit of output. B. change in total cost which results from producing one more unit of output. C. change in average variable cost which results from producing one more unit of output. D. change in average total cost which results from producing one more unit of output.

28. The following is the total output and cost data for a firm.

Total Output 0 1 2 3 4 5 6

Cost 24 33 41 48 54 61 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.

29. If a technological advance reduces the amount of variable resources needed to produce any given level of output, this will cause: A. the AVC curve to shift downward. B. the MC curve to shift downward. C. the ATC curve to shift downward. D. all of the answers given.

30. The following represents the marginal revenue and marginal cost data for a firm:

Refer to the above information. At the profit-maximising output the firm's total revenue will be: A. $48. B. $32. C. $80. D. $64.

31. A firm finds that; its MR = MC output, its TC = $1000, TVC = $800, TFC = $200, and total revenue is $900. This firm should: A. close down in the short run. B. produce because the resulting loss is less than its TFC. C. produce because it will realise an economic profit. D. liquidate its assets and go out of business.

32. In a purely competitive industry: A. there will be no economic profits in either the short run or the long run. B. economic profits may persist in the long run, if consumer demand is strong and stable. C. there may be economic profits in the short run, but not in the long run. D. there may be economic profits in the long run, but not in the short run.

33. The loss of a purely competitive firm which closes down in the short-run: A. is equal to its total variable costs. B. is zero. C. is equal to its total fixed costs. D. cannot be determined.

34. A. B. C. D.

The monopolistic firm's demand curve: is less elastic than a purely competitive firm's demand curve. is perfectly elastic. coincides with its marginal revenue curve. is perfectly inelastic.

35. A pure monopolist should never produce in the: A. elastic segment of its demand curve, because it can increase total revenue and reduce total cost by lowering price. B. inelastic segment of its demand curve, because it can increase total revenue and reduce total cost by increasing price. C. inelastic segment of its demand curve, because it can always increase total revenue by more than it increases total cost by reducing price. D. segment of its demand curve where the price elasticity coefficient is greater than one.

36. The following is demand and cost data for a pure monopolist:

Refer to the above information. Equilibrium price for the monopolist will be: A. $2.90. B. $3.35. C. $3.85. D. $4.50.

37. As a profit-maximising monopolist faces a downward-sloping market demand curve, its: A. average revenue is less than the price of the product. B. average revenue is less than marginal revenue. C. marginal revenue is less than the price of the product. D. marginal revenue is greater than the price of the product.

38. A. B. C. D.

The monopolistically competitive seller's demand curve will tend to become more elastic, the: more significant the barriers to entering the industry. greater the degree of product differentiation. larger the number of competitors. smaller the number of competitors.

39. The monopolistically competitive seller maximises profits by producing at the point where: A. total revenue is at a maximum. B. average costs are at a minimum. C. marginal revenue equals marginal cost. D. price equals marginal revenue.

40. In the long run, new firms will enter a monopolistically competitive industry: A. providing economies of scale are being realised. B. even though losses are incurred in the short run. C. until minimum average total cost is achieved. D. until economic profits are zero.

41. The following are demand and cost data for a specific firm:

Refer to the above information. Suppose that entry into the industry changes this firm's demand schedule from columns (1) and (3) to columns (2) and (3). Economic profit will: A. fall by $10. B. fall to $6. C. increase by $10. D. decline to zero.

42. Since a firm in a monopolistically competitive market faces a: A. downward-sloping demand curve, it will always operate with excess capacity. B. downward-sloping demand curve, it will always operate at efficient scale. C. perfectly elastic demand curve, it will always operate with excess capacity. D. perfectly inelastic demand curve, it will always operate at efficient scale.

43. Game theory can be used to demonstrate: A. that oligopolistic firms are mutually interdependent. B. that independent pricing will lead to low-price policies. C. that oligopolists can increase their profits through collusion. D. all of the answers given.

44. The kinked demand curve model helps to explain price rigidity because: A. there is a gap in the marginal revenue curve, within which changes in marginal cost will not affect output or price. B. demand is inelastic above and elastic below the ‘going' price. C. the model assumes firms are engaging in some form of collusion. D. the associated marginal revenue curve is perfectly elastic at the ‘going' price.

45. The likelihood of a cartel being successful is greater when: A. firms are producing a differentiated, rather than a homogeneous, product. B. cost and demand curves of various participants are very similar. C. the number of firms involved is relatively large. D. the economy is in the recession phase of the business cycle.

46. The prisoner's dilemma is: A. having to choose between pleading guilty and taking a reduced sentence or taking your chance with the jury. B. a way to analyse and understand the interactions between firms in an oligopoly. C. a tactic police use to get information from criminal suspects. D. a game that OJ Simpson plays with his lawyers.

47. A. B. C. D.

If a good's production entails substantial spillover benefits and no spillover costs, then: too much of the good will be produced, unless firms are subsidised. too much of the good will be produced, unless firms are taxed. too little of the good will be produced, unless firms are subsidised. too little of the good will be produced, unless firms are taxed.

48. If the production of a good or service entails rather sizeable spillover benefits, government might correct the: A. under allocation of resources to its production by imposing an excise tax. B. over allocation of resources to its production by imposing an excise tax. C. under allocation of resources to its production by granting a subsidy. D. over allocation of resources to its production by granting a subsidy.

49. In a competitive market: A. demand will always reflect all spillover costs. B. demand will always reflect all spillover benefits. C. supply will always reflect all spillover costs and/or spillover benefits. D. none of the answers given hold true.

50. Pollution: A. should be corrected by the subsidisation of offending firms. B. is not an economic problem because it is external to the market system. C. is an example of private production costs. D. is an example of a spillover or external cost.

SECTION B: True/False Questions (Answer ALL questions) Instructions

• • • • •

Answer all questions below For each statement nominate either TRUE or FALSE In about 75 words (i.e. one paragraph) explain why you think it’s true or false It is important that you use diagrams where appropriate Each question is worth 5 marks, i.e. 1 mark for correctly nominating true or false and 4 marks for your explanation.

Q1. If a sales tax was imposed on a product that had a price elasticity coefficient of -0.4 and a unitary price elasticity of supply, the majority of the tax burden (or tax incidence) would fall on the consumer. (5 marks)

Q2. The law of diminishing returns suggests that the addition to total product derived from an additional unit of input will increase initially but eventually become constant as economies of scale set in. (5 marks)

Q3. In the long-run, a monopolistically competitive firm will earn normal profits only. (5 marks)

Q4. The term oligopoly describes the situation when the number of firms in an industry is so small that each must consider the reactions of rivals in formulating its price policy. (5 marks)

END OF SECTION B

SECTION C: Short Answer Questions (Answer any three questions) Instructions: • • •

Answer three (out of five) questions only from this section. Each question is worth 10 marks. Note: Answers that utilise graphs, where appropriate, will score more marks.

Q1. Compare the efficiency outcomes of perfect or pure competition with that of one imperfectly competitive market. Conclude your analysis with a comment on why governments of modern, mixed economies invariably enact some form of legislation to promote competition. (10 marks)

Q2. Using at least one current example, describe how governments can correct market failures. (10 marks)

Q3. Explain why a perfectly competitive firm will not charge a price which is higher or lower than the market determined price. (10 marks)

Q4.Assuming avocado is sold in a purely competitive market, use a well-labelled demand and supply diagram model to explain how market equilibrium price and quantity for avocado are determined. Clearly explain the equilibrating process. (10 marks)

Q5. Discuss the two ways the go...