MIDTERM EXAMINATION
Fall 2009
ECO401- Economics (Session - 4)
Time: 60 min
M a r k s: 50
Question No: 1 ( M a r k s: 1 ) http://vuzs.net
Land is best described as:
► Produced factors of production.
► "Organizational" resources.
► Physical and mental abilities of people.
► "Naturally" occurring resources.
Natural resources (economically referred to as land or raw materials) occur naturally within environments that exist relatively undisturbed by mankind, in a natural form. A natural resource is often characterized by amounts of biodiversity existent in various ecosystems.
Question No: 2 ( M a r k s: 1 ) http://vuzs.net
While 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: 3 ( M a r k s: 1 ) http://vuzs.net
When government sets the price of a good and that price is above the equilibrium price, the result will be:
► A surplus of the good.
► A shortage of the good.
► An equilibrium.
► None of the given options.
SSurplus:
A surplus is a situation of excess supply, in which market demand falls short of the quantity
supplied; i.e. the producers are unable to sell all the produced goods in the market.
so increase in price would result in lesser demand...which creates surplus situation.
Question No: 4 ( M a r k s: 1 ) http://vuzs.net
If pen and ink are complements, then an increase in the price of pen will cause:
► An increase in the price of ink.
► Less ink to be demanded at each price.
► A decrease in the demand for pen.
► A rightward shift in the demand curve for ink.
This is also a Surplus situation ...as ink and pen are related to each other...if pen demand decrease so that ink demand also decreases...but surely it doesn't mean that ink price wil increase....but 3rd option is not right as he is talking about the compliments.
Question No: 5 ( M a r k s: 1 ) http://vuzs.net
An increase in supply is shown by:
► Shifting the supply curve to the left.
► Shifting the supply curve to the right.
► Upward movement along the supply curve.
► Downward movement along the supply curve.
Question No: 6 ( M a r k s: 1 ) http://vuzs.net
When an industry's raw material costs increase, other things remaining the same:
► The supply curve shifts to the right.
► Output increases regardless of the market price and the supply curve shifts upward.
► Output decreases and the market price also decrease.
► The supply curve shifts to the left.
Input prices - As the prices of inputs such as labour, raw materials, and capital increase, production tends to be less profitable, and less will be produced. This leads to a decrease in supply.
Question No: 7 ( M a r k s: 1 ) http://vuzs.net
Sugar can be refined from sugar beets. When the price of those beets falls:
► The demand curve for sugar would shift right.
► The demand curve for sugar would shift left.
► The supply curve for sugar would shift right.
► The supply curve for sugar would shift left.
Question No: 8 ( M a r k s: 1 ) http://vuzs.net
The price elasticity of demand measures the responsiveness of quantity demanded to:
► Quantity demanded.
► Quantity supplied.
► Price.
► Output.
Question No: 9 ( M a r k s: 1 ) http://vuzs.net
Since the fish that are caught each day go bad very quickly, the daily catch will be offered for sale no matter what price it brings. As a result, we know that:
► None of the given options.
► The daily supply curve for fish slopes upward.
► The daily supply curve for fish is perfectly inelastic.
► The daily supply curve for fish is perfectly elastic.
Question No: 10 ( M a r k s: 1 ) http://vuzs.net
In order to calculate the price elasticity of supply, you need to know:
► Two prices and two quantities supplied.
► The slope of the supply curve.
► The equilibrium price and quantity in the market.
► The quantity supplied at two different prices, all else equal.
Question No: 11 ( M a r k s: 1 ) http://vuzs.net
Suppose the first four units of an output produced incur corresponding total costs of 50, 150, 300, and 500. The marginal cost of the second unit of output is:
► 50.
► 100.
► 150.
► 200.
Question No: 12 ( M a r k s: 1 ) http://vuzs.net
Law of diminishing marginal utility indicates that the slope of the marginal utility curve is:
► Horizontal.
► Vertical.
► Negative.
► Positive.
Question No: 13 ( M a r k s: 1 ) http://vuzs.net
Assume that the total utilities for the fifth and sixth units of a good consumed are 83 and 97, respectively. The marginal utility for the sixth unit is:
► -14.
► 14.
► 83.
► 97.
Question No: 14 ( M a r k s: 1 ) http://vuzs.net
Suppose that the price of a pizza is $10 and price of a jeans is $30. If ratio of marginal utility of pizza to marginal utility of jeans is 1/4 then to maximize total utility, a consumer should:
► Buy more pizzas and fewer jeans.
► Buy fewer pizzas and more jeans.
► Continue to buy the same quantities of pizza and jeans.
► Spend more time consuming pizza.
Question No: 15 ( M a r k s: 1 ) http://vuzs.net
Which of the following is NOT an assumption of ordinal utility analysis?
► Consumers are consistent in their preferences.
► Consumers can measure the total utility received from any given basket of good.
► Consumers are non-satiated with respect to the goods they confront.
► All of the given options are true.
Question No: 16 ( M a r k s: 1 ) http://vuzs.net
Assume leisure is a normal good. If income effect equals substitution effect then a wage rate increase will lead a person to:
► Increase hours of work.
► Decrease hours of work.
► Not change hours of work.
► None of the given options.
Question No: 17 ( M a r k s: 1 ) http://vuzs.net
Ali initially leased one-room space and started a small day care centre with only 4 children and one staff member. But he found that the cost per child is very high. He wants to expand the centre. Which of the following will happen when Ali expand the centre?
► Economies of scale.
► Diseconomies of scale.
► Decreasing returns to the labor inputs.
► Increasing returns to the labor inputs.
Question No: 18 ( M a r k s: 1 ) http://vuzs.net
A graph showing all the combinations of capital and labour available for a given total cost is the:
► Budget constraint.
► Expenditure set.
► Isoquant.
► Isocost.
Question No: 19 ( M a r k s: 1 ) http://vuzs.net
An isoquant curve shows:
► All the alternative combinations of two inputs that yield the same maximum total product.
► All the alternative combinations of two products that can be produced by using a given set of inputs fully and in the best possible way.
► All the alternative combinations of two products among which a producer is indifferent because they yield the same profit.
► None of the given options.
Question No: 20 ( M a r k s: 1 ) http://vuzs.net
L-shaped isoquant:
► Indicate that capital and labor cannot be substituted for each other in production.
► Is impossible.
► Indicate that the firm could switch from one output to another costlessly.
► Indicate that the firm could not switch from one output to another.
Question No: 21 ( M a r k s: 1 ) http://vuzs.net
Costs determine all of the following EXCEPT:
► Demand for a product.
► Firm's behaviour.
► How firms should expand?
► Firm's profitability.
Question No: 22 ( M a r k s: 1 ) http://vuzs.net
Total costs are the sum of:
► Marginal costs and variable costs.
► Fixed costs and variable costs.
► Fixed costs and marginal costs.
► Average variable costs and marginal costs.
Question No: 23 ( M a r k s: 1 ) http://vuzs.net
To find the profit maximizing level of output, a firm finds the output level where:
► Price equals marginal cost.
► Marginal revenue and average total cost.
► Price equals marginal revenue.
► None of the given options.
Question No: 24 ( M a r k s: 1 ) http://vuzs.net
The good produced by a monopoly:
► Has perfect substitutes.
► Has no substitutes at all.
► Has no close substitutes.
► Can be easily duplicated.
Ref. by sehar khan
In Monopoly, firm is price maker. A monopoly or a firm within monopolistic competition that has the power to influence the price it charges as the good it produces does not have perfect substitutes. A monopoly is a price maker as it holds a large amount of power over the price it charges.(same referance for b0th questions)
Question No: 25 ( M a r k s: 1 ) http://vuzs.net
A perfectly competitive firm maximizes profit by finding the level of production at which:
► Price = Marginal Cost.
► Price = Average Total Cost.
► Average Total Cost = Marginal Cost.
► Price < Marginal Cost.
Question No: 26 ( M a r k s: 1 ) http://vuzs.net
The monopolist has no supply curve because:
► The quantity supplied at any particular price depends on the monopolist's demand curve.
► The monopolist's marginal cost curve changes considerably over time.
► The relationship between price and quantity depends on both marginal cost and average cost.
► Although there is only a single seller at the current price, it is impossible to know how many sellers would be in the market at higher prices.
Question No: 27 ( M a r k s: 1 ) http://vuzs.net
In monopoly, which of the following is TRUE at the output level, where price = marginal cost?
► The monopolist is maximizing profit.
► The monopolist is not maximizing profit and should increase output.
► The monopolist is not maximizing profit and should decrease output.
► The monopolist is earning a positive profit.
Question No: 28 ( M a r k s: 1 ) http://vuzs.net
Following are the disadvantages of monopoly EXCEPT:
► Monopolists earn higher profits.
► Monopolists produce high quality goods at higher prices.
► Most of the “surplus” (producer + consumer surplus) accrues to monopolists.
► Monopolists do not pay sufficient attention to increasing efficiency.
Question No: 29 ( M a r k s: 1 ) http://vuzs.net
When a firm charges each customer the maximum price that the customer is willing to pay, the firm:
► Engages in a discrete pricing strategy.
► Charges the average reservation price.
► Engages in second-degree price discrimination.
► Engages in first-degree price discrimination.
Question No: 30 ( M a r k s: 1 ) http://vuzs.net
Third-degree price discrimination involves:
► Charging each consumer the same two part tariff.
► Charging lower prices the greater the quantity purchased.
► The use of increasing block rate pricing.
► Charging different prices to different groups based upon differences in elasticity of demand.
Question No: 31 ( M a r k s: 1 ) http://vuzs.net
Which of the following is true in long run equilibrium for a firm in a monopolistic competitive industry?
► The demand curve is tangent to marginal cost curve.
► The demand curve is tangent to average cost curve.
► The marginal cost curve is tangent to average cost curve.
► The demand curve is tangent to marginal revenue curve.
Question No: 32 ( M a r k s: 1 ) http://vuzs.net
Which of the following would most likely shift the production possibilities curve for a nation outward?
► A reduction in unemployment.
► An increase in the production of capital goods.
► A reduction in discrimination.
► An increase in the production of consumer goods.
Question No: 33 ( M a r k s: 1 ) http://vuzs.net
A demand schedule is best described as:
► A numerical tabulation of the quantity demanded of a good at different prices, ceteris paribus.
► A graphical representation of the law of demand.
► A systematic listing of all the variables that might conceivably bring about a change in demand.
► A symbolic representation of the law of demand: P,Q and Q, P.
Question No: 34 ( M a r k s: 1 ) http://vuzs.net
A partial explanation for the inverse relationship between price and quantity demanded is that a:
► Lower price shifts the supply curve to the left.
► Higher price shifts the demand curve to the left.
► Lower price shifts the demand curve to the right.
► Higher price reduces the real incomes of buyers.
Question No: 35 ( M a r k s: 1 ) http://vuzs.net
The total utility curve for a risk neutral person will be:
► Straight line.
► Convex.
► Concave.
► None of the given options.
Question No: 36 ( M a r k s: 1 ) http://vuzs.net
Figure
In figure given above, the marginal utility of income is:
► Increasing as income increases.
► Constant for all levels of income.
► Diminishes as income increases.
► None of the given options.
Question No: 37 ( M a r k s: 1 ) http://vuzs.net
A welfare loss occurs in monopoly where:
► The price is greater than the marginal cost.
► The price is greater than the marginal benefit.
► The price is greater than the average revenue.
► The price is greater than the marginal revenue.
Question No: 38 ( M a r k s: 1 ) http://vuzs.net
Which of the following is NOT a factor of production?
► Labour.
► Land.
► Capital.
► Investment.
Question No: 39 ( M a r k s: 1 ) http://vuzs.net
Which of the following does NOT refer to macroeconomics?
► The study of the aggregate level of economic activity.
► The study of the economic behavior of individual decision-making units such as consumers, resource owners, and business firms.
► The study of the cause of unemployment.
► The study of the cause of inflation.
Question No: 40 ( M a r k s: 1 ) http://vuzs.net
Demand is elastic when the elasticity of demand is:
► Greater than 0 but less than 1.
► Greater than 1.
► Less than 0.
► Equal to 1.
Question No: 41 ( M a r k s: 10 )
A. Differentiate between risk and uncertainty.
B. What would the risk neutral person, risk averse person and risk loving person do in the following cases?
o If Odds Ratio > 1
o If Odds Ratio = 1
o If Odds Ratio < 1
C. You toss a coin, if head comes, you are given Rs. 200 and if tail comes, you have to pay Rs. 200. Will you play this game or not? Give your answer with brief explanation.(M a r k s: 3+3+4)
Answers : A)
Risk and Uncertainty : Risk is when an outcome may or may not occur but its probability is known while uncertainty is when an outcome may or may not occur but its probability is not known.
Answers : B)
1) For risk neutral person
o If Odds Ratio > 1, then he will definitely buy
o If Odds Ratio = 1, then he will be indifferent
o If Odds Ratio < 1, then he might not buy as OR < 1
2) For risk averse person
o If Odds Ratio > 1, then in this case as well he might decide not to buy.
o If Odds Ratio = 1, then he will definitely not buy
o If Odds Ratio < 1, then he will definitely not buy
3) For risk loving person
o If Odds Ratio > 1, then he will definitely buy
o If Odds Ratio = 1, then he will definitely buy
o If Odds Ratio < 1, then in this case as well he might decide to buy.
Answers : C)
The tossing of a coin and the probability of a head appearing is 50% i.e. the odds of success are fair. So the option of OR < 1 and OR > 1 is not there. The only possibility is OR = 1 which means that the chances are not that bad. Now it depends on the fact that whether I am a risk averse, risk neutral or risk loving person. In case of fair odds both risk loving and risk neutral person might decide to play. So I will play this game as the amount of money involved is not that much and as far as my perception of it is concerned the marginal benefit of gaining 200 Rs is perceived by me as more than the marginal cost of losing the 200 Rs. So I would definitely play this game. Moreover the excitement of winning might overshadow my rational judgement and I would definitely decide to play by being carried away by excitement.
