ECO401 MidTerm Paper
Spring 2010
Question No. 1 (M a r k s: 1 ) http://vuzs.net
Microeconomics is the branch of economics that deals with which of the following topics?
► The behavior of individual consumers.
► Unemployment and interest rates.
► The behavior of individual firms and investors.
► The behavior of individual consumers and behavior of individual firms and investors.
Question No: 2 ( M a r k s: 1 ) http://vuzs.net
A market is said to be in equilibrium when:
► Demand equals output.
► There is downward pressure on price.
► The amount consumers wish to buy at the current price equals the amount producers wish to sell at that price.
► All buyers are able to find sellers willing to sell to them at the current price.
Question No: 3 ( 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: 4 ( M a r k s: 1 ) http://vuzs.net
A demand curve is price elastic when:
► Changes in demand are proportionately greater than changes in price.
► Changes in demand are equal to changes in price.
► None of the given options.
► Changes in demand are proportionately smaller than changes in price.
Question No: 5 ( M a r k s: 1 ) http://vuzs.net
Which of the following will be TRUE if demand is inelastic?
► The coefficient of elasticity is greater than one.
► The percentage change in quantity demanded is same as the percentage change in the price.
► An increase in price will increase total revenue.
► None of the given options.
Ref by Sehar khan,
Inelastic demand of any product means that if price of that product increases there is very small effect on its quantity demanded. As price increases, total revenue also increases in case of inelastic demand.
Ref by Imran Ali
Its Simple .... When Demand is inelastic... then
%age increase in price > %age decrease in Demand....
e.g. OLD price = 100 and OLD Demand is 100 .....
TR = 100*100 = 10,000
now increase price by 50% i.e. NEW Price = 150 and Decrease Demand by 10% i.e New Demand = 90
So TR = 150 * 90 = 13,500
Ref by Respetado Ray,
Question: How increase in price of an inelastic demanded good will increase total revenue?
Answer: Total revenue = Quantity produced x Price
We can prove this with the help of an example.
Example:
There are 10 goods being demanded at 10 rupees per each. (Total Revenue = 100)
Price of good is increased by 2 rupees, but as the demand is inelastic so we can say;
% change in quantity demanded < % Change in Price
10% Change in quantity demanded < 20% Change in Quantity Price
If Price increased by 2 rupees per unit, then demand will decrease with less then this, lets say that 1 good.
Hence; There are 9 goods being demanded at 12 per each. (Total Revenue = 108)
Lets increase the price more, so new price will be 14 and the quantity demanded at this price will be 8.
Now there are 8 goods being demanded at 14 per each. (Total Revenue = 112)
With the above example, we proved that with increase in price of inelastic good will increase the total revenue. I hope I could successfully transfer my idea and logic to you.
Question No: 6 ( M a r k s: 1 ) http://vuzs.net
Which of the following is regarded as a general determinant of price elasticity of demand?
► Nature of the good (luxury versus necessity).
► Availability of close substitutes.
► Share of consumer's budget and passage of time.
► All of the given options.
Question No: 7 ( M a r k s: 1 ) http://vuzs.net
The substitution effect of a wage increase will lead a person to:
► Work more.
► Take more leisure.
► Not change anything.
► None of the given options.
Question No: 8 ( M a r k s: 1 ) http://vuzs.net
A production function:
► Relates inputs with output.
► Generates a curve that is upward sloping.
► Shows diminishing marginal product of an input, since it gets flatter as output rises.
► All of the given options.
Ref by Sehar khan:
A mathematical relation between the production of a good or service and the inputs used. A
production function is usually expressed in this general form: Q = f(L, K), where Q = quantity of production output, L = quantity of labor input, and K = quantity of capital input. A production function is simply the relationship between inputs & outputs. (for referance of option 2 and 3 see page no 56 from soft copy)
Question No: 9 ( M a r k s: 1 ) http://vuzs.net
If isoquants are straight lines, it means that:
► Only one combination of inputs is possible.
► There is constant returns to scale.
► Inputs have fixed costs at all use rates.
► The marginal rate of technical substitution of inputs is constant.
Question No: 10 ( M a r k s: 1 ) http://vuzs.net
A firm maximizes profit by operating at the level of output where:
► Average revenue equals average cost.
► Average revenue equals average variable cost.
► Total costs are minimized.
► Marginal revenue equals marginal cost.
Question No: 11 ( M a r k s: 1 ) http://vuzs.net
Producer surplus in a perfectly competitive industry is:
► The difference between profit at the profit-maximizing and profit-minimizing level of output.
► The difference between revenue and total cost.
► The difference between revenue and variable cost.
► The difference between revenue and fixed cost.
Question No: 12 ( 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)
Ref by Respetado Rey,
Monopoly is market structure in which there is only one producer of a product and every producer has identical/ differentiated production. Therefore, there is no substitutes for those goods exits at all. Examples include WAPDA.
Q. The key ingredients of any market structure are:
• Number of firms in the market/industry
• Extent of barriers to entry
• Nature of product
• Degree of control over price
Market structure refers to how an industry (broadly called market) that a firm is operating in is
structured or organized.
Question No: 13 ( M a r k s: 1 ) http://vuzs.net
A market with few entry barriers and with many firms that sell differentiated products is:
► Purely competitive.
► A monopoly.
► Monopolistically competitive.
► Oligopolistic.
Question No: 14 ( 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: 15 ( M a r k s: 1 ) http://vuzs.net
Which of the following 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: 16 ( M a r k s: 1 ) http://vuzs.net
You observe that the price of houses and the number of houses purchased both rise over the course of the year. You conclude that:
► The demand for houses has increased.
► The demand curve for houses must be upward-sloping.
► The supply of houses has increased.
► Housing construction costs must be decreasing.
Question No: 17 ( M a r k s: 1 ) http://vuzs.net
Insurance companies operate under the principle of:
► Law of large numbers.
► Law of small numbers.
► Law of zero numbers.
► All of the given options.
Question No: 18 ( M a r k s: 1 ) http://vuzs.net
If income elasticity is negative, the good is:
► Normal good.
► A substitute good.
► A complementary good.
► Inferior good.
Question No: 19 ( M a r k s: 1 ) http://vuzs.net
In monopoly, which of the following is NOT true?
► Products are differentiated.
► There is freedom of entry and exit into the industry in the long run.
► The firm is a price maker.
► There is one main seller.
Question No: 20 ( M a r k s: 1 ) http://vuzs.net
In the above figure, 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: 21 ( M a r k s: 1 ) http://vuzs.net
How many points you need to know to calculate the price elasticity of demand on the same demand curve?
► One.
► Two.
► Three.
► Four.
Question No: 22 ( M a r k s: 1 ) http://vuzs.net
What is the assumption of constructing a production possibilities curve?
► Economic resources are underutilized.
► Resources are equally productive in many alternative uses.
► All available resources are employed efficiently.
► Production technology is allowed to vary.
Question No: 23 ( M a r k s: 1 ) http://vuzs.net
Production possibilities curve will shift downward if there is:
► Immigration of skilled workers into the nation.
► An increase in the size of the working-age population.
► A decrease in the size of the working-age population.
► Increased production of capital goods.
Question No: 24 ( M a r k s: 1 ) http://vuzs.net
Which of the following will happen if the current market price is set below the market clearing level?
► There will be a surplus to accumulate.
► There will be downward pressure on the current market price.
► There will be upward pressure on the current market price.
► There will be lower production during the next time period.
Question No: 25 ( M a r k s: 1 ) http://vuzs.net
The total cost (TC) function is given as: TC = 200 + 5Q. What is the variable cost?
► 5Q.
► 5.
► 5 + (200/Q).
► 200.
TC= FC+VC
Question No: 26 ( M a r k s: 1 ) http://vuzs.net
If average physical product (APP) is decreasing then which of the following must be true?
► Marginal physical product is more than the average physical product.
► Marginal physical product is less than the average physical product.
► Marginal physical product is decreasing.
► Marginal physical product is increasing.
Question No: 27 ( M a r k s: 1 ) http://vuzs.net
Which of the following statement describes decreasing returns to scale?
► Increasing the inputs by 1/4% leads to a 1/2% increase in output.
► Increasing inputs by 1/2 leads to an increase in output of 1/6.
► Doubling the inputs used leads to double the output.
► None of the given options.
1/2 > 1/6
change in input > change in output ---------> decreasing return to scale
1/2 = 50% and 1/6 = 17%
In other words u can say that
Inputs ko 50% increase kiya magar output 50% increase nhi balkeh us se kam (i.e. 17%) increase howa............... isay hum Decreasing return to scale hi kehtay hain..........................
Question No: 28 ( M a r k s: 1 ) http://vuzs.net
All the factors of production become variable in:
► Law of increasing return.
► Long run.
► Law of decreasing cost.
► Short run.
Question No: 29 ( M a r k s: 1 ) http://vuzs.net
Indifference curves that are concave to the origin reflect:
► An increasing marginal rate of substitution
► A decreasing marginal rate of substitution
► A constant marginal rate of substitution
► A marginal rate of substitution that first decreases then increases
Question No: 30 ( M a r k s: 1 ) http://vuzs.net
The total cost (TC) function is given as TC = 500 + 30Q. What is the average total cost?
► 500
► 30+ (500/Q)
► 30Q2+500Q
► 30
ref by Abdul Ghafoor
becasue Average Cost is TC/Q=(500+30Q)/Q=30+500/Q
Question No: 31 ( M a r k s: 1 ) http://vuzs.net
Which of the following is not included in the key ingredients of any market structure?
► Number of firms in the market/industry
► Extent of barriers to entry
► Perfect knowledge
► Degree of control over price
Question No: 32 ( M a r k s: 1 ) http://vuzs.net
At the profit-maximizing level of output, marginal cost equals to:
► Average revenue
► Total revenue
► Marginal revenue
► None of the given options
Question No: 33 ( M a r k s: 1 ) http://vuzs.net
Monopolists produce lower quantities at higher prices compared to perfectly competitive firms, because monopolists do not produce where
► Marginal cost = marginal revenue
► Average revenue = marginal cost
► Price = average variable cost
► Price = marginal cost
Question No: 34 ( M a r k s: 1 ) http://vuzs.net
An increase in quantity demand is shown by:
► Shifting the demand curve to the left.
► Shifting the demand curve to the right.
► Upward movement along the demand curve.
► Downward movement along the demand curve.
Ref by Abdul Ghafoor
increase in quantity demanded does not change the curve itself. We have to find point on curve for new price at new qunatity.
Question No: 35 ( M a r k s: 3 )
Describe the profit-maximizing conditions that give answer to the following questions faced by any competitive business firm:
a) How much output to produce?
b) How to produce that output?
Question No: 36 ( M a r k s: 5 )
A. Derive the equation of budget line. Which part of the equation shows the slope and which part shows the intercept?
B. Which factors cause the shift in budget line and which cause the change in slope of budget line?
(M a r k s: 3+2)
Question No: 37 ( M a r k s: 5 )
How advertisement can affect a cartel’s marginal cost and average revenue?
