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UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION

COURSE COURSE CODE EXAMINATION TIME

MICROECONOMICS ECO162/104 OCTOBER 2010 3 HOURS

INSTRUCTIONS TO CANDIDATES 1. This question paper consists of three (3) parts : PART A (20 Questions) PART B (4 Questions) PART C (4 Questions) Answer ALL questions from PART A and PART B, and two (2) questions from PART C. i) ii) 3. 4. Answer PART A in the Objective Answer Sheet. Answer PART B and PART C in the Answer Booklet. Start each answer on a new page.

2.

Do not bring any material into the examination room unless permission is given by the invigilator. Please check to make sure that this examination pack consists of: i) ii) iii) iv) the Question Paper an Answer Booklet - provided by the Faculty an Objective Answer Sheet - provided by the Faculty a graph paper - provided by the Faculty

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

This examination paper consists of 10 printed pages
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PART A 1. In Islamic economics, the objective of a consumer is to maximize all the following except A. B. C. D. 2. individual utility and income. family welfare and savings. social development and progress. ownership of all types of goods.

The problem of scarcity is relevant to A. B. C. D. third world countries. countries with low income. countries before practicing mass production. all countries and individuals.

3.

The main difference between a command economy and a mixed economy is that in a command economy A. B. C. D. the state provides both public and private goods. there are both public and private sectors. government will intervene if she sees necessary. there is freedom of enterprise.

4.

Which of the following will not influence demand? A. B. C. D. An increase in consumers' preference for the good. A reduction of the good's price. An increase in consumers' income. A reduction in the price of a complementary good.

5.

According to the law of supply, ceteris paribus, more of a good is supplied if price A. B. C. D. is constant. decreases. fluctuates. increases.

6.

Suppose equilibrium price is higher than maximum price, this will cause A. B. C. D. quantity demanded to be more than quantity supplied. quantity demanded to be equal to quantity supplied. quantity supplied to be more than quantity demanded. quantity demanded to be either more or less than quantity supplied.

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7.

If demand for a good increases as income decreases, this good is A. B. C. D. a normal good. a luxury good. a Giffen good. a necessity good.

8.

When the market for a good is in equilibrium, A. B. C. D. quantity supplied exceeds quantity demanded. quantity demanded exceeds quantity supplied. quantity supplied equals quantity demanded. there will be shortage of goods in the economy.

9.

Accounting profit is A. B. C. D. greater than economic profit because the former takes implicit cost consideration. equal to economic profit because the former takes implicit cost consideration. smaller than economic profit because the former does not take implicit into consideration. greater than economic profit because the former does not take implicit into consideration. into into cost cost

10.

Diseconomies of scale is shown by A. B. C. D. a decrease in long run average cost. an increase in long run average cost. a decrease in short run average cost. an increase in short run marginal cost.

11.

When average product reaches its maximum, A. B. C. D. marginal product is maximum. average product is greater than marginal product. average product is less than marginal product. average product is equal to marginal product.

12.

Which of the following statements on the relationship between marginal cost and average cost is correct? A. B. C. D. Average cost is falling if marginal cost is falling. Average cost equals marginal cost. Average cost must be rising if marginal cost exceeds average cost. Marginal cost must be rising if average cost exceeds marginal cost.

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13.

Third degree price discrimination is when prices are charged according to A. B. C. D. places of trading. consumers' capabilities. blocks of quantity. elasticities of demand.

14.

Which of the following is true for a perfectly competitive firm? A. B. C. D. It experiences diminishing returns. Its average revenue equals marginal revenue. It is making only normal profit in the short run. There are other firms in the industry producing close substitutes.

15.

When demand is inelastic, an increase in price will cause total revenue to A. B. C. D. increase. decrease. remain unchanged. increase or decrease.

16.

Condition of entry into the market is most difficult for A. B. C. D. oligopoly. perfect competition. monopoly. monopolistic competition.

17.

In the short run, a profit maximizing firm will expand output as long as A. B. C. D. average revenue is greater than average cost. total revenue is less than marginal cost. marginal revenue equals marginal cost. marginal revenue is greater than marginal cost.

18.

Which of the following is not a characteristic of a monopoly? A. B. C. D. Barriers of entry. Absence of market power. Ability to be a price maker. Absence of close substitutes.

19.

If marginal revenue product of labour is less than the wage rate, then A. B. C. D. the firm is making profits. the firm is incurring losses. more labour should be employed. less labour should be employed.

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20.

The budget line shows A. B. C. D. the amount of a good that a consumer is willing to give up in order to obtain one more unit of another good. all possible combinations of two goods which can be purchased, given money income and prices of goods. all equilibrium points on an indifference map. all possible combinations of two goods which will yield the same level of utility to consumers.

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PARTB QUESTION 1

Let us hire foreigners Cameron Highlands: Prices of vegetables have almost doubled since April due to a dearth of manpower, farmers here, claimed Cameron Highlands Vegetable Farmers Association Secretary Chay Ee Mong, had reached a critical stage, causing a steep hike in the cost of greens. Vegetable prices from the Highland had increased between 50% and 100% since April, he added. Citing examples, Chay said English cabbage had gone up by 40 sen to RM1.60 per kilo, leafy mustard price doubled to RM4, French beans from RM2.50 to RM4, dwarf white mustard from RM1.50 to RM4 and tomato from RM1 to RM1.50. Vegetable farmers here are appealing to the government to review a regulation on reducting the number of foreign workers from 2.5 million to 1.8 million. They also want the government to lift the ban on workers from Bangladesh. Chay said the price hike way also a result of a reduction of imported vegetables due natural disasters in countries like China. Cameron Highlands produces 550 tonnes of vegetables daily of which 80% is for the local market and the rest exported to Singapore. Chay said many farmers were forced to operate with a skeleton crew and also work additional hours to meet demand because they had difficulties in hiring foreign workers. "We hope the Government will approve the entry of 5,000 foreign workers, especially Bangladeshis, for farms here," he said yesterday. The freeze on hiring Bangladeshi workers was re-introduced by the Home Ministry in October 2007 in view of the "scandal" surrounding their intake. Chay said farmers preferred Bangladeshi workers because they reliable, hard working and prepared to work for more than five years. He said only 10% of workers in Cameron Highlands were locals, comprising mainly orang asli. Source: The Star, f June 2010.

Based on the above article, answer the following questions. a) State law of supply. (1 mark) b) List down two (2) reasons why prices of vegetables have increased? (2 marks) c) With the aid of a diagram, show how the prices of vegetables have increased based on any reason in part (b) above. (2 marks)

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d)

Suppose government approves the entry of 5,000 foreign workers for the farm, explain the effect on the market price for vegetables. (2 marks) Suggest any three (3) factors to increase the supply of vegetables. (3 marks)

e)

QUESTION 2 The following data refers to the petrol market in an economy. Price per litre (RM) 1.20 1.30 1.40 1.50 1.60 1.70 Quantity demanded (million of litres) 170 150 140 125 100 95 Quantity supplied (million of litres) 90 105 140 175 210 230

Based on the above table, answer the following questions. a) Using a graph paper, plot the demand and supply curves of petrol. State the equilibrium price and quantity. (3 marks) Suppose government imposes a sales tax of RM0.10 per litre. i) Using the same diagram as in part (a), show the effect of the sales tax on the market for petrol. (2 marks) What is the new equilibrium price and quantity? (1 mark) iii) Calculate the amount of tax paid by consumers and sellers each. (2 marks) c) On a separate diagram, illustrate the effect of an increase in the price of automobile on the demand for petrol. (2 marks)

b)

ii)

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QUESTION 3 Below are short run costs of Firm Aldi. Quantity (units) 0 1 2 3 4 5 6 Total Cost (RM) 300 370 410 430 460 500 550 Variable Cost (RM) 0 70 110 130 160 200 250 Marginal Cost (RM) Average Fixed Cost (RM)

Based on the above table, answer the following questions. a) Fill in the empty columns. (3 marks) b) How much is the fixed cost? (1 mark) c) If price is constant at RM50, determine the profit maximizing output. (1 marks) d) Calculate total profit or loss at equilibrium. Name the type of profit or loss the firm is making. (3 marks) What type of profit is earned by this firm in the long run. Why? (2 marks)

e)

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QUESTION 4 The diagram below refers to an oligopolist. Price, Cost, Revenue (RM)

Output (Units)

a)

Label curves (i) and (ii). (1 mark) Determine the profit maximizing price and output. (2 marks)

b)

c)

Suppose production cost of the firm increases from MCi to MC2, what is the new equilibrium output and price? (2 marks)

d)

Calculate total profit at equilibrium and name the type of profit the firm is making. (2 marks)

e)

State two (2) assumptions of the above oligopoly model. This oligopolistic model is also known as model.

(2 marks)

f)

(1 mark)

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PARTC QUESTION 1 a) Discuss any two (2) features to distinguish between a planned economic system and a free market economic system. (10 marks) Define production possibilities curve. Using a diagram, discuss any three (3) factors that influence the outward shift of production possibilities curve. (10 marks)

b)

QUESTION 2 a) Explain the differences between a movement along a demand curve and a shift in demand curve using diagrams. (10 marks) Explain four (4) determinants of price elasticity of supply. (10 marks) QUESTION 3 a) b) Explain any four (4) types of short run costs. (10 marks) With the aid of a diagram, explain the stages of production in the short run. At which stage will a rational producer choose to operate? Why? (10 marks)

b)

QUESTION 4 a) Compare any four (4) characteristics of monopolistic competition and oligopoly. (10 marks) b) Using a diagram, explain the optimal employment of labour based on the marginal revenue product theory in a perfectly competitive labour and product market. (10 marks)

END OF QUESTION PAPER

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