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Managerial Economics BSP1005 NATIONAL UNIVERSITY OF SINGAPORE Semester 2 (2010/2011) Examinations 12th March 2011 Time Allowed: 1 Hour

15 min

INSTRUCTIONS TO CANDIDATES 1. 2. 3. 4. Answer ALL questions. Ordinary calculators are allowed. Graphic calculators are not allowed This is a CLOSED-BOOK EXAMINATION. This test contains 25 multiple Choice Questions

1) The owner of a competitive firm making zero economic profit a) b) c) d) Should consider shutting down because more money can be made elsewhere Is making exactly what he would make in his next best alternative will most probably make positive profits in the long run should increase the price of the product

2) What is the effect on the supply and demand for a Graphite Tennis racquet if the prices of Graphite falls: a) b) c) d) Demand Demand Demand Demand Curve and Supply curves shift right curve shifts Left and Supply Curve shifts right curve does not change but Supply curve shifts right Curve does not change but supply curve shifts left

3) There are two firms in the same industry. Firm A chooses a very high fixed cost and very low variable cost technology. Firm B uses a very low fixed cost and very high variable cost technology. Which of the following statements is necessarily true in the short run: a) b) c) d) The shutdown point for Firm A is at a much lower Price than Firm B Firm A makes much more profits than Firm B Firm B makes much more profit than firm A The shutdown point for Firm B is at a much lower Price than Firm A

The Demand Curve has the equation Qd = 30 2P and Supply Curve has the equation QS = 3P +5. Use this information to answer the Question 4-7. 4) At the equilibrium Price the Price Elasticity of Demand is: a) b) c) d) 0 -2 -0.5 -8

5) At the Equilibrium Price, the total Consumer surplus is a) b) c) d) Not enough information to find 100 units 62.5 units At equilibrium Consumer surplus is always Zero

6) If the government puts in a price floor of 4, at the new equilibrium: a) b) c) d) The Consumer Surplus will increase The producers Surplus will fall The price floor will have no impact The deadweight loss will be a positive number

7) Which of the following statements are true about perfect competition: a) b) c) d) The Market demand Curve can be negatively sloped The average revenue for a firm is same as the marginal revenue A firm should shut down if the price is below Average Variable Cost All of the Above

The income elasticity of demand for your firms product is estimated to be 0.75. A recent report in The Wall Street Journal says that national income is expected to decline by 3 per cent this year. Use this information to answer Questions 8 and 9. 8) Your firms product can be categorised as a) b) c) d) Normal Inferior Price elastic Price Inelastic

9) Expected change in sales of your product would be a) b) c) d) -0.5%, +0.5%, -2.25%, -5.5%.

10) Assume Coke and Pepsi are the only two competitors in the soft drink industry. Coke has an advertising expenditure elasticity of demand of 5 and Pepsi has an own price elasticity of demand of -3. Both companies face a cross-price elasticity of demand of 2. If Pepsi decreases its price by 2% and Coke simultaneously increases its advertising expenditures by 1%, what is the percentage change in Qd for Coke ? a) b) c) d) 5% 6% -4% 1%

11) You have $5500 and considering what to do with it. You are offered Project X where you have to put in $5,500 today. It is expected to generate an income stream of $2000 at the end of year 1 , 2 and 3 and nothing after that. The discount rate you use is 5%? The next best alternative is to put money in a bank that pays you no interest. a) b) c) d) The Economic Profit from Project X is positive The Economic Profit from Project X is negative The Economic Profit from Project X is Zero Not enough information to find Economic profit

12) If both the equilibrium price and equilibrium quantity in the market fall, then which of the following events must have taken place? a) increase in supply b) decrease in supply c) increase in demand d) decrease in demand 13) Recently, the Brazilian Association of Citrus Exports (Abecitrus) announced that orange production would be down 25 percent this year because of poor weather conditions, disease, and tree stress resulting from three straight bumper crops. What effect will the decreased production of oranges have on the market for grapefruit juice? a) b) c) d) increase in supply decrease in supply increase in demand decrease in demand

14). A firm produces 50,000 units of output, and determines that at that quantity its marginal cost is $0.80 and its average total cost is $0.72. Assume a U-shaped Average Total Cost Curve. At 50,000 units of output, this firms average total cost curve is: a) b) c) d) horizontal upward-sloping. downward-sloping Above the average revenue

15) In the short run, a perfectly competitive firm with U-shaped marginal and average costs a) should optimally produce so long as price is greater than average fixed costs b) could optimally produce if price is less than average costs c) should optimally produce at the minimum of the average cost

d) could optimally produce at the minimum of marginal cost 16). A positive demand shock in a perfectly competitive, constant cost industry will in the long run. a) b) c) d) Raise the market price. Raise the individual amount each firm produces. Raise the number of firms in the market. Have no effect on the market equilibrium.

17. In a competitive market, firms are price-takers because: a) b) c) d) they can set whatever price they wish prices are set by the government any firm that charges higher than the market price will lose its customers prices are set by the biggest firm in the market

18) In the market for good X, the elasticity of supply is 2.75 and the elasticity of demand is 0.75. If a per unit GST is implemented, then a) consumers c) d) consumers will share a larger burden of the GST tax than producers. b) and producers will share the burden of the GST tax equally. producers will share a larger burden of the GST tax than consumers. It is not possible to know who will share a larger burden more of the tax.

A perfectly competitive firms total cost curve is given by the equation: TC Q 2 2Q 100 . The firms marginal cost is MC 2Q 2 . The price is 82. Use this information to answer question 19 and 20. 19) What is the optimal quantity of production? a) b) c) d) 50 2 40 10

20) The producers surplus is a) b) c) d) 1500 1600 1780 3280

21) Market demand for a good A is given by Qd= 60 +2 (PB P) + .05Y, where Qd is quantity demanded of A in million units, P is price of A, Y is the index of income and PB is the price of a related good B. Which of the following statements is not true?
a) b) c) d) A is a normal good A follows the law of demand B is a substitute for A B is a complement for A

22) For a good X at market equilibrium, a 10% increase in price will result in the same market quantity sold before and after the price hike. If the elasticity of supply at equilibrium is 2, then a 5% tax on the good will cause a) b) c) d) The buyers to pay the entire tax The sellers to pay the entire tax The buyers and sellers will share the tax We do not have enough information to determine sellers share of tax

23) If At Q= 0, The total Cost for a firm is 0. This necessarily implies a) b) c) d) The Marginal Cost function for the firm is a horizontal line The Average variable cost is 0 The Average Total Cost is the same as Average Variable Cost The Marginal Cost Curve will be the same as Variable Cost curve

24) The number of consumers for a product A in a market are 200. Of that 200, 100 have a demand function which is P=30 2Q and the other 100 have a demand function which is P = 20 - 2Q. At P =22, the total demand for product A is: a) b) c) d) 4 400 3 300

25) You won a free ticket to see a Manchester United football game, which has a resale value of $100. Janet Jackson is performing on the same night. You can use the $100 from the resale to purchase a ticket to see Janet Jackson, which costs $100, and this is your next best alternative. On any given day, you would be willing to pay up to $150 to see Janet Jackson. Assume there are no other costs of seeing either event. What is the minimum benefit from attending the Manchester United Game that should incentivize you to go to the game? a) $100 b) $50 c) $150 d) $250

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