Semester II Examinations 2005/ 2006

Exam Code(s) 1BA5

Exam(s) 1BA (Economic & Social Studies)

Module Code(s) EC150

Module(s) Economics

Paper No. 1
Repeat Paper

External Examiner(s) Professor Vincent Munley

Internal Examiner(s) Mr. Brendan Kennelly
*Ms. Breda Lally

Instructions: Section A: (100 Marks)

Answer ALL multiple choice questions

Section B: (200 Marks)

Answer FOUR questions

Duration 3 hours
No. of Pages 9 (including cover sheet)
Department(s) Economics
Course Co-ordinator(s) Mr. Stephen McNena,
BA Department, St. Angela’s College, Sligo

Requirements:
MCQ
Handout
Statistical Tables
Graph Paper Yes
Log Graph Paper
Other Material
 Section A (100 Marks)

Please write your answers to the following multiple-choice questions on the first
page of your answer book. Write your answers in the same order as the questions
using CAPITAL letters only.

1. On a production possibilities frontier, production is efficient if the production point is

(a) on the frontier
(b) outside the frontier
(c) on or inside the frontier
(d) inside the frontier

2. Unemployment would cause an economy to

(a) produce inside its production possibilities frontier
(b) produce on its production possibilities frontier
(c) produce outside its production possibilities frontier
(d) unemployment could actually cause a, b, or c, depending on how severe it is

3. Which of the following would NOT be a determinant of demand?

(a) the price of related goods
(b) income
(c) tastes
(d) the prices of the inputs used to produce the good

4. Wheat is the main input in the production of flour. If the price of wheat increases, all
else equal, we would expect the
(a) supply of flour to be unaffected
(b) supply of flour to decrease
(c) supply of flour to increase
(d) demand for flour to decrease

5. When quantity demanded responds only slightly to changes in price, demand is said
to be
(a) unit elastic
(b) elastic
(c) inelastic
(d) perfectly elastic

6. There are very few, if any, good substitutes for motor oil. Therefore,
(a) the supply of motor oil would tend to be price elastic
(b) the demand for motor oil would tend to be price elastic
(c) the demand for motor oil would tend to be price inelastic
(d) the demand for motor oil would tend to be income elastic

7. A price floor
(a) is a legal minimum on the price at which a good can be sold
(b) is a legal maximum on the price at which a good can be sold
(c) will generally result in a market shortage
(d) will benefit the consumer, but hurt the supplier

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8. The minimum wage is an example of
(a) price ceiling
(b) a price floor
(c) a free-market process
(d) an efficient labour allocation mechanism

9. If a consumer is willing and able to pay €20 for a particular good but only has to pay
€14, the consumer surplus is
(a) €6
(b) €14
(c) €20
(d) €34

10. Producer surplus is the area

(a) under the supply curve
(b) between the supply and demand curves
(c) under the demand curve, and above the price
(d) below the price and above the supply curve

11. A tax levied on the supplier of a product shifts the

(a) supply curve upward (or to the left)
(b) supply curve downward (or to the right)
(c) demand curve upward (or to the right)
(d) demand curve downward (or to the left)

12. Whether a tax is levied on the buyer or seller of the good does not matter because
(a) sellers always bear the full burden of the tax
(b) buyers always bear the full burden of the tax
(c) buyers and sellers share the burden of the tax
(d) sellers bear the full burden if the tax is levied on them, and buyers bear the full
burden if the tax is levied on them

13. The amount of money that a firm receives from the sale of its output is called
(a) total gross profit
(b) total net profit
(c) total revenue
(d) net revenue

14. For a firm, the production function represents the relationship between
(a) implicit and explicit costs
(b) quantity of inputs and total cost
(c) quantity of inputs and quantity of output
(d) quantity of output and total cost

15. When buyers in a competitive market take the selling price as given, they are be
(a) market entrants
(b) monopolists
(c) free riders
(d) price takers

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16. In a competitive market
(a) no single buyer can influence the price of the product
(b) there is a small number of sellers
(c) the goods offered by the different sellers are markedly different
(d) all of the above are correct

17. If a monopolist sells 100 units at €8 per unit and realizes an average total cost of €6
per unit, what is the monopolist’s profit?
(a) €200
(b) €400
(c) €600
(d) €800

18. In comparison to the price a competitive firm charges, monopoly pricing has the
effect of causing
(a) the level of output to be higher
(b) the price of output to be higher
(c) consumer surplus to be larger
(d) all of the above are correct

19. In markets characterized by oligopoly

(a) the oligopolists are best off cooperating and behaving like a monopolist
(b) collusive agreements will always prevail
(c) collective profits are always lower with cartel arrangements than they are without
cartel arrangements
(d) pursuit of self-interest by profit-maximizing firms always maximizes collective
profits in the market

20. As the number of sellers in an oligopoly grow larger, an oligopolistic market looks
more like
(a) monopoly
(b) monopolistic competition
(c) a competitive market
(d) a collusion solution

Question 1 (50 marks)

Atlantis is a small, isolated island in the South Atlantic. The inhabitants grow potatoes
and catch fresh fish. The accompanying table shows the maximum annual output
combinations of potatoes and fish that can be produced. Obviously, given their limited
resources and available technology, as they use more of their resources for potato
production, there are fewer resources available for catching fish.

Maximum annual output Quantity of potatoes Quantity of fish (pounds)

options (pounds)
A 1,000 0
B 800 300
C 600 500
D 400 600
E 200 650
F 0 675

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(a) Draw a production possibility frontier, showing points A – F, with potatoes on the
vertical axis and fish on the horizontal axis.

(b) Can Atlantis produce 500 pounds of fish and 800 pounds of potatoes? Explain.
Where would this point lie relative to the production possibility frontier?

(c) If Atlantis produces 200 pounds of fish and 200 pounds of potatoes, is the outcome
efficient? Draw this production point on your diagram and explain your answer.

(d) What is the opportunity cost of increasing the annual output of potatoes from 200 to
400 pounds?

(e) What is the opportunity cost of increasing the annual output of potatoes from 600 to
800 pounds?

(f) Can you explain why the answers to parts (d) and (e) are not the same?

(g) If technology improves allowing Atlantis to double their output of fish and potatoes
what impact will this have on Atlantis’ production possibility frontier. Illustrate your
answer.

Question 2 (50 marks)

(a) What is the difference between a “change in demand” and a “change in quantity
demanded”? Graph your answer.

(b) For each of the following changes, determine whether there will be a “change in
quantity demanded” or a “change in demand”. Illustrate your answer
(i) a change in tastes in favour of the product
(ii) an increase in the number of buyers
(iii) a decrease in price
(iv) a reduction in income

(c) Use a diagram to illustrate how each of the following events affects the equilibrium
price and quantity of pizza.
(i) the price of mozzarella cheese rises
(ii) the health hazards of hamburgers are widely publicized
(iii) the incomes of consumers rise and pizza is an inferior good
(iv) consumers expect the price of pizza to rise next week
(v) the price of tomato sauce falls and the health hazards of hamburgers are
widely publicized.

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 Question 3 (50 marks)
Market research has revealed the following information about the market for 2.5kg bags
of potatoes. The demand and supply curves can be represented by the equation
QD = 400 – 40P, where QD is the quantity demanded and P is the price. The supply
schedule can be represented by QS = 120 + 30P, where QS is the quantity supplied.

(a) Find the equilibrium price and quantity in the market using the equations above.

(b) On a diagram PLOT the demand and supply curves (using the equations above) and
illustrate the equilibrium price and quantity. Ensure that your diagram is drawn to a
proper scale.

(c) Suppose the government decides that the market price of the 2.5kg bags of potatoes
is too high and that it sets a new maximum price of €3 per bag. Explain and illustrate
clearly the effects of the maximum price on the price, quantity demanded and
quantity supplied of 2.5kg bags of potatoes.

(d) Is the maximum price for 2.5kg bags of potatoes introduced by the government an
example of a price ceiling or a price floor?

(e) Explain the terms ‘price ceiling’ and ‘price floor’.

(f) Explain the term ‘rent control’.

Question 4 (50 marks)

(a) Explain the concept ‘price elasticity of demand’. What are the main determinants of
price elasticity of demand?

(b) Suppose the data below represent the market demand and supply schedules for
bicycles over a range of prices.

Price (€) Quantity Quantity

Demanded Supplied
100 90 30
150 80 40
200 70 50
250 60 60
300 50 70
350 60 80

(i) Use the midpoint method to calculate the price elasticity of demand for bicycles
as the price increases from €150 to €200. Is demand elastic or inelastic?

(ii) Based on your answer to part (i) as to whether demand is elastic or inelastic,
should bicycle manufacturers increase or reduce the price of bicycles in order to
increase total revenue?

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(c) When the Ann and Joe have a monthly income of €4000, they would usually eat out 8
times a month. Now that they couple make €4,500 a month they eat out 10 times a
month.
(i) Compute the couple’s income elasticity of demand.
(ii) Using the answer to part (i) is eating out
(a) a normal or inferior good to the couple?
(b) a necessity or a luxury good.

(d) Explain the concept of ‘cross-price elasticity of demand’. Is it positive or negative?

Explain.

Question 5 (50 marks)

(a) (i) Explain the concept of ‘consumer surplus’?
(ii) Using a demand diagram for good X illustrate consumer surplus.
(iii) Suppose the price of the good X decreases. What happens to consumer
surplus? Illustrate your answer.

(b) Draw a diagram, which shows consumer surplus and producer surplus at the market
equilibrium. Briefly explain what is meant by producer surplus.

(c) The following demand and supply diagram shows the market for good x with a tax
imposed on the sale of the good.
Price

A
P3
B C
P1
D E
P2
F

Quantity

(i) Copy the following table to your answer book and use the graph shown to
complete the table.
Without Tax With Tax Change
Consumer
Surplus
Producer Surplus
Tax Revenue
Total Surplus

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 (ii) What is the equilibrium price before the tax is imposed?
(iii) What price do consumers pay after the tax is imposed?
(iv) What price do sellers receive after the tax is imposed?
(v) What area(s) in the diagram represents the deadweight loss from the tax?

(d) Consider the market for rubber bands. If this market has very elastic supply and very
inelastic demand, how would the burden of a tax on rubber bands be shared
between consumers and producers? Use the tools of consumer surplus and
producer surplus in your answer.

Question 6 (50 marks)

(a) The information below is for Bob’s blue jeans manufacturing plant. All data is per
hour. Copy the table to your answer book. Note the following abbreviations FC
(fixed costs), VC (variable cost), TC (total cost), AFC (average fixed cost), AVC
(average variable cost), ATC (average total cost), MC (marginal cost). All costs are
measured in euro.

Quantity FC VC TC AFC AVC ATC MC

0 16 0 ------
1 16 18
2 16 31
3 16 41
4 16 49
5 16 59
6 16 72
7 16 90
8 16 114
9 16 145
10 16 184

(i) Complete the table above.

(ii) Explain the relationship between ATC and MC.

(b) Define each of the following terms:

(i) marginal product of labour
(ii) diminishing marginal product
(iii) economies of scale
(iv) production function

(c) Differentiate between accounting profit and economic profit.

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 Question 7 (50 marks)
(a) The following table contains information about a company that produces baseball
bats. The firm’s only factors of production are lathe operators and a small building
with a lathe. The number of bats per day it produces depends on the number of
employee-hours per day, as shown in the table below. Copy the table to your answer
book
Output Employee Fixed Variable Total Profit Marginal Marginal
per day hours per Cost Cost Cost Revenue Cost
day
0 0
5 1
10 2
15 4
20 7
25 11
30 16
35 22

(i) Assuming that the daily cost of the lathe is €60, that the wage rate is €15 per
hour, and that baseball bats are sold for €10 each, complete the table.
(ii) What is the profit-maximizing quantity of baseball bats?

(b) List and explain the three characteristics of a perfectly competitive market.

(c) What are the main characteristics of a monopoly?

(d) What are the three sources of barriers to entry that allow a monopoly to remain the
sole seller of a product?

(e) Draw the demand, marginal revenue and marginal cost curves for a monopolist.
Show the profit-maximizing level of output. Show the profit-maximizing price.