NATIONAL UNIVERSITY OF SINGAPORE
EC1301 PRINCIPLES OF ECONOMICS
SEMESTER I: AY2015-2016
Mid-Term Examination
1st October 2015
Time Allowed: 1 Hour
________________________________________________________________
INSTRUCTIONS TO CANDIDATES
1. This examination paper comprises TWELVE (12) printed pages, including this
page.
2. There are THIRTY (30) multiple-choice questions (MCQ) in SECTION A AND
TWO (2) short-answer questions in SECTION B.
3. Answer ALL questions. The total mark for this paper is 25 marks.
4. This is a CLOSED BOOK examination.
5. Use the bubble form for your MCQ answers. SUBMIT both the bubble form and
question paper at the end of the examination.
SECTION B
MARKS (5 EACH)
Question 1
Question 2
TOTAL MARKS
MATRICULATION NUMBER: _________________________
TUTORIAL GROUP NUMBER: ________________________
SECTION A: MULTIPLE CHOICE QUESTIONS (15 MARKS)
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Choose the one alternative that best completes the statement or
answers the question.
1. The decision about what goods and services will be produced in a market
economy is made by
A. lawmakers in the government voting on what will be produced.
B. producing firms deciding to produce only what the boss says must be
produced.
C. celebrities deciding what society needs the most.
D. consumers and firms choosing which goods and services to buy or
produce.
2. Poverty should not be tolerated in a wealthy nation such as the United States of
America. This statement is best described as a
A. positive statement.
B. normative statement.
C. negative statement.
D. Marxist ideology.
Tom
Mary
Bags packed
8
6
Sandwiches made
16
18
TABLE 1
3. Mary and Tom both volunteer at a food pantry that serves the poor in their town.
They both pack bags for distribution and make sandwiches. TABLE 1 shows
what they can each do in one hour. If each person only has one hour to spend
on these activities, then the largest number of bags packed and sandwiches
made would result in
A. Tom packed bags for a half-hour and then switched to making sandwiches
for another half hour; Mary would make sandwiches for the whole hour.
B. Tom packed bags for one hour and Mary made sandwiches for one
hour.
C. Mary made sandwiches for a half-hour then switched to packing bags for
another half hour; Tom would pack bags for the whole hour.
D. All of the above would result in the same total number of packed bags and
sandwiches.
4. Which of the following is not held constant along a demand schedule or curve?
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A.
B.
C.
D.
The buyerʹs tastes and preferences
The buyerʹs incomes
The price of the product
The buyerʹs expectations about future prices
5. The demand for big screen TVs would fall, if big screen TVs are normal goods
and
A. the market price of big screen television sets increases.
B. there is a larger output of big screen TVs.
C. buyers of big screen TVs incomes fall because of a recession.
D. the market price of DVDs falls.
6. Businesses feel that slowly rising general prices are good for business because
A. demand is kept strong because buyers expect prices to be higher in
the future.
B. the price of substitute goods must be rising faster.
C. prices are rising slowly means buyers incomes must also be rising, so
demand will increase.
D. tastes are moving in a positive direction for goods whose prices are rising.
7. An insect that is resistant to currently used pesticides has infested the cotton
crop, and this year’s crop is only half of what is produced last year. You
accurately predict that this
A. will shift the supply curve of cotton to the right, the equilibrium price of
cotton will increase, and the demand for cotton will fall.
B. will shift the supply curve of cotton to the right, the equilibrium price of
cotton will increase, and the quantity demanded of cotton will decrease.
C. will shift the supply curve of cotton to the left, the equilibrium price of
cotton will increase, and the quantity demanded of cotton will
decrease.
D. will shift the supply curve of cotton to the left, the equilibrium price of cotton
will increase, and the demand for cotton will fall.
8. Electronics firms can produce more than one type of good. Suppose that
electronics firms are producing both military radios and microchips. A war
breaks out, and the price of military radios increases. The electronics firms use
more resources into making military radios and fewer resources into making
microchips. Which of the following statements below is true?
A. The supply of microchips has decreased, and the quantity supplied of
military radios has increased.
B. The supply of microchips has decreased, and the supply of military radios
has increased.
C. The quantity supplied of microchips has decreased, and the supply of
military radios has decreased.
D. The quantity supplied of microchips has decreased, and the quantity
supplied of military radios has decreased.
E. There has been no change in the supply of microchips or in the supply of
military radios.
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FIGURE 1
9. In FIGURE 1
that initially the
equilibrium as
demand
and
D1 and S1.
price/quantity
could
result
increase
in
incomes
improvement in
A. $100 and
B. $100 and
C. $100 and
D. $120 and 75,000
E. $120 and 100,000
above, suppose
market is in
defined by the
supply curves
Which
combination
from
an
consumers'
coupled with an
technology?
75,000
100,000
50,000
FIGURE 2
10. If demand for a good is represented by curve D in FIGURE 2 above, then an
increase in supply of the good will cause
A. the equilibrium quantity to rise, but seller’s total revenue to fall.
B. the equilibrium quantity to fall, but seller’s total revenue to rise.
C. both the equilibrium quantity and seller’s total revenue to fall.
D. the equilibrium quantity to rise, but seller’s total revenue will not change.
E. both the equilibrium quantity and seller’s total revenue to rise.
11. If the current market price of beer is $10 per six pack and a price floor of $12
per six pack is imposed, then
A. $12 per six pack is the maximum legal price that can be charged.
B. quantity demanded of beer will rise.
C. there will be a surplus of beer in the market at the price floor.
D. All of the above.
12. Among the impacts of the minimum wage is that
A. higher costs are imposed on employers.
B. higher product prices result because production costs are increased.
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C. employers substitute other lower cost inputs in place of higher priced labor.
D. All of the above are impacts of a minimum wage.
13. The following question refers to the discussion on the “Supply and Demand in
Housing Markets” which was highlighted in a video that was uploaded to the
workbin via the IVLE facility.
Which of the following is not true about the housing market?
A. The price of housing will increase or decrease in order to achieve an
equilibrium.
B. An increase in the demand for housing will cause an increase in the
quantity supplied of housing.
C. When the demand for housing increases, the price of housing will increase
but the quantity supplied will not increase in the short run.
D. The housing market is a unique market because most people had to borrow
money to buy their homes.
E. The only way to increase the supply of housing is to build more houses.
14. A local store noticed that when it increased the price of milk from $2.50 to $3.50
per gallon, it sold the same amount of milk per week (165 gallons). Since
everything else remained the same, we would say the
A. demand for milk is perfectly elastic
B. demand for milk is elastic
C. demand for milk is perfectly inelastic
D. demand for milk is unitary elastic
E. law of supply does not apply in this situation
15. Because the price elasticity of demand for agricultural products is very low,
A. increases and decreases in supply result in large price changes.
B. increases and decreases in supply result in small price changes.
C. increases in supply result in large price changes, whereas decrease in
supply result in small price changes.
D. increases in supply result in small price changes, whereas decrease in
supply result in large price changes.
E. increases and decreases in supply do not result in price changes.
16. Which of the following types of goods has the most inelastic demand?
A. Necessities
B. Luxuries
C. Goods with many substitutes
D. Goods whose price is high relative to consumersʹ budgets
17. If a firm raised its price and found that total revenue fell to zero, then the
demand for its product is
A. perfectly inelastic.
B. relatively inelastic.
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C. perfectly elastic.
D. relatively elastic.
18. When the price of gasoline rises, people immediately cut back on unnecessary
trips. If the price pf gasoline stays high, people eventually replace their cars
with more fuel-efficient models. As a result, the
A. long-run demand for gasoline falls.
B. short-run demand for gasoline is less elastic than the long-run
demand.
C. short-run demand for gasoline is more elastic than the long-run demand.
D. price of gasoline is forced down to its original level.
19. If scissors manufacturers cannot quickly and easily increase their output when
the price of scissors rises, it is likely that
A. scissors are a normal good.
B. the supply of scissors is perfectly elastic.
C. the supply of scissors is elastic.
D. the supply of scissors is inelastic.
20. In the short run, the marginal cost of producing the first unit of output is $20, the
marginal cost of producing the second unit of output is $16, and the marginal
cost of producing the third unit of output is $12. The firm’s total variable cost of
producing three units of output is
A. $12.
B. $16.
C. $20.
D. $48.
E. None of the above.
21. XYZ Co. has produced 25 shirts at a total cost of $300. The next shirt produced
will add $10 to the firm’s total cost. Which of the following is definitely true if the
26th shirt is produced?
A. Short run average total cost will decrease.
B. Marginal cost will decrease.
C. Average fixed cost will decrease.
D. Answers A and C.
22. Other things being equal, if a firm's marginal cost curve shifts upward at all
output levels,
A. the average total cost curve remains unchanged at all output levels.
B. the average variable cost curve remains unchanged at all output levels.
C. the average fixed cost curve remains unchanged at all output levels.
D. All of the above.
23. Suppose that in 1999 MBI Corp. produced 100 million units of a good at an
average cost of $6, and in 2000 MBI Corp. expanded its plant capacity and
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produced 200 million units at an average cost of $6.20. In this range, one can
conclude that MBI Corp. is experiencing
A. economies of scale.
B. diseconomies of scale.
C. neither economies of scale or diseconomies of scale.
D. increasing marginal product.
24. If all firms in a market have the same LRATC curve,
A. only one of them can survive in the long run.
B. the lowest possible long-run price is determined by LRATC at
minimum efficient scale.
C. the highest possible long-run price is determined by LRATC at minimum
efficient scale.
D. minimum efficient scale must be zero.
E. there is no minimum efficient scale.
25. Which of the following conditions allows perfect competition to arise?
A. Attempts by each firm to make their product different from products
produced by other firms reinforces competition between firms.
B. The minimum efficient scale of a single producer is small relative to
the demand for the good or service.
C. New firms must operate more efficiently in order to overcome the
competitive advantage of existing firms.
D. Sellers and buyers are well informed about available quantity but not
prices.
26. Connie's Golf Pte. Ltd. sells golf balls in a perfectly competitive market. At its
current level of golf ball production, Connie has marginal costs equal to $1, and
AVC is rising. If the market price of golf balls is $2, Connie should
A. decrease the level of golf ball production.
B. continue producing the current level of production.
C. increase the production of golf balls.
D. shut down and produce no golf balls.
27. If a profit-maximizing firm in a perfectly competitive market is currently
producing the output where (price - average variable cost) = average fixed cost,
the firm is
A. making a positive economic profit.
B. making a zero economic profit.
C. suffering an economic loss.
D. None of the above
28. A perfectly competitive firm’s short-run supply curve is
A. its marginal cost curve above the shutdown point.
B. its average total cost curve above the minimum of the average variable
cost.
C. its average variable cost curve above the breakeven point.
D. horizontal at the market price.
E. its marginal cost curve above the breakeven point.
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29. The owner of Tie-Dyed T-shirts, a perfectly competitive firm, has hired you to
give him some economic advice. He has told you that the market price for his
shirts is $20 and that he is currently producing 200 shirts. Its short run average
variable cost is $15 and its short run average total cost is $25. What would you
recommend to him?
A. To continue producing in the short run, as his loss from production is
less than his fixed costs, but to exit the industry in the long run if
there are no changes in economic conditions.
B. To shut down in the short run, as he is incurring a loss and to leave the
industry in the long run, if there are no changes in economic conditions.
C. To continue to produce in the short run, even though he is earning a loss,
and to expand in the future with the hope of increasing market share and
total revenue.
D. You tell him you cannot make any recommendations until you know what
his fixed costs are.
30. If a typical firm in a perfectly competitive industry is incurring losses, then
A. all firms will continue to lose money.
B. some firms will exit in the long run causing market supply to decrease
and market price to rise increasing profits for the remaining firms.
C. some firms will exit in the long run causing market supply to decrease and
market price to fall increasing losses for the remaining firms.
D. some firms will enter in the long run causing market supply to increase and
market price to rise increasing profit for all firms.
SECTION B: SHORT-ANSWER QUESTIONS (10 MARKS)
WRITE YOUR ANSWER IN THE SPACE PROVIDED
Question 1
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1a.
You attend a rock concert and notice that there are hundreds of empty seats.
What can you conclude about the market price of the concert? (1 mark)
Answer: Since the quantity of tickets supplied is greater than the quantity of
tickets demanded, there is a surplus of tickets. This means that the current
price must be greater than the market equilibrium price.
1b. You are an economist working for the telephone company. You discover that
demand for phone calls during business hours is inelastic, and demand for
phone calls during evening hours is elastic. How could your company use this
information to increase its total revenue? (2 marks)
Answer: In order to increase total revenue, the telephone company should
increase the cost of phone calls during business hours, and decrease the cost
of phone calls during evening hours.
1c.
Comment on the following statement: “The shape of the long-run average cost
curve is determined by diminishing returns.” (2 marks)
Answer: The statement is false. Diminishing returns occurs in the short run, as
the firm adds units of a variable input to a fixed input. In the long run, there are
no fixed inputs. Thus, the shape of the long-run average cost curve depends on
how costs are affected by changes in the firm’s scale of production.
Question 2
Kyle, Stan and Eric have created a new app that enables someone to point a
smartphone at a person’s face while he or she is talking and tell you the probability
that he or she is lying. They originally spent $80,000 to develop and patent the app.
They could sell the patent to a large firm for $1,000,000 and get out of the business,
but it would take them a year to arrange the sale. Currently, they are selling the app
themselves, charging the profit-maximizing price of $10 per download and selling
1,000 downloads per year. The only actual payment they make to run the business is
a flat $200 per month ($2,400 per year) to an Internet service provider. The interest
rate in the economy – which they could earn on alternative investments – is 5% per
year.
2a. What is the annual accounting profit of their business? (1 mark)
Answer: Total revenue is $10 x 1,000 = $10,000 per year. Total explicit cost is
$2,400 per year. So accounting profit = Total revenue – explicit costs = $10,000
- $2,400 = $7,600.
2b. What is the annual economic profit of their business? (1.5 marks)
Answer: The $80,000 spent to develop the app is a sunk cost, and not an
ongoing cost to the business. However, the $1,000,000 they could get if they
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sold the patent creates an ongoing cost to the business: This money could be
invested at 5% per year, giving them $50,000 in interest. Thus, by continuing to
run the business, they forego interest of $50,000 per year – an implicit cost.
Adding this implicit cost to the explicit cost of the server, total cost = $52,400.
Economic profit = Total Revenue – Total Cost = $10,000 - $52,400 = -$42,400,
or a loss of $42,400 per year.
2c.
Based on the information given in the problem, what is the marginal cost of
selling another download? (1 mark)
Answer: The marginal cost of selling another download is zero, because they
pay a flat fee for their server regardless of how many downloads they sell, and
there are no variable costs for selling an app (at least, none that are mentioned
in the problem).
2d. Based on the answers above, should Kyle, Stan and Eric continue to run the
business in the short run (the next few months)? (1.5 marks)
Answer: In the short run, they should keep operating. The problem tells us that
it would take more than a few months to sell the patent, so they cannot escape
the fixed cost of the foregone interest during this time. And in this problem,
there are no variable inputs, so TVC = 0. Therefore, TR > TVC at their current
(profit maximizing or loss minimizing) output level, and the firm should stay
open.
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