NATIONAL UNIVERSITY OF SINGAPORE
EC1301 PRINCIPLES OF ECONOMICS
SEMESTER II: AY2014-2015
Mid-Term Examination
4th March 2015
Time Allowed: 1 Hour
__________________________________________________________________
INSTRUCTIONS TO CANDIDATES
1.
This examination paper comprises TWELVE (12) printed pages, including this
page.
2.
There are FORTY (40) multiple-choice questions.
3.
Answer ALL questions. The total mark for this paper is 30 marks.
4.
This is a CLOSED BOOK examination.
5.
Use the bubble form for your answers. SUBMIT both the bubble form and question
paper at the end of the examination. WRITE your name on the question paper.
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MULTIPLE CHOICE QUESTIONS. Choose the one alternative that best
completes the statement or answers the question.
1. In order to identify the best decision at any given time, microeconomics
compares
A. the rewards associated with each different option at hand.
B. the risks associated with each different option at hand.
C. the costs and benefits associated with that decision.
D. the prices and quantities of the goods involved.
2. The amount of education that one has is an important factor in the determination
of his or her wage rate. This is best described as
A. a positive statement.
B. Marxist ideology.
C. a normative statement.
D. ceteris paribus.
3. Suppose a scientific breakthrough leads to a lower-cost method of producing
battery-operated cars in Malaysia. The likely effect would be to move Malaysia's
current production
A. to a point beyond its new production possibilities frontier.
B. to a point inside its new production possibilities frontier.
C. possibilities frontier outward.
D. possibilities frontier inward.
4. The opportunity cost to a firm of using an asset is zero if
A. the asset is already owned by the firm.
B. the asset has no alternative uses.
C. the asset has zero sunk costs associated with it.
D. the asset was given to the firm for free.
5. You have decided that you want to attend a costume party as Ironman. You
estimate that it will cost $40 to assemble your costume. After spending $40 on
the costume, you realize that the additional pieces you need will cost you $25
more. The marginal cost of completing the costume is
A. $15.
B. $25.
C. $40.
D. $65.
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6. If your tuition fee is $25,000 this semester, your books cost $1,500, you can only
work 20 rather than 40 hours per week during the 15 weeks you are taking
classes and you make $15 per hour, and your room and board is $7,500 this
semester, then your opportunity cost of attending college this semester is
A. $26,500.
B. $26,800.
C. $31,000.
D. $38,500.
7. If you eat at a sushi restaurant that charges $20 for its All-You-Can-Eat sushi
special, then the marginal cost of your 10th piece of sushi is
A. $0.
B. $2.
C. $200.
D. $2,000.
8. TABLE 1 below represents the output of Poems and TV Commercials per day by
two authors: Connie or Mark
Connie
Mark
Writing Poems
8
12
Writing TV Commercials
2
4
TABLE 1
To maximize total production,
A. Connie should specialize in writing TV commercials and Mark should
specialize in writing poems.
B. Mark should specialize in writing TV commercials and Connie should
specialize in writing poems.
C. Connie and Mark should both split their time between writing poems and
writing TV commercials.
D. Connie should write poems and write TV commercials, but Mark should only
write poems.
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9. TABLE 2 below represents the output of Poems and TV Commercials per day by
two authors: Connie or Mark
Connie
Mark
Writing Poems
8
12
Writing TV Commercials
2
4
TABLE 2
For Connie, the opportunity cost of writing four TV commercials is ________
poems.
A. 2
B. 8
C. 16
D. 32
10. Which of the following is a correct statement about a change in equilibrium?
A. A decrease in supply would result in a higher equilibrium price and a lower
equilibrium quantity.
B. An increase in demand would result in a higher equilibrium price and a larger
equilibrium quantity.
C. An increase in supply would result in lower equilibrium price and a larger
equilibrium quantity.
D. All of the above.
11. The price of mozzarella cheese, which is used in making pizza, increases. In the
market for pizza you would expect that
A. the demand for pizza would increase and the price of pizza would increase.
B. the demand for pizza would decrease and the price of pizza would fall.
C. the supply of pizza would decrease and the price of pizza would increase.
D. the supply of pizza would increase and the price of pizza would decrease.
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12. Papayas and grapefruit are substitute goods. A drought in California destroyed a
good portion of the grapefruit crop. Ceteris paribus,
A. the price of both papayas and grapefruit will increase.
B. the price of both papayas and grapefruit will fall.
C. the price of grapefruit will increase and the price of papayas will fall.
D. the price of grapefruit will fall and the price of papayas will increase.
13. Refer to the scenario below to answer the question that follows.
Lettuce and spinach are substitutes. Lettuce and tomatoes are complements.
Lettuce is a normal good. During the winter, about 20% of the lettuce crop was
destroyed by flooding. If at the same time that part of the lettuce crop was
destroyed, consumer income also decreased, then, ceteris paribus, in the market
for lettuce this would have caused
A. both the equilibrium price and quantity to decrease.
B. the equilibrium price to increase and the equilibrium quantity to decrease.
C. the equilibrium price to decrease. The equilibrium quantity could have
increased, decreased, or remained the same.
D. the equilibrium price to either increase, decrease, or remain the same and the
equilibrium quantity to decrease.
14. "The price of compact fluorescent light bulbs fell because of improvements in
production technology. As a result, the demand for incandescent light bulbs
decreased. This caused the price of incandescent light bulbs to fall; as the price
of incandescent light bulbs fell the demand for incandescent light bulbs
decreased even further." Evaluate this statement.
A. The statement is false. A decrease in the price of compact fluorescent light
bulbs would decrease the demand for incandescent light bulbs, but a decrease
in the price of incandescent light bulbs would not cause the demand for
incandescent light bulbs to decrease.
B. The statement is false because the demand for incandescent light bulbs would
increase as the price of compact fluorescent light bulbs fell.
C. The statement is false because compact fluorescent light bulbs producers
would not reduce their prices as a result of improvements in technology; doing
so would reduce their profits.
D. The statement is false because it confuses the law of demand with the law of
supply.
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15. Assume there is a shortage in the market for digital music players. Which of the
following statements correctly describes this situation?
A. The price of digital music players will rise in response to the shortage; as the
price rises the quantity demanded will increase and the quantity supplied will
decrease.
B. Some consumers will be unable to obtain digital music players at the market
price and will have an incentive to offer to buy the product at a higher price.
C. The shortage will cause an increase in the equilibrium price of digital music
players.
D. The demand for digital music players is greater than the supply of digital music
players.
16. The ABC Computer Company spends a lot of money for advertising designed to
convince you that their personal computers are superior to all other personal
computers. If the ABC Company is successful, the demand for ABC personal
computers
A. and the demand for other firms' personal computers will become less price
elastic.
B. and the demand for other firms' personal computers will become more price
elastic.
C. will become more price elastic but the demand for other firms' personal
computers will become less price elastic.
D. will become less price elastic but the demand for other firms' personal
computers will become more price elastic.
17. If the demand for a product is perfectly inelastic, then which of the following is
most likely to be TRUE?
A. The product is extremely important, or necessary, to those who buy it.
B. The product has many substitutes.
C. The demand curve for the good is horizontal.
D. The price elasticity of demand for that product is equal to one.
18. In order to discourage consumers from eating unhealthy fast food, the
government is considering placing a tax on all fast food sales. Which of the
following statements is TRUE?
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A. Given the numerous alternatives for food in general, consumers' demand for
fast food is relatively elastic and the tax will likely work to discourage fast food
consumption.
B. The tax on fast food will likely raise considerable revenue, but will be unlikely
to reduce the consumption of fast food by consumers.
C. The tax on fast food will likely increase the demand for homecooked meals.
D. Both A and C are true.
19. A taco shop observes that when it increases the price of a taco, total revenue
from taco sales increases, and when it lowers the price of a taco, total revenue
from taco sales decreases. This suggests
A. the demand for tacos is inelastic.
B. the demand for tacos elastic.
C. there are many good substitutes for tacos.
D. the law of demand is being violated.
20. If the income elasticity of demand for good X is positive but less than 1, then
other things being equal, which of the following statements is incorrect?
A. Good X is a normal good.
B. The quantity demanded of good X decreases as a consumer's income
declines.
C. A consumer buys more X as income rises, but the share of income spent on
good X falls.
D. A consumer buys more X as income rises and the share of income spent on
good X also rises.
21. The reason the marginal product of labor in the short run increases at first and
then falls is because
A. as more capital is used, they break down.
B. there are fewer opportunities for division of labor and specialization.
C. the management is inefficient.
D. the extra workers have busy work piled on them.
22. Which of the following is an example of something that economists would
consider a cost but accountants would not?
A. The cost of materials and supplies purchased by a firm.
B. The salary that the firm actually pays to the firm's owner.
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C. The interest income foregone by the firm's owner because the owner invested
funds into the firm.
D. The cost of advertising.
23. Marginal cost is ______________ average variable cost when ____________.
A. greater than; average fixed cost is minimized
B. equal to; average total cost is minimized
C. equal to; average variable cost is minimized
D. less than; total cost is minimized
24. Other things equal, if the wage rates paid to a firm’s labor inputs were to rise, we
would expect the
A. AFC, AVC, ATC and MC curves all to rise.
B. AVC, ATC and MC curves all to rise.
C. AFC and ATC curves to fall.
D. MP curve to fall.
25. The effect of diminishing marginal returns outweighing the effect of spreading out
the fixed costs is illustrated by the ________ average cost curve ________.
A. long-run; decreasing
B. long-run; increasing
C. short-run; decreasing
D. short-run; increasing
26. Suppose that your firm’s marginal cost of producing a pen is 5 cents and the
average cost of producing a pen is 7 cents. If your firm is interested in minimizing
average total costs, what should your firm do?
A. Decrease production.
B. Increase production.
C. Maintain production at the current level.
D. Look for ways to increase fixed costs.
27. Every point on the long-run average cost curve represents
A. the minimum cost at which the associated output level can be produced when
the scale of plant can be changed.
B. the minimum point of the associated short-run average cost curve.
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C. the minimum cost at which the associated output level can be produced when
the scale of plant cannot be changed.
D. Both A and B.
28. Since a large or a small wind turbine have the same installation, operating and
maintenance costs, but a large turbine has four times the generating capacity but
costs less than three times as much as a small turbine, the wind power industry
faces
A. constant economies of scale.
B. economies of scale.
C. diseconomies of scale.
D. a hump shaped cost curve.
29. At the minimum efficient scale,
A. all possible economies of scale have been exhausted.
B. the short-run average total cost curve’s minimum point is equal to the long run
average cost curve’s minimum point.
C. any increases in the scale of operation will encounter diseconomies of scale.
D. All of the above happen.
30. If there is an improvement in the firm's technology,
A. the firm will move to a lower point on both its long-run and short-run average
cost curves.
B. both the long-run and short-run average cost curves will shift downward.
C. there will be a downward shift in the long-run average cost curve but not in the
short-run average cost curve.
D. there will be no change in the cost curves in the long run.
31. Refer to the information provided in TABLE 4 below to answer the following
question.
Number of
Fruit Baskets
TFC($)
TVC($)
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TC($)
MC($)
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0
1
2
3
4
5
6
50
50
50
50
50
50
50
0
10
15
21
31
46
68
50
60
65
71
81
96
118
-10
5
6
10
15
22
TABLE 4
Assume that fruit baskets are sold in a perfectly competitive market. The market
price of a fruit basket is $22. To maximize profits, Exotic Fruit Company should
sell _______________ fruit basket (s) and their profit is ______________.
A. six; $14
B. three; $5
C. four; $7
D. five; $14
32. Suppose your firm is operating in a perfectly competitive market, and that the
minimum average variable cost of producing your good is $30. If the price of the
good is $32, your firm should
A. not produce anything since the price is above the minimum of average variable
cost.
B. not consider price when determining the amount to sell.
C. supply the amount of the good where the marginal cost of production is equal
to $32.
D. supply the amount of the good where the marginal cost of production is $30.
33. Strawberries are produced in a perfectly competitive market. Average consumer
incomes decrease. This will cause the individual strawberry farmer’s marginal
revenue to _____________and their profit maximizing level of output to
______________.
A. increase; increase
B. increase; decrease
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C. decrease; increase
D. decrease; decrease
34. Sato sells cherry snow-cones along the boardwalk in Tokyo. During the summer
this is a perfectly competitive business, and Sato faces a perfectly elastic curve.
If he wants to try to increase revenues he should
A. lower the price of his snow-cones to try to sell more.
B. keep the price the same but produce more to increase sales.
C. do nothing; there is nothing he can do to increase revenue.
D. raise the price of his snow-cones to make more per sale.
35. Suppose a paper mill in Singapore is temporarily shut down by its owner, even
though the plant and equipment are in excellent shape and the paper is of top
quality. What could explain this?
A. The price the firm is receiving for the paper is less than its average variable
cost.
B. The paper mill must not have been operating at its profit-maximizing level of
output.
C. The price the firm is receiving is less than the average total cost.
D. the owner is minimizing its production costs.
36. Assume the market for beef is perfectly competitive. Beef producers are currently
earning a zero economic profit. If consumers switch from beef to chicken, which
of the following is most likely to occur?
A. Beef producers will now incur economic losses in both the short run and the
long run.
B. Beef producers will now incur economic losses in the short run. Some
producers will exit the industry until those remaining are earning a zero
economic profit.
C. Beef producers will now incur economic losses in the short run. Some
producers will exit the industry until those remaining are earning an economic
profit.
D. Beef producers will now earn economic profits in the short run and there will
be no additional adjustments in the long run.
37. Comparing the short-run and long-run profit-maximizing positions of a perfectly
competitive firm, which statement is TRUE?
A. Price will equal marginal cost in the short run, but not necessarily in the long
run.
B. Economic profit may exist in the short run and in the long run.
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C. Price should equal average cost in the long run, but not necessarily in the
short run.
D. The firm may have unexploited economies of scale in both the short run and
the long run.
38. Consider the following statements when answering this question.
I. Increases in the demand for a good, which is produced by a competitive
industry, will raise the short-run market price.
II. Increases in the demand for a good, which is produced by a competitive
industry, will raise the long-run market price.
A. I and II are true.
B. I is true, and II is false.
C. I is false, and II is true.
D. I and II are false.
39. If a perfectly competitive firm is producing where its MR=MC, but is operating to
the left of the minimum point of its LRAC curve,
A. it can reduce its average costs by building a larger plant.
B. it can still be in long-run equilibrium as long as P = SRATC (Short-run ATC).
C. its profits will decrease if it builds a larger plant.
D. it is in a long-run profit maximizing position.
40. What happens in a perfectly competitive industry when economic profit is greater
than zero?
A. New firms may enter the industry.
B. Firms may move along their LRAC curves to new outputs.
C. There may be pressure on prices to fall.
D. All of the above may occur.
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