MIDLANDS STATE UNIVERSITY
FACULTY OF COMMERCE
DEPARTMENT OF ECONOMICS
MICROECONOMICS 1: EC101
SESSIONAL EXAMINATIONS
NOVEMBER] DECEMBER 2018
DURATION: 3 HOURS
REQUIREMENTS
None
INSTRUCTIONS TO CANDIDATES
Answer all questions in section A and any two (2)
questions from section B
Write legibly.
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SECTION A: ANSWER ALL QUESTIONS (50 MARKS)
1. Which of the following is not a normative economic statement?
A. The government of Zimbabwe ought to reduce agricultural subsidies.
B. The minimum wage for agricultural workers should be increased.
C. A fall in money supply will cause inflation.
D. The ban on food imports should be reversed.
2. Which of the following will cause a rightward shift in the demand curve for chicken?
A. Rise in the price of sausage, a substitute.
B. Decrease in the price of chicken.
C. Decrease in the price of sausage, a substitute.
D. Anticipated decrease in the price of chicken.
3. Ceteris paribus, a fall in the price of commodity X increases the quantity demanded of
good Y. It follows that good Y is:
A. Superior to good X.
B. Inferior to good X.
C. A substitute of good X.
D. A complement of good X.
4. Mr. Growers is a resettled farmer and can either grow potatoes or tomatoes on his
farm. If the price of tomatoes increases, then:
A. The demand for potatoes increases.
B. The supply of potatoes decreases.
C. The supply of potatoes increases.
D. The demand for potatoes decreases.
5. Which of the following will lead to excess demand in a market?
A. Price is set at the equilibrium level.
B. Price is set below the equilibrium level.
C. Price is set above the equilibrium level.
D. Quantity demanded equals quantity supplied.
6. Which of the following is not correct about a consumer maximising utility?
A. The budget line is tangential to the lowest indifference curve possible.
B. The budget line is tangential to the highest indifference curve possible.
C. The marginal utility per dollar spent on the two goods is the same.
D. Marginal rate of substitution equals the ratio of commodity prices.
7. A leftward shift of the supply curve can be due to:
A. Technological improvement.
B. The removal of a tax on production.
C. The removal of a subsidy on production.
D. The entry of new firms in an industry.
8. When total revenue remains constant as price increases, the own price elasticity of
demand is:
A. Perfectly elastic.
B. Perfectly inelastic.
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C. Unity.
D. Zero.
9. A consumer gets utility from consuming two goods, wine and milk, and is in
equilibrium. From the last unit consumed of each good, the consumer derives a
marginal utility of 6 and 5 utils, respectively. If the price of wine is $0.6 per glass, the
price of milk is:
A. $0.50
B. $3
C. $1
D. $0.20
The following diagram illustrates the effect of a tax levied on the production of some cartons
of cigarettes by a company in Zimbabwe. Use the diagram to answer the next three questions:
Price
$5
$4
$3
0
1000
Quantity
1300
10. The burden of the excise tax on wine:
A. Is shared equally between consumers and producers.
B. Falls mainly on producers than on producers.
C. Falls entirely on consumers.
D. Falls mainly on consumers than producers.
11. The excise tax generates government revenue of:
A. $3000
B. $5000
C. $2000
D. $5200
12. The deadweight loss of the excise tax is:
A. $600
B. $150
C. $200
D. $300
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13. Following an increase in income by $200, a consumer's demand for aproduct rose by
10 per cent. If the consumer's income elasticity of demand is 1, it follows that his new
income is:
A. $2000
B. $2200
C. $1800
D. $220
14. Which of the following would increase the likelihood of collusion among oligopoly
firms?
A. a large number of firms.
B. strong entry barriers.
C. weak entry barriers.
D. government legislation against mergers.
15. Which of the following is not correct about the perfectly competitive firm?
A. The firm can sell everything that it produces at the prevailing market price.
B. A firm that charges a price higher than the prevailing price will lose all customers.
C. The individual firm faces a perfectly elastic demand curve for its product.
D. The individual firm faces a perfectly inelastic demand curve for its product.
16. The difference between accounting and economic cost is that:
A. Economic cost is usually lower than accounting cost.
B. Economic cost is usually higher than accounting cost.
C. Economic cost excludes the opportunity cost of resources owned by the firm.
D. Accounting cost includes the opportunity cost of resources owned by the firm.
The next diagram shows the short run equilibrium of a firm under imperfect competition.
Use the diagram to answer the next two questions.
Price
ATC
$10
$8
$7
Quantity
MR
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17. The equilibrium price is
A. $10 and 50 units
B. $8 and 80 units
C. $7 and 50 units
D. $7 and 80 units
while the equilibrium quantity is
18. Given the above situation, the firm is making
operations:
A. Zero economic profits, continue
B. Subnormal profits, cease
C. Normal profits, stop
D. Excess profits, continue
and should
19. Long run average costs of production can decrease due to:
A. Use of advanced technology in production.
B. Lower costs of borrowing.
C. Bulk buying of raw materials.
D. All of the above.
20. The perfectly competitive firm is producing an output where price is greater than
marginal cost. To maximise profit, the firm should:
A. Reduce output.
B. Maintain the current production level.
C. Increase production.
D. None of the above.
Use the following information to answer the next two questions. Consider a firm producing a
commodity such that:
Output
0
3
5
Fixed
Cost
36
Variable
Cost
0
27
35
21. The Average Fixed Cost of producing three (3) units is:
A. $9
B. $12
C. $63
D. $27
22. The Marginal Cost of producing five (5) units is:
A. $8
B. $35
C. $63
D. $4
23. In the second stage of production:
A. Marginal product curve has a positive slope.
B. Average product curve has a positive slope.
C. Average product curve is at its maximum.
D. Total product curve has a negative slope.
24. Decreasing returns to scale are most useful in explaining:
A. The falling part of the Average Total cost curve.
B. The rising part of the Long Run Average Cost curve.
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C. The lowest part of the Average Variable Cost curve.
D. The convex shape of isoquants.
25. A firm is producing such that the marginal product per dollar spent on labour is less
than the marginal product per dollar spent on capital. In order to minimize cost, the
firm should:
A. Increase the use of capital.
B. Increase the use of labour.
C. Increase the wage rate.
D. Reduce the use of capital.
SECTION B: ANSWER ANY TWO QUESTIONS (50 MARKS)
Question 26
With the aid of diagrams, describe the following issues in microeconomics:
a) Deadweight loss arising from the setting of a price ceiling on cooking oil.
[6 marks]
b) Unemployment due to the setting of a minimum wage policy by Government.
[6 marks]
c) The granting of a subsidy to famers growing wheat on equilibrium in the market for
wheat.
[6 marks]
d) The effect of outmigration of skilled labour on your country's Production Possibilities
Frontier (PPF).
[7 marks]
Question 27
a) Define price elasticity of demand and discuss any two (2) of its determinants.
[10 marks]
b) Giving two examples of each, describe how internal Economies of Scale (EOS) and
Diseconomies of Scale (DEOS) influence the shape of the long run average cost
curve. (Answer with the aid of a relevant diagram).
[15 marks]
Question 28
Critically examine the suitability of a laissez faire economy in allocating scarce resources in a
nation.
[25 marks]
Question 29
a) Identify an industry falling under a monopoly market structure in your country and
describe the source of such monopoly power.
[10 marks]
b) Discuss any three (3) possible measures that Government may take to guard against
the abuse of monopoly power by the firm identified in part (a) above.
[15 marks]
END
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