SET 1

END-OF-SEMESTER EXAMINATION
SEMESTER I, 2008/2009 SESSION
KULLIYYAH OF ECONOMICS AND MANAGEMENT SCIENCES
Programme

B.ENGINEERING

Level of Study : 2 - 4

Time
Duration

:
:

9.00 a.m. 11.30 a.m.

2 Hr(s) 30 Min(s)

Date

: 11/11/2008

Course Code :

ECON 1550

Section(s)

: 1-9

Course Title

Introductory Economics for Engineering

(This Question Paper Consists of 15 Printed Pages With 2 Sections)

INSTRUCTION (S) TO CANDIDATES

DO NOT OPEN UNTIL YOU ARE ASKED TO DO SO
1. Section A: Answer ALL questions.
2. Section B: Answer ONE (1) question only.
3. Section C: Answer TWO (2) questions.

Any form of cheating or attempt to cheat is a serious

offence which may lead to dismissal

APPROVED BY

SECTION A: ANSWER ALL QUESTIONS. Each question carries ONE (1) mark.
1.

The economic perspective refers to:

A) macroeconomic phenomena, but not microeconomic phenomena.
B) microeconomic phenomena, but not macroeconomic phenomena.
C) the making of purposeful decisions in a context of marginal costs and marginal
benefits.
D) unlimited resources in a context of limited economic wants.

2.

Ramli sold gold coins for $1000 that he bought a year ago for $1000. He says, "At least
I didn't lose any money on my financial investment." His economist friend points out
that in effect he did lose money, because he could have received a 3 percent return on
the $1000 if he had bought a bank certificate of deposit instead of the coins. The
economist's analysis in this case incorporates the idea of:
A) opportunity costs
B) marginal benefits that exceed marginal costs.
C) imperfect information.
D) normative economics.

3.

Refer to the Table below. Which of the following schedules correctly reflects "supply"?
(a)

4.

(b)

P
$12
10
8
6
4
2

Qs
50
30
10
0
0
0

A)
B)
C)
D)

(a)
(b)
(c)
(d)

P
$14
12
10
8
6
4

(c)
Qs
50
40
30
20
10
0

P
$12
10
8
6
4
2

Qs
50
40
30
20
10
0

(d)
P
$12
10
8
6
4
2

Qs
0
0
10
20
30
40

Suppose that Zulia, which has full employment, can obtain 1 unit of capital goods by
sacrificing 2 units of consumer goods domestically, but can obtain 1 unit of capital
goods from another country by trading 1 unit of consumer goods for it. This reality
illustrates:
A) a rightward (outward) shift of the production possibilities curve.
B) increasing opportunity costs.
C) achieving points beyond the production possibilities curve through international
specialization and trade.
D) productive efficiency.

5.

Which statement best describes an Islamic economy?

A) The role of individual self-interest is relatively unimportant because government
makes most of the economic decisions.
B)
Production and the allocation of goods and services are through market
mechanism with a positive role of the state.
C)
Government policies determine the production, but not the allocation, of goods
and services.
D) Government policies determine the production and the allocation of goods and
services.

Use the following to answer question 6:

6.

Refer to the above diagram. Flow (2) represents:

A) wage, rent, interest, and profit income.
B) land, labor, capital, and entrepreneurial ability.
C) goods and services.
D) consumer expenditures.

7.

When the price of a product falls, the purchasing power of our money income rises and
thus permits consumers to purchase more of the product. This statement describes:
A) an inferior good.
B) the rationing function of prices.
C) the substitution effect.
D) the income effect.

Use the following to answer question 8:

S
C
Price

A
D
0

E
Quantity

8.

Refer to the above diagram. A government-set price floor is best illustrated by:
A) price A.
B) quantity E.
C) price C.
D) price B.

9.

Suppose the price of local cable TV service increased from $16.20 to $19.80 and as a
result the number of cable subscribers decreased from 224,000 to 176,000. Along this
portion of the demand curve, price elasticity of demand is:
A) 0.8.
B) 1.2.
C) 1.6.
D) 8.0

10.

In which of the following instances will total revenue decline?

A) price rises and supply is elastic.
B) price rises and demand is inelastic.
C) price falls and demand is elastic.
D) price rises and demand is elastic.

Use the following to answer question 11:

Price per ticket
$13
11
9
7
5
3

Quantity demanded
1,000
2,000
3,000
4,000
5,000
6,000

11.

Refer to the above information and assume the stadium capacity is 5000. If the
stadiums management wanted a full house for the game, it would:
A) set price so as to maximize its total revenue.
B) encourage scalpers to sell their tickets for more than $7.
C) set ticket prices at $5.
D) set ticket prices at $9.

12.

The basic difference between the short run and the long run is that:
A) all costs are fixed in the short run, but all costs are variable in the long run.
B) the law of diminishing returns applies in the long run, but not in the short run.
C) at least one resource is fixed in the short run, while all resources are variable in the
long run.
D) economies of scale may be present in the short run, but not in the long run.

13.

If a variable input is added to some fixed input, beyond some point the resulting extra
output will decline. This statement describes:
A) economies and diseconomies of scale.
B) X-inefficiency.
C) the law of diminishing returns.
D) the law of diminishing marginal utility.

Use the following to answer question 14:

14.

Refer to the above diagram. The vertical distance between ATC and AVC reflects:
A) the law of diminishing returns.
B) the average fixed cost at each level of output.
C) marginal cost at each level of output.
D) the presence of economies of scale.

15.

Which of the following is not a source of economies of scale?

A) learning-by-doing.
B) use of larger machines.
C) labor specialization.
D) inelastic resource supply curves.

16.

Economists use the term imperfect competition to describe:

A) all industries which produce standardized products.
B) any industry in which there is no nonprice competition.
C) a pure monopoly only.
D) those markets which are not purely competitive.

17.

In the short run a purely competitive firm that seeks to maximize profit will produce:
A) where the demand and the ATC curves intersect.
B) where total revenue exceeds total cost by the maximum amount.
C) that output where economic profits are zero.
D) at any point where the total revenue and total cost curves intersect.

Use the following to answer question 18:

Answer the next question on the basis of the following cost data for a purely competitive seller:
Total
product
0
1
2
3
4
5
6

18.

Total
fixed
cost
$50
50
50
50
50
50
50

Total
variable
cost
$ 0
70
120
150
220
300
390

Total
cost
$ 50
120
170
200
270
350
440

Refer to the above data. Given the $75 product price, at its optimal output the firm will:
A) realize a $25 economic profit.
B) realize a $30 economic profit.
C) incur a $25 loss.
D) realize a $30 loss.

Use the following to answer question 19:

19.

Refer to the above diagrams, which pertain to a purely competitive firm producing
output q and the industry in which it operates. In the long run we should expect:
A) firms to enter the industry, market supply to rise, and product price to fall.
B) firms to leave the industry, market supply to rise, and product price to fall.
C) firms to leave the industry, market supply to fall, and product price to rise.
D) no change in the number of firms in this industry.

20.

In long-run equilibrium, purely competitive markets:

A) minimize total cost.
B) allocatively and productively efficient.
C) yield economic profits to most sellers.
D) inevitably degenerate into monopoly in increasing cost industries.

21.

Large minimum efficient scale of plant combined with limited market demand may lead
to:
A) natural monopoly.
B) patent monopoly
C) government franchise monopoly.
D) shared monopoly.

22.

For a pure monopolist marginal revenue is less than price because:

A) the monopolist's demand curve is perfectly elastic.
B) the monopolist's demand curve is perfectly inelastic.
C) when a monopolist lowers price to sell more output, the lower price applies to all
units sold.
D) the monopolist's total revenue curve is linear and slopes upward to the right.

23.

If a monopolist's marginal revenue is $3.00 and its marginal cost is $4.50, it will
increase its profits by:
A) reducing output and raising price.
B) reducing both output and price.
C) increasing both price and output.
D) raising price while keeping output unchanged.

Use the following to answer question 24:

Answer the next question(s) on the basis of the following information for a pure monopolist:
Output
0
1
2
3
4
5

24.

Total
cost
$250
260
290
350
480
700

Product
price
$500
300
250
200
150
100

The above monopolist should set its price at:

A) $300.
B) $250.
C) $200.
D) $15.

Use the following to answer question 25:

25.

Refer to the above diagram for a pure monopolist. If a regulatory commission seeks to
achieve the most efficient allocation of resources to this line of production, it will set a
price of:
A) P1.
B) P3.
C) P2.
D) P4.

26.

GDP is:
A) the monetary value of all goods and services (final, intermediate, and non-market)
produced in a given year.
B) total resource income less taxes, saving, and spending on exports.
C) the economic value of all economic resources used in the production of a year's
output.
D) the market value of all final goods and services produced within a nation in a
specific year.

27.

If real GDP in a particular year is $80 billion and nominal GDP is $240 billion, the GDP
price index for that year is:
A) 100.
B) 200.
C) 240.
D) 300.

28.

In comparing GDP data over a period of years, a difference between nominal and real
GDP may arise because:
A) of changes in trade deficits and surpluses.
B) the length of the workweek has declined historically.
C) the price level may change over time.
D) depreciation may be greater or smaller than gross investment.

29.

Assume that the size of the underground economy increases both absolutely and
relatively over time. As a result:
A) real GDP will rise more rapidly than nominal GDP.
B) GDP will tend to increasingly understate the level of output through time.
C) GDP will tend to increasingly overstate the level of output through time.
D) the accuracy of GDP will be unaffected through time.

Use the following to answer question 30:

Year
1
2
3
4
5

Nominal
GDP
$ 550
560
576
586
604

Price
index
140
135
120
117
108

30.

The economy above has experienced a:

A) a declining nominal GDP.
B) a rising price level.
C) a declining real GDP.
D) deflation.

31.

Which of the following best measures improvements in the standard of living of a

nation?
A) growth of nominal GDP
B) growth of real GDP
C) growth of real GDP per capita
D) growth of national income

32.

The industries or sectors of the economy in which output is likely to be most strongly
affected by the business cycle are:
A) military goods and capital goods.
B) services and nondurable consumer goods.
C) clothing and education.
D) capital goods and durable consumer goods.

33.

Prof. Dr. H. Simon, an economics professor, decided to take a year off from teaching to
run a commercial fishing boat in Alaska. That year, Professor Simon would be
officially counted as:
A) structurally unemployed.
B) frictionally unemployed.
C) not in the labor force.
D) employed.

10

34.

Cost-push inflation may be caused by:

A) a decline in per unit production costs.
B) a decrease in wage rates.
C) a negative supply shock.
D) an increase in resource availability.

35.

Inflation is undesirable because it:

A) arbitrarily redistributes real income and wealth.
B) invariably leads to hyperinflation.
C) usually is accompanied by declining real GDP.
D) reduces everyone's standard of living.

36.

The most important determinant of consumer spending is:

A) the level of household debt.
B) consumer expectations.
C) the stock of wealth.
D) the level of income.

37.

If Ahmad's MPC is .80, this means that he will:

A) spend eight-tenths of any increase in his disposable income.
B) spend eight-tenths of any level of disposable income.
C) break even when his disposable income is $8,000.
D) save two-tenths of any level of disposable income.

Use the following to answer question 38:

38.

Refer to the above diagram. The break-even level of disposable income:

A) is zero.
B) is minus $10.
C) is $100.
D) cannot be determined from the information given.

11

39.

Other things equal, the real interest rate and the level of investment are:
A) related only when saving equals planned investment.
B) unrelated.
C) inversely related.
D) directly related.

40.

The practical significance of the multiplier is that it:

A) equates the real interest rate and the expected rate of return on investment.
B) magnifies initial changes in spending into larger changes in GDP.
C) keeps inflation within tolerable limits.
D) helps to stabilize the economy.

12

SECTION B: ANSWER ONE QUESTION ONLY.

Question 1
Refer to the table below to answer questions 1 (a) - 1(e)
Product
Price
(RM)

Quantity
Demanded
(Total
Product)

Total
Revenue
(RM)

Marginal
Revenue
(RM)

Total
Fixed
Cost
(RM)

Total
Variable
cost (RM)

Total
Cost
(RM)

Profit(+)
or
Loss (-)

150
150

120
120

(iv)

(v)

150

150

60

180

(vi)

150

i)

150

120

200

320

(vii)

150

450

150

120

300

420

(viii)

150

600

iii)

120

420

540

(ix)

150

750

120

595

715

(x)

ii)

(a)

Fill in the missing numbers in columns (1 mark each)

i) _________
ii) _________
iii) _________
iv) _________
v) _________
vi) _________
vii) _________
viii)_________
ix) _________
x) _________

(b)

What can you conclude about the structure of the industry (structure of market
model) in which this firm is operating? Explain.
(2 marks)

(c)

Why do the demand and marginal-revenue curves coincide?

(d)

Marginal revenue is the change in total revenue associated with additional units
of output. Do you agree? Explain your answer using the data in the table above.
(2 marks)
What is the output of the profit maximizing level of the firm? Explain. (4marks)
TOTAL = 20 MARKS

(e)

(10 marks)

(2 marks)

13

Question 2
The demand schedule for the product produced by a monopolist is given in the table
below. Complete the table by computing total revenue and marginal revenue.
Quantity
Total
Marginal
demanded
Price revenue
revenue
1
$325 $______
2
300
______
$______
3
275
______
______
4
250
______
______
5
225
______
______
6
200
______
______
7
175
______
______
8
150
______
______
9
125
______
______
10
100
______
______
11
75
______
______
12
50
______
______
13
25
______
______
14
0
______
______
(a)

What do the data in the table indicate about the relationship between total
revenue and marginal revenue? Explain.
(10 marks)

(b)

What do the data in the table indicate about the elasticity of demand? (10 marks)
TOTAL = 20 MARKS

SECTION C: ANSWER TWO QUESTIONS.

Question 3
Answer the following:
(a)

Define GDP and its characteristics.

(b)

Explain the difference between final and intermediate goods, giving an example
of each.
(5 marks)

(c)

Which of the following are included and which are excluded in calculating GDP?
Explain each instance.
(i)
(ii)
(iii)
(iv)
(v)

(5 marks)

A monthly scholarship check received by an economics student. (2 marks)

The purchase of a new truck by a trucking company.
(2 marks)
Government purchase of missiles from a private business.
(2 marks)
The purchase of a used tractor by a farmer.
(2 marks)
The value of the purchase of shares of Microsoft by an individual
(2 marks)
TOTAL = 20 MARKS

14

Question 4
The table below shows the price index in the economy at the end of four different years.
(a)

What is the rate of inflation in years 2, 3, and 4?

(b)

Using the rule of 70, how many years would it take for the prices to double at
each of these three inflation rates?
(6 marks)

(c)

(6 marks)

Year

Price index

Rate of
inflation

Years to double

1
2

100
108

_____

_____

120

_____

_____

132

_____

_____

Unexpected inflation is more beneficial to those who save than those who
borrow. Evaluate this statement. How does your answer change if the inflation
is expected?
(8 marks)
TOTAL = 20 MARKS

Question 5
Answer the following:
(a)

How do the APC and the MPC differ? Explain relationship between MPC and
multiplier?
(3 marks)

(b)

Asses the determinants of the consumption and saving?

(c)

Using diagram, discuss factors that determined investment? Explain relationship

between the real interest rate and the level of investment.
(5+5 Marks)
TOTAL = 20 MARKS

(7 Marks)

15