END-OF-SEMESTER EXAMINATION

SEMESTER 2, 2016/2017 SESSION

KULLIYYAH OF ECONOMICS AND MANAGEMENT SCIENCES

Programme : ENM/B.ECONS/BBA/BACC Level of Study : 1

Time : 9.00 a.m. – 12.00 noon Date : 23/05/2017

Duration : 3 Hr.(s) – 0 Min(s)

Course Code : ECON 1510 Section(s) : 1-8

Course Title : Principles of Microeconomics

(This Question Paper Consists of 17 Printed Pages)

INSTRUCTION (S) TO CANDIDATES

DO NOT OPEN UNTIL YOU ARE ASKED TO DO SO
Part A - Answer ALL Questions.

Part B - Answer Any TWO (2) Questions.

ANY FORM OF CHEATING OR ATTEMPT TO CHEAT IS A SERIOUS

OFFENCE WHICH MAY LEAD TO DISMISSAL
APPROVED BY:
PART A: ANSWER ALL QUESTIONS (40 MARKS)

1. Which of the following statements is not correct?

A. An increase in a nation's labor supply will cause its potential output to increase
B. Economic growth can be illustrated by an expansion of a nation's production possibilities
curve
C. An increase in the quantity of a nation's resources will cause economic growth, but an
increase in the quality of resources will not
D. New technologies or new ways of producing output can cause a nation's production
possibilities curve to shift outwards

2. When a nation is under-allocating resources to the production of a good, then the:

A. Marginal benefit is greater than the marginal cost of the good

B. Marginal benefit is less than the marginal cost of the good
C. Marginal cost of producing the good is decreasing
D. Marginal benefit of producing the good is increasing

3. The market system communicates changes in market conditions and elicits appropriate
responses from businesses and resource suppliers through changes in prices. This is
known as the:

A. Guiding function of prices

B. Monetary function of prices
C. Circular flow of income
D. Market determination of prices

4. When central planners in a command economy end up having a huge surplus of shoes
and widespread shortages of bread in their economy, they have failed to attain:

A. Productive efficiency
B. Allocative efficiency
C. Minimum opportunity costs
D. Maximum process and revenues

5. Which of the following is not a determinant of demand for laptop computers?

A. Income of buyers of laptop computers

B. The cost of inputs for producing laptop computers
C. The prices of related goods such as software and iPads
D. Expectations about the future price of laptop computers

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6. In competitive markets, a surplus or shortage will:

A. Never exist because the markets are always at equilibrium

B. Cause changes in the quantities demanded and supplied that tend to eliminate the surplus or
shortage
C. Cause shifts in the demand and supply curves that tend to eliminate the surplus or shortage
D. Cause changes in the quantities demanded and supplied that tend to intensify the surplus or
shortage

7. Refer to the graph below, which shows the market for beef where demand shifted from
D 1 and D 2 .

The change in equilibrium from E 1 to E 2 cannot be a result of:

A. Buyers expectations of lower prices for beef in the very near future
B. An increase in the subsidy given to cattle farms
C. A widespread concern about mad-cow disease
D. A decrease in the productivity of cattle farms

8. An increase in demand for oil along with a simultaneous increase in supply of oil will:

A. Decrease price and increase quantity

B. Increase price and decrease quantity
C. Increase quantity, but whether it increases price depends on how much each curve
shifts
D. Increase price, but whether it increases quantity depends on how much each curve
shifts

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9. A government-set price floor on a product:

A. Does not interfere with the rationing function of price in a market system
B. Will drive resources away from the production of the product
C. Will attract more resources towards the production of the product
D. Is intended to benefit the buyers of the product

10. What are the two characteristics that differentiate private goods from public goods?

A. Rivalry and excludability

B. Negative externality and positive externality
C. Marginal cost and marginal benefit
D. Ownership and usage

11. Refer to the table below.

A technological advance lowers production costs such that the quantity supplied
increases by 60 units of this product at each price. As a result of this technological
change, equilibrium output in this market:

A. Decreased by 60 units
B. Increased by 60 units
C. Increased by 30 units
D. Decreased by 30 units

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12. Consider the supply and demand curves depicted in the diagram above. If the government
imposed a price ceiling of $15, then sellers will be willing to sell ___, and a black market
could develop where the price would be:

A. 24 units; below $15

B. 36 units; above $15
C. 24 units; above $15
D. 36 units; below $15

13. When the production of a good generates external costs, the firm's supply curve will be:

A. Below the true-cost supply curve

B. Above the true-cost supply curve
C. Vertical
D. Horizontal

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14. Refer to the above graph. If the output level is Q 1 , then there are efficiency losses
indicated by the area:

A. 0abe
B. bce
C. 0eQ 1
D. ecf

15. Answer the question based on the following information. Normal University has found it
necessary to institute a crime-control program on its campus to deal with the high costs of
theft and vandalism. The university is now considering several alternative levels of crime
control. This table shows the expected annual costs and benefits of these alternatives.

Refer to the above information. Based on cost-benefit analysis, Normal University should
undertake Level:

A. Two
B. Three
C. Four
D. Five

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16. Blossom, Inc. sells 500 bottles of perfume a month when the price is $7. A huge increase
in resource costs forces Blossom to raise price to $9, and the firm only manages to sell
460 bottles of perfume. The price elasticity of demand is:

A. 0.33 and elastic

B. 3.0 and elastic
C. 0.33 and inelastic
D. 3.0 and inelastic

17. When the price of movie tickets in a certain town was reduced, the movie-theaters'
revenues did not change. This suggests that the demand for movie tickets in that town has
a price-elasticity coefficient of:

A. 1.0
B. Greater than 1
C. 0.5
D. Zero

18. The cross elasticity of demand between digital cameras and memory cards is likely to be:

A. Zero
B. A negative number
C. A positive number greater than 1
D. A positive number between zero and 1

19. The goal of a rational consumer is to maximize:

A. The quantities of all goods consumed

B. The MU/P of all goods consumed
C. Marginal utility of all goods consumed
D. Total utility from all goods consumed

20. Assume that a consumer purchases a combination of products Y and Z and that the
MU y /P y = 25 and MU z /P z = 20. To maximize utility, without spending more money, the
consumer should:

A. Purchase less of Y and more of Z

B. Purchase more of Y and less of Z
C. Purchase more of both Y and Z
D. Make no change in Y and Z

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21. Suppose an individual's budget line moved as shown above. Which of the four pairs of
graphs, each showing the demand for Good X and a separate demand for Good Y, is the
most consistent with the given change in the top graph?

A. Pair A
B. Pair B
C. Pair C
D. Pair D

22. Refer to the above table. The average variable cost of producing 35 units of output is:

A. $6.00
B. $7.43
C. $4.57
D. $1.43

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23. Diseconomies of scale occur mainly because:

A. Of the law of diminishing returns

B. Firms in an industry must be relatively large in order to use the most efficient production
techniques
C. Of the inherent difficulties involved in managing and coordinating a large business
enterprise
D. The short-run average total cost curve rises when marginal product is greater than average
total cost

24. Refer to the above graph showing the marginal product (MP L ) and the average product of
labor (AP L ). At which quantity of labor employed does diminishing marginal returns set
in?

A. A
B. B
C. C
D. D

25. Marginal product of labor refers to the:

A. Last unit of output produced by labor at the end of each period

B. Increase in output resulting from employing one more unit of labor
C. Total output divided by the number of labor employed
D. Smallest unit of the output produced by labor

26. The mass affordability of the smart phones is the results of the following, except:

A. Mass production and spreading of fixed costs

B. The law of diminishing returns in manufacturing
C. Economies of scale and large volumes
D. Mass sales and distribution cost-savings

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27. A purely competitive firm does not try to sell more of its product by lowering its price
below the market price because:

A. Its competitors would not permit it

B. It can sell all it wants to at the market price
C. This would be considered unethical price chiseling
D. Its demand curve is inelastic, so total revenue will decline
28. A purely competitive firm will be willing to produce even at a loss in the short run, as
long as:

A. The loss is smaller than its total variable costs

B. The loss is smaller than its marginal costs
C. The loss is smaller than its total fixed costs
D. Price exceeds marginal costs

29. Which is true of a purely competitive firm in the long-run equilibrium?

A. Average fixed cost equals price

B. Marginal cost equals marginal product
C. Price equals marginal cost
D. Average variable cost equals marginal cost

30. The following table shows cost data for a firm that is selling in a purely competitive
market.

Refer to the above table. If the market price for the firm's product is $180, the
competitive firm will produce:

A. 5 units and earn economic profits of $100

B. 6 units and earn economic profits of $120
C. 7 units and earn economic profits of $238
D. 8 units and earn economic profits of $278

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31. At the profit-maximizing level of output for a monopolist:

A. Price is greater than marginal cost

B. Price is greater than average revenue
C. Average total cost equals marginal cost
D. Total revenue is greater than total cost

32. Compared to pure competition, monopolistic competition:

A. Provides greater product differentiation at the cost of some excess capacity

B. Offers less product differentiation but attains equal productive efficiency
C. Provides greater product differentiation and achieves greater productive efficiency
D. Offers less product differentiation and lower productive efficiency

33. Refer to the graph above representing the purely competitive market for a product. When
the market is at equilibrium, the deadweight loss would be:

A. Area a
B. Area b
C. Area d
D. Zero

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34. Refer to the above graph showing a linear demand curve for a monopolist. In which range
of the demand curve (or output quantity) will the firm operate?

A. To the right of point W

B. Between V and W
C. Between S and T
D. Between quantity 0 and S

35. Which of the following does not necessarily apply to a pure monopoly?

A. The product the firm produces must have no close substitutes

B. The firm must be the sole producer of a product
C. The firm will charge the highest price possible
D. Entry must be blocked

36. Assume that in a monopolistically competitive industry, firms are earning economic
profit. This situation will:

A. Reduce the excess capacity in the industry as firms expand production

B. Attract other firms to enter the industry, causing the existing firms' profits to shrink
C. Cause firms to standardize their product to limit the degree of competition
D. Make the industry allocatively efficient as each firm seeks to maintain its profits

37. Refer to the above graph for a monopolist in short-run equilibrium. This monopolist will
charge a price:

A. 0A
B. 0B
C. 0C
D. Not labeled on the graph

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38. Which is not true for a monopolistically competitive industry?

A. Firms tend to operate with excess capacity

B. Each firm faces a downward-sloping demand curve
C. These firms earn zero economic profits in the long run
D. Firms operate at the lowest point of their ATC curves in the long run

39. Which statement concerning the kinked demand curve model of oligopoly is false?

A. It addresses the question of price "stickiness."

B. It assumes when one oligopolist raises the price, all others will follow.
C. The portion of the demand curve above the "kink" is more elastic than the portion below.
D. The firm's marginal costs can sometimes shift without changing the profit-maximizing price
and output.

40. The strategy of establishing a price that prevents the entry of new firms is called:

A. Cartel pricing
B. Limit pricing
C. Price leadership
D. Profit maximizing price

END OF PART A

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PART B: ANSWER ANY TWO (2) QUESTIONS (40 MARKS)

QUESTION 1

A. “For whom to produce” is one of the basic economic questions that all economic system
need to answer.
i. Explain how the market system distributes the goods and services produces in the
economy. Provide your evaluation on the fairness of the distribution mechanism.
(4 marks)
ii. How can Islam address the issue of fairness in distribution in the market?
(4 marks)

B. “At equilibrium, the market is said to contribute to efficiency and maximum economic
welfare for consumers and producers”.
i. Discuss the two types of efficiencies and how they are achieved through the
market based economic system.
(4 marks)
ii. Using an appropriate diagram, explain how the economic welfare of consumers
and producers are maximised when the market is in equilibrium.
(4 marks)

C. Using the theory of market failure, explain the following statement. “Clean air and water
have become increasingly scarce and valuable resources because they have been treated
in the past as if they were free and unlimited in supply.” Explain how government can
internalize these spill-over costs.
(4 marks)

Total: 20 marks
QUESTION 2

A. With the aid of relevant diagrams, evaluate how the following situations will affect the
market equilibrium for iPods.

i. Income statistics show that income of 18-25 years old have increased by 10% over
the last year.
(3 marks)
ii. Government imposed a duty of 6% on imported IPods.
(3 marks)
B. This question is related to supply adjustments to an increase in demand in a market
selling banana.
i. Draw three separate supply curves for banana representing immediate market
period, short-run and long-run. Explain why the shape of these curves are not the
same at different time horizons.
(6 marks)
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 ii. Suppose that there is an increase in demand for banana. Explain the impact of this
on equilibrium price and equilibrium quantity in each of the time horizons. In
which market period does an increase in demand impose greatest impact on price?
Graphical illustration is required.
(3 marks)

C. Sukabuku.my is an online book store specialising in selling non-fiction books. All books
sold by Sukabuku.my are priced at RM25.00 per unit. The company is currently planning
for a New Year promotion of a RM5.00 discount on all books. Based on the research
done by its marketing unit, online customers of the company can generally be categorised
into three groups: students, working adults and retirees. The estimated impact of the
proposed RM5.00 discount on the quantity demanded for each of the three groups of
customers are shown in the table below.

Price of Quantity Demanded Quantity Demanded Quantity

Books (RM) (Students) (Working Adults) Demanded
(Retirees)
25.00 550 650 135
20.00 850 725 180

iii. Using the total revenue test, identify whether the demand is elastic or inelastic
for each of the three categories of Sukabuku.my customers. Justify your answer
by explaining the relationship between price elasticity of demand and total
revenue.
(3 marks)

iv. If Sukabuku.my can identify the category of its online customers and decide
whether to give the RM5.00 discount or not, which group of customers that it
should give the discount and which group of customers that it should not give the
discount in order to increase its total revenue?
(2 marks)

Total: 20 marks

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QUESTION 3

A. Assume that the short-run cost and demand data given in the table below confront a
monopolistic competitor selling a given product and engaged in a given amount of
product promotion.
Total Cost Marginal Quantity Marginal
Output Cost Demanded Price Revenue
0 $ 25 0 $60
1 40 1 55
2 45 2 50
3 55 3 45
4 70 4 40
5 90 5 35
6 115 6 30
7 145 7 25
8 180 8 20
9 220 9 15
10 265 10 10

i. Compute the marginal cost and marginal revenue of each unit of output and
enter these figures in the table.
(4 marks)
ii. At what output level and at what price will the firm produce in the short
run? What will be the total profit?
(2 marks)
iii. What will happen to demand, price, and profit in the long run?
(2 marks)

B. “Firms in both Pure Competition and Monopolistic Competition would only realise a
normal profit in the long-run”. Do you agree with this statement?
Using two separate diagrams, compare the long-run equilibrium position for firms under
Pure Competition and Monopolistic Competition.
(6 marks)

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C. This question is about barriers of entry into an industry.

i. Briefly discuss three sources of barriers that restrict the entry of firms into
an industry.
(3 marks)
ii. Using relevant examples, discuss how the barriers can limit the level of
competition in an industry and result in the creation of the different market
structures.
(3 marks)

Total: 20 marks

END OF PART B

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