SINGAPORE INSTITUTE OF MANAGEMENT

UNIVERSITY OF LONDON
PRELIMINARY EXAM 2017

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MODULE CODE : EC1002

MODULE TITLE : Introduction to Economics

DATE OF EXAM : 24/02/2017

DURATION

TOTAL NUMBER :
OF PAGES
(INCLUDING
THIS PAGE)
:
PL 3 hours

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INSTRUCTIONS TO CANDIDATES :-
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The paper consists of 3 sections.
Section A (40 marks): 10 multiple choice questions, each worth 4 marks. Answer all
questions. No explanation is required.
Section B (30 marks): Answer one of two questions on microeconomics. Explanations
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are essential.
Section C (30 marks): Answer one of two questions on macroeconomics. Explanations
are essential.

A calculator may be used when answering questions on this paper and it must comply in
all respects with the specification given in the University of London External Degree
General Regulation. The make and type of machine used must be stated clearly on the front
cover of your answer book.

DO NOT TURN OVER THIS QUESTION PAPER UNTIL YOU ARE TOLD TO
DO SO.

EC1002 Introduction to Economics Page 1 of 8

SECTION A: Multiple choice questions
Answer all questions. Each question is worth 4 marks.

Choose one answer for each question; no explanation is required.

1. Which of the following is a correct description of the short-run supply curve of a

perfectly competitive firm?

(a) The part of the short-run marginal cost curve above short-run average fixed

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cost.

(b) The part of the short-run marginal cost curve above short-run average
variable cost.

(c) The part of the short-run marginal cost curve above short-run average total

2.
(d)
cost.
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The whole short-run marginal cost curve.

A specific tax is imposed on a commodity. Which of the following statements

about the incidence of the tax is correct?

(a) If demand is perfectly price elastic then the demand price rises and the tax
burden falls only on the seller.
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(b) If supply is perfectly price elastic then the supply price is unchanged and the
tax burden falls only on the buyer.

(c) If demand is perfectly price elastic then the supply price rises and tax burden
falls only on the seller.

(d) If supply is perfectly price elastic then the supply price falls and the tax
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burden falls only on the buyer.

3. Which of the following statements is correct?

(a) A public good is non-excludable, but rivalrous.

(b) A public good is efficiently provided when everyone’s marginal utility from
the good is equal to the marginal cost of the good.

(c) A public good is non-rivalrous, but excludable.

(d) A public good is efficiently provided when the sum of everyone’s marginal
utilities from the good is equal to the marginal cost of the good.

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4. Which of the following statements about a labour market with a monopsonist firm
is not correct?

(a) Less labour is hired than if the firm were perfectly competitive and took the
wage as given.

(b) Workers would like to supply more labour at the monopsony wage.

(c) The firm pays a wage below the marginal product of labour.

(d) The marginal product of labour is diminishing for the firm.

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5. Which of the following statements is correct?

(a) A natural monopoly is a market with barriers to entry that cannot be

overcome by potential entrants.

(b)

(c)

(d)
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A natural monopoly produces a product for which there are no substitutes.

A natural monopoly has a long-run average cost curve that is always

diminishing.

A natural monopoly produces where marginal revenue is greater than

marginal cost.

6. A car maker produces 10,000 cars in a year, which have price $10,000, though
2000 of these cars remain unsold at the end of the year. The car maker pays its
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workers $40m and spends a total of $30m on buying parts needed to make the cars
from other firms. It spends $5m on new robots to use next year, and must pay
interest $2m on its debts. Which of the following statements is correct?

(a) The car maker’s value added is $40m.

(b) The car maker’s value added is $65m.

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(c) The car maker’s value added is $70m.

(d) The car maker’s value added is $23m.

7. The government increases its spending by $1bn and raises taxes by $1bn.
According to the IS/LM model, which of the following statements is correct?

(a) Output rises by exactly $1bn and the interest rate is higher.

(b) Output rises by less than $1bn and the interest rate is higher.

(c) Output rises by more than $1bn and the interest rate is higher.

(d) There is no effect on either output or the interest rate.

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8. Which of the following statements about the ‘paradox of thrift’ is correct?

(a) There is a paradox of thrift because an increase in desired saving leads to

lower income and lower consumption.

(b) There is a paradox of thrift because an increase in desired saving leads to

higher income and lower consumption.

(c) There is a paradox of thrift because saving is not equal to investment.

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(d) There is a paradox of thrift because lending to the government does not boost
investment.

9. Which of the following statements is correct?

(a)

(b)

(c)
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The central bank can increase the money supply by selling bonds.

The central bank can decrease the money supply by lowering its discount
rate.

The central bank can decrease the monetary base by increasing reserve
requirements.

(d) The central bank can increase the money supply by an unsterilized purchase
of foreign exchange reserves.
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10. Which of the following statements about perfect capital mobility is correct?

(a) If the domestic interest rate is equal to the foreign interest rate then the
financial account of the balance of payments must be zero.

(b) If the domestic interest rate is above the foreign interest rate then the financial
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account of the balance of payments must be negative.

(c) If the domestic interest rate is different from the foreign interest rate then the
financial account of the balance of payments is zero.

(d) If the domestic interest rate is equal to the foreign interest rate then the
financial account of the balance of payments might be negative.

EC1002 Introduction to Economics Page 4 of 8

SECTION B: Microeconomics long questions

Answer one of the following two long questions (30 marks each). It is essential that you
explain your answers.

11. A consumer has preferences over two goods, coconuts and fish. The consumer
prefers more of each good to less, and has a diminishing marginal rate of
substitution between the two goods.

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(a) [4 marks] Draw a diagram showing indifference curves and the budget
constraint of the consumer (with coconuts on the horizontal axis and fish on
the vertical axis). Show how the consumer’s optimal consumption choice is
found in the diagram.

(b)

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[12 marks] The price of coconuts rises. Draw diagrams showing how the
change in consumption of coconuts can be broken down into income and
substitution effects in each of the following three cases:

i. Coconuts are a normal good;

ii. Coconuts are a Giffen good;

iii. Coconuts are an inferior good, but not a Giffen good.

(c) [8 marks] Now suppose the consumer is a farmer whose income comes only
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from selling a fixed supply of coconuts. This means that when the price of
coconuts increases by %, the consumer’s income also increases by %.
Assuming that coconuts are a normal good, will the consumer necessarily
consume fewer coconuts? Explain your answer by illustrating income and
substitution effects in a diagram.
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(d) [6 marks] The theory of labour supply is based on a trade-off between two
goods, leisure and consumption. Explain the similarity between this decision
and the consumption choice problem in part (c). What is the role of income
and substitution effects in understanding the effect of higher wages on labour
supply?

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12. A monopolist can produce a good with a constant marginal cost of 1. There are two
groups of customers. The first group would buy an amount 7 at price .
The second group would buy an amount 6.5 0.5 at price .

(a) [6 marks] Suppose the monopolist can set a price paid only by those in the
first group of customers. Find the profit-maximizing value of this price and
the quantity sold to the first group.

(b) [7 marks] Suppose the monopolist can practise price discrimination and

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charge a different price to the customers in the second group. Find the profit-
maximizing value of this price and the quantity sold to the second group.

(c) [10 marks] Now suppose the monopolist cannot practise price discrimination
and must charge one price for all customers. Write down the total demand

(d)
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function faced by the monopolist and calculate the profit-maximizing price
and total quantity sold.

[7 marks] How much extra profit does the monopolist gain by being able to
practise price discrimination? Explain why it is in the interests of the
monopolist to charge different prices to the two groups of customers.
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SECTION C: Macroeconomics long questions

Answer one of the following two long questions (30 marks each). It is essential that you
explain your answers.

13.

(a) [6 marks] Explain why inflation has a positive effect on aggregate supply in
the short run, and a negative effect on aggregate demand.

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(b) [8 marks] Suppose the economy is hit by a negative demand shock and the
central bank would like to stabilize both output and inflation. What is the best
action the central bank can take, and what are the consequences for the
nominal and real interest rates?

(c)

(d)
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[8 marks] Alternatively, suppose the economy is hit by a temporary negative
supply shock and the central bank would like to stabilize output. What action
should the central bank take, and what are the consequences for the nominal
and real interest rates? Can the central bank also stabilize inflation? Explain.

[8 marks] If the negative supply shock is permanent, would loosening

monetary policy help to stabilize output in the long run? What would be the
consequences of the shock and the policy response for inflation and for
nominal and real interest rates?
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14. Output is produced using capital and labour with constant returns to scale
and diminishing returns to capital and labour individually. The production function
is , , capital depreciates at rate , the population grows at rate , and the
saving rate is .

(a) [6 marks] Use a diagram to show the economy has a steady state for capital
per person and output per person . Explain.

(b) [8 marks] There is an increase in the saving rate. Explain why this does not

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lead to permanently higher growth in output per person. If there is no
permanent effect on growth, would it ever make sense for an economy to save
more?

(c) [8 marks] There is an increase in population growth. Since the marginal

(d)
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product of labour is diminishing, will there be a permanent decline in the
growth rate of output per person? Explain.

[8 marks] The economy now experiences permanent (labour-augmenting)

technical progress at rate . What will be the steady-state growth rates of
capital per person and output per person in this case? Since capital per person
is increasing, is the marginal product of capital declining over time? Explain.
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END OF PAPER

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