uob peab sample exam paper 2014

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Calculators may be used in this examination but must not be used to store text. Calculators with the ability to store text should have their memories de-leted prior to the start of the examination. MCQ sheets provided.

Department of Economics

Degree of BSc

08 11095/08 11096

ECON101AB Principles of Economics

Summer Examination 2014

Time Allowed: 3 hours

Answer all of Section A, one question from Section B, all of Section C, and one question from Section D.

Any Calculator MCQ sheets provided

A09465 TurnoverPage 2

Section A

Multiple choice questions. This section is worth 25%. For each question there is a choice of four answers, only one of which is correct. Each question carries equal weight. 1. An indifference curve shows:

(a) all combinations of goods X and Y that yield the same marginal utility. (b) all the combinations of factors of production that cost the same to employ. (c) all combinations of goods X and Y that yield the same total utility. (d) the set of all goods that the consumer can afford given her income and the

prices of the goods.

2. A firm's supply curve under perfect competition in the short-run will be equal to: (a) the upward-sloping portion of its AC curve.

(b) the upward-sloping portion of its MC curve above its AC curve.

(c) the upward-sloping portion of its MC curve.

(d) the upward-sloping portion of its MC curve above the AVC curve.

3. Monopolistic competition and perfect competition are similar in the long-run, be-cause in both market structures:

(a) firms will be producing at minimum average cost. (b) firms will only earn a normal profit in the long-run. (c) the efficient output level will be produced in the long-run. (d) firms realise economies of scale.

4. Under monopoly, the firm's supply curve in the short-run will be equal to:

(a) the upward-sloping portion of its AC curve.

(b) the upward-sloping portion of its MC curve above its AC curve.

(c) the upward-sloping portion of its AVC curve.

(d) there is no supply curve.



5. The figure below shows a kinked demand curve. Which of the following represents the MR curve?

(a) fghi

(b) jgkl

(c) jghi

(d) jgk, hi

6. In the kinked demand curve model, the kink is due to the firm's belief that its com-petitors will:

(a) match any price increase it makes, but will not match a price reduction. (b) set a price at the kink of the demand curve. (c) match neither price increases nor reductions. (d) not match a price increase but will match any price reduction.

7. What is the slope (in absolute value) of a budget line if the price of good X is PX and the amount of good X is measured on the horizontal axis, while the price of good Y is PY and the amount of good Y is measured on the vertical axis?

(a) PX/PY (b) PY/PX (c) MUX/MUY (d) PX/MUX

8. A firm will choose to shutdown rather than continue to produce in the short-run whenever:

(a) AR < AVC. (b) AR < AC. (c) MR < MC. (d) TR < TC.

Quantity



9. Which is the definition of deadweight welfare loss under monopoly? (a) the increase in total profit compared with perfect competition. (b) the loss of total consumer-plus-producer surplus compared with perfect com-

petition. (c) the loss in output compared with perfect competition. (d) the loss of total consumer surplus compared with perfect competition.

10. A firm's 'expansion path' shows: (a) the optimum input requirements of different output levels when input prices and

technology are constant. (b) how output expands in the long-run regardless of the input combination. (c) how output expands as the function of the firm's market share increases over

time. (d) a firm's maximum output consistent with sales revenue maximisation.

11. What effect will a lump-sum tax have on a firm that has monopoly power? (a) it will shift the firm's average cost curve upwards, but will have no effect on the

firm's marginal cost curve. (b) it will shift the firm's marginal cost and average cost curves upwards. (c) it will not affect the firm, because it has monopoly power. (d) it will shift the firm's marginal cost and average cost curves downwards.

12. Andrew spends all his income on just three goods: X, Y and Z. If at his present level of consumption, he finds that MUX/PX > MUY/PY > MUZ/PZ, which one of the fol-lowing will he do if he is rational?

(a) he will buy more X, but we cannot say whether he will buy more, less or the same amount of Y and Z.

(b) he will buy more X and less Z, but we cannot say whether he will buy more, less or the same amount of Y.

(c) he will buy more X, less Z and the same amount of Y. (d) he will buy more X and Y, and less Z.

13. John has a budget of 20 which he spends on pizzas (with price PP = 2) and crisps (with price PC = 3). What will happen to his budget line if the price of a pizza changes to PP = 4, and the price of a packet of crisps to PC = 6 while Johns budget increases to 40?

(a) the budget line would become steeper.

(b) the budget line would shift to the left.

(c) the budget line would not change.

(d) the budget line would become flatter and shift to the right.



14. The table below gives various combinations of inputs that a firm can use to pro-duce good A. Assuming that the price of input X is PX = 30, what must be the price PY of input Y if the top row shows the least-cost factor combination to produce 500 units?

Quantity of in-put X

Quantity of in-put Y

Output of A

150 90 500 150 91 520 151 90 510

(a) PY = 60

(b) PY = 30

(c) PY = 25

(d) PY = 24

15. Consider a perfectly competitive firm. Referring to the diagram below, which is the output at which it makes a normal profit, but not a supernormal profit?

(a) A (b) B (c) C (d) D



Section B Open questions.

This section is worth 25%. Answer only one question from this section in a short essay format.

16. Consider a shoe manufacturer employing both machines and workers in his firm, with the workers working 2,000 hours per year. Suppose he learns that there are the following changes next year: his national insurance contributions for the workers employed will be lower by 10 pence per labour hour, but he will have to pay a new 200 lump-sum tax (regardless of the quantity produced, labour hours employed etc.). If he plans to produce the same quantity of shoes as before, does he welcome these changes (i.e., can he produce the same quantity at a lower cost next year)? Explain your answer graphically using isocost-isoquant analysis. 17. Explain how the costs of a firm operating under perfect competition relate to its individual supply curve and how the industry supply curve is obtained from the firms' individual supply curves. Why is it not possible to make a similar analysis for a mo-nopolist? Illustrate your answer graphically. 18. Explain the concept of deadweight welfare loss and illustrate it in the case of a monopolist. Discuss how a government imposed price-ceiling can reduce this dead-weight loss. Illustrate your answers graphically.



Section C

Multiple choice questions. This section is worth 25%. For each question there is a choice of four answers, only one of which is correct. Each question carries equal weight. 19. A key difference between the classical model and the IS-LM model is that

(a) one describes the money market the other the goods and services market. (b) in the classical model the real interest rate, in the IS-LM model the interest

rate and the output, adjusts in order to achieve equilibrium. (c) in the classical model the output, in the IS-LM model the real interest rate,

adjusts in order to achieve equilibrium. (d) only the IS-LM model describes long-term economic growth.

20. If a UK citizen is employed in a British company in Switzerland, the output that he/she produces is:

(a) part of the UK GDP only. (b) part of the Swiss GDP only. (c) part of both UK and Swiss GDP. (d) it is not counted in either.

21. In the Keynesian cross equilibrium

(a) unplanned inventory accumulation is equal to zero.

(b) planned expenditure is equal to actual expenditure.

(c) there is no tendency for GDP to change.

(d) all of the answers are correct.

22. According to the Solow growth model of an economy without technological pro-gress and population growth, in the steady state, per worker:

(a) investment equals depreciation.

(b) capital is at the Golden Rule level.

(c) saving equals capital.

(d) all of the answers are correct.



23. Suppose that a country (without technological progress and population growth) in a steady state implements policies to cut its saving rate. After the new steady state is reached:

(a) the level of output per worker will be higher than before.

(b) the level of output per worker will be lower than before.

(c) the level of output per worker will be the same as before.

(d) whether the level of output per worker is higher or lower depends on the initial saving rate.

24. In the classical model of a closed economy, an increase in taxes:

(a) increases saving and output. (b) increases saving and interest rate. (c) decreases saving and interest rate. (d) increases saving, but decreases the interest rate.

25. Consider the classical model of a closed economy with consumption function C = 100 + 0.8 (Y - T), investment function I = 20 0.2r, government spending G = 100 and tax T = 80. The equilibrium interest rate is

(a) r = 2.

(b) r = 3.

(c) r = 4.

(d) not something that can be deduced from the information given.

26. Working with the Keynesian cross and assuming investment and government spending fixed, and that the consumption function is C = 100 + 0.75 (Y - T) (measur-ing everything in s), if taxes decrease by 2, the equilibrium level of income will:

(a) increase by 6.

(b) decrease by 6.

(c) increase by 4.

(d) decrease by 4.

27. The IS-LM model predicts that an increase in government spending of G: (a) increases output by G times the government-purchases multiplier. (b) decreases output by G times the government-purchases multiplier. (c) increases output by less than G times the government-purchases multiplier.(d) increases output by more than G times the government-purchases multiplier.



28. All of the following will shift the aggregate demand curve to the right EXCEPT:

(a) an increase in government purchases.

(b) a government spending cut.

(c) an increase in the money supply.

(d) a reduction in taxes.

29. In terms of the AD-AS model, if output is initially less than its natural level, the price level in the long-run (provided that the AD curve does not change during the transition):

(a) will gradually fall.

(b) will gradually rise.

(c) will remain the same.

(d) the direction of the change cannot be deduced from the information given.

30. The IS-LM model predicts that if the central bank increases the money supply at the same time as government purchases increase the:

(a) interest rate will definitely rise.

(b) interest rate will definitely fall.

(c) equilibrium level of income will definitely rise.

(d) equilibrium level of income will definitely fall.

31. An increase in the money supply will shift the supply curve of real money bal-ances to the ............... and the LM curve ..................

(a) left; upward

(b) right; upward

(c) left; downward

(d) right; downward

32. Suppose that the central bank follows a policy of increasing the money supply by 1% each year. According to the quantity theory of money, assuming constant veloc-ity, the inflation rate:

(a) is 1%.

(b) will be positive whenever real GDP grows by less than 1%.

(c) will always be positive because the money supply increases.

(d) is unaffected.



33. Suppose the unemployment rate at the beginning of the year is 3%; the natural rate of GDP growth is 4%. According to the Okuns law:

(a) if the unemployment rate is unchanged during the year, real GDP rises by 3%

(b) if the average unemployment rate for the year rises to 6%, real GDP falls by 2% in that year.

(c) if the average unemployment rate for the year falls to 2%, real GDP rises by 7% that year.

(d) if the average unemployment rate for the year stays at 3%, real GDP remains constant.


A09465End of PaperPage 11

Section D

Open questions.

This section is worth 25%. Answer only one question from this section in a short essay format.

34. Consider a closed economy described by the classical model with an exoge-nously given output of

1000 and consumption and investment functions

C = 140 + 0.7(Y - T) I = 400 30r

Suppose government spending and taxes are fixed at 200, 200

What is the national, private and public saving in the economy? How much is the equilibrium interest rate and investment? How do the national, private, public saving, investment and interest rate change if the government reduces its spending to 170? Obtain your answers algebraically and illustrate them graphically. Explain your ob-servations. 35. Some economists believe that monetary policy should be governed by a set of rules or formulas. Suppose for example that the goal of monetary policy is to fuel non-inflationary long-run economic growth. Using the quantity theory of money, as-suming velocity is constant, what is the growth rate of money supply that will keep the price level stable? What should be the rule, if, instead of price stability, a target inflation rate is to be achieved? 36. Consider an economy with production function is 5// and assume that 2% of capital wears out every year. If the saving rate is s = 0.1, and if population growth and technological progress are absent, what is the steady-state level of capi-tal per worker, output per worker, consumption per worker? What is the Golden Rule level of capital? (The answer wont be a whole number - specifying up to two deci-mals is sufficient.) Is the current saving rate above, below or equal to the saving rate for the Golden Rule level? Starting from the current saving rate, if s suddenly changes to its Golden Rule value, what happens (qualitatively) over time to con-sumption, investment and output? (Hint: MPK = /)

uob peab sample exam paper 2014

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