ECO401 TODAY PAPER 2010

MIDTERM EXAMINATION
Spring 2010
ECO401- Economics


Question No: 1 ( Marks: 1 ) - Please choose one
Microeconomics is the branch of economics that deals with which of the following topics?

► The behavior of individual consumers.
► Unemployment and interest rates.
► The behavior of individual firms and investors.
► The behavior of individual consumers and behavior of individual firms and investors.

Question No: 2 ( Marks: 1 ) - Please choose one
Land is best described as:

► Produced factors of production.
► "Organizational" resources.
► Physical and mental abilities of people.
► "Naturally" occurring resources.

Question No: 3 ( Marks: 1 ) - Please choose one
Aslam decides to stay at home and study for his exam rather than going out with his friends to a movie. His dilemma is an example of:


► The economic perspective.
► Marginal analysis.
► Allocative efficiency.
► Opportunity cost.

Question No: 4 ( Marks: 1 ) - Please choose one
Price floor results in:
► All of the given options.
► Excess supply.
► Equilibrium.
► Excess demand.

Question No: 5 ( Marks: 1 ) - Please choose one
The price elasticity of demand measures the responsiveness of quantity demanded to:


► Quantity demanded.
► Quantity supplied.
► Price.
► Output.

Question No: 6 ( Marks: 1 ) - Please choose one
The cross price elasticity of demand for complementary goods is:
► Less than 0.
► Equal to 0.
► Greater than 0.
► Between 0 and 1.

Question No: 7 ( Marks: 1 ) - Please choose one
In order to calculate the price elasticity of supply, you need to know:

► Two prices and two quantities supplied.
► The slope of the supply curve.
► The equilibrium price and quantity in the market.
► The quantity supplied at two different prices, all else equal.

Question No: 8 ( Marks: 1 ) - Please choose one
We know that the demand for a product is elastic:

► When price rises, total revenue rises.
► When price rises, total revenue falls.
► When income rises, quantity demanded rises.
► When income falls, quantity demanded rises.

Question No: 9 ( Marks: 1 ) - Please choose one
An individual with a constant marginal utility of income will be:

► Risk loving.
► Risk neutral.
► Risk averse.
► Insufficient information for a decision.

Question No: 10 ( Marks: 1 ) - Please choose one
Suppose that the price of a pizza is $10 and price of a jeans is $30. If ratio of marginal utility of pizza to marginal utility of jeans is 1/4 then to maximize total utility, a consumer should:

► Buy more pizzas and fewer jeans.
► Buy fewer pizzas and more jeans.
► Continue to buy the same quantities of pizza and jeans.
► Spend more time consuming pizza.

Question No: 11 ( Marks: 1 ) - Please choose one
Increase in pension benefits leads to income and substitution effect which:

► Encourage workers to retire later.
► Encourage workers to work more hours.
► Have no effect on incentive to retire.
► Encourage workers to retire earlier.

Question No: 12 ( Marks: 1 ) - Please choose one
Suppose you are a workaholic (like work a lot) and your friend is a leisure lover. Compared to your friend your indifference curve will be:

► Flatter.
► Steeper.
► Identical.
► None of the given options.

Question No: 13 ( Marks: 1 ) - Please choose one
Which of the following is a correct statement about the substitution effect?

► The substitution effect is always negative.
► The substitution effect is positive for an inferior good.
► The substitution effect measures how demand changes when income changes.
► The substitution effect is positive for a Giffen good.

Question No: 14 ( Marks: 1 ) - Please choose one
The income effect of a price change:

► Is always positive.
► Is always negative.
► May be positive or negative.
► Is associated with a change in nominal income.

Question No: 15 ( Marks: 1 ) - Please choose one
Which of the following is considered to be a variable cost in the long run?

► Expenditures for wages.
► Expenditures for research and development.
► Expenditures for raw materials.
► All of the given options.

Question No: 16 ( Marks: 1 ) - Please choose one
If a simultaneous and equal percentage decrease in the use of all physical inputs leads to a larger percentage decrease in physical output, a firm’s production function is said to exhibit:

► Decreasing returns to scale.
► Constant returns to scale.
► Increasing returns to scale.
► Diseconomies of scale.

Question No: 17 ( Marks: 1 ) - Please choose one
Graphically, marginal revenue is defined as:
► The slope of a line from the origin to a point on the total revenue curve.
► The slope of a line from the origin to the end of the total revenue curve.
► The slope of the total revenue curve at a given point.
► The vertical intercept of a line tangent to the total revenue curve at a given point.

Question No: 18 ( Marks: 1 ) - Please choose one
The optimal point of production for any individual firm is where:

► Marginal Revenue = Marginal Cost.
► Marginal Revenue > Marginal Cost.
► Marginal Revenue < Marginal Cost.
► None of the given options.

Question No: 19 ( Marks: 1 ) - Please choose one
The break-even point occurs when:

► Price < Average Variable Cost.
► Price < Average Total Cost.
► Price = Average Total Cost.
► Price > Average Variable Cost.

Question No: 20 ( Marks: 1 ) - Please choose one
In monopoly, which of the following is TRUE at the output level, where price = marginal cost?

► The monopolist is maximizing profit.
► The monopolist is not maximizing profit and should increase output.
► The monopolist is not maximizing profit and should decrease output.
► The monopolist is earning a positive profit.

Question No: 21 ( Marks: 1 ) - Please choose one
Compared to the equilibrium price and quantity sold in a competitive market, a monopolist will charge a ______________ price and sell a ______________ quantity.

► Higher; larger.
► Lower; larger.
► Higher; smaller.
► Lower; smaller.

Question No: 22 ( Marks: 1 ) - Please choose one
As compared to existing firms, a new firm entering in monopolist market has:
► High costs.
► Low costs.
► Equal costs.
► None of the given options.

Question No: 23 ( Marks: 1 ) - Please choose one
A monopolistically competitive firm in short run equilibrium:

► Will make negative profit (lose money).
► Will make zero profit (break-even).
► Will make positive profit.
► Any of the given are possible.

Question No: 24 ( Marks: 1 ) - Please choose one
If a sales tax on beer leads to reduced tax revenue, this means:

► Elasticity of demand is < 1.
► Elasticity of demand is > 1.
► Demand is upward-sloping.
► Demand is perfectly inelastic.

Question No: 25 ( Marks: 1 ) - Please choose one

In the above figure, the marginal utility of income is:
► Increasing as income increases.
► Constant for all levels of income.
► Diminishes as income increases.
► None of the given options.

Question No: 26 ( Marks: 1 ) - Please choose one
Which of the following is true about supply curve under monopoly?
► It is same as the competitive market supply curve.
► It is the portion of marginal cost curve where marginal costs exceed the minimum value of average variable costs.
► It is the result of market power and production costs.
► None of the given statements is true.

Question No: 27 ( Marks: 1 ) - Please choose one
What is meant by freedom of enterprise in pure capitalism?
► It means that businesses are free to produce products that consumers want.
► It means that consumers are free to buy goods and services that they want.
► It means that resources are distributed freely to businesses.
► It means that government is free to direct the actions of businesses.

Question No: 28 ( Marks: 1 ) - Please choose one
Which of the following best describes a demand schedule?
► It is a numerical tabulation of the quantity demanded of a good at different prices, ceteris paribus.
► It is a graphical representation of the law of demand.
► It is a systematic listing of all the variables that might conceivably bring about a change in demand.
► It is a symbolic representation of the law of demand: P,Q and Q, P.

Question No: 29 ( Marks: 1 ) - Please choose one
Suppose the total utilities for the first four units of a good consumed are 13, 23, 33, and 43 respectively. What is the marginal utility of the third unit?
► 10.
► 13.
► 20.
► 33.

Question No: 30 ( Marks: 1 ) - Please choose one
Suppose all inputs are increased by 20% but output increases by less than 20% in a production process. This means that the firm experiences:
► Decreasing returns to scale.
► Constant returns to scale.
► Increasing returns to scale.
► None of the given options.

Question No: 31 ( Marks: 1 ) - Please choose one
Suppose all inputs are increased by 30% and output increases by more than 30% in a production process. This means that the firm experiences:
► Decreasing returns to scale.
► Constant returns to scale.
► Increasing returns to scale.
► None of the given options.

Question No: 32 ( Marks: 1 ) - Please choose one
If marginal cost is Rs.15,000/- and marginal revenue is Rs.20,000/-. The firm should:
► Reduce output until marginal revenue equals marginal cost.
► Do nothing without information about your fixed costs.
► Expand output until marginal revenue equals marginal cost.
► None of the given options.

Question No: 33 ( Marks: 1 ) - Please choose one
Rationing is needed due to the problem of
► Unemployment.

► Inflation.
► Scarcity.
► Poverty.

Question No: 34 ( Marks: 1 ) - Please choose one
The demand curve for eggs is downward-sloping. Suddenly the price of eggs decreases from Rs.60/- per dozen to Rs.50/- per dozen. This will cause:

► The demand curve for eggs to shift leftward.
► Quantity demanded of eggs to decrease.
► The demand curve for eggs to shift rightward.
► Quantity demanded of eggs to increase.

Question No: 35 ( Marks: 3 )
How the monopolist can maintain the high price even in the long run?

A monopolist can make super normal, profits even in long run because there is no easy entry fo other firms as in the case of perfect competition therefore a monopolist can maintain her high price even in the long run.

Question No: 36 ( Marks: 5 )
A. Compare the characteristics of oligopoly and monopoly market structures.

B. Differentiate between the shape of demand curve in oligopoly and monopoly.
(Marks: 3+2)

Question No: 37 ( Marks: 5 )
Explain engel curve for giffen commodities with the help of graph.

Question No: 1
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] In a free-market economy, the allocation of
resources is determined by:





► Votes
taken by consumers.


► A
central planning authority.


► Consumer
preferences.


► The
level of profits of firms.





Question No: 2
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] Ceteris paribus means:





► Equal
access to public transportation.


► Other
things being equal.


► Other
things not being equal.


► All
things considered.





Question No: 3
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] If pen and ink are complements, then an
increase in the price of pen will cause:





► An increase in the price of ink.


► Less ink
to be demanded at each price.


► A
decrease in the demand for pen.


► A
rightward shift in the demand curve for ink.





Question No: 4
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] A good for which income and quantity demanded
are inversely related is known as:





► Inferior
good.


►
Complementary good.


► Normal good.


► None of
the given options.





Question No: 5
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] Which of the following is calculated as the
percentage change in quantity demanded of a given good with respect to the
percentage change in the price of another good?





► Price
elasticity of demand.


► Income
elasticity of demand.


► Cross
price elasticity of demand.


► Price
elasticity of supply.





Question No: 6
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] In order to calculate the price elasticity of
supply, you need to know:





► Two
prices and two quantities supplied.


► The
slope of the supply curve.


► The
equilibrium price and quantity in the market.


► The
quantity supplied at two different prices, all else equal.





Question No: 7
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] A demand curve is price elastic when:





► Changes
in demand are proportionately greater than changes in price.


► Changes
in demand are equal to changes in price.


► None of
the given options.


► Changes
in demand are proportionately smaller than changes in price.





Question No: 8
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.]
As more of a good is consumed, then total utility typically:


►
Increases at a decreasing rate.


► Decreases as long as marginal utility
is negative.


►
Decreases as long as marginal utility is positive.


► Is negative as long as marginal
utility is decreasing.





Question No: 9
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] Which of the following is the term that economists
use to describe how consumers rank different goods and services?





►
Satisfaction index.


►
Goodness.


► Utility.


► None of
the given options.





Question No: 10
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] If your demand price for one unit of a good is
$100 and the market price is $75, your consumer's surplus is:





► $25.


► $50.


► $75.


► $100.





Question No: 11
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] Assume leisure is a normal good. If income
effect equals substitution effect then a wage rate increase will lead a person
to:





► Increase hours of work.


► Decrease hours of work.


► Not change hours of work.


► None of the given options.





Question No: 12
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] A normal good can be defined as one which
consumers purchase more of as:





► Prices fall.


► Prices rise.


► Incomes fall.


► Incomes increase.





Question No: 13
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] Diminishing marginal returns implies:





► Decreasing marginal costs.


► Increasing marginal costs.


► Decreasing average variable costs.


► Decreasing average fixed costs.





Question No: 14
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] If isoquants are straight lines, it means
that:


► Only one
combination of inputs is possible.


► There is
constant returns to scale.


► Inputs
have fixed costs at all use rates.


► The
marginal rate of technical substitution of inputs is constant.





Question No: 15
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] A firm maximizes profit by operating at the
level of output where:


► Average
revenue equals average cost.


► Average
revenue equals average variable cost.


► Total
costs are minimized.


► Marginal
revenue equals marginal cost.





Question No: 16
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] Producer surplus in a perfectly competitive
industry is:


► The
difference between profit at the profit-maximizing and profit-minimizing level
of output.


► The
difference between revenue and total cost.


► The
difference between revenue and variable cost.


► The
difference between revenue and fixed cost.





Question No: 17
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] Monopolistically competitive firms have
monopoly power because they:





► Are
great in number.








► Have
freedom of entry.





► Are free
to advertise.





► Face
downward sloping demand curves.








Question No: 18
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] Which of the following can be thought of as a
barrier to entry?





► Scale economies.


► Patents.


► Strategic actions by incumbent firms.


► All of the given options.





Question No: 19
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] The price elasticity of demand for any good
must be less than or equal to zero unless:





► The good is a necessity.


► The good is a luxury.


► The good is a Giffen good.


► None of the given options.





Question No: 20
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] The amount of output that a firm decides to
sell has no effect on the market price in a competitive industry because:


► The
market price is determined (through regulation) by the government.


► The firm
supplies a different good than its rivals.


► The
firm's output is a small fraction of the entire industry's output.


► The
short run market price is determined solely by the firm's technology.





Question No: 21
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] Because of unusual warm weather, the supply of
strawberries has substantially increased. This statement indicates that:





► The
demand for strawberries will necessarily rise.


► The
equilibrium quantity of strawberries will fall.


► The quantity of strawberries that will
be available at various prices has increased.


► The price of strawberries will fall.





Question No: 22
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] Under monopoly, when the demand curve is downward
sloping, marginal revenue is:





► Equal to price.


► Equal to average cost.


► Less than price.


► More than price.





Question No: 23
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] Suppose the price of rail tickets decreases,
what will happen to the demand for airline travel?


► The
demand curve for airline travel shifts left.


► The
demand curve for airline travel shifts right.


► The
supply curve of airline travel shifts left.


► The supply curve of airline travel shifts
right.





Question No: 24
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] Which of the following will happen if two
indifference curves cross each other?


► The
assumption of a diminishing marginal rate of substitution will be violated.


► The
assumption of transitivity will be violated.


► The
assumption of completeness will be violated.


►
Consumers will minimize their satisfaction.





Question No: 25
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] Which of the following determines the largest
amount of output that a firm can produce with a given combination of inputs?


► Marginal product of labor.


► Gains from specialization.


► Cost function.


► Production function.





Question No: 26
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] Which of the following is TRUE about an
isocost line?


► It shows the cost of inputs needed to
produce along an isoquant.


► It shows the cost of inputs needed to
produce along an expansion path.


► It shows the input combinations that
can be purchased with a given outlay of funds.


► It shows the output combinations that
can be produced with a given outlay of funds.





Question No: 27
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] Which of the following is TRUE for the total
cost of producing a given level of output?


► It is
maximized when a corner solution exists.


► It is
minimized when the ratio of marginal product to input price is equal for all
inputs.


► It is
minimized when the marginal products of all inputs are equal.


► It is
minimized when marginal product multiplied by input price is equal for all
inputs.





Question No: 28
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] In which of the following situations, a
monopoly occurs?


► When each firm produces a product that
is slightly different from the other firms.


► When one firm sells a good that has no
close substitutes and a barrier blocks entry for other firms.


► When there are many firms producing
the same product.


► In all of the given situations.





Question No: 29
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] The shape of isoquant which indicates capital
and labor cannot be substituted for each other in production is


► Concave.


► Convex.


►
L-shaped.


► None of the given options.





Question No: 30
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] At the profit-maximizing level of output, the
marginal cost is equal to:


► Average
revenue


► Total
revenue


► Marginal
revenue


► None of
the given options





Question No: 31
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] Monopolistic competition is also characterized
by a large number of buyers and sellers and absence of


►
Competition.


► Entry barriers.


► Price discrimination.


► All of the given options.





Question No: 32
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] An increase in quantity demand is shown by:


► Shifting the demand curve to the left.


► Shifting
the demand curve to the right.


► Upward movement along the demand
curve.


► Downward
movement along the demand curve.





Question No: 33
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] Since bread and butter are complements. When
the price of bread goes down, the demand curve for butter:


► Shifts to the left.


► Shifts to the right.


► Remains constant.


► Shifts
to the right initially and then returns to its original position.





Question No: 34
( Marks: 1 ) - Please choose
one


[You must be registered and logged in to see this image.] Slope and elasticity of demand have





► A direct relation.





► An inverse relationship.





► No
relation between slope and elasticity.


► None of the given options.








Question No: 35
( Marks: 3 )


[You must be registered and logged in to see this image.] Why economists believe that when firms earn
zero accounting profits, they actually earn normal economic profits?





Question No: 36
( Marks: 5 )


[You must be registered and logged in to see this image.] What are the two main theories of production
regarding time?





Question No: 37
( Marks: 5 )


[You must be registered and logged in to see this image.] Why marginal cost curve is not considered as
supply curve in monopoly?

Question No: 1 ( Marks: 1 ) - Please choose one
Which of the following is a positive statement?

► When the price of a good goes up, consumers buy less of it.
► When the price of a good goes up, firms produce more of it.
► When the Federal government sells bonds, interest rates rise and private investment is reduced.
► All of the given options.

Question No: 2 ( Marks: 1 ) - Please choose one
Aslam decides to stay at home and study for his exam rather than going out with his friends to a movie. His dilemma is an example of:


► The economic perspective.
► Marginal analysis.
► Allocative efficiency.
► Opportunity cost.

Question No: 3 ( Marks: 1 ) - Please choose one
When government sets the price of a good and that price is above the equilibrium price, the result will be:

► A surplus of the good.
► A shortage of the good.
► An equilibrium.
► None of the given options.

Question No: 4 ( Marks: 1 ) - Please choose one
If the quantity supplied of oranges exceeds the quantity demanded then:

► There is a shortage of oranges.
► Market forces will cause the price to fall.
► Market forces will cause the price to rise.
► The market is in equilibrium.

Question No: 5 ( Marks: 1 ) - Please choose one
When the marginal utility of a good is zero, this implies that:

► The consumer would not spend any additional income to buy more of that good.
► Consumption of additional units would have positive marginal utility.
► Total utility is minimized.
► Total utility is also zero.

Question No: 6 ( Marks: 1 ) - Please choose one
At any given point on an indifference curve, the absolute value of the slope equals:

► Unity--otherwise there would be no indifference.
► The marginal rate of substitution.
► The consumer’s marginal utility.
► None of the given options.

Question No: 7 ( Marks: 1 ) - Please choose one
A production function:

► Relates inputs with output.
► Generates a curve that is upward sloping.
► Shows diminishing marginal product of an input, since it gets flatter as output rises.
► All of the given options.

Question No: 8 ( Marks: 1 ) - Please choose one
A negatively sloped isoquant implies:

► Products with negative marginal utilities.
► Products with positive marginal utilities.
► Inputs with negative marginal products.
► Inputs with positive marginal products.

Question No: 9 ( Marks: 1 ) - Please choose one
Total costs are the sum of:
► Marginal costs and variable costs.
► Fixed costs and variable costs.
► Fixed costs and marginal costs.
► Average variable costs and marginal costs.

Question No: 10 ( Marks: 1 ) - Please choose one
To find the profit maximizing level of output, a firm finds the output level where:
► Price equals marginal cost.
► Marginal revenue and average total cost.
► Price equals marginal revenue.
► None of the given options.

Question No: 11 ( Marks: 1 ) - Please choose one
A price taker is:
► A firm that accepts different prices from different customers.
► A monopolistically competitive firm.
► A firm that cannot influence the market price.
► An oligopolistic firm.

Question No: 12 ( Marks: 1 ) - Please choose one
If at the profit-maximizing quantity, profits are positive,then:

► Price < Average Total Cost.
► Price > Average Total Cost.
► Price < Average Variable Cost.

► Price = Marginal Cost.

Question No: 13 ( Marks: 1 ) - Please choose one
The break-even point occurs when:

► Price < Average Variable Cost.
► Price < Average Total Cost.
► Price = Average Total Cost.
► Price > Average Variable Cost.

Question No: 14 ( Marks: 1 ) - Please choose one
Second-degree price discrimination is the practice of charging:

► The reservation price to each customer.
► Different prices for different blocks of the same good or service.
► Different groups of customers different prices for the same products.
► Each customer the maximum price that he or she is willing to pay.

Question No: 15 ( Marks: 1 ) - Please choose one
What happens to an incumbent firm's demand curve in monopolistic competition as new firms enter?

► It shifts rightward.
► It shifts leftward.
► It becomes horizontal.
► New entrants will not affect an incumbent firm's demand curve.

Question No: 16 ( Marks: 1 ) - Please choose one
You observe that the price of houses and the number of houses purchased both rise over the course of the year. You conclude that:


► The demand for houses has increased.
► The demand curve for houses must be upward-sloping.
► The supply of houses has increased.
► Housing construction costs must be decreasing.

Question No: 17 ( Marks: 1 ) - Please choose one
A natural monopoly is most likely to exist when:

► There are large barriers to entry.
► There are long term patents.
► There are large economies of scale.
► There is government regulation of the industry.

Question No: 18 ( Marks: 1 ) - Please choose one
If the income elasticity of demand is 1/2, the good is:

► A luxury.
► A normal good (but not a luxury).
► An inferior good.
► A Giffen good.

Question No: 19 ( Marks: 1 ) - Please choose one
Usually the shape of production possibilities curve is:

► Concave.
► Convex.
► Linear.
► Positive.

Question No: 20 ( Marks: 1 ) - Please choose one
If average physical product (APP) is increasing then which of the following must be true?

► Marginal physical product is above the average physical product.
► Marginal physical product is less than average physical product.
► Marginal physical product is decreasing.
► None of the given statements is true.

Question No: 21 ( Marks: 1 ) - Please choose one
Which of the following is true about supply curve under monopoly?
► It is same as the competitive market supply curve.
► It is the portion of marginal cost curve where marginal costs exceed the minimum value of average variable costs.
► It is the result of market power and production costs.
► None of the given statements is true.

Question No: 22 ( Marks: 1 ) - Please choose one
The demand curve for chicken is downward-sloping. Suddenly the price of chicken rises from Rs.130 per kg to Rs.140 per kg. This will cause:

► The demand curve for chicken to shift to the left.
► The demand curve for chicken to shift to the right.
► Quantity demanded of chicken to increase.
► Quantity demanded of chicken to decrease.

Question No: 23 ( Marks: 1 ) - Please choose one
Suppose an increase in income causes demand curve to shift to rightward. In this case, what will happen at any given price?
► The price elasticity of demand will remain unchanged.
► The price elasticity of demand will decrease in absolute terms.
► The price elasticity of demand will increase in absolute terms.
► The price elasticity of demand will increase, decrease or stay the same. It cannot be determined.

Question No: 24 ( Marks: 1 ) - Please choose one
Suppose the total costs of first four units of an output produced are 10, 20, 30, and 40 respectively. What is the marginal cost of the fourth unit of output?
► 10.
► 20.
► 30.
► 40.


Question No: 25 ( Marks: 1 ) - Please choose one
Suppose the total utilities for the first four units of a good consumed are 13, 23, 33, and 43 respectively. What is the marginal utility of the third unit?
► 10.
► 13.
► 20.
► 33.

Question No: 26 ( Marks: 1 ) - Please choose one
Which of the following determines the largest amount of output that a firm can produce with a given combination of inputs?
► Marginal product of labor.
► Gains from specialization.
► Cost function.
► Production function.

Question No: 27 ( Marks: 1 ) - Please choose one
Which of the following best defines the marginal rate of technical substitution?
► The rate at which a producer is able to exchange, without affecting the quantity of output produced, a little bit of one input for a little bit of another input.
► The rate at which a producer is able to exchange, without affecting the total cost of inputs, a little bit of one input for a little bit of another input.
► The rate at which a producer is able to exchange, without affecting the total inputs used, a little bit of one output for a little bit of another output.

► A measure of the ease or difficulty with which a producer can substitute one technique of production for another.


Question No: 28 ( Marks: 1 ) - Please choose one
The total cost (TC) function is given as TC = 100 + 3Q. What is the marginal cost?
► 100
► 3Q
► 3

► 103

Question No: 29 ( Marks: 1 ) - Please choose one
The total cost (TC) function is given as TC = 200 + 5Q. What will be the average total cost if four units of commodity are produced?
► 20
► 55
► 50

► 220

Question No: 30 ( Marks: 1 ) - Please choose one
In cartels, there are a small number of sellers and usually involve
► Heterogeneous products.
► Large competition.
► Homogeneous products.
► Less demand in market.

Question No: 31 ( Marks: 1 ) - Please choose one
If the current market price is set above the market clearing level then which of the following will happen:

► There will be downward pressure on the current market price.
► There will be upward pressure on the current market price.
► There will be lower production during the next time period.
► There will be a surplus to accumulate.

Question No: 32 ( Marks: 1 ) - Please choose one
As price increases total revenue decreases in case of

► Inelastic demand.
► Unit elastic demand.

► Zero elastic demand.

► Elastic demand.


Question No: 33 ( Marks: 1 ) - Please choose one
If the cross price elasticity of demand between two goods A and B is negative; it means that goods are
► Independent.
► Inferior.
► Complements.
► Substitutes.

Question No: 34 ( Marks: 1 ) - Please choose one
If a 7% price reduction causes quantity demanded to rise by 10% then:
► Demand is inelastic.
► Demand is elastic.
► Demand is perfectly elastic.
► Total revenue will remain constant.

Question No: 35 ( Marks: 3 )
Why economists believe that when firms earn zero accounting profits, they actually earn normal economic profits?
It means they price on which they are selling, they have already included their normal profit in that cost and if their product is sold in the same cost with zero profit, then it means they only earn normal profit. So economist believe that when firms earn zero accounting profits they actually earn normal economics profit which is included in the cost as we studied in accounting. Sales = Cost of good sold + Profit.
Question No: 36 ( Marks: 5 )
A. What are the effects of price discrimination on the profit and loss of a firm?
B. There are certain conditions for price discrimination to hold. Discuss those conditions.
(Marks: 2+3)

A: Price discrimination may be beneficial and harmful. There are number of factors like concerns, production of goods, equity etc.

B: Firms should have the flexibility to price discrimination. Price elasticity of demand should be different to different customers. Markets should independent.

Question No: 37 ( Marks: 5 )
a) What is meant by production function in economics?
b) Write complete equation of production function.

A: it is used to represent the relationship of inputs and outputs.
B:
Q = A Kα L1 – α
Q = A Kα L1 – α
Where:
Q = output
L = labor input
K = capital input
A, α and 1 – α are constants determined by technology

Kindly provide their solutions.

MIDTERM EXAMINATION
Spring 2010
ECO401- Economics (Session - 2)
Time: 60 min
Marks: 47

Question No: 1 ( Marks: 1 ) - Please choose one
Government authorities have managed to reduce the unemployment rate from 8% to 4% in a hypothetical economy. As a result:

► The economy's production possibilities curve will shift outward.
► The economy's production possibilities curve will become steeper.
► The economy will move downward along its production possibilities curve.
► The economy will move from a point inside to a point closer to its production possibilities curve.

Question No: 2 ( Marks: 1 ) - Please choose one
When government sets the price of a good and that price is above the equilibrium price, the result will be:

► A surplus of the good.
► A shortage of the good.
► An equilibrium.
► None of the given options.

Question No: 3 ( Marks: 1 ) - Please choose one
If the income elasticity of demand for boots is 0.2, a 10% increase in consumer's income will lead to a:

► 20 percent decrease in the quantity of boots demanded.
► 2 percent increase in the quantity of boots demanded.
► 0.2 percent increase in the quantity of boots demanded.
► 20 percent increase in the quantity of boots demanded.

Question No: 4 ( Marks: 1 ) - Please choose one
The numerical measurement of a consumer’s preference is called:
► Use.
► Pleasure.
► Utility.
► Satisfaction.

Question No: 5 ( Marks: 1 ) - Please choose one
Marginal utility is best described as:

► The total satisfaction gained from the total consumption of the good.
► The change in satisfaction from consuming one additional unit of the good.
► The additional satisfaction gained by consumption of the last good.
► The per unit satisfaction of the good consumed.

Question No: 6 ( Marks: 1 ) - Please choose one
The law of diminishing marginal utility states:

► The supply curve slopes upward.
► Your utility grows at a slower and slower rate as you consume more and more units of a good.
► The elasticity of demand is infinite.
► None of the given options.

Question No: 7 ( Marks: 1 ) - Please choose one
Consumers will maximize satisfaction when:

► The price of each good is exactly equal to the price of every other good consumed.
► The price of each good is exactly equal to the total utility derived from the consumption of every other good.
► The marginal utility of the last dollar spent on each good is exactly equal to the marginal utility of the last dollar spent on any other good.
► Marginal utility is equal to average utility.

Question No: 8 ( Marks: 1 ) - Please choose one
As long as all prices remain constant, an increase in money income results in:

► An increase in the slope of the budget line.
► A decrease in the slope of the budget line.
► An increase in the intercept of the budget line.
► A decrease in the intercept of the budget line.

Question No: 9 ( Marks: 1 ) - Please choose one
Which of the following is TRUE about price-consumption curve for good X?

► Nominal income falls as the price of X falls.
► The absolute price of X falls, but the relative price between X and the composite good Y stays the same.
► It is always downward sloping for a normal good.
► It represents only those market baskets that are optimal for the given price ratio and preference pattern and therefore a demand curve can be plotted from it.

Question No: 10 ( Marks: 1 ) - Please choose one
_______________ arises when an increase in all inputs leads to a more-than-proportional increase in the level of output. _____________ means that as inputs are added to the production process, output increases proportionally.

► Economies of scale; constant returns to scale.
► Constant returns to scale; decreasing returns to scale.
► Decreasing returns to scale; economies of scale.
► Economies of scale; decreasing returns to scale.

Question No: 11 ( Marks: 1 ) - Please choose one
The rate at which a firm can substitute capital for labour and hold output constant is the:

► Law of diminishing marginal returns.
► Marginal rate of substitution.
► Marginal rate of factor substitution.
► Marginal rate of production.

Question No: 12 ( Marks: 1 ) - Please choose one
Fixed costs are fixed with respect to changes in:
► Output.
► Capital expenditures.
► Wages.
► Time.

Question No: 13 ( Marks: 1 ) - Please choose one
A price taker is:
► A firm that accepts different prices from different customers.
► A monopolistically competitive firm.
► A firm that cannot influence the market price.
► An oligopolistic firm.

Question No: 14 ( Marks: 1 ) - Please choose one
If a firm experiences economies of scale, then the:

► Long-run average total cost curve is equal to the economies of scope.
► Long-run average total cost curve is positively sloped.
► Long-run average total cost curve is horizontal.
► Long-run average total cost curve is negatively sloped.


Question No: 15 ( Marks: 1 ) - Please choose one
The break-even point occurs when:

► Price < Average Variable Cost.
► Price < Average Total Cost.
► Price = Average Total Cost.
► Price > Average Variable Cost.

Question No: 16 ( Marks: 1 ) - Please choose one
Compared to the equilibrium price and quantity sold in a competitive market, a monopolist will charge a ______________ price and sell a ______________ quantity.

► Higher; larger.
► Lower; larger.
► Higher; smaller.
► Lower; smaller.

Question No: 17 ( Marks: 1 ) - Please choose one
The principle economic difference between a competitive and a non-competitive market is:

► The number of firms in the market.
► The extent to which any firm can influence the price of the product.
► The size of the firms in the market.
► The annual sales made by the largest firms in the market.

Question No: 18 ( Marks: 1 ) - Please choose one
Usually the shape of production possibilities curve is:

► Concave.
► Convex.
► Linear.
► Positive.

Question No: 19 ( Marks: 1 ) - Please choose one
For price making firm, at the profit-maximizing level of output, what is TRUE of the total revenue (TR) and total cost (TC) curves?
► They must intersect with TC cutting TR from below.
► They must intersect with TC cutting TR from above.
► They must be tangent to each other.
► They must have the same slope.

Question No: 20 ( Marks: 1 ) - Please choose one
A person with a diminishing marginal utility of income is said to be:
► Risk averse person.
► Risk neutral person.
► Risk loving person.
► None of the given options.

Question No: 21 ( Marks: 1 ) - Please choose one
What questions are related with explanation? What questions are related with what ought to be?
► Positive, negative.
► Negative, normative.
► Normative, positive.
► Positive, normative.

Question No: 22 ( Marks: 1 ) - Please choose one
Production possibilities curve will shift upward if there is:
► A reduction in unemployment.
► An increase in the production of capital goods.
► A reduction in discrimination.
► All of the given options.

Question No: 23 ( Marks: 1 ) - Please choose one
What will happen to the demand for product X, if there is an increase in consumer’s income?
► It will shift to the right if X is a complementary good.
► It will shift to the right if X is a normal good.
► It will shift to the right if X is an inferior good.
► It will necessarily remain unchanged.

Question No: 24 ( Marks: 1 ) - Please choose one
What will happen if there is an increase in the raw material costs, other things remaining the same?
► The supply curve will shift to the left.
► The supply curve will shift to the right.
► Output will increase regardless of the market price and the supply curve will shift upward.
► Output will decrease and the market price will also decrease.

Question No: 25 ( Marks: 1 ) - Please choose one
Suppose the total costs of first four units of an output produced are 20, 40, 60, and 80 respectively. What is the marginal cost of the second unit of output?
► 10.
► 20.
► 30.
► 40.

Question No: 26 ( Marks: 1 ) - Please choose one
Which of the following determines the largest amount of output that a firm can produce with a given combination of inputs?
► Marginal product of labor.
► Gains from specialization.
► Cost function.
► Production function.

Question No: 27 ( Marks: 1 ) - Please choose one
Suppose that 36 units of output are produced by using 12 units of labor. Which of the following is TRUE in this context?
► The marginal product of labor is 3.
► The total product of labor is 1/3.
► The average product of labor is 3.
► None of the given options.

Question No: 28 ( Marks: 1 ) - Please choose one
Which of the following best defines the marginal rate of technical substitution?
► The rate at which a producer is able to exchange, without affecting the quantity of output produced, a little bit of one input for a little bit of another input.
► The rate at which a producer is able to exchange, without affecting the total cost of inputs, a little bit of one input for a little bit of another input.
► The rate at which a producer is able to exchange, without affecting the total inputs used, a little bit of one output for a little bit of another output.

► A measure of the ease or difficulty with which a producer can substitute one technique of production for another.


Question No: 29 ( Marks: 1 ) - Please choose one
Usually, for electric sales, the electric power company uses block pricing strategy. It is an example of:
► First-degree price discrimination.
► Second-degree price discrimination.
► Third-degree price discrimination.
► Block pricing is not a type of price discrimination.

Question No: 30 ( Marks: 1 ) - Please choose one
The total cost (TC) function is given as TC = 500 + 30Q. What is the average total cost?
► 500
► 30+ (500/Q)
► 30Q2+500Q
► 30

Question No: 31 ( Marks: 1 ) - Please choose one
If marginal cost is Rs.15,000/- and marginal revenue is Rs.20,000/-. The firm should:
► Reduce output until marginal revenue equals marginal cost.
► Do nothing without information about your fixed costs.
► Expand output until marginal revenue equals marginal cost.
► None of the given options.

Question No: 32 ( Marks: 1 ) - Please choose one
It is not possible to identify any single equilibrium in
► Perfect competition.
► Monopoly.
► Oligopoly.
► Duopoly.

Question No: 33 ( Marks: 1 ) - Please choose one
Theory of firm is not clearly discussed & established in
► Monopoly.
► Perfect competition.
► Oligopoly.
► None of the given options.

Question No: 34 ( Marks: 1 ) - Please choose one
If you sum the marginal utilities obtained by consumption from one unit to five units of any commodity, you will get:
► The marginal utility for the consumption of the fifth unit.
► The marginal utility for the consumption of the sixth unit.
► The total utility for the consumption of the first five units.
► The average utility for the consumption of the first five units.

Question No: 35 ( Marks: 3 )
Assuming that supernormal profits can be made in the short run in a monopolistically competitive industry; will there be any difference in the long-run and short-run elasticity of demand?

Question No: 36 ( Marks: 5 )
Compare the characteristics of perfect competition and monopolistic competition with examples.


Question No: 37 ( Marks: 5 )
A. Derive the equation of budget line. Which part of the equation shows the slope and which part shows the intercept?
B. Which factors cause the shift in budget line and which cause the change in slope of budget line?
(Marks: 3+2)

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