11175 INTRODUCTION TO ECONOMICS

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INTRODUCTION TO ECONOMICS

FINAL EXAMINATION

Section A. (40 Marks)

Mark the BEST answer out of the available choices with a cross (X) in the answer sheet provided at the end of the question paper

1)  In terms of Australia's production possibility curve, (PPC), a rise in the level of unemployment could be shown by:   

A) a movement from a point on the PPC to a point inside the PPC.   

B) a movement along the PPC.   

C) the PPC shifting inward.   

D) the PPC shifting outward.   

2)  Inflation and unemployment:   

A) are the focus of positive economics.   

B) are the focus of macroeconomics.   

C) are the focus of economic history.   

D) are the focus of microeconomics.   

3) Which of the following would NOT shift the demand curve for coffee to the right?

A) An increase in the price of tea.   

B) A drop in the price of cream and sugar.

C) Research findings that drinking coffee increases your life span.   

D) A decrease in the price of coffee.

4) Market equilibrium:   

A) maximises economic surplus.   

B) maximises consumer surplus.   

C) maximises producer surplus.   

D) all of the above are correct.  

5)  An increase in price will:   

A) shift the supply curve to the right.   

B) shift the demand curve to the left.   

C) leave the supply curve unchanged but cause a movement up the supply curve.   

D) leave the demand curve unchanged but cause a movement down the demand curve.   

6)  If the supply curve shifts to the right, ceteris paribus, there will be:

A)  an increase in equilibrium price. 

B) a decrease in equilibrium price. 

C) a decrease in equilibrium quantity. 

D) both B and C

 

7)  In the above diagram, the shift in the supply curve from S to S1 might reflect

A)  a decrease in the cost of the tomato sauce used to produce pizza.  

B) an increase in the price of a pizza.  

C) a decrease in the number of pizza producers.  

D) None of the above answers is correct.  

8)  Cross-price elasticity of demand measures the response in:   

A) quantity of one good demanded when the quantity demanded of another good changes.   

B) the income of consumers to the change in the price of goods.   

C) the price of a good to a change in the quantity of another good demanded.   

D) the quantity of one good demanded to a change in the price of another good.   

9)  As a result of a technological breakthrough at XYZ Computers, the supply curve shifted out, the equilibrium price of computers decreased, and total revenue decreased. This suggests the price elasticity of demand for computers is:   

A)  inelastic.   

B) perfectly inelastic.   

C) perfectly elastic.   

D) elastic.   

10)  If your income increased by 10% and the quantity of pizza you demanded increased by 5%, your income elasticity of demand for pizza is:   

A)  10%.   

B) -0.2.  

C) 0.5.  

D) 2.0.  

11)  Perfect competition is a market structure  

A) resulting from individual firms selling highly differentiated products.  

B) where there is significant regulation and markets are always efficient.  

C) in which any firm would have serious impediments to entry or exit.  

D) in which individual buyers and sellers have no effect on market price.  

12)  Average variable cost is equal to:  

A) average fixed cost plus marginal cost.   

B) average total cost minus average fixed cost.   

C) average total cost minus marginal cost.   

D) average fixed cost minus marginal cost.   

13)  Which of the following statements is FALSE?   

A) The length of time that the short run lasts will vary from firm to firm and industry to industry.   

B) In the short run firms can neither exit nor enter an industry.   

C) In the short run there is at least one fixed factor of production.   

D) Labour can never be fixed in the short run.   

14)  Profit-maximising firms want to maximise the difference between:   

A)  marginal revenue and average cost.   

B) marginal revenue and marginal cost.   

C) total revenue and total cost.   

D) total revenue and marginal cost.   

15)  The closest example of a perfectly competitive industry is:   

A)  fresh vegetables.   

B) petrol stations.   

C) fast foods.   

D) beer.   

16)  The cosmetic industry is not considered perfectly competitive because:   

A)  each firm's products are differentiated.   

B) there are a very large number of firms.   

C) entry and exit are strictly regulated by the government.   

D) all of the above   

17)  Jerry grows lettuces commercially. This is a perfectly competitive business and Jerry faces a perfectly elastic demand curve. If he wants to try to increase revenue he should:

A)  do nothing; there is nothing he can do to increase revenue.   

B) lower the price of his lettuces to try to sell more.   

C) keep the price the same but produce more to increase sales.   

D) raise the price of his lettuces to make more per sale.   

18)  A cinema decides to increase the price of its seats and, as a result finds that its revenue increases. This means that   

A) the income elasticity of demand for seats is negative.  

B) the demand for seats is inelastic with respect to income.  

C) the demand for seats is elastic with respect to income.  

D) the demand for seats is inelastic with respect to price.  

19)  If the cross price elasticity of demand between two goods is positive, then the goods are

A)  normal goods.  

B) complements.  

C) inferior goods.  

D) substitutes.  

20)  In the theory of the firm the long run is   

A) the period of time in which only variable costs can be changed.  

B) one year or more.  

C) the period of time in which all factors except fixed factors can be changed.  

D) the period of time in which all factors can be varied.  

21)  Externalities are a problem only if:

A)  the externalities are negative.   

B) all firms are perfectly competitive.   

C) all firms are monopolistic.   

D) decision makers do not take them into account.   

22)  When calculating GDP by the expenditure method, exports are ________ and imports are ________.   

A) added, added  

B) added, subtracted  

C) subtracted, subtracted  

D) subtracted, added  

23)  Any transaction that causes a country to lose foreign exchange is a:   

A)  credit item in that country's balance of payments.   

B) debit item in that country's balance of payments.   

C) credit item in that country's balance of trade.   

D) debit item in that country's balance of trade.   

24)  A man is sacked from his job because he was late for work too many times. While he is searching for another job he would be classified as:   

A) not in the labour force because his employer had a legitimate reason for sacking him.   

B) cyclically unemployed.   

C) frictionally unemployed.   

D) structurally unemployed.   

25) Which of the following transactions would be included in the official calculation of GDP?   

A) A student buys a used text book at the bookstore.   

B) Bridgestone Australia sells $2 million worth of tyres to General Motors Holden Australia.

C) You buy a new iPod.

D) You illegally download music off the Internet to put on your new iPod.   

11175 INTRODUCTION TO ECONOMICS

26)  The aggregate supply curve will shift outwards when:   

A)  new technology arises.   

B) the government increases income tax rates.   

C) the costs of production rise.   

D) consumer expenditure rises.   

27)  Public goods are distinguished from other types of goods because

A)  they are relatively demand inelastic.  

B) it is impossible to exclude free riders.  

C) they are provided by the public sector.   

D) the government feels it knows better than consumers what people ought to consume.  

Figure 1

 

28) Figure 1 shows:       

A) a negative externality.

B) a positive externality.

C) a public good.

D) common resource.

29) In Figure 1 the firm wants to produce:

A) Q1.

B) Q2.

C) Q3.

D) Q4.

30) In Figure 1 the efficient output is:

A) Q1.

B) Q2.

C) Q3.

D) Q4.

31)  If the economy were in recession, we would expect:    

A) government expenditure to be high and tax revenues to be high so that the government might have a large deficit.   

B) government expenditure to be low and tax revenues to be low so that the government could run a public sector surplus.   

C) government expenditure to be high and tax revenues to be low causing a large public sector deficit.   

D) none of the above   

32) Demand-pull inflation is caused by:       

A) very high levels of aggregate demand in the short run.

B) wage increases that are higher than increases in productivity growth.

C) a recession.

D) an increase in the costs of production, which pulls prices higher.

33)  The natural rate of unemployment can be best defined as:

A) unemployment that arises due to the natural changes in technology that occur in the conomy.

B) unemployment that occurs as the result of a recession.

C) unemployment that occurs when people are re-entering the labour force.

D) the rate of unemployment that exists when there is no demand deficient unemployment.

34)  Cost push inflation may be caused by:

A) very high levels of aggregate demand pushing prices higher.

B) an increase in the prices of final goods and services.

C) a recession.

D) an increase in the level of real wages.

35)  Assuming that all else remains constant, contractionary monetary policy causes:

A) aggregate demand to rise, and the price level to rise.

B) aggregate demand to rise, and the price level to fall.

C) aggregate demand to fall, and the price level to fall.

D) aggregate demand to fall, and the price level to rise.

36)  Answer this question by referring to the table below. All calculations are correct.  The unemployment rate is approximately:

Employed            500 000

Unemployed         50 000

Population          1 000 000 

A) (50 000/550 000) x 100 = 9.1 %

B) (50 000/500 000) x 100 = 10.0%

C) (50 000/1 000 000) x 100 = 5.0%

D) cannot be determined without the above table including figures on the size of the labour force.

37) The record of a country's transactions in goods, services, and assets with the rest of the world is its   

A) current account.  

B) balance of payments.  

C) balance of trade.  

D) capital account.  

38) If the Reserve Bank of Australia's policy is described as contractionary, then it would:

A) increase the level of liquidity in the financial market.

B) use open market operations to sell financial securities.

C) reduce the overnight cash rate.

D) use open market operations to buy financial securities.

39) A country that allows its exchange rate be determined by the market, without government intervention has a:  

A) managed float exchange rate system.

B) floating exchange rate.

C) gold standard.

D) fixed currency.

40) An appreciation of a country's currency, ceteris paribus, is likely to:  A) increase its GDP.

B) decrease imports.

C) decrease its GDP.

D) increase exports. 

SECTION B                  (40 marks)   

ANSWER ANY TWO QUESTIONS IN THIS SECTION.  DO NOT ANSWER MORE THAN TWO QUESTIONS IN THIS SECTION 

BEGIN EACH QUESTION ON A NEW ANSWER BOOK.  WRITE THE NUMBER OF THE QUESTION ANSWERED CLEARLY ON THE FRONT PAGE OF THE ANSWER BOOK.

You should use diagrams to illustrate your answers where appropriate in this section.

1.    Use demand and supply curves to illustrate and explain how each of the following events would affect the equilibrium price and quantity in the market:

a) How would an increase in the price of milk affect the equilibrium in the butter market?               (4 marks)

b) How would an increase in the price of milk affect the equilibrium in the cereal market?           (4 marks)

c) The Australian Medical Association finds that French fries are not bad for your health after

all and issues a report endorsing their use. What happens to the equilibrium in the French fries market?                  (4 marks)

d) How would a ban on smoking in public affect the equilibrium in the market for cigarettes?      (4 marks)

e) How would increase in the price of movie theatre tickets affect the equilibrium in the DVD rental market?      (4 marks)

2.    Answer both of the following.  This counts as one question.

a) Discuss why the perfectly competitive market equilibrium outcome is efficient?  Use the concepts of allocative, productive and dynamic efficiency in your explanation.              (10 marks)

b) Compare the monopoly equilibrium (output and price) with the perfectly competitive market equilibrium. What can you say about efficiency under monopoly compared to that of perfect competition?                   (1 marks)

3. Answer both of the following.  This counts as one question.

a. What is market failure?   Discuss why the market would fail in the presence of an

‘Externality’.   Using a suitable diagram illustrate and explain how government intervention in a market with negative externality will result in a socially desirable  optimal level of output?             (15 marks)

b. Discuss why the market fails in the allocation of common resources and public goods.        (5 marks)  

4. Answer both of the following.  This counts as one question.

a) Discuss the difference between production in the short run and Long run. Draw a graph that shows the total output curve in the short run and explain its shape. Make sure you label your axes appropriately.          (10 marks)

b) What is average product of labour? Explain the relationship between the average product of labour and marginal product of labour. Illustrate the relationship between the two using a graph. Make sure you label your axes appropriately.   (10 marks)

5. Using a suitable diagram explain what is an inflationary gap, and what is a recessionary gap?  Explain how fiscal policy can be used to close a recessionary gap? In this context explain what is the “crowding out” effect of fiscal policy?        (20 marks)  

6. Answer both of the following

a) Explain the different types of unemployment that can occur in an economy giving an example of each type of unemployment you have discussed             (10 marks)                                                                            

b) Explain using a suitable diagram how the exchange rate is determined under a flexible exchange rate system.  Explain three factors, which are likely to increase a country’s demand  for foreign exchange (i.e