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Foundation Level Economics for Business

3a FECB
19 May 2003
Monday morning

INSTRUCTIONS TO CANDIDATES
Read this page before you look at the questions

THIS QUESTION PAPER BOOKLET IS ALSO YOUR ANSWER BOOKLET.

Sufficient space has been provided for you to write your answers, and also for workings where questions
require them. For section B questions, you must write your answers in the shaded space provided. Do not
exceed the stated number of words. Do NOT remove any sheets from this booklet: cross through neatly
any work that is not to be marked. Avoid the use of correction fluid.

You are allowed two hours to answer this question paper. All questions are compulsory.

Answer the ONE question in section A (this has 26 sub-questions and is on pages 2-8)
Answer the THREE questions in section B (these are on pages 10-15)

You are advised to spend 10 minutes reading through the paper before starting to answer the questions.
You should spend no more than 55 minutes on answering the ONE question in section A, which has 26
sub-questions.
You should spend no more than 55 minutes on answering the THREE questions in section B.

Hand this entire booklet to the invigilators at the end of the examination. You are NOT permitted to leave
the examination hall with this booklet.

Do NOT write your name or your student registration number anywhere on this booklet.

© The Chartered Institute of Management Accountants 2003

SECTION A — 52 MARKS
ANSWER ALL TWENTY-SIX SUB-QUESTIONS – 2 MARKS EACH

Each of the sub-questions numbered from 1.1 to 1.26 inclusive, given below, has only ONE correct
answer.

REQUIRED:
Place a circle “O” around the letter A, B, C or D that gives the correct answer to each sub-question.
If you wish to change your mind about an answer, block out your first answer completely and then circle
another letter. You will NOT receive marks if more than one letter is circled.

Please note that you will NOT receive marks for any notes or workings to these sub-questions.

Question One

1.1 For a business producing shirts and dresses, the opportunity cost of a dress is

A the market price that the business can obtain for a dress.

B the cost of the labour and raw materials used in making the dress.

C the shirts that could have been produced with the resources used to make the dress.

D the total cost of all the resources used to make one dress.

1.2 An increase in labour productivity in a business can be caused by all of the following EXCEPT which
ONE?

A An increase in the stock of capital equipment.

B An increase in the quantity of labour employed.

C An increase in the rate of technical innovation.

D An increase in the level of training of the labour force.

1.3 The term economic welfare refers to

A the stock of wealth in an economy.

B the expenditure on social welfare by the government.

C the private consumption levels of the population as a whole.

D the overall standard of living in an economy.

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1.4 Long term economic growth is encouraged by all of the following policies EXCEPT which ONE?

A The encouragement of research and development.

B An expansion of aggregate demand to increase the level of employment.

C The establishment of education and training centres to improve human capital.

D Tax allowances for business investment expenditure.

1.5 A slow down in economic growth in the US would be transmitted to the rest of the world by all
EXCEPT which ONE of the following processes?

A A fall in US interest rates.

B A fall in the US demand for imports.

C A decline in the level of US capital flows to the rest of the world.

D Falling US stock market prices leading to similar falls in other countries.

1.6 An economy is usually described as a mixed economy when production

A is partly for the home market and partly for export.

B consists partly of capital goods and partly of consumer goods.

C takes place in all three sectors; agriculture, industry and services.

D is partly in the private sector and partly in the public sector.

1.7 What does the elasticity of supply measure?

A The time taken for supply to adjust to changes in price.

B The responsiveness of the quantity supplied to a change in demand.

C The responsiveness of the quantity supplied to a change in price.

D The change in the quantity supplied divided by the price.

May 2003 3 FECB

1.8 A business producing an inferior good will find that the demand for the good

A will not respond to a reduction in price.

B will fall when consumer incomes rise.

C has a very low price elasticity of demand.

D has a positive, but low, income elasticity of demand.

1.9 Which ONE of the following would lead the demand curve for a good to shift to the right?

A A rise in consumer income.

B A decrease in the supply of a complementary good.

C An increase in the supply of a substitute good.

D A fall in the price of the good.

1.10 The law of diminishing returns applies to a business only when the quantity of

A all factors of production used in the production process can be varied.

B all factors of production used in the production process are fixed.

C at least one factor of production which is used in the production process is fixed.

D capital used in the production process is fixed but the amount of labour employed can be varied.

1.11 If a business is taxed by an amount equal to the external costs it imposes on the rest of society by its
production activity, then

A there will be a misallocation of resources because the price mechanism has been interfered with.

B the increase in costs will lead the business to produce more in order to maintain its profits.

C there will be no change in production and resource allocation because costs and prices will adjust.

D resource allocation will be improved since prices will more accurately reflect costs and benefits.

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1.12 All of the following are internal economies of scale for a firm EXCEPT which ONE?

A The firm is able to reduce administration costs per unit of output when it opens a second production
plant.

B The firm can buy raw materials from other firms at lower prices when it buys in bulk.

C TV advertising costs can be spread over a larger output.

D Training costs are reduced when the firm can draw on the pool of skilled labour in the region.

1.13 What is meant by the divorce of control from ownership in modern market economies?

A The employment of salaried senior managers who do not have significant shareholdings in the
companies that employ them.

B The increased rights and roles of employees in business organisations.

C The growth in government regulation and control of business through regulatory bodies.

D The increased importance of institutional shareholders relative to individual shareholders.

1.14 If the total revenue from the sales of a good rises by 10% when its price is increased by 10%, then the
demand for the good must

A be perfectly price elastic.

B be perfectly price inelastic.

C be of unitary elasticity.

D have a price elasticity of -1.

1.15 On scheduled airflights, airlines sell standby passenger tickets at discounted (lower) prices because

A the demand for seats is always price elastic.

B the marginal cost is low up to the point where all seats on the aeroplane are occupied.

C the average cost for standby seats is less than the marginal cost.

D this price discrimination raises marginal revenue.

May 2003 5 FECB

1.16 A perfectly competitive market has all of the following features EXCEPT which ONE?

A There are many buyers and sellers.

B Buyers and sellers have full information.

C Sellers can earn only normal profits in both the short and the long run.

D There are no barriers to entry into, and to exit from, the market.

1.17 A merger between two companies producing similar products might be in the public interest for all of
the following reasons EXCEPT which ONE?

A Rationalisation of production may permit economies of scale.

B The new company may be able to afford higher levels of research and development.

C The new company may be able to compete more effectively with an established large company.

D Increased control of the market by the company will limit the opportunities for overseas companies to
compete.

1.18 Which ONE of the following would lead to a fall in the value of the multiplier?

A A decrease in the marginal propensity to consume.

B A fall in the level of public expenditure.

C Consumers saving a lower proportion of their income.

D A decrease in the marginal propensity to import.

1.19 The weights used in an index of retail (consumer) prices take account of

A changes in the quality of goods.

B the redistribution of income that occurs when prices change.

C the relative importance of different goods in the pattern of consumer expenditure.

D seasonal variations in the prices of some goods.

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1.20 All of the following statements about the monetary system are true EXCEPT which ONE?

A Financial intermediation links net savers and net debtors.

B In developed economies cash and notes form only a very small part of the money supply.

C The capital market deals in long term financial assets.

D The more liquid a financial asset is, the higher is the expected rate of return.

1.21 The downswing phase of the trade cycle usually has each of the following features EXCEPT which
ONE?

A A fall in the level of government revenue from taxation.

B A rise in structural unemployment.

C A reduction in inflationary pressures.

D Lower levels of demand for imported goods.

1.22 Which ONE of the following would result from a reduction in interest rates?

A Lower levels of business investment.

B Increased business costs.

C Higher wage pressure resulting from lower unemployment.

D Reduced international competitiveness

1.23 If there is inflation caused by excess aggregate demand, which ONE of the following policies is likely
to be most effective in controlling the rise in prices?

A An increase in the level of direct taxation.

B The imposition of barriers to imports.

C A reduction in interest rates.

D A reduction in VAT and excise taxes.

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1.24 A progressive tax is defined as one where

A the amount paid in tax increases as income rises.

B the amount of tax revenue received by the government rises over time.

C the proportion of income paid in taxation increases as income rises.

D high income earners pay more direct tax than do low income earners.

1.25 A multinational company may wish to locate production in an economy to which it currently exports for
all of the following reasons EXCEPT which ONE?

A There is little cost for the company to move its capital and management to the other economy.

B Production costs may be lower in the other economy.

C There are tariff barriers in the other economy.

D There are significant transport costs.

1.26 The process of globalisation leads to all of the following EXCEPT which ONE?

A Increasing foreign competition in domestic markets.

B Decreasing interdependence of national economies.

C Greater international division of labour.

D Rising levels of international trade relative to national income.

(Total = 52 Marks)

End of Section A

FECB 8 May 2003

SECTION B – 48 MARKS
ANSWER ALL THREE QUESTIONS

IMPORTANT
MARKS ARE AWARDED FOR COMPLETING THE SHADED BOXES WITH THE CORRECT
ANSWER WHERE A MARK IS INDICATED IN THE RIGHT-HAND COLUMN.

DO NOT WRITE IN THE MARGINS NOR IN THE COLUMNS FOR USE BY MARKERS.

Question Two

The following diagram is that of the kinked demand curve model for company ZZZ producing a consumer
good in an oligopolistic market.

MC2
P1
Costs, revenue

MC1

MR1 D

0 q1 Output
Required:
Use your knowledge of economics AND the diagram above to answer the Do not write in these
following: columns below

(a) Complete the following (maximum of 8 words per gap). For use For use
by the by the
Marks first second
available marker marker
(i) The kinked demand curve model shows that if company ZZZ
raises its prices from P1, then its competitors
1
and if company ZZZ reduces its prices from P1, its competitors
1
(ii) If company ZZZ is a profit maximiser, it will produce where
1

and its price will only rise if costs rise from MC1 to
1

(iii) Because of the kinked demand curve, firms in oligopoly tend to

avoid 1
and depend heavily on
1
to compete.

sub-total: 6

May 2003 9 FECB

Question Two continued

Use your knowledge of economics AND the diagram opposite to answer

the following:
Do not write in these
Required: columns below

(a) Complete the following (maximum of 8 words per gap). For use For use
by the by the
Marks first second
available marker marker
(iv) In oligopoly markets, companies making decisions on price and
output must consider the 1
of rival companies. This is called
1

in decision making.

sub-total: 8
(b) Using no more than 5 words for each, describe the effects of the
following on the demand curve (curve DD opposite) for company
ZZZ’s product.
Event The demand curve would
(i) A successful advertising
campaign by one of ZZZ’s rival 1
companies.
(ii) The introduction of a new
production technology which
significantly reduces production 1
costs for all firms in the
industry.
(iii) A fall in the price of a good
which is complementary to 1
ZZZ’s product.
(iv) Significant rises in income tax in
the country which is ZZZ’s main 1
market.
sub-total: 12
(c) State whether each of the following is TRUE or FALSE.
(i) Oligopolies are most likely to occur where there are 1
significant barriers to entry.
(ii) Excess profits may persist in oligopolies even in the 1
long run.
(iii) Collusion is rare in oligopoly industries because the
dominant company has nothing to gain from co- 1
operating with rivals.
(iv) Price leadership in oligopoly occurs where one firm
sets a price for the product and other firms are not 1
allowed to charge more than this.

Total for Question Two = 16 Marks

FECB 10 May 2003

Question Three

The following diagram represents the aggregate demand curve (AD) and aggregate supply curve (AS) for an
economy.
AS
Price level

P2

P1
AD2

AD1

O Y1 Y2

National output

Required:
Use your knowledge of economics AND the diagram above to answer the
following:
Do not write in these
columns below

(a) With respect to the aggregate supply curve, For use For use
by the by the
Marks first second
available marker marker
(i) identify the effect on national output and on the price level of a
negative supply shock (maximum of 5 words each);
Effect on output Effect on price

(ii) state whether each of the following would produce a negative

supply shock for an economy (YES/NO).
A steep rise in the price of oil imported into the 1
economy.
An increase in labour productivity brought about by 1
the widespread application of information technology.
The introduction of strict regulations reducing the 1
length of the working week.
Deregulation of the financial system producing a 1
sharp increase in the availability of credit.
sub-total: 5

May 2003 11 FECB

Required:
Use your knowledge of economics AND the diagram opposite to answer Do not write in these
the following: columns below

(b) For use For use

by the by the
Marks first second
available marker marker
(i) With respect to the aggregate demand curve, identify the two
missing components of aggregate demand;

Private Business 2
consumption investment
(ii) State whether each of the following could be a reason for the shift
in the aggregate demand curve from AD1 to AD2 (YES/NO).
A significant fall in the average propensity to save in 1
the economy.
An improvement (move towards surplus) in the 1
country’s current account of the balance of payments.
An increase in the rate of income tax levied by the 1
country’s government.
A large rise in the rate of return expected by the 1
business sector on all new investment.
sub-total: 11
(c) Complete the following (maximum of three words per gap).
(i) An effective policy of improving the education and training of
unemployed workers would shift the 1

curve to the and, as a result, both 1

and the price level would fall. 1

(ii) For the business sector as a whole, a shift in the aggregate

demand curve to the right would mean higher 1

as a benefit, but higher 1

as a disadvantage.

Total for Question Three = 16 Marks

FECB 12 May 2003

Question Four

Anyland is a small economy with a high per capita income by world standards. It has a high trade ratio with
both imports and exports being a high proportion of gross domestic product. The most important exports are
textiles, consumer electronics and tourism. Imports are mainly raw materials, oil and engineering and
transport equipment. The economy is an open one with low trade barriers and no significant controls on the
international movement of capital. The current and capital accounts of the balance of payments are currently
in balance. Multinational companies are generally welcomed by Anyland.

Required:
Use your knowledge of economics and the information contained above to Do not write in these
answer the following: columns below

(a) State whether, other things being equal, the direct effect on For use For use
Anyland’s balance of payments current and capital accounts, of by the by the
each of the following would be a MOVE TOWARDS SURPLUS, or Marks first second
a MOVE TOWARDS DEFICIT or would have NO EFFECT. available marker marker
Economic process Current Capital
account account
A significant rise in consumer
expenditure in Anyland’s trading 1
partners.

A large rise in interest rates in

1
Anyland.

Investment by a multinational oil

company in an offshore oilfield in 1
Anyland.

Increased remittance of profits of

foreign companies in Anyland back 1
to their parent companies.

sub-total: 4
(b) Complete the following (maximum of 8 words per gap).
(i) Trade theory would suggest that the Anyland economy has
1
in the production of textiles and consumer electronics because it
has a
1
in the production of these goods.

(ii) The Anyland economy is vulnerable to changes in world economic

activity because it has a
1
(iii) The balance of exports and imports of goods for Anyland is known
as its balance of trade, while its terms of trade are the ratio of
1
sub-total: 8

May 2003 13 FECB

Required:
Do not write in these
columns below

(c) State whether each of the following items would appear in For use For use
Anyland’s balance of payments CURRENT ACCOUNT or CAPITAL by the by the
ACCOUNT and state whether each item would be a CREDIT or a Marks first second
DEBIT. available marker marker

Item Current or Credit or

capital debit?
account?
Interest paid to an Anyland resident
on capital held in a bank account in 1
the USA.

Expenditure by an Anyland resident

1
on an overseas holiday.

A financial gift by the Anyland

government to a developing 1
country.

The sale of an airliner by the US

company Boeing to Anyland 1
International Airways.

sub-total: 12
(d) State whether each of the following are TRUE or FALSE.
(i) If Anyland adopted a fixed exchange rate system
business in Anyland could avoid transaction costs 1
when buying and selling foreign exchange.
(ii) Intra-industry trade is when a country imports and 1
exports the same types of goods and services.
(iii) If a country adopted high trade barriers on the goods
produced by companies based overseas, such 1
companies would be discouraged from locating
production there.
(iv) The imposition of trade barriers normally reduces
economic welfare in the importing as well as the 1
exporting country.

Total for Question Four = 16 Marks

End of Question Paper

FECB 14 May 2003