ECON 111_201102: PREPARATION TOWARDS FINAL EXAM

CONTENTS
Structure of Exam and skills required Past Final exam questions

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ECON 111, FINAL EXAMINATION: STRUCTURE, INFORMATION AND SAMPLE QUESTIONS FOR YOUR PREPARATION

FRONT PAGE OF FINAL EXAMINATION SEMESTER 2, 2011

TABLE NO FAMILY NAME FIRST NAME STUDENT ID

Final Examination Semester 2, 2011 Unit Name: Microeconomic Principles Unit Code: Examination Time: Reading Time: Total Time: Instructions Candidates Candidates Candidates Candidates should should should should attempt attempt attempt attempt ALL questions in Section A (30 Marks) ALL questions in Section B (20 Marks) ONE OF TWO questions in Section C (15 Marks) ONE OF TWO questions in Section D (15 Marks) ECON 111 3 Hours and 0 Minutes 10 Minutes 3 Hours and 10 Minutes

Answer Section A on the Multiple Choice answer sheet provided. Answer all other questions in the exam paper. The use of calculators is permitted. Make sure you hand in ALL four sections, the multiple choice answer sheet AND the examination paper at the end of the exam.

NO PART OF THIS EXAMINATION PAPER IS TO BE TAKEN FROM THE EXAMINATION ROOM.

This examination consists of pages, excluding the cover page DO NOT START UNTIL INSTRUCTED TO DO SO

Assessment Task Name Exam MC Exam Problems Exam Discussion Online Quiz 2 Online Quiz 1 Group Presentation Mid-Semester Test MC Mid-semester Test Long Answer Online Quiz 3 Online Quiz 4 Total

Weighting (%) 20 15 20 2.5 2.5 10 10 15 2.5 2.5 100

Assessment Out of 30 20 30 20 20 10 20 20 20 20 210

Final Exam

Section A (30 marks)

There are 30 multiple choice questions spanning all topics (i.e. lecture 1 - lecture 13) %Weighting toward Final Exam Recommended Time

20 (i.e. (30/30) x 20 = 20)

60 minutes

Some questions on market structure are presented in diagrams or tables. A refresher on how to calculate elasticity of demand and supply curves and basic calculations in market structure, including marginal revenue and marginal cost. All questions are adapted from the text book, lecture notes, and tutorials.

Sections B (20 marks)

Recommended Time

35 minutes

There are two compulsory mathematical problems on market structures and their applications (e.g. Monopoly and perfect competition, externalities/market failure) Question 1 has 2 parts: (a) is worth 3 marks; (b) is worth 2 marks Question 2 has 5 parts (a - e): (a) is worth 2 marks; (b) is worth 2 marks; (c) is worth 7 marks; (d) is worth 2 marks; (e) is worth 2 marks. Every calculation requires you to show steps leading to the final answer. Each step is rewarded with appropriate mark, with the final answer earning the smallest

fraction of total allocated mark. For example, for a total of 3 marks 2.5 would be allocated to steps leading to the final answer and 0.5 to the final.

Sections C and D (30 marks (=15 x 2))

%Weighting 20 (i.e. (30/30) x 20=20) Recommended Time 50 minutes Each section contains 2 essay questions of which you must answer ONLY one. Each question is worth 15 marks. Questions in sections C, D, are drawn from the topics below. These are essay questions demanding discussion. Therefore, POINT FORM answers will EARN VERY LOW, in fact, below pass marks.

Government intervention: Effect of tax on demand for goods and services (i.e. good knowledge of demand and supply model, especially, incidence of tax. Using demand and supply model to analyse real life economic events Understanding how cost of inputs affect a firm's profit maximisation decision. Market structure: Ability to explain, compare and contrast monopoly, monopolistic competition.

TIME MANAGEMENT To harness your full potential, the following strategy is worth considering: 1. Choose your questions carefully (those you can handle better) 2. For each section, exert maximum effort on chosen questions within recommended time 3. Use extra time (35 minutes) for harder questions and revision. NOTE: you do not have to answer the questions in the order in which they are set (i.e. 1, 2, 3, ,n); start with your favourite, or specialised, or the most friendly topic, if any, and there are many, if you are well prepared. SKILLS REQUIRED

Ability to calculate equilibrium values from equations of demand and supply curves, including, for example, effect of tax and incidence/distribution of tax, and correct labelling of diagrams. Knowledge of the concept of elasticity and calculations involving the first derivative (e.g. marginal cost and marginal revenue, etc.) are crucial.

Ability to calculate equilibrium values in a monopoly.

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Using economic theory and diagrams to explain real life issues (similar to tutorial group presentations), with emphasis on changes in equilibrium values. Basic concepts in game theory, including determination of Nash equilibrium: ability to use a prisoners dilemma game to explain economic organisation, for example, cartel. Ability to distinguish positive and negative externality and to illustrate them with diagrams, including internalization (remedy) of externalities, both positive and negative externality.

Ability to sketch/draw and diagrams and use them to illustrate answers. Ability to calculate and explain all types of profit in market structure. Understanding basic characteristics of a natural monopoly Ability to organise a discussion, especially comparing and contrasting two things or issues (e.g. talking about pros and cons of monopoly, perfect competition and monopolistic competition).

Group Presentations: Skills acquired from solving problems for presentation.

SAMPLE QUESTIONS 1. Multiple choice questions: Practice questions in appendix 3 of Unit Outline 2. Below are past exam questions
Final Examination Semester 1, 2011

SECTION A
Page 2 - 11 (30 Marks)
Answer ALL of the forty (30) multiple choice questions. Questions are of equal value. For each question, select from the alternatives given, the one that most fully and correctly answers the question. Record your answers on the accompanying response sheet. You must code your answers with A PENCIL not a pen. You must code your NAME AND STUDENT NUMBER ON THE ANSWER SHEET.

1.

Suppose China and Vietnam are both producing copper and leather, and that China is more productive in the production of both goods. If Vietnam has lower opportunity cost in producing copper, then: Vietnam has comparative advantage in the production of copper, and specialization and trade between the two countries can benefit both. Vietnam has comparative advantage in leather production, but there will be no gains from specialization and trade

a.

b.

c. Vietnam has comparative advantage in copper production, but it is outweighed by Chinas absolute advantage in copper production. d. China has comparative advantage in the production of both goods, so trade is impossible.
2.

If the government decides to control pollution by placing a tax on the product that is associated with the pollution, the size of the tax should be:

a. equal to the marginal social cost of the product b. equal to the marginal external cost of the product c. large enough to increase the market price so that no buyer can afford the product. d. equal to the marginal private cost of the product.

3.

Assume that food is measured on the horizontal axis and clothing on the vertical axis. If the price of food falls relative to clothing, the budget line will: shift outward become steeper.
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a. b.

c. d.

become flatter become flatter or steeper depending on the relationship between prices and income

4.

In figure 1 below the best Coke and Pepsi can do jointly is

Figure 1
a) b) c) d)

Both produce low quantity Coke can produce low quantity while Pepsi can produce a high quantity. Coke can produce a high quantity while Pepsi can produce a low quantity Both produce a high quantity Which of the following is true about game theory? a. b. c. d. Every dominant strategy equilibrium is also a Nash equilibrium Every Nash equilibrium is also dominant strategy equilibrium Both (a) and (b) are true All players must have a dominant strategy for a Nash equilibrium to exist.

5.

6.

A consumer has $200 per day to spend on product A, which has a unit price of $15, and product B, which has a unit price of $7. Suppose the budget line shows product A is on the horizontal axis and product B on the vertical axis. What is the marginal rate of substitution (MRS), if the consumer is maximising utility? a. -200/15.
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b. c. d. 7.

-200/7. -7/15. -15/7.

A prisoners dilemma game demonstrates how cooperative action is often not rational even though: a. b. c. d. cooperation would make everyone worse off. cooperation would make everyone better off. prisoners are not capable of playing repeated games. cooperative outcomes are always a Nash equilibrium.

8. Which of the following would expect to occur as the result of a binding price ceiling in the apartment rental market? a. The rental market will gradually move toward equilibrium, as the price falls due to the surplus. b. Discrimination as landlords choose their tenants, possibly based on gender, race and age c. The rental market will gradually move toward equilibrium, because the price for rental apartments will rise due to the shortage. d. A reallocation of resources to the rental market to meet the increased demand for rental accommodation. 9. Conditions necessary for a monopolist to engage in price discrimination are: a. b. c d. 10. all customers display identical price elasticity of demand and the good being intangible. ability to perfectly price discriminate and ability to prevent a dead weight loss occurring. Both (b) and (c) are necessary. ability to sort customers into groups with different price demand elasticities and ability to prevent resale of good.

Suppose the demand for pizzas is described by the following function: Qd = 200 4P, where Q and P are the equilibrium quantity and price, respectively. If the price of pizzas rises slightly above $10, the total expenditure by consumers on pizzas will ---- and the number of pizzas sold ----. a. b. c. d. fall; fall rise; rise rise; fall fall; rise

11.

Use the following two statements to answer this question: I. The total product curve (production function) describes what is technically feasible when the firm operates efficiently.
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II. a. b. c. d. 12.

The total product curve (production function) describes the least cost method of producing a given output. I is true and II is false Both I and II are true I is false and II is true Both I and II are false

In monopolistically competitive markets, long-run zero profit occurs together with: a. b. c. d. excess capacity and efficient output. socially competitive output, because there is no barrier to entry. inefficient output and excess capacity. none of the above.

13.

The change in consumption that results when a price change moves the consumer along the initial indifference curve is known as: a. b. c. d. substitution effect. income effect. total effect. complementary effect.

14.

Consider the following statements: X: For a normal good, the income effect of an increase in price leads to decreased consumption. Y: A consumer maximises utility by choosing consumption bundles that sets MRS equal to the relative price. a. b. c. d. X is true and Y is false X is false and Y is true. Both X and Y are false. Both X and Y are true.

15.

Consider the following statements: X: Monopolistically competitive firms are efficient because they increase total surplus by creating variety of goods. Y: The average total cost of a natural monopoly continually declines, at least to the quantity that could supply the entire market. a. b. c. d. X is false and Y is true X is true and Y is false. Both X and Y are false. Both X and Y are true.

16.

In a competitive market, where cost curves are U-shaped, which of the following would be true? a. b. c. d. ATC would shift up if the government subsidises cost of production ATC would shift down if the government subsidises cost of production Economies of scale occurs when a firm employs more staff and variable cost rises faster than increase in output. all of the above

17.

A monopolists marginal revenue is $35 for the last unit produced and its marginal cost is $30, then: a. to maximize profit the firm should decrease output
b. c. d.

to maximize profit the firm should continue to produce the output level it is producing to maximize profit the firm should increase output there is not enough information give to conclude what the firm should do to maximize profit If the government decides to control pollution by placing a tax on the product that is associated with the pollution, the size of the tax should be:

18.

a. equal to the marginal social cost of the product b. large enough to increase the market price so that no buyer can afford the product. c. equal to the marginal private cost of the product. d. equal to the marginal external cost of the product

19. In the figure 2 below shows a leftward shift in the supply curve from S 1 to S2 due to the imposition of a tax on the product. P1 is the original pre-tax price and Q1 the original pre-tax quantity. The tax revenue and consumers burden of the tax are respectively,

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Figure 2.

a. A + B and E + F b. C + D + E + F and C + F c. C + D + E + F and D + E d. A + B + C + D and D + E

20.

To sell an extra unit of output, a perfect competitor _____________ while a monopoly _____________. a does not alter its price; must lower its price b must hope the market price falls; must lower its price c does not alter its price; does not alter its price either d must lower its price; must lower its price Which one of the following government actions is intended to generate positive externalities? a. Subsidies for planting trees on hillsides b Speed limits on the highways. c Requiring cars to meet minimum emissions regulations. d All of the above. Encouraging firms to invest in research and development and individuals to engage in creative endeavours such as writing novels is one justification for: a. natural monopolies.
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22.

b.

c. d. 23

government-created monopolies. resource monopolies. monopolistic competition.

Suppose S is the private supply curve and S1 is the social supply curve. The reason the invisible hand does not allocate resources efficiently in the market is because: a b c d there is too much demand. S1 does not include the external cost of production. S does not include the external cost of production. S includes the external cost of production.

24.

When the price of a good falls and the total revenue decreases from $120 to $100, which statement is true? a. b. c. d. consumer expenditure falls. the good is normal. in the relevant range the price elasticity of demand is greater than 1 (in absolute terms). in the relevant range the price elasticity of demand is less than 1 (in absolute terms).

25.

Which of the following is NOT a characteristic of natural monopoly? a. One firm can produce the total market output at a lower cost b. Average cost is minimized at an output level less than the total market output c. Average cost is minimized at an output level greater than total market output d. All potential firms have same strictly declining average cost

26.

If the inverse demand curve is p = 60 Q, what is the total surplus if price is 30?
a. 900

b. 450 c. 1800 d. More information required before total surplus can be calculated. 27. Coase theorem prescribes a means of achieving an efficient outcome if an economic activity generates a negative externality. The theorem cannot be applied if a. it is difficult to ascertain the effect of pollution, say, and offer an appropriate compensation b. transaction costs are low c. a victim of an externality can be assigned property rights d. both (a) and (c) 28. Allocative efficiency occurs when ----; and excess capacity is associated with --markets a. output is produced with the least cost combination of inputs; oligopolistic b. goods are distributed evenly among consumers; monopolistic competition c. there is excess capacity in the long run; perfect competition d. marginal benefit equals marginal cost for the last unit sold; monopolistic competition Suppose the before-trade domestic price of pineapple in Australia is $600 per ton. The world price of pineapple is $500 per ton. Australia is a price-taker in the pineapple market. If trade in pineapple is allowed, consumer surplus in Australia:
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29.

a. b. c. d. 30.

will increase. will decrease. will be unaffected. could increase or decrease.

The figure 3 reflects the market for outdoor concerts in a public park surrounded by residential neighbourhoods. Use this figure to answer question below.

Figure 3

What price and quantity combination best represents the optimum price and number of concerts that should be organised? a. P1, Q1 b. P3, Q0 c. P2, Q0 d. The optimum quantity is zero concerts as long as residents in surrounding neighbourhoods are adversely affected by noise and congestion. END OF MULTIPLE CHOICE QUESTIONS

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Final Examination Semester 1, 2011 Unit Name: Microeconomic Principles

SECTION B
Unit Code: Examination Time: Reading Time: Total Time: ECON 111 3 Hours and 0 Minutes 10 Minutes 3 Hours and 10 Minutes

SECTION B (20 marks) Below are TWO (2) problems. You are required to attempt BOTH questions. Question 1 Suppose the neighbourhood cinema is a local monopoly whose demand curve for adult tickets on Saturday night is P = 12 -2Q, where P is the price of a ticket in dollars and Q is the number of tickets sold in hundreds. The demand for childrens tickets on Sunday afternoon is P = 8 -3Q and demand for adult tickets on Sunday afternoon is P = 10 4Q. On both Saturday night and Sunday afternoon, the marginal cost of an additional patron, child or adult is $2.
a)

What price should the firm charge adults and children on Sunday afternoon if its goal is to maximise profit? (6 marks) Suppose the firm faces competition from another operator on Saturday night. What price should the firm charge adults on Saturday night? [2 marks]

b)

Sunday afternoon (adult): Total revenue TR = PQ = (10-4Q)xQ 2 TR ( 10Q 4Q ) Marginal revenue MR = = = 10 8Q Q Q For Q: MR = MC 10 8Q = 2 Q = 1 ticket Therefore P = 10 (4x1) P = $6 [3 marks] Sunday afternoon (children): Total revenue TR = PQ = (8-3Q)xQ TR ( 8Q 3Q Marginal revenue MR = = Q Q For Q: MR = MC 8 6Q = 2 Q = 1 ticket Therefore P = 8 (3x1) P = $5 [3 marks]
2

) = 8 6Q

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Saturday night (adult): In a competitive market, condition for choosing profit maximising output is Price = marginal cost. Therefore, 12 2Q = 2 Q = 5. P = 12 (2x5) $2 [2 mark] Question 2 The demand for and supply of cars in Australia are, respectively, given by Q d = 12000 200 P Q s = 7000 + 50 P Where P is price of a car, and Q is the quantity of cars.
i)

Assuming the economy is closed. Find the equilibrium price and production of cars. [3 mark] The economy opens to trade and the world price of a car is 18. Find the domestic quantities demanded and supplied and the quantity of imports. [4 marks] Suppose the government imposes a quota of 300 cars. Find the equilibrium price in the domestic car market, as well as the quantities produced by domestic firms and purchased by domestic consumers. How much revenue do the holders of import licences earn? [5 marks]

ii)

iii)

Answers

i) To find the price of a car, set demand equal to supply: 12 000 200P = 7000 + 50P 5000 = 250P P = 20 [3 marks] ii) At a world price of 18 units, domestic demand is 12 000 200(18) = 8400 cars, and domestic supply is 7000 + 50(18) = 7900 cars. The difference (500 cars) must be imported. Because the world price of cars is lower than the domestic price. [4 marks] iii) Suppose the government imposes a quota of 300 imported cars. In this case, supply equals domestic supply plus 300, or 7300 + 50P, and demand equals 12 000 200P as before. [2 marks] Setting demand equal to supply, we get: 12 000 200P = 7300 + 50P 4700 = 250P P = 18.8 Demand is 12 000 200(18.8) = 8240 and supply is 7000 + 50(18.8) = 7940. The difference, 300 cars, is imported (so imports have fallen) [2 marks] Quota licence holders revenue = 19 x 300 = $5700 [1 mark]

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Final Examination Semester 3, 2010 Unit Name: Microeconomic Principles

SECTION C
Unit Code: Examination Time: Reading Time: Total Time: ECON 111 3 Hours and 0 Minutes 10 Minutes 3 Hours and 10 Minutes

SECTION C (15 marks): ATTEMPT QUESTION 1 OR 2

Question 1 This question concerns the topic of market failure.

(a)

Firms that make and sell paper also create, as a by-product, a chemical called dioxin. Exposure to dioxin is believed to increase the risk of cancer and birth defects. What type of externality is this? Illustrate the effects of the externality using a demand-supply model, appropriately labelled [7 marks] Which policy would you recommend to internalise/remedy the externality, Coases private remedy or Pigouvian tax? Carefully explain your choice and why you did not recommend the other. [8 marks]

(b)

a. This is an example of a negative production externality. The external cost is the health costs associated with the chemical - 2 marks Use a diagram similar to those used in lecture notes show the MSC curve & the private cost curve, show the market Q & the optimum Q. Show that the free market overproduces & this is why the market fails, indicating the deadweight loss - Well labelled diagram = 2 marks (deduct 1 mark for diagrams labelled, P and Q as they depict rote learning). Explanation = 3 marks. Internalization: Brief explanation of Pigouvian tax [1 mark]; Explanation = 4 marks. Coases solution is not appropriate because of conditions cannot be satisfied: Low transactions costs; ability to establish distribution of costs; assigning of property rights (State conditions = 1; Explanation = 2 marks.)

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Final Examination Semester 3, 2010 Unit Name: Microeconomic Principles

SECTION D
SECTION D (15 marks) ATTEMPT QUESTION 1 OR 2 Question 1 Firm A and Firm B have agreed to form a cartel. Use the following information to construct their payoff matrix. For each firm identify the dominant strategy, the Nash equilibrium and the collusion/cartel equilibrium. Is this a Prisoners dilemma? Explain your answers. Their (firms A & B) strategies are (charge high price or charge low price). If both firms charge high price, each makes a profit of $150 million. If both charge a low price, each makes a profit of $100 million. If A charges low while B charges high, A earns $200 million and B earns $60 million. If A charges high and B charges low, then A earns $60 million and B earns $200 million. [15 marks] Payoff Matrix [2 marks]
Firm B High Price Firm A High Price Low Price 150, 150 200, 60 Low Price 60, 200 100, 100

An equilibrium in dominant strategies results if each player has a best strategy, no matter the other player's strategy. The dominant strategy for each firm is to charge low price. Game must be played to show dominant strategy. [Excellent explanation reflecting definition of dominant strategy 5 marks] Nash equilibrium is an outcome where both players correctly believe that they are doing the best they can, given the action of the other player. A game is in Nash equilibrium if neither player has an incentive to change his or her strategy, unless there is a change by the other player. The Nash equilibrium is both firms to charge low price and earn $100 million each this is the best they can do given what the other firm is doing. [Excellent explanation reflecting definition of Nash equilibrium, 4 marks] The collusion/cartel equilibrium is for both firms to charge high price but this is unstable since each firm has incentive to cheat and charge low [well explained = 2.5 mark, otherwise 1 mark] In a prisoners dilemma game the social outcome is worst than that of collusion. If both firms could agree to play (High, High), the social outcome of $300 million is better than the Nash Equilibrium payoff of $200million [1.5 mark]

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OR
Question 2 (15 MARKS) (a) The price of housing in Sydney has increased substantially since the government increased the first homeowners grant. Assuming the housing industry is a perfectly competitive market, state, with reasons, whether supply of housing is elastic or inelastic. Use the demand-supply model to explain how house prices increased to their present levels. Does the elasticity of supply affect the change in price? [10marks]. (b) Suppose the housing industry experiences constant input costs. What would be the equilibrium price after the demand shock relative to the equilibrium price before the shock. Illustrate your answer with a demand and supply model showing the shape of the long run supply curve [5 marks]. Part (a) Supply would be inelastic nature of the industry, housing takes many months to Construct [3 marks], Basically, because of a large increase in demand there would be excess demand (as demand curve shifts from D to D1) in at current price, P. Because in the short run supply does not increase to meet demand, prices rise to P1and quantity demanded increase from Q to Q1. The lower the elasticity of supply the higher the percent increase in price. See diagrams below [4 marks for explanation; 3 marks for correctly drawn and labelled diagrams, showing increase in D resulting in higher prices]

Part b
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Both prices will be equal because supply will increase to meet demand. Text Figure 14.11(a) shows that in the absence of external economies or external diseconomies, an increase in demand does not change the price in the long run. The long-run market supply curve LSA is horizontal [Diagram = 2 marks; Explanation = 3 marks].

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