RESIT/SPECIAL EXAMINATION

SEMESTER II, 2003/2004 SESSION

KULLIYYAH OF ECONOMICS AND MANAGEMENT SCIENCES
Programme

B.Engineering

Level of Study :

Time
Duration

:
:

9.00 - 12.00 noon

3 Hr(s) - Min(s)

Date

: 21/11/2003

Course Code :

ECON 1550

Section(s)

: 1-3

Course Title

Introductory Economics for Engineering

1-2

(This Question Paper Consists of 14 Printed Pages With 2 Sections)

INSTRUCTION (S) TO CANDIDATES

DO NOT OPEN UNTIL YOU ARE ASKED TO DO SO

Answer all questions in Section A and Section B.

Any form of cheating or attempt to cheat is a serious

offence which may lead to dismissal

APPROVED BY

Semester I, 2003/04
Introductory Economics for Engineering
Econ 1550

Answer all questions in Section A and Section B

SECTION A: Answer in the answer sheet provided (0.5 mark each)

1. The study of economics is primarily concerned with:

a) keeping private businesses from losing money.
b) demonstrating that capitalistic economies are superior to socialistic economies.
c) choices that are made in seeking to use scarce resources efficiently.
d) determining the most equitable distribution of society's output.

2. Macroeconomics approaches the study of economics from the viewpoint of:

a) the entire economy.
b) governmental units.
c) the operation of specific product and resource markets.
d) individual firms.

3. Which of the following is a distinguishing feature of a market system?

a) public ownership of all capital.
b) central planning.
c) wide-spread private ownership of capital.
d) a circular flow of goods, resources, and money.

4. A production possibilities curve shows:

a) that resources are unlimited.
b) that people prefer one of the goods more than the other.
c) the maximum amounts of two goods that can be produced assuming the full and
efficient use of available resources.
d) combinations of capital and labor necessary to produce specific levels of output.

5. A nation's production possibilities curve is "bowed out" from the origin because:
a)
resources are not equally efficient in producing every good.
b)
the originator of the idea drew it this way and modern economists follow
this convention.
c)
resources are scarce.
d)
wants are virtually unlimited.

6. In 2000 the demand for "Razor" two-wheel scooters greatly increased. This
increase in demand might best be explained by:
a) an increase in consumer income.
b) an increase in the price of a substitute good.
c) a change in consumer expectations.
d) a change in buyer tastes.

7. Which of the following will not cause the demand for product K to change?
a) a change in the price of close-substitute product J
b) an increase in consumer incomes
c) a change in the price of K
d) a change in consumer tastes

8. If the price of K declines, the demand curve for the complementary product J will:
a) shift to the left.
b) decrease.
c) shift to the right.
d) remain unchanged.

9.

An economist for a bicycle company predicts that, other things equal, a rise in
consumer incomes will increase the demand for bicycles. This prediction is based
on the assumption that:
a) there are many goods that are substitutes for bicycles.
b) there are many goods that are complementary to bicycles.
c) there are few goods that are substitutes for bicycles.
d) bicycles are normal goods.

Use the following to answer questions 10-11:

S1

Price

S2

0
Quantity

10. A decrease in supply is depicted by a:

a) move from point x to point y.
b) a shift from S1 to S2.
c) shift from S2 to S1.
d) move from point y to point x.

11. An increase in quantity supplied (as distinct from an increase in supply) is depicted
by a:
a) move from point y to point x.
b) a shift from S1 to S2.
c) shift from S2 to S1.
d) move from point x to point y.

12. Which of the following will cause a decrease in market equilibrium price and an
increase in equilibrium quantity?
a) an increase in supply
b) an increase in demand
c) a decrease in supply
d) a decrease in demand

Use the following to answer question 13:

13. Refer to the above diagram, in which S1 and D1 represent the original supply and
demand curves and S2 and D2 the new curves. In this market:
a) supply has decreased and equilibrium price has increased.
b) demand has increased and equilibrium price has decreased.
c) demand has decreased and equilibrium price has decreased.
d) demand has increased and equilibrium price has increased.

14.
If the supply of a product decreases and the demand for that product
simultaneously increases, then equilibrium:
a) price must rise, but equilibrium quantity may either rise, fall, or remain
unchanged.
b) price must rise and equilibrium quantity must fall.
c) price and equilibrium quantity must both increase.
d) price and equilibrium quantity must both decline.

15. The price elasticity of demand coefficient indicates:

a) buyer responsiveness to price changes.
b) the extent to which a demand curve shifts as incomes change.
c) the slope of the demand curve.
d) how far business executives can stretch their fixed costs.

16. The demand for a product is inelastic with respect to price if:
a) consumers are largely unresponsive to a per unit price change.
b) the elasticity coefficient is greater than 1.
c) a drop in price is accompanied by a decrease in the quantity demanded.
d) a drop in price is accompanied by an increase in the quantity demanded.

17. In the long run:

a) all costs are variable costs.
b) all costs are fixed costs.
c) variable costs equal fixed costs.
d) fixed costs are greater than variable costs.

18. Which of the following best expresses the law of diminishing returns?
a) Because large-scale production allows the realization of economies of scale, the
real costs of production vary directly with the level of output.
b) Population growth automatically adjusts to that level at which the average
product per worker will be at a maximum.
c) As successive amounts of one resource (labor) are added to fixed amounts of
other resources (property), beyond some point the resulting extra output will
decline.
d) Proportionate increases in the inputs of all resources will result in a less-thanproportionate increase in total output.

Product

Use the following to answer questions 19-20:

2
1
Variable input

19. In the above diagram curves 1, 2, and 3 represent the:

a) average, marginal, and total product curves respectively.
b) marginal, average, and total product curves respectively.
c) total, average, and marginal product curves respectively.
d) total, marginal, and average product curves respectively.

20. The above diagram suggests that:

a) when marginal product is zero, total product is at a minimum.
b) when marginal product lies above average product, average product is rising.
c) when marginal product lies below average product, average product is rising.
d) when total product is at a maximum, so is marginal product and average product.

21. If you operated a small bakery, which of the following would be a variable cost in
the short run?
a) baking ovens
b) interest on business loans
c) annual lease payment for use of the building
d) baking supplies (flour, salt, etc.)

Use the following to answer questions 22-23:

Answer the next question(s) on the basis of the following cost data:

Output
1
2
3
4
5
6
7
8

Average
fixed
cost
$50.00
25.00
16.67
12.50
10.00
8.37
7.14
6.25

Average
variable
cost
$100.00
80.00
66.67
65.00
68.00
73.33
80.00
87.50

22. Refer to the above data. If the firm closed down and produced zero units of output,
its total cost would be:
a) zero.
b) $50.
c) $150.
d) $100.

23. Refer to the above data. The marginal cost of the fifth unit of output is:
a) $3.
b) $62.
c) $80.
d) $78.

24. The short-run average total cost curve is U-shaped because:

a) average fixed costs decline continuously as output increases.
b) of increasing and diminishing returns.
c) of economies and diseconomies of scale.
d) minimum efficient scale is encountered.

25. If a technological advance reduces the amount of variable resources needed to

produce any level of output, then the:
a) AVC curve will shift upward.
b) MC curve will shift downward.
c) ATC curve will shift upward.
d) AFC curve will shift downward.

26. The long-run average total cost curve:

a) will rise if diminishing returns are encountered.
b) will fall if diminishing returns are encountered.
c) will rise if economies of scale are incurred.
d) is based on the assumption that all resources are variable.

27. When diseconomies of scale occur:

a) the long-run average total cost curve falls.
b) marginal cost intersects average total cost.
c) the long-run average total cost curve rises.
d) average fixed costs will rise.

28. Economists would describe the Malaysian automobile industry as:

a) purely competitive.
b) an oligopoly.
c) monopolistically competitive.
d) a pure monopoly.

29. The demand curve in a purely competitive industry is ______, while the demand
curve to a single firm in that industry is ______.
a) perfectly inelastic, perfectly elastic
b) downsloping, perfectly elastic
c) downsloping, perfectly inelastic
d) perfectly elastic, downsloping

30. In which of the following market structures is there clear-cut mutual

interdependence with respect to price-output policies?
a) pure monopoly
b) oligopoly
c) monopolistic competition
d) pure competition

31. Which of the following statements applies to a purely competitive producer?

a) It will not advertise its product.
b) In long-run equilibrium it will earn an economic profit.
c) Its product will have a brand name.
d) Its product is slightly different from those of its competitors.

32.
If a firm in a purely competitive industry is confronted with an equilibrium
price of $5, its marginal revenue:
a) may be either greater or less than $5.
b) will also be $5.
c) will be less than $5.
d) will be greater than $5.

33. A monopolistic firm has a sales schedule such that it can sell 10 prefabricated
garages per week at $10,000 each, but if it restricts its output to 9 per week it can
sell these at $11,000 each. The marginal revenue of the tenth unit of sales per week
is:
a) -$1,000.
b) $9,000.
c) $10,000.
d) $1,000.

34. A pure monopolist is producing an output such that ATC = $4, P = $5, MC = $2,
and MR = $3. This firm is realizing:
a) a loss that could be reduced by producing more output.
b) a loss that could be reduced by producing less output.
c) an economic profit that could be increased by producing more output.
d) an economic profit that could be increased by producing less output.

35. The supply curve for a monopolist is:

A) perfectly elastic.
B) upsloping.
C) that portion of the marginal cost curve lying above minimum average variable
cost.
D) nonexistent.

36. Under monopolistic competition entry to the industry is:

a) completely free of barriers.
b) more difficult than under pure competition but not nearly as difficult as under
pure monopoly.
c) more difficult than under pure monopoly.
d) blocked.

37.
The monopolistically competitive seller's demand curve will become more
elastic the:
a) more significant the barriers to entering the industry.
b) greater the degree of product differentiation.
c) larger the number of competitors.
d) smaller the number of competitors.

38. Oligopolistic firms engage in collusion to:

a) minimize unit costs of production.
b) realize allocative efficiency, that is, the P = MC level of output.
c) earn greater profits.
d) increase production.

39. One would expect that collusion among oligopolistic producers would be easiest to
achieve in which of the following cases?
a) a rather large number of firms producing a differentiated product
b) a very few firms producing a differentiated product
c) a rather large number of firms producing a homogeneous product
d) a very few firms producing a homogeneous product

40. The terms strategic behavior and payoff matrix both relate directly to:
a)
the perfect competition model.
b)
the monopolistic competition model.
c)
game theory.
d)
the price leadership model.

Use the following to answer question 41:

10

41.
Refer to the above diagram where the numerical data show profits in millions
of dollars. Beta's profits are shown in the northeast corner and Alpha's profits in the
southwest corner of each cell. If Alpha and Beta agree to a high-price policy
through collusion, the temptation to cheat on that agreement is demonstrated by the
fact that:
a) Beta can increase its profit by lowering its price.
b) Beta can increase its profit by increasing its price still further.
c) both Alpha and Beta can earn even more profits if both agree to a low-price
policy.
d) Alpha can increase its profit by reducing its production costs.

42. The phase of the business cycle in which real GDP declines is called:
a) the peak.
b) a recovery.
c) a recession.
d) the trough.

43. Cyclical unemployment results from:

a) a deficiency of aggregate spending.
b) the decreasing relative importance of goods and the increasing relative
importance of services in the U.S. economy.
c) the everyday dynamics of a free labor market.
d) technological change.

44. At the economy's natural rate of unemployment:

a) the economy achieves its potential output.
b) there is only a relatively small amount of cyclical unemployment.
c) only frictional unemployment exists.
d) only structural unemployment exists.

45. The GDP gap measures the:

a) difference between NDP and GDP.
b) amount by which potential GDP exceeds actual GDP.
c) amount by which actual GDP exceeds potential GDP.
d) amount by which nominal GDP exceeds real GDP.

11

Use the following to answer question 46:

Answer the next question(s) on the basis of the following information for a specific year in
a hypothetical economy for which Okun's law is applicable:
Potential Real GDP = $200 billion
Natural rate of unemployment = 6 percent
Actual rate of unemployment = 12 percent

46. The amount of output being forgone by the above economy is:
a) $12 billion.
b) $15 billion.
c) $18 billion.
d) $24 billion.

47. Okun's law:

a) measures the tradeoff between the rate of inflation and the rate of unemployment.
b) indicates the number of years it will take for a constant rate of inflation to cause
the price level to double.
c) quantifies the relationship between nominal and real incomes.
d) shows the relationship between the unemployment rate and the size of the GDP
gap.

48. "Too much money chasing too few goods" best describes:
a) the GDP gap.
b) demand-pull inflation.
c) the inflation premium.
d) cost-push inflation.

49. Suppose that a person's nominal income rises from $10,000 to $12,000 and the
consumer price index rises from 100 to 105. The person's real income will:
a) fall by about 20 percent.
b) fall by about 2 percent.
c) rise by about 15 percent.
d) rise by about 25 percent.

12

50. If the nominal interest rate is 12 percent and the real interest rate is 8 percent,
then the inflation premium is:
a) 8 percent.
b) 12 percent.
c) 4 percent.
d) 20 percent.

SECTION B: Answer in the answer sheet provided.

Question 1

a) Define the price elasticity of demand. (2 marks)

b) Consider the following demand curve for Starbucks coffee.
Price per cup
$10
$9
$8

A
B
C

$5
D
$2
$1

E
1

10

Number of cups

(i) Suppose the current price is $8 per cup. Using elasticity of demand, explain
why Starbucks should not increase the price in order to increase total revenue.
(3 marks)
(ii) Suppose the current price is $2 per cup. Using elasticity of demand, explain
why Starbucks should not lower the price in order to increase total revenue.
(3 marks)

Question 2
a)

In the short-run, firms under perfect competition will either face economic profit
economic loss or even have to shut down its business. Explain and illustrates each
of the above events by using appropriate diagram(s). (6 marks)

b)

In the long-run, firms under perfect competition will only gain economic profit. Do
you agree with this statement? Why? (1 + 3 marks)

13

Question 3
a)
b)

What is meant by the term business cycle? List the four phases of the business
cycle. (1 + 4 marks)
What phase of the business cycle is our economy experiencing at the present time?
Justify your answer. (1 + 1 marks)

14