SEAT NUMBER: . ROOM:...

FAMILY NAME:......
This question paper must be returned.
OTHER NAMES:.......
Candidates are not permitted to remove any part
of it from the examination room.
STUDENT NUMBER:.......

FORMAL EXAMINATION PERIOD: SESSION 2, NOVEMBER 2016

Unit Code: ECON111

Unit Name: Microeconomic Principles

Duration of Exam 3 hours and 10 minutes reading time
(including reading time if applicable):
Section A Twenty (20) Multiple Choice Questions (20 marks)
Section B Twenty (20) Short Answer Questions (20 marks)
Section C One (1) Written Question (15 marks)
Total No. of Questions:
Section D One (1) Written Question (15 marks)
Section E One (1) Written Question (15 marks)
Section F One (1) Written Question out of Two (2) (15 marks)
Total No. of Pages 32
(including this cover sheet):

GENERAL INSTRUCTIONS TO STUDENTS:

Students are required to follow directions given by the Final Examination Supervisor and must refrain from communicating in any way with another student once they have entered
the final examination venue.
Students may not write or mark the exam materials in any way during reading time.
Students may only access authorised materials during this examination. A list of authorised material is available on this cover sheet.
All watches must be removed and placed at the top of the exam desk and must remain there for the duration of the exam. All alarms, notifications and alerts must be switched off.
Students are not permitted to leave a final examination venue during the last 15 minutes of the examination.
If it is alleged you have breached these rules at any time during the examination, the matter may be reported to a University Discipline Committee for determination.

EXAMINATION INSTRUCTIONS:

This examination is marked out of 100. The examination accounts for 60% of the marks used to
assess your grade.

Instructions: Answer ALL questions in Section A

Answer ALL questions in Section B
Answer ALL questions in Section C
Answer ALL questions in Section D
Answer ALL questions in Section E
Answer ONE question out of the two questions in Section F

Section A Answers must be recorded in PENCIL on the multiple choice coding sheet
supplied.

Section B Answers must be written on the PINK question paper itself, on the diagrams
provided.

Sections C, D, E and F You have FOUR (4) White Answer Booklets. You MUST use a
separate ONE for each section.

Writing must be clear and legible. Diagrams must be clear and fully-labelled.

AIDS AND MATERIALS PERMITTED/NOT PERMITTED:

Dictionaries: No dictionaries permitted
Calculators: Non-programmable calculators (no text retrieval capacity) permitted
Other: Closed book no notes or textbooks permitted
 SECTION A: MULTIPLE-CHOICE QUESTIONS
(20 MARKS)

Answer ALL of the following twenty (20) MULTIPLE CHOICE QUESTIONS. All
questions are worth 1 mark each for a total of 20 marks.

For each question, select the best answer from the alternatives given, i.e. 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.

The coding sheet is machine marked and the machine cannot identify crossed out
answers.

You must code your NAME as well as your STUDENT NUMBER on the answer sheet.

The diagrams in Section A are the same diagrams in Section B.

1) Refer to the production possibilities frontier in the figure above. Which production point indicates that
resources are NOT fully utilised or are misallocated?
A) point a
B) point b
C) point c
D) point e

2
2) Anna and Maria produce shirts and ties. The figure above shows Anna's PPF and Maria's PPF. Anna and
Maria can achieve the gains from trade if Anna produces ________ and Maria produces ________.
A) ties; shirts
B) shirts and ties; only ties
C) only ties; shirts and ties
D) shirts; ties

3) In the figure above, if the initial point is a, an increase in the supply of oil could result in a movement from
A) point a to point e.
B) point a to point b.
C) point a to point c.
D) point a to point d.
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4) In the above figure, if the price is $8 then there is a
A) surplus of 100.
B) surplus of 200.
C) shortage of 100.
D) shortage of 200.

5) The above figure shows a linear (straight-line) demand curve. Starting at point A and then moving to point B
and then point C, the absolute value of the price elasticity of demand
A) increases.
B) decreases.
C) increases and then decreases.
D) decreases and then increases.

4
6) The figure above shows Aanya's demand for CDs. If the price for a CD is $15, then Aanya
A) receives no consumer surplus on the 6th CD she buys.
B) receives a total of $10 of consumer surplus.
C) will buy no CDs.
D) receives a total of $40 of consumer surplus.

7) The above figure shows the demand and supply curves for housing. What would be the effect/s of a rent
ceiling equal to $500 per month?
A) a surplus equal to 3,000 apartments
B) a shortage equal to 3,000 apartments
C) a shortage equal to 250 apartments
D) nothing because the rent ceiling has no effect on the equilibrium price and quantity

5
8) The above figure shows the market for blouses. The government decides to impose the sales tax on sellers, as
shown in the figure. Using the figure, what is the tax per blouse?
A) $10 per blouse
B) $20 per blouse
C) $30 per blouse
D) $40 per blouse

9) A chemical factory and a fishing club share a lake. Producing chemicals creates water pollution that harms the
fish. The marginal social cost, private marginal cost, and marginal social benefit from producing chemicals are in
the figure above. If polluting is legal and no one owns the lake into which waste is dumped, then the amount of
chemicals produced each week will be
A) 0 tons.
B) 4 tons.
C) 8 tons.
D) None of the above answers is correct.
6
10) In the above figure, the unregulated, competitive market equilibrium is tuition of ________ and the
equilibrium quantity is ________ students in college.
A) $18,000; 30
B) $12,000; 40
C) $6,000; 50
D) $18,000; 50

11) Given the indifference curve in the above figure, which point is preferred to point a?
A) point b
B) point c
C) point d
D) none of the above

7
12) In the figure above, as more six-packs of soda are consumed, moving along any of the illustrated
indifference curves, the MRS between twelve-packs of soda and six-packs of soda
A) increases.
B) decreases.
C) stays constant.
D) first increases, then decreases.

13) The figure above shows Yeheli's budget line and one of her indifference curves. At point a, Yeheli's marginal
rate of substitution is ________.
A) 1/4
B) 4
C) 10
D) 40
8
14) In the figure above, the marginal product of the second worker is
A) 10 units.
B) 5 units.
C) 2 units.
D) 1 units.

15) In the above figure, which of the following statements is FALSE?

A) Average fixed cost decreases as output decreases.
B) The vertical gap between curves B and C equals marginal fixed cost.
C) The vertical gap between curves B and C gets smaller as average fixed cost decreases.
D) Curve A is the marginal cost curve.

9
16) In the above figure, the long-run average cost curve exhibits economies of scale
A) up to 10 units per hour.
B) between 10 and 20 units per hour.
C) after 20 units per hour.
D) along the entire curve.

17) In the above figure, the firm will produce

A) 0 units in the long run.
B) 15 units in the short run.
C) 15 units in the long run.
D) 20 units in the long run.

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18) The unregulated, revenue maximising monopolist will have a maximum total revenue equal to:
A) $8.00 per day.
B) $22.50 per day.
C) $31.50 per day.
D) $40.50 per day.

19) The above figure shows a firm in monopolistic competition. What would happen to the firm if it were to
produce 10 units of output per day?
A) The firm would make economic profit
B) The firm would make normal profit
C) The firm would make an economic loss
D) It is impossible to say from the diagram
11
 Mihael
Cheat Comply
M: $1 M: $2
Cheat
R: $1 R: $12
Rahul
M: $12 M: $10
Comply
R: $2 R: $10

20) Mihael and Rahul are the only firms that clean offices in a large city. They agree to operate as a cartel. The
payoff matrix above gives the economic profit (in millions) that each firm can make. If Rahul cheats on the
agreement but Mihael complies, Rahul makes an economic profit of ________ and Mihael makes an economic
profit of ________.
A) $10 million; $10 million
B) $1 million; $1 million
C) $2 million; $12 million
D) $12 million; $2 million

CHECK THAT YOUR MULTIPLE CHOICE CODING SHEET IS

CODED PROPERLY OTHERWISE YOU COULD JEOPARDISE YOUR
OWN MARK. CHECK THIS NOW!

GO TO SECTION B
12
SECTION B: VERY SHORT ANSWER QUESTIONS (20 MARKS)

ANSWER ALL QUESTIONS FROM SECTION B IN THIS PINK

EXAM BOOKLET ITSELF.

The graphs for each question below are exactly the same graphs in the same
order AND the exact same questions numbers as in Section A.

You must answer this question, and every question in Section B on this booklet itself.
1. On the graph above, illustrate opportunity cost and illustrate the law of increasing opportunity cost by
drawing on this graph.

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2. In the graph above, if Anna and Maria specialize in their comparative advantages, illustrate the rotation of
their PPFs (you only need to illustrate the direction of the rotation, without exact numbers).

3. In the graph above, assuming that the current supply curve is S2. Show on the graph the impact of: i) a rise
in price of oil; and then, ii) a rise is the cost of production of oil.

14
4. In the graph above, illustrate how an increase in demand and an increase in supply (at the same time) could
result in an equilibrium price of $8.

5. In the graph above, label the following regions on the demand curve above: elastic, unit elastic and inelastic.

15
6. In the graph above, if the price of CDs is $15, label the consumer surplus and calculate this dollar amount.

7. In the graph above, draw an ineffective (non-binding) rent ceiling and label the quantity traded (the quantity
bought and sold) for this ineffective rent ceiling.

16
8. Demonstrate the incidence of a tax of $20, indicating on the graph above: the burden of this tax on
consumer and producer, as well as the deadweight loss to society as a whole.

9. In the graph above, label the allocatively efficient outcome as well as the deadweight loss that results in an
unregulated market that does not have well defined property rights.

17
10. In the graph above, label the marginal external benefit (MXB) as well as the deadweight loss that results in
an unregulated market that does not have well defined property rights.

11. In the graph above, draw an indifference curve to show combinations that give this consumer equal
satisfaction as bundle c. Illustrate how the consumer could be maximising utility at bundle c.

18
12. In the graph above, based on this consumers indifference curves, which product (6-pack and/or 12-pack)
would the consumer buy if a 6-pack of soda costs $6 and a 12-pack costs $12?

13. In the graph above, draw the consumers new budget line if the price of apples were to halve. Illustrate a
new utility maximising bundle for the consumer after such a price change.

19
14. In the graph above, illustrate marginal product and illustrate the law of diminishing marginal returns by
drawing on this graph.

15. Label all of the curves in the graph above with their full name as well as their acronyms (short form).

20
16. In the graph above, label the firms minimum efficient scale (MES), constant returns to scale (CRS),
economies of scale (EoS) and diseconomies of scale (DoS) you may use the acronyms (short forms).

17. Calculate the value of the short run supernormal (economic) profit in the graph above and label the long run
price in the graph above.

21
18. In the graph above, label the allocatively efficient level of output and label the deadweight loss.

19. In the graph above, calculate the markup and calculate the excess capacity.

22
 Mihael
Cheat Comply
M: $1 M: $2
Cheat
R: $1 R: $12
Rahul
M: $12 M: $10
Comply
R: $2 R: $10

20. Mihael and Rahul are the only firms that clean offices in a large city. They agree to operate as a cartel. The
payoff matrix above gives the economic profit (in millions) that each firm can make. In the matrix above,
label the collusive outcome and label the Nash Equilibrium.

Please Turn Over

You will now use a separate white answer booklet

for each of sections: C, D, E and F.

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Extra Page

24
 EXTRA PAGE

GO TO SECTION C

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 SECTION C: LONG ANSWER QUESTION
(15 MARKS in total 5 Marks for each sub-part)

THIS ENTIRE SECTION IS COMPULSORY

LABEL THIS BOOKLET: Section C

Assume that the world market for mobile phone production is monopolistically competitive.
a) Assume that the mobile phone industry is experiencing long run equilibrium conditions. Draw a fully-
labelled diagram (half an A4 page) to illustrate this situation for a representative firm. Indicate on your
diagram the markup and the excess capacity. You do not need to explain this diagram.
b) Re-draw your diagram in (a). On this diagram, carefully show and explain the short run impact on all the
curves in your diagram when all firms in this industry innovate their products through expenditure on
research and development.
c) If the innovations in (b) are successful, explain in detail the transition from the short run to the long run.
What could prevent this transition from occurring and why? What could happen to the slope of the
demand curve? You need not draw a diagram for part (c).

REMEMBER TO LABEL THE COVER OF THIS BOOKLET SECTION C.

NOW CLOSE THIS ANSWER BOOKLET AND GO TO A NEW ANSWER BOOKLET.

GO TO SECTION D

START A NEW BOOKLET FOR SECTION D

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 SECTION D: LONG ANSWER QUESTION
(15 MARKS in total 5 Marks for each sub-part)

THIS ENTIRE SECTION IS COMPULSORY

START A NEW BOOKLET NOW
LABEL THIS BOOKLET: Section D

Assume that the government decides to subsidise the sale of mobile devices to students.
a) Using a demand and supply diagram (half an A4 page), demonstrate and explain how such a subsidy that
is provided to sellers in fact creates a benefit to consumers as well. Indicate the government expenditure
on your diagram.
b) What is price elasticity of demand and what will influence the price elasticity of demand for mobile devices?
Briefly explain using diagram/s, how price elasticity of demand will play a role in determining the size of
the benefit on consumers when a subsidy is provided to the sellers of mobile devices.
c) Define allocative efficiency. What are all the possible economic scenarios when such a subsidy for sellers
of mobile devices could be allocatively efficient, and thus create no deadweight loss? Is there any scenario
where there will be a deadweight loss via the application of this particular subsidy on mobile devices
(briefly explain in one/two sentences)?

REMEMBER TO LABEL THE COVER OF THIS BOOKLET SECTION D.

NOW CLOSE THIS ANSWER BOOKLET AND GO TO A NEW ANSWER BOOKLET.

GO TO SECTION E
START A NEW BOOKLET FOR SECTION E

27
 SECTION E: LONG ANSWER QUESTION
(15 MARKS in total 5 Marks for each sub-part)

THIS ENTIRE SECTION IS COMPULSORY

START A NEW BOOKLET NOW
LABEL THIS BOOKLET: Section E

Assume that consumers can choose between just two goods: data for mobile phones (Good M) and data for tablet
devices (Good T). Assume that both goods are normal.
a) Using indifference curves and a budget line, draw a diagram (half an A4 page) showing a utility maximising
consumer consuming both Good M and Good T. Place Good M on the horizontal (x) axis and Good T
on the vertical (y) axis. Indicate the utility maximising bundle, and state the condition for utility
maximisation in detail in words, and using an equation. Remember to leave space on your page for the
rest of this question.
b) Using your diagram in (a), show what would happen if there is a rise in the cost of production of data for
mobile phones (and not data for tablet devices). Use your diagram in (a) to derive a demand curve for
Good M (data for mobile phones) on a separate pair of axes. Briefly explain your answer.
c) Re-draw your indifference curves and budget lines in (b) on a new pair of axes. Show and explain the
income effect and the substitution effect, using this new diagram.

REMEMBER TO LABEL THE COVER OF THIS BOOKLET SECTION E.

NOW CLOSE THIS ANSWER BOOKLET AND GO TO A NEW ANSWER BOOKLET.

GO TO SECTION F
START A NEW BOOKLET FOR SECTION F

28
 IMPORTANT

Even though you will see two questions in Section F:

(Question F.1 on page 30 and Question F.2 on page 31),
you must choose only ONE of these two questions.

Each of these two questions has three parts: a, b and c.

REMEMBER

EITHER

ANSWER ALL OF QUESTION F.1 a, b, c

OR

ANSWER ALL OF QUESTION F.2 a, b, c

29
 SECTION F: LONG ANSWER QUESTIONS (15 MARKS)

Question F.1 START A NEW BOOKLET. LABEL IT F.1

F.1.a) 5 Marks
Apple (A)
Headphone Jack No Jack
A: $5,000 A: $20,000
Headphone Jack
G: $10,000 G: $30,000
Google (G)
A: $10,000 A $30,000
No Jack
G: $5,000 G: $20,000

The payoff matrix of economic profits above displays the possible outcomes for Apple (A) and Google (G) who
are involved in a game of whether or not to release their latest phone with a Headphone Jack or No Jack.
The payoffs in millions of dollars are indicated in the matrix above, and the companies are unable to communicate
with each other. Define the term: dominant strategy and explain in detail with reference to the above scenario,
why both firms have a dominant strategy. What is the Nash equilibrium of this game?

F.1.b) START A NEW PAGE. 5 Marks

Suppose it is deemed that the consumption of mobile phones imposes a harm on society because of the depletion
of rare earth metals that are used to produce mobile phones. Draw a demand and supply diagram that illustrates
this externality. Indicate the market equilibrium and the allocatively efficient outcome. Use an equation in your
answer to demonstrate the application of this externality. Briefly explain your answer.

F.1.c) START A NEW PAGE. 5 Marks

Suppose that Apple successfully applies for a patent on all of its technologies, and Apple is a profitable venture.
Show and explain using an appropriate diagram what would happen to Apple if governments around the world
imposed fines on Apple totalling $50 billion for avoiding the payment of tax for several years. (Assume that such
a fine still keeps Apple profitable.) Label the front of your answer booklet F.1.

30
 DO NOT ANSWER ANY PART OF THE QUESTION BELOW
IF YOU HAVE ALREADY ATTEMPTED QUESTION F.1 FROM
THE PREVIOUS PAGE

Question F.2 START A NEW BOOKLET LABEL IT F.2

F.2.a) 5 Marks
Googles production Apples production
possibilities possibilities
Tablets 20 10
OR
Laptops 40 30

The above table shows the amount of tablets or laptops in millions of kilos that could be produced by Google
and Apple in a year. What is comparative advantage? Explain with reference to this scenario, the good that each
company should specialise in and explain why. State a terms of trade that is acceptable to both companies.

F.2.b) START A NEW PAGE. 5 Marks

Suppose that a company is producing mobile phones utilising recycled phone parts rather than utilising newly
mined rare earth metals. Draw a demand and supply diagram that illustrates this externality. Indicate the market
equilibrium and the allocatively efficient outcome. Use an equation in your answer to demonstrate the application
of this externality. Briefly explain your answer.

F.2.c) START A NEW PAGE. 5 Marks

Suppose that Google develops a new technology that will be a component of each new mobile phone produced.
Google successfully applies for a patent and the technology is profitable. Show and explain using an appropriate
diagram what would happen to this Google venture if there is a price increase for the rare earth metals that are
used to produce this new technology. (Assume that such an event still keeps this venture profitable.) Label the
front of your answer booklet F.2.

31
 DID YOU LABEL ALL YOUR BOOKLETS?
(If not: Minus 1 Mark per unlabelled booklet)

PLEASE DO IT NOW!

Now check if you coded your student ID correctly on your

multiple choice coding sheet
(If not: Minus 1 mark)

END OF PAPER
See you in ECON110 and/or ECON131 and/or ECON203

AFTER THE EXAM IT WOULD BE GREAT IF YOU

COULD LOG ONTO iLearn and give your
CONSTRUCTIVE FEEDBACK ON THIS EXAM PAPER.

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