Resolved by Grevancy MIDTERM EXAMINATION Spring 2010 ECO401- Economics (Session - 5) Time: 60 min Marks: 47 Question No: 1 ( Marks:

1 ) - Please choose one Aslam decides to stay at home and study for his exam rather than going out with his friends to a movie. His dilemma is an example of: Theeconomicperspective. Marginalanalysis. Allocativeefficiency.
Ans Opportunity cost.

Question No: 2

( Marks: 1 )

- Please choose one

At the equilibrium price: Therewillbeashortage.

AnsThere will be neither a shortage nor a surplus.

Therewillbeasurplus. Thereareforcesthatcausethepricetochange. Question No: 3 ( Marks: 1 ) - Please choose one

The price elasticity of demand measures the responsiveness of quantity demanded to: Quantitydemanded. Quantitysupplied.
AnsPrice.

Output. Question No: 4 Whenpricerises,totalrevenuerises.

AnsWhen price rises, total revenue falls.

( Marks: 1 )

- Please choose one

We know that the demand for a product is elastic:

Whenincomerises,quantitydemandedrises.

Whenincomefalls,quantitydemandedrises. Question No: 5 Thesupplycurveslopesupward.

AnsYour utility grows at a slower and slower rate as you consume more and more units

( Marks: 1 )

- Please choose one

The law of diminishing marginal utility states:

of a good. Theelasticityofdemandisinfinite. Noneofthegivenoptions. Question No: 6 Thepriceofeachgoodisexactlyequaltothepriceofeveryothergoodconsumed. Thepriceofeachgoodisexactlyequaltothetotalutilityderivedfromtheconsumptionof everyothergood.

AnsThe marginal utility of the last dollar spent on each good is exactly equal to the

( Marks: 1 )

- Please choose one

Consumers will maximize satisfaction when:

marginal utility of the last dollar spent on any other good. Marginalutilityisequaltoaverageutility. Question No: 7 Anincreasingmarginalrateofsubstitution.
AnsA decreasing marginal rate of substitution.

( Marks: 1 )

- Please choose one

Indifference curves that are convex to the origin reflect:

Aconstantmarginalrateofsubstitution. Amarginalrateofsubstitutionthatfirstdecreases,thenincreases. Question No: 8 ( Marks: 1 ) - Please choose one

Suppose there are only two goods A and B, if more of good A is always preferred to less, and if less of good B is always preferred to more, then: Indifferencecurvesslopedownwards.
AnsIndifference curves slope upwards.

Indifferencecurvesmaycross.

Indifferencecurvescouldtaketheformofellipses. Question No: 9 Encourageworkerstoretirelater. Encourageworkerstoworkmorehours. Havenoeffectonincentivetoretire.

AnsEncourage workers to retire earlier.

( Marks: 1 )

- Please choose one

Increase in pension benefits leads to income and substitution effect which:

Question No: 10

( Marks: 1 )

- Please choose one

Increasing returns to scale in production means: Morethantwiceasmuchofonlyoneinputisrequiredtodoubleoutput. Isoquantsmustbelinear. Morethan10%asmuchofallinputsarerequiredtoincreaseoutput10%.

AnsLess than twice as much of all inputs are required to double output.

Question No: 11 Productionlossesarelessthanfixedcosts. AnsOnly normal profits are earned. Productionlossesexceedfixedcosts. Fixedcostsarezero. Question No: 12 ( Marks: 1 ) - Please choose on Second-degree price discrimination is the practice of charging: Thereservationpricetoeachcustomer. AnsDifferent prices for different blocks of the same good or service. Differentgroupsofcustomersdifferentpricesforthesameproducts. Eachcustomerthemaximumpricethatheorsheiswillingtopay. Question No: 13 ( Marks: 1 ) - Please choose one The market structure in which strategic considerations are most important is: ( Marks: 1 ) - Please choose one In the short run, a firm should shut down when:

AnsMonopolistic competition. Oligopoly. Purecompetition. Puremonopoly. Question No: 14 Ahigherpricereducesdemand. Alowerpricereducesdemand. AnsA higher price reduces quantity demanded. Alowerpriceshiftsthedemandcurvetotheright. Question No: 15 Elasticityofdemandis<1. AnsElasticity of demand is > 1. Demandisupward-sloping. Demandisperfectlyinelastic. ELASTICDEMAND>1 Pricerises: AsPincreases,Qdecreases PercentagechangeinP<percentagechangeinQ.NowTR=PxQTRwillalsodecrease Question No: 16 ( Marks: 1 ) - Please choose one The textbook for your class was not produced in a perfectly competitive industry because: AnsThere are so few firms in the industry that market shares are not small, and firm's decisions have an impact on market price. Upper-divisionmicroeconomicstextsarenotallalike. Itisnotcostlesstoenterorexitthetextbookindustry. Allofthegivenoptions. Question No: 17 ( Marks: 1 ) - Please choose one Which of the following is true about supply curve under monopoly? Itissameasthecompetitivemarketsupplycurve. Itistheportionofmarginalcostcurvewheremarginalcostsexceedtheminimumvalueof averagevariablecosts. ( Marks: 1 ) - Please choose one If a sales tax on beer leads to reduced tax revenue, this means: ( Marks: 1 ) - Please choose one Which of the following best expresses the law of demand?

Ans It is the result of market power and production costs. Noneofthegivenstatementsistrue. Question No: 18 ( Marks: 1 ) - Please choose one If other things remaining the same, expected income can be used as a direct measure of well-being in which of the following situations? AnsIt can be used no matter what a person's preference to risk. Itcanbeusedifandonlyifindividualsarenotrisk-loving. Itcanbeusedifandonlyifindividualsareriskaverse. Itcanbeusedifandonlyifindividualsareriskneutral. Question No: 19 ( Marks: 1 ) - Please choose one Which of the following will happen if the cost of computer components falls? AnsThe demand curve for computers shifts to the right. Thedemandcurveforcomputersshiftstotheleft. Thesupplycurveforcomputersshiftstotheright. Thesupplycurveforcomputersshiftstotheleft. Question No: 20 ( Marks: 1 ) - Please choose one What will happen if there is an increase in the raw material costs, other things remaining the same? AnsThe supply curve will shift to the left. Thesupplycurvewillshifttotheright. Outputwillincreaseregardlessofthemarketpriceandthesupplycurvewillshiftupward. Outputwilldecreaseandthemarketpricewillalsodecrease. Question No: 21 ( Marks: 1 ) - Please choose one Suppose the total utilities for the first four units of a good consumed are 13, 23, 33, and 43 respectively. What is the marginal utility of the third unit? Ans10. 13. 20. 33. Question No: 22 ( Marks: 1 ) - Please choose one Which of the following is TRUE for a Giffen good? Itsmarginalutilityiszero. AnsIts demand curve is perfectly elastic. Itssubstitutioneffectispositive. Itsdemandcurveispositivelysloped.

Question No: 23

( Marks: 1 )

- Please choose one

Which of the following occur when an isocost line is just tangent to an isoquant? AnsOutput is being produced at minimum cost. Outputisnotbeingproducedatminimumcost. Thetwoproductsarebeingproducedatthemediuminputcosttothefirm. Thetwoproductsarebeingproducedatthehighestinputcosttothefirm. Question No: 24 ( Marks: 1 ) - Please choose one Indifference curves that are concave to the origin reflect: AnsAn increasing marginal rate of substitution Adecreasingmarginalrateofsubstitution Aconstantmarginalrateofsubstitution Amarginalrateofsubstitutionthatfirstdecreasesthenincreases Question No: 25 ( Marks: 1 ) - Please choose one What will happen to the isocost line if the price of both goods decreases proportionality? AnsIt shifts farther away from the origin of the graph. Itshiftinward. Itshiftsoutward. Noneofthegivenoptions. Question No: 26 ( Marks: 1 ) - Please choose one Average total costs are the sum of: Fixedcostsandmarginalcosts Averagevariablecostsandmarginalcosts AnsAverage fixed costs and average variable costs Averagemarginalcostsandaveragevariablecosts Question No: 27 ( Marks: 1 ) - Please choose one At the profit-maximizing level of output, the marginal cost is equal to: Averagerevenue Totalrevenue AnsMarginal revenue Noneofthegivenoptions Question No: 28 ( Marks: 1 ) - Please choose one The amount of output for maximum profit that a firm decides to sell has an effect on the market price in a monopolistic competitive industry because:

AnsThe firm supplies a different good than its rivals. Thefirm'soutputisaconsiderablefractionoftheentireindustry'soutput. Theshortrunmarketpriceisdeterminedsolelybythefirm'stechnology. Noneofthegivenoptions. Question No: 29 ( Marks: 1 ) - Please choose one When new firms enter in perfectly competitive industry for profits, the supply starts to: AnsIncrease in response to demand. Increaseinresponsetoprice. Decreaseinresponsetodemand. Decreaseinresponsetoprice. Question No: 30 2 10 15 Ans20 Question No: 31 Dictatorship. Commandorplannedeconomy. Ans A mixed economy. Capitalisteconomy. Question No: 32 ( Marks: 1 ) - Please choose one The demand curve for eggs is downward-sloping. Suddenly the price of eggs decreases from Rs.60/- per dozen to Rs.50/- per dozen. This will cause: Thedemandcurveforeggstoshiftleftward. Quantitydemandedofeggstodecrease. AnsThe demand curve for eggs to shift rightward. Quantitydemandedofeggstoincrease. Question No: 33 ( Marks: 1 ) - Please choose one An increase in quantity demand is shown by: Shiftingthedemandcurvetotheleft. AnsShifting the demand curve to the right. ( Marks: 1 ) - Please choose one Resources are governed by both government and individuals in ( Marks: 1 ) - Please choose one Maximum number of firms in an oligopoly is about

Upwardmovementalongthedemandcurve. Downwardmovementalongthedemandcurve. Question No: 34 ( Marks: 1 ) - Please choose one If a 7% price reduction causes quantity demanded to rise by 10% then: AnsDemand is inelastic. Demandiselastic. Demandisperfectlyelastic. Totalrevenuewillremainconstant. Question No: 35 ( Marks: 3 ) What is the key difference between the short run and the long run for the profitmaximizing firm? Answer: Demandtendstobemoreelasticinthelongrunratherthanintheshortrun. Shortrunisaperiodinwhichnotallfactorscanadjustfullyandthereforeadjustmenttoshocks canonlybepartial. Longrunisaperiodoverwhichallfactorscanbechangedandfulladjustmenttoshockscantake place. Inshortrunsomeprices,especiallywages,arerigidandinflexiblewhereasinlongrunwagesare flexible.