ECO401 MIDTERM EXAMINATION
Spring 2010
ECO401 Question No: 1 ( M a r k s: 1 )
If pen and ink are complements, then an increase in the price of pen will cause:
► An increase in the price of ink.
► Less ink to be demanded at each price.
► A decrease in the demand for pen.
► A rightward shift in the demand curve for ink.
ECO401 Question No: 2 ( M a r k s: 1 )
A good for which income and quantity demanded are inversely related is known as:
► Inferior good.
► Complementary good.
► Normal good.
► None of the given options.
ECO401 Question No: 3 ( M a r k s: 1 )
When movie ticket prices decrease, families tend to spend more time at cinema for watching videos instead at home. This best reflects:
► The rationing function of markets.
► The substitution effect.
► Diminishing marginal utility.
► The income effect.
ECO401 Question No: 4 ( M a r k s: 1 )
When college students leave town for the summer, the demand for meals at the local restaurants decline. This results in:
► A decrease in equilibrium price and an increase in quantity of meal.
► An increase in equilibrium price and quantity of meal.
► A decrease in equilibrium price and quantity of meal.
► An increase in equilibrium price and a decrease in quantity of meal.
ECO401 Question No: 5 ( M a r k s: 1 )
A new technology which reduces costs for firms:
► Shifts the supply curve to the right.
► Shifts the supply curve to the left.
► Reduces the equilibrium quantity.
► Raises the equilibrium price.
ECO401 Question No: 6 ( M a r k s: 1 )
If the quantity supplied of oranges exceeds the quantity demanded then:
► There is a shortage of oranges.
► Market forces will cause the price to fall.
► Market forces will cause the price to rise.
► The market is in equilibrium.
ECO401 Question No: 7 ( M a r k s: 1 )
Which of the following measures the percentage change in quantity demanded given a percentage change in consumer's income?
► Price elasticity of demand.
► Income elasticity of demand.
► Supply price elasticity.
► Cross price elasticity.
ECO401 Question No: 8 ( M a r k s: 1 )
Marginal utility is best described as:
► The total satisfaction gained from the total consumption of the good.
► The change in satisfaction from consuming one additional unit of the good.
► The additional satisfaction gained by consumption of the last good.
► The per unit satisfaction of the good consumed.
ECO401 Question No: 9 ( M a r k s: 1 )
Aslam spends all of his money on racquetballs and food. What would happen to Aslam’s budget line if his income increased by 10 percent holding prices constant?
► It would shift inward.
► It would rotate about the axis for food.
► It would rotate about the axis for racquetballs.
► It would shift outward.
ECO401 Question No: 10 ( M a r k s: 1 )
The income effect of a price change:
► Is always positive.
► Is always negative.
► May be positive or negative.
► Is associated with a change in nominal income.
ECO401 Question No: 11 ( M a r k s: 1 )
Which of the following is TRUE about price-consumption curve for good X?
► Nominal income falls as the price of X falls.
► The absolute price of X falls, but the relative price between X and the composite good Y stays the same.
► It is always downward sloping for a normal good.
► It represents only those market baskets that are optimal for the given price ratio and preference pattern and therefore a demand curve can be plotted from it.
ECO401 Question No: 12 ( M a r k s: 1 )
A production function:
► Relates inputs with output.
► Generates a curve that is upward sloping.
► Shows diminishing marginal product of an input, since it gets flatter as output rises.
► All of the given options.
ECO401 Question No: 13 ( M a r k s: 1 )
Incremental cost is the same concept as:
► Average cost.
► Marginal cost.
► Fixed cost.
► Variable cost.
ECO401 Question No: 14 ( M a r k s: 1 )
A firm maximizes profit by operating at the level of output where:
► Average revenue equals average cost.
► Average revenue equals average variable cost.
► Total costs are minimized.
► Marginal revenue equals marginal cost.
ECO401 Question No: 15 ( M a r k s: 1 )
A market with few entry barriers and with many firms that sell differentiated products is:
► Purely competitive.
► A monopoly.
► Monopolistically competitive.
► Oligopolistic.
ECO401 Question No: 16 ( M a r k s: 1 )
The similarity in the Perfect competition and monopolistic competition is that:
► Firms in both types of market structure will act as price takers.
► Firms in both types of market structure will produce a product that is exactly like one produced by other firms in the industry.
► Firms in both types of market structure will produce a level of output where price equals marginal cost.
► Firms in both types of market structure will earn zero profit in the long run.
ECO401 Question No: 17 ( M a r k s: 1 )
Demand is elastic when the elasticity of demand is:
► Greater than 0 but less than 1.
► Greater than 1.
► Less than 0.
► Equal to 1.
ECO401 Question No: 18 ( M a r k s: 1 )
Suppose an increase in income causes demand curve to shift to rightward. In this case, what will happen at any given price?
► The price elasticity of demand will remain unchanged.
► The price elasticity of demand will decrease in absolute terms.
► The price elasticity of demand will increase in absolute terms.
► The price elasticity of demand will increase, decrease or stay the same. It cannot be determined.
ECO401 Question No: 19 ( M a r k s: 1 )
How many points you need to know to calculate the price elasticity of demand on the same demand curve?
► One.
► Two.
► Three.
► Four.
ECO401 Question No: 20 ( M a r k s: 1 )
What might be the reason of a leftward shift in the demand curve for product X?
► A decrease in income if X is an inferior good.
► An increase in income if X is a normal good.
► An increase in the price of a product that is a close substitute for X.
► An increase in the price of a product that is complementary to X.
ECO401 Question No: 21 ( M a r k s: 1 )
What will be the impact of a ban on foreign firms from selling in the domestic market?
► It will cause domestic producers competing with the imports to face huge losses.
► It will cause the supply curve to shift to the left.
► It will cause the supply curve to shift to the right.
► It will have no effect on the domestic market.
ECO401 Question No: 22 ( M a r k s: 1 )
For which of the following good, the substitution effect of a lowered price is counteracting by the income effect?
► For an inferior good.
► A substitute good.
► For an independent good.
► For a normal good.
ECO401 Question No: 23 ( M a r k s: 1 )
The total cost (TC) function is given as: TC = 200 + 5Q. What is the average total cost?
► 5Q.
► 5.
► 5 + (200/Q).
► None of the given options.
ECO401 Question No: 24 ( M a r k s: 1 )
Which of the following is TRUE for the total cost of producing a given level of output?
► It is maximized when a corner solution exists.
► It is minimized when the ratio of marginal product to input price is equal for all inputs.
► It is minimized when the marginal products of all inputs are equal.
► It is minimized when marginal product multiplied by input price is equal for all inputs.
ECO401 Question No: 25 ( M a r k s: 1 )
An improvement in technology would result in:
► There will be upward shift of marginal cost and increases in output.
► There will be upward shift of marginal cost and reductions in output.
► There will be downward shift of marginal cost and reductions in output.
► There will be downward shift of marginal cost and increases in output.
ECO401 Question No: 26 ( M a r k s: 1 )
What is the reason that monopolist has no supply curve?
► Because the quantity supplied at any particular price depends on the monopolist's demand curve.
► Because the monopolist's marginal cost curve changes considerably over time.
► Because the relationship between price and quantity depends on both marginal cost and average cost.
► Because although there is only a single seller at the current price, it is impossible to know how many sellers would be in the market at higher prices.
ECO401 Question No: 27 ( M a r k s: 1 )
Since fish comes under perishable good, therefore, the fish which are caught each day, must be offered for sale on that day, no matter what price it brings.This statement infers that
► None of the given options.
► The daily supply curve for fish slopes upward.
► The daily supply curve for fish is perfectly inelastic.
► The daily supply curve for fish is perfectly elastic.
ECO401 Question No: 28 ( M a r k s: 1 )
The total cost (TC) function is given as TC = 500 + 30Q. What is the average total cost?
► 500
► 30+ (500/Q)
► 30Q2+500Q
► 30
ECO401 Question No: 29 ( M a r k s: 1 )
When new firms enter in perfectly competitive industry for profits, the supply starts to:
► Increase in response to demand.
► Increase in response to price.
► Decrease in response to demand.
► Decrease in response to price.
ECO401 Question No: 30 ( M a r k s: 1 )
The characteristics of a monopolistically competitive market are almost the same as in
► Monopoly.
► Oligopoly.
► Perfect competition.
► Duopoly.
ECO401 Question No: 31 ( M a r k s: 1 )
A reduced price may be offered if you buy two t-shirts instead of just one. This is an example of
► Perfect competition.
► First-degree price discrimination.
► Monopoly.
► Second-degree price discrimination.
ECO401 Question No: 32 ( M a r k s: 1 )
Maximum number of firms in an oligopoly is about
► 2
► 10
► 15
► 20
ECO401 Question No: 33 ( M a r k s: 1 )
As price increases total revenue decreases in case of
► Inelastic demand.
► Unit elastic demand.
► Zero elastic demand.
► Elastic demand.
ECO401 Question No: 34 ( M a r k s: 1 )
If the cross price elasticity of demand between two goods A and B is negative; it means that goods are
► Independent.
► Inferior.
► Complements.
► Substitutes.
ECO401 Question No: 35 ( M a r k s: 3 )
Briefly explain the relationship between monopoly power and price elasticity of demand.
Answer:
Market power is the ability to raise price above marginal cost and earn a positive profit. The degree to which a firm can raise price above marginal depends on the shape of the demand curve at the profit maximizing output. That is, elasticity is the critical factor in determining market power.
The relationship between market power and the Price Elasticity of Demand can be summarized by the equation:
P/MC = PED/(1 + PED)
PED will be negative, so the ratio is always greater than one. The higher the P/MC ratio, the more market power the firm possesses. As PED increases in magnitude, the P/MC ratio approaches one, and market power approaches zero. The equation is derived from the monopolist pricing rule:
(P - MC)/P = -1/PED
ECO401 Question No: 36 ( M a r k s: 5 )
Write down the advantages and disadvantages of monopoly.
ECO401 Question No: 37 ( M a r k s: 5 )
Explain engel curve for giffen commodities with the help of graph.
The income effect of a Giffen good is positive that it compensate the negative substitution effect. If price of X increases, quantity demanded increases, Violates law of demand, Goods called Giffen goods.
(P)
Engel Curve
(Q)
