Paper - 02/March/2011/HRN

EDUTION INSTITUTE
G.C.E (A/L)

Economics Unit 1&2

P.Suthaharan BBA (Marketing Special)(Col) Duration: 2.5 Hours Part A MCQ (Answer All Questions 25*2) 1. The fundamental economic problem faced by all societies is: a. unemployment b. inequality c. poverty d. scarcity 2. "Capitalism" refers to: a. the use of markets b. government ownership of capital goods c. private ownership of capital goods d. private ownership of homes & cars 3. There are three fundamental questions every society must answer. Which of the following is/are one of these questions? a. What goods and services are to be produced? b. How are the goods and services to be produced? c. Who will get the goods and services that are produced? d. All of the above 4. If you were working full-time now, you could earn $20,000 per year. Instead, you are working parttime while going to school. In your current part-time job, you earn $5,000 per year. At your school, the annual cost of tuition, books, and other fees is $2,000. The opportunity cost of completing your education is: a. $2,000 b. $5,000 c. $17,000 d. $20,000 5. The bowed shape of the production possibilities curve illustrates: a. the law of increasing marginal cost b. that production is inefficient c. that production is unattainable d. the demand is relatively inelastic P.Suthaharan ECONOMICS Page 1

6. You have taken this quiz and received a grade of 3 out of a possible 10 points (F). You are allowed to take a second version of this quiz. If you score 7 or more, you can raise your score to a 7 (C). You will need to study for the second version. In making a rational decision as to whether or not to retake the test, you should a. always retake the quiz b. consider only the marginal benefits from of retaking the quiz (four extra points) c. consider only the marginal opportunity costs from taking the quiz (the time spent studying and taking the quiz) d. consider both the marginal benefits and the marginal opportunity costs of retaking the quiz 7. The law of demand states that: a. as the quantity demanded rises, the price rises b. as the price rises, the quantity demanded rises c. as the price rises, the quantity demanded falls d. as supply rises, the demand rises 8. The price elasticity of demand is the: a. percentage change in quantity demanded divided by the percentage change in price b. percentage change in price divided by the percentage change in quantity demanded c. dollar change in quantity demanded divided by the dollar change in price d. percentage change in quantity demanded divided by the percentage change in quantity supplied 9. Community Colleges desired to increase revenues. They decided to raise fees paid by students with Bachelors degrees to $50 per unit because they believed this would result in greater revenues. But in reality, total revenues fell. Therefore, the demand for Community College courses by people with Bachelors degrees must have actually been: a. relatively inelastic b. unit elastic c. relatively elastic d. perfectly elastic

10. The demand for a product would be more inelastic: a. the greater is the time under consideration b. the greater is the number of substitutes available to buyers c. the less expensive is the product in relation to incomes d. all of the above 11. If there is a price ceiling, which of the following is NOT likely to occur? a. rationing by first-come, first-served b. black markets c. gray markets d. sellers providing goods for free that were formerly not free P.Suthaharan ECONOMICS Page 2

12. The law of diminishing (marginal) returns states that as more of a variable factor is added to a certain amount of a fixed factor, beyond some point: a. Total physical product begins to fall b. The marginal physical product rises c. The marginal physical product falls d. The average physical product falls 13. Which of the following best defines price discrimination? a. charging different prices on the basis of race b. charging different prices for goods with different costs of production c. charging different prices based on cost-of-service differences d. selling a certain product of given quality and cost per unit at different prices to different buyers 14. Some people are shipwrecked on a tropical island and allocate their time between gathering coconuts and fishing. Each individual is equally productive in collecting coconuts or catching fish. Which diagram represents the production possibility curve of this community?

15. The following might influence the demand for a good.Which would not cause a shift in the demand curve for the good? a. a change in the price of a complement b. change in the price of a substitute c. a change in the price of the good itself d. a change in consumers incomes 16. A fall in the price of cars causes the demand for petrol to rise by 20 %. The cross-elasticity of demand between cars and petrol is 2.Which change in car prices has brought this about?

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17. What is correct about market supply? a. Market supply can increase only when all individual firms increase their output. b. Market supply is effective when consumers have sufficient income to buy the good. c. Market supply is the result of aggregating the supply of all individual firms. d. Market supply of an inferior good falls as price increases. 18. The government imposes a sales tax to reduce consumption of good X. With which combination of price elasticity of demand and price elasticity of supply will this have The greatest effect? a. elastic demand and elastic supply b. elastic demand and inelastic supply c. inelastic demand and elastic supply d. inelastic demand and inelastic supply 19. Jam and honey are substitutes and honey and beeswax are in joint supply.Other things being equal, what will be the result of an increase in the price of jam?

20. The diagram shows a market for a good which is supplied partly from domestic production and partly from imports. Sh represents domestic supply and Sm represents imports.

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21. Advances in technology are turning a number of goods which are usually thought of as public goods (for example, television broadcasting and road use) into private goods. Why might this be so? a. Consumer surplus is being increased. b. The costs of production are being reduced. c. It is becoming easier to exclude non-payers. d. The technology is increasing the number of people consuming the goods. 22. What is true of merit goods? a. Consumers underestimate the benefit they provide. b. The free rider problem restricts their supply. c. Their social cost is greater than their private cost. d. The market system over-provides them. 23. What would be an economic benefit to a country of imposing a tariff on imported goods? a. It would increase global productivity. b. It would make the countrys exports more competitive. c. It would put pressure on foreign suppliers to reduce their prices. d. It would reduce the prices paid by consumers for imported goods. 24. One reason why there are mixed economies is that, a. The free market economy allocates recourses efficiently b. The profit motive acts as a disincentive to new businesses to enter an industry c. Competition is always undesirable d. The free market economy can lead to an unequal income distribution. 25. The problem of scarcity, a. Exists only in economies which rely on a mixed economy b. Could be eliminated if we could force prices to fall c. Means there are shortage of some goods d. Exists because human wants cannot be satisfied with available resources

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Part B Answer any 3 questions including the First question. Question No 1 a) Free market price operates as a rationing and allocating mechanism. Explain how it does this.(4) b) Explain how the basic economic problems are solved in the free market economy and the planned economy (4) c) What is meant by the term Division of Labour Explain how division of labour may reduce cost of production and increase Competitiveness? (4) d) Why does an increase in price reduces the quantity demanded ? What are the determinants of quantity demand? (4) e) Explain the following with the assistance of a diagram (4) 1. Positive price elasticity of demand 2. Negative cross elasticity of demand 3. Income elasticity of demand greater than one. (20 Marks) Question No 2 Consider the following data regarding a product in a perfect competitive market,

Price 2 4 6 8 10

Demand 500 400 300 200 100

Supply -100 0 100 200 300

a. Draw the demand and supply curve and identify the equilibrium price and quantity.(2) b. At the equilibrium point, calculate the price elasticity of demand and price elasticity of supply? (3) c. Identify the price for excess demand at100 units.(2) d. Identify the price for excess supply at 300 units.(2) e. If government introduces a maximum control price of Rs.6, what would be the total demand, local supply, excess demand, black market price and excess income for the producers? (2) f. Calculate the consumer surplus and producer surplus at the maximum control price. (2) g. What government can do to protect the control price? (2)

(15 Marks)

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Question No 3 The production possibility diagram below shows an economy that produces only manufactured goods and agricultural goods.

a. If the economy is operating on its production possibility frontier producing OM1 and OA1, what is the opportunity cost of increasing the output of manufactured goods from OM1 to OM2? [2] b. If the economy is now producing at point X what does this indicate? Explain [3] c. Adapt the above diagram to show an increase in the productivity of manufacturing only [1] d. Explain the Decreasing opportunity cost with an assistant of a diagram (3) e. List the main assumptions in constructing the PPC (2) f. Explain two reasons why the production possibility curve is concave to the origin most of the time (4)

(15 Marks)

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Question No 4 Economic Aspects of Cigarette Smoking, Smoking cigarettes is a controversial matter that illustrates a number of economic issues. As with most products, the key influence on the level of consumption is the products price.

(a) How far does the data in Fig. 1 confirm that the normal demand curve relationship exists between the price and the quantity demanded of cigarettes? [2] (b) (i) What do the three elasticity values in Table 1 tell us about the elasticity of demand for cigarettes? [2] (ii) What might explain these different elasticity values? [2] P.Suthaharan ECONOMICS Page 8

(c) Explain two possible economic reasons why cigarettes are heavily taxed. [4] (d) Discuss the possible economic consequences of making cigarette smoking illegal. [5]\ (15 Marks)

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