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Semester 1 Examinations 2023-2024 Course Instance 1BC1 Exam(s) Bachelor of Commerce Module Code(s) EC142 Module(s) Principles of Microeconomics Paper No. 1 External Examiner(s) Professor Peter Howley and Professor C...

Semester 1 Examinations 2023-2024 Course Instance 1BC1 Exam(s) Bachelor of Commerce Module Code(s) EC142 Module(s) Principles of Microeconomics Paper No. 1 External Examiner(s) Professor Peter Howley and Professor Colin Carter Internal Examiner(s) Professor John McHale *Dr. Edel Doherty Instructions: Answer ALL questions in Section A and choose 3 out of 4 questions in Section B. Duration 2 hours No. of Pages 10 Discipline(s) Economics Requirements: Release in Exam Venue No[  ] Yes [ ] MCQ Answer sheet No [ ] Yes [ ] Handout No [ ] Yes [ ] Formulae & Tables* No [ ] Yes [] Cambridge Tables 2nd Edition** No [ ] Yes [ ] Graph Paper*** A4 Graph Paper No [ ] Yes [ ] 1mm 0.1cm Squared (Standard) Other Materials No [ ] Yes [ ] Graphic material in colour No [ ] Yes [ ] End of requirements. PTO Page 1 of 10 EC142: Principles of Microeconomics Exam Duration: 2 Hours Section A: Multiple Choice Questions Section. Answer ALL questions in Section A. Each Question is worth two marks. There is no negative marking. 1. A firm's opportunity costs of production are equal to its a) explicit costs only. opportunity costs = explicit + implicit costs b) implicit costs only. c) Explicit costs – implicit costs d) explicit costs + implicit costs. e) explicit costs + implicit costs + total revenue. 2. The theory of consumer choice most closely examines which of the following Ten Principles of Economics? a) People face trade-offs. b) Governments can sometimes improve market outcomes. people c) Trade can make everyone better off. facing trade d) Markets are usually a good way to organize economic activity. offs e) People respond to incentives 3. Total surplus in a market is equal to a) consumer surplus + producer surplus. consumer + producer surplus b) value to buyers - amount paid by buyers. c) amount received by sellers - costs of sellers. d) producer surplus - consumer surplus. e) None of the above PTO Page 2 of 10 4. Refer to the Figure below. Given the budget constraint depicted in the graph, the consumer’s optimal choice will be point point C (b) a) B. b) C. c) A d) D. e) E. 5. Table 1.1 Text Buyer Willingness To Pay Calvin $150.00 Sam $135.00 Andrew $120.00 Lori $100.00 Refer to Table 1.1: If the price of the product is $132, then the total consumer surplus is: a) 18 b) 21 c) 43 b d) 405 e) 506 PTO Page 3 of 10 6. When a consumer is purchasing the best combination of two goods, X and Y, subject to a budget constraint, we say that the consumer is at an optimal choice point. A graph of an optimal choice point shows that it occurs: a) along the highest attainable indifference curve. b) where the indifference curve is tangent to the budget constraint. c) where the marginal utility per dollar spent is the same for both X and Y. d) All of the above are correct. e) A and C all of the above 7. The profit-maximising rule for the firm is: a) MR > MC; b) AR = AC; c) MR = MC; d) AR < AC; when revenue = cost e) MR < MC. 8. Refer to data below: Number of Workers Output 0 0 1 23 2 40 3 50 The marginal product of labour as production moves from employing one worker to employing two workers is: a) 0. 17 b) 10. c) 17. d) 23. e) 40. PTO Page 4 of 10 9. The change in consumption that results when a price change moves the consumer along a given indifference curve is known as the a) income effect. b) normal effect. substitution effect c)inferior effect d) substitution effect. 10. If an increase in a consumer's income causes the consumer to decrease their quantity demanded of a good, then the good is a) a substitute good. b) a normal good. an inferior good c) a complementary good. d) an inferior good. 11. An individual's demand curve for a good is derived by a) varying the income level and observing the resulting total utility derived from both goods. b) varying the price of one good and observing the resulting quantities of the other good. c) varying the price of one good and observing the resulting quantities demanded of that good c d) shifting the budget line to the left and calculating the loss in total utility. 12. Higher education is a normal good. If its price falls a) the quantity demanded of higher education will fall. b) the substitution and income effects work in opposite directions. c) the income effect is negative. d d) higher education will satisfy the law of demand. 13. If a consumer spent their entire income on crisps and cola, what would happen if the consumer’s income were to double and the prices of crisps and cola were also to double? a) the consumer’s budget line would remain unchanged. b) the consumer’s budget line would shift outward but remain parallel to the original budget line. c) the consumer’s budget line would shift inward but remain parallel to the original budget line d) the consumer’s budget line would shift in an unpredictable way a PTO Page 5 of 10 14. A change in the relative prices of which of the following pair of goods would likely cause the smallest substitution effect? a) Right shoes and left shoes. a b) Petrol from BP and petrol from Shell. c) Kit-Kat chocolate snacks and Twix chocolate snacks. d) Coke and Pepsi. 15. A cost that has already been committed and cannot be recovered is best described as: a) Total cost. sunk cost so b) Marginal cost. none of the c) Fixed cost. above are d) Variable cost. correct e) None of the above. PTO Page 6 of 10 Section B: Answer THREE questions ONLY in this section. Each Question Carries EQUAL Marks Q1. Worth 45 Marks in Total A. The weekly demand and supply curves for mobile phones are given by the following equations: Qd = 500 - 10P Qs = -100 + 10P 25 Marks i. Calculate the equilibrium price and quantity of mobile phones using the equations above. (5 Marks) ii. Plot the demand and supply curves (using the equations above) and illustrate the equilibrium price and quantity (5 Marks) iii. Calculate the value of consumer surplus at the equilibrium (5 Marks) iv. If the price of mobile phones were €20 each would this result in a shortage or a surplus? Explain your answer (5 Marks) v. Assume instead that an influx of students shifts the demand curve for phones to: QD = 750 – 10P. What is the new equilibrium price and quantity in the market? Illustrate your answers using a diagram. (5 Marks) B. Using three separate diagrams illustrate and briefly explain how each of the following events affects the market for olives. 15 Marks Clearly illustrate what happens to the equilibrium price and quantity in each case. i. there is an increase in the number of olive producers (5 Marks) ii. excessive drought disrupts the harvesting of olives (5 Marks) iii. the population increases substantially and the number of olives producers increases by a small amount (5 Marks) C. Define and explain a (i) normal good and (ii) complementary goods (5 Marks) PTO Page 7 of 10 Q2. Worth 45 Marks in Total A. List and explain four determinants of price elasticity of demand (10 Marks) B. When the price of a weekend break in Disneyworld Florida is €2,000, the number of visitors to the attraction is 10,000. When the price increases to €2,400 the number of visitors falls to 7000 20 Marks i. Using the midpoint method calculate the price elasticity of demand for weekend breaks in Disneyworld Florida (5 Marks) ii. Is the demand for weekend breaks in Disneyworld Florida elastic or inelastic? Explain your answer. Your answer should be based on the answer to part (i) above. (5 Marks) iii. A businessperson reads that the price elasticity of demand for a product is 1.25, if they wish to increase revenue should they increase or reduce the price? Explain. (5 Marks) iv. Why is price elasticity of demand important for (i) firms and (ii) governments? (5 Marks) C. When Jim’s income increased from €3,000 to €5,000 he increased his consumption of burgers from 4 to 8 a month. i. Calculate Jim’s income elasticity of demand (5 Marks) ii. Are burgers a normal or inferior good for Jim? (5 Marks) D. What sign (positive or negative) would you expect the coefficient of the cross- price elasticity of demand to be for Walkers crisps and Tayto crisps? Explain your answer. (5 Marks) PTO Page 8 of 10 Q3. Worth 45 Marks in Total Suppose Jim has €200 this semester to spend on magazines and CDs. The price of one magazine is €10 and the price of a CD is €20. Assume that Jim only spend this €200 on either CDs or magazines and that magazines must be bought two at a time. a) Draw your budget line representing the combinations of magazines and CDs that you can afford. (5 Marks) b) Assume that Jim’s utility for the two goods is represented by the following schedule. Number of Total Number of Total Magazines Utility CDs Utility 0 0 0 0 2 20 1 26 4 36 2 45 6 50 3 58 8 60 4 70 10 68 5 81 12 73 6 91 Calculate the marginal utility for each quantity of magazine and CDs consumed (remember to divide by two when calculating the marginal utility for magazines). (10 Marks) c) Do these MU results obey the law of diminishing marginal utility? Why? (5 Marks) d) Given these utility levels and Jim’s semester budget constraint, what combination of magazines and CDs should Jim buy? (again, assume that magazines must be bought two at a time). Does the optimal quantity of magazines and CDs satisfy the equi-marginal principle? (10 Marks) e) Now suppose Jim’s income increases to €250 per month. Use the diagram you drew in part (i) to show what happens to Jim’s consumption of magazines and CDs, assuming both are normal goods (5 Marks) f) What types of goods are represented by: i. L shaped indifference curves (5 Marks) ii. linear downward sloping indifference curves? (5 Marks) PTO Q4. Worth 45 Marks in Total A. The table below shows how output changes in the short-run as the labour input is varied. Page 9 of 10 20 Marks Labour Output Marginal Product Average Product Of Labour Of Labour 0 0 1 35 2 80 3 122 4 156 5 177 6 180 i. Complete the table. (10 Marks) ii. At what level of labour input do diminishing marginal returns set in? (5 Marks) iii. Indicate what levels of labour reflect increasing marginal returns and decreasing marginal returns? (5 Marks) B. Assume that capital costs €100 per machine and labour costs €200 per worker. 25 Marks Units Total Cost Average Cost Capital Labour Output TVC TFC TC AVC AFC ATC MC 10 0 0 10 1 20 10 2 54 10 3 100 10 4 151 10 5 197 10 6 230 10 7 251 10 8 260 i. Complete the table. (15 Marks) ii. Is this in the short-run or long-run? (5 Marks) iii. Why does the MC curve slope upwards as output increases? (5 Marks) END Page 10 of 10