NUI Galway Principles of Microeconomics 2019/2020 PDF

Semester I Examinations 2019/2020 Module code: EC142 Module title: Principles of Microeconomics Instance(s): 1BC1 Exam(s): Bachelor of Commerce Internal examiners -- lecturers: Dr. Michelle Queally & Dr. Anastasios Matopoulos Internal examiner -- hea...

Semester I Examinations 2019/2020 Module code: EC142 Module title: Principles of Microeconomics Instance(s): 1BC1 Exam(s): Bachelor of Commerce Internal examiners -- lecturers: Dr. Michelle Queally & Dr. Anastasios Matopoulos Internal examiner -- head of economics Professor Paddy Gillespie External examiners: Prof. Vincent Munley, Prof. Stephen Kinsella Duration: 2 hours No of pages: 8 INSTRUCTIONS: ! There are three sections to be answered. " Answer all MCQ questions in Section A (20 marks). " Answer three of the questions in Section B (60 marks). " Answer all of the True/False questions in Section C (20 marks). ! Please note that there is no negative marking. Requirements: None Page 1 of 8. Section A – Worth 20 marks Please answer all of the following multiple-choice questions (there is no negative marking). Each question carries two marks. Please write your answers in the exam answer book provided. an increeae in price of watches 1. All of the following shift the supply of watches to the right except: (a) An advance in the technology used to manufacture watches. (b) An increase in the price of watches. (c) A decrease in the wage of workers employed to manufacture watches. (d) Manufacturers' expectation of lower watch prices in the future. (e) None of the above. 2. If consumers think that there are very few substitutes for a good, then: demand would be inelelastic (a) Supply would tend to be price elastic. (b) Demand would tend to be price elastic. (c) Supply would tend to be price inelastic. (d) Demand would tend to be price inelastic. (e) None of the above. 3. A price floor: (a) Sets a legal minimum on the price at which a good can be sold. (b) Always determines the price at which a good must be sold. c (c) Sets a legal maximum on the price at which a good can be sold. (d) Is not a binding constraint if it is set above the equilibrium price. (e) None of the above. 4. An inferior good is defined as: (a) A good for which, other things equal, an increase in income leads to a decrease in demand. (b) A good for which, other things equal, an increase in income leads to a increase in demand. (c) A good for which demand decreases when its price decreases. (d) A good which is not scarce. a (e) A good which is intended for use in production. 5. Suppose that the price of a new bicycle is €350. Natalie values a new bicycle at €400. It costs €100 for the seller to produce the new bicycle. What is the value of total surplus if Natalie buys a new bike? (a) €250 (b) €50 (c) €300 250 (d) €350 (e) No total surplus exist. Page 2 of 8. 6. When marginal costs are below average total costs, (a) Average fixed costs are rising. (b) Average total costs are minimized. Text (c) Marginal costs are never below average total costs. (d) Average total costs are rising. (e) Average total costs are falling. 7. Which of the following is not a property of indifference curves? (a) Combinations of goods on the one indifference curve yield the same level of satisfaction to the consumer. (b) The slope of an indifference curve is the marginal rate of substitution. (c) Indifference curves usually slope downwards from left to right. (d) Indifference curves do not intersect. (e) Indifference curves reflect the income and price constraints. 8. When people behave in ways that involve increased risk because they have insurance, this is known as: (a) Moral Hazard. (b) Adverse Selection. (c) Asymmetric information. (d) Bad behaviour. (e) None of the above. 9. A person with a history of serious illness will buy a lot of hospitalisation insurance. This action is called: (a) Moral Hazard. (b) Adverse Selection. (c) Asymmetric information. (d) An externality. (e) None of the above. 10. A cost that has already been committed and cannot be recovered is best described as: (a) Total cost. (b) Marginal cost. (c) Fixed cost. (d) Variable cost. (e) None of the above. Page 3 of 8. Section B – Worth 60 marks Please answer any 3 (and only 3) questions in this section. Each question carries equal marks. Q1. Supply and Demand (20 Marks: Each part is worth 5 marks) The market for chocolate has the following supply and demand schedules: QD = 250 − 10 P QS = 40 P Where P is the price per chocolate (in €) and Q is the quantity of chocolates. a) What is the market equilibrium price and quantity for chocolates? Clearly show your answer. b) Sketch in a diagram the supply and demand for this market. The diagram does not have to be drawn to scale but is should illustrate your answer clearly. c) Suppose the government implements a price ceiling at P = €4. What will happen in this market (identify what will happen to the quantity demanded and the quantity supplied)? Is there a shortage or surplus in this market? Explain your answer clearly and show your answer in a graph. d) Think about the market for fizzy drinks like Coca-Cola & Pepsi-Cola i. Is Coca-Cola a substitute or complement for Pepsi-Cola? ii. Using a supply and demand diagram, show what happens in the market for Coca-Cola if Pepsi-Cola increase the price of its product. Page 4 of 8. Q2. Elasticity (20 Marks: Each part is worth 5 marks) a) Under what circumstances Demand tends to be more elastic? b) For each pair of goods listed below, which good would you expect to have the more inelastic demand? Support your choice with a short answer. i. Fizzy drink VS Salt ii. Petrol over the next month VS Petrol in 20 years iii. Refreshing drinks VS coffee iv. Insulin VS aspirin v. Cigarettes VS a trip to Florida c) Yesterday, the price of smarties was €3 a box, and Debby was willing to buy 10 boxes. Today, the price has gone up to €4 a box, and Debby is now willing to buy 6 boxes. i. Calculate Debby’s elasticity of demand using the midpoint method ii. Is Debby’s demand for smarties elastic or inelastic? Justify your answer. d) Do you think that the price elasticity of demand for Mercedes sport-utility vehicles (SUVs) will increase, decrease, or remain the same when each of the following events occurs? Explain with a short answer. i. Other car manufacturers, such as Alfa Romeo and General Motors, decide to make and sell SUVs. ii. SUVs produced in foreign countries are banned from the European Union market. Page 5 of 8. Q3. Theory of Consumer Choice (20 Marks: Each part is worth 5 marks) John is a student and his weekly income for food and drinks is €200. His favourite food is burrito and his favourite drink is soda. The price of burrito is €10 and the price of soda is €2. a) Write down John’s budget constraint. Draw John’s budget constraint, put burritos on the X-Axis and sodas on the Y-Axis. b) Calculate the slope of John’s budget constraint. What does the slope tells us? c) John’s Utility Function (i.e. the function that we are able to calculate his satisfaction from consuming burritos and sodas) is U=B·S. Calculate the Marginal Utility of consuming a burrito and the Marginal Utility of consuming a soda. d) Find John’s optimum choice bundle of burritos and sodas and draw his indifference curve. Page 6 of 8. Q4. Production Costs (20 Marks: Each part is worth 5 marks) Galway patisserie is a company that creates amazing chocolate desserts. Table below provides the relationship between the number of workers at the patisserie and the patisserie’s output in a given day. Workers Output Marginal Total Average Marginal of Product Cost Total Cost Desserts Cost 0 0 1 20 2 60 3 100 4 130 5 150 6 160 7 165 a) Fill in the column of marginal product. What pattern do you see? How might you explain it? b) A skilled patisserie chef costs €100 a day and the firm has fixed costs of €200. Use this information to fill in the column for total cost and for average total cost. c) Now fill in the column for marginal cost. What pattern do you see? How you might explain it? d) Compare the column for average total cost and the column for marginal cost. Explain the relationship. Page 7 of 8. Section C – Worth 20 marks Please answer all of the following true or false questions and support your true or false choice with a short answer. Each question carries two marks. 1. The price per pen decreased from €2 last month, is €1 today. The demand curve for pens must have shifted leftward between last month and today. 2. If apples and oranges are substitutes, an increase in the price of apples will increase the demand for oranges. 3. An uninsured patient who incessantly visits his doctor because he always thinks he is getting sick is an example of moral hazard. 4. If the income elasticity of demand for an electric scooter is positive, then the electric scooter is an inferior good. 5. The marginal rate of substitution between goods A and B measures the price of A relative to the price of B. 6. An advance in the technology employed to manufacture roller blades will result in a decrease in the equilibrium price and an increase in the equilibrium quantity in the market for roller blades. 7. Total surplus in a market is consumer surplus minus producer surplus. 8. When market price increases, producer surplus increases because (1) producer surplus received by existing sellers’ increases, and (2) new sellers enter the market. 9. When a firm’s price equals its average variable cost, it will break even. 10. An example of asymmetric information is when a worker knows more than their employer about how much effort they put into their job. Page 8 of 8.