002 MIDTERM EXAMINATION
Spring 2010
ECO401 Economics (Session - 5)

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:


► The economic perspective.
► Marginal analysis.
► Allocative efficiency.
► Opportunity cost.

Question No: 2 ( Marks: 1 ) - Please choose one
At the equilibrium price:


► There will be a shortage.
► There will be neither a shortage nor a surplus.
► There will be a surplus.
► There are forces that cause the price to change.

Question No: 3 ( Marks: 1 ) - Please choose one
The price elasticity of demand measures the responsiveness of quantity demanded to:



► Quantity demanded.
► Quantity supplied.
► Price.
► Output.

Question No: 4 ( Marks: 1 ) - Please choose one
We know that the demand for a product is elastic:


► When price rises, total revenue rises.
► When price rises, total revenue falls.
► When income rises, quantity demanded rises.
► When income falls, quantity demanded rises.

Question No: 5 ( Marks: 1 ) - Please choose one
The law of diminishing marginal utility states:


► The supply curve slopes upward.
► Your utility grows at a slower and slower rate as you consume more and more units of a good.
► The elasticity of demand is infinite.
► None of the given options.

Question No: 6 ( Marks: 1 ) - Please choose one
Consumers will maximize satisfaction when:


► The price of each good is exactly equal to the price of every other good consumed.
► The price of each good is exactly equal to the total utility derived from the consumption of every other good.
► The marginal utility of the last dollar spent on each good is exactly equal to the marginal utility of the last dollar spent on any other good.
► Marginal utility is equal to average utility.

Question No: 7 ( Marks: 1 ) - Please choose one
Indifference curves that are convex to the origin reflect:


► An increasing marginal rate of substitution.
► A decreasing marginal rate of substitution.
► A constant marginal rate of substitution.
► A marginal rate of substitution that first decreases, then increases.

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:

► Indifference curves slope downwards.
► Indifference curves slope upwards.
► Indifference curves may cross.
► Indifference curves could take the form of ellipses.

Question No: 9 ( Marks: 1 ) - Please choose one
Increase in pension benefits leads to income and substitution effect which:


► Encourage workers to retire later.
► Encourage workers to work more hours.
► Have no effect on incentive to retire.
► Encourage workers to retire earlier.

Question No: 10 ( Marks: 1 ) - Please choose one
Increasing returns to scale in production means:


► More than twice as much of only one input is required to double output.
► Isoquants must be linear.
► More than 10% as much of all inputs are required to increase output 10%.
► Less than twice as much of all inputs are required to double output.

Question No: 11 ( Marks: 1 ) - Please choose one
In the short run, a firm should shut down when:


► Production losses are less than fixed costs.
► Only normal profits are earned.
► Production losses exceed fixed costs.
► Fixed costs are zero.

Question No: 12 ( Marks: 1 ) - Please choose one
Second-degree price discrimination is the practice of charging:


► The reservation price to each customer.
► Different prices for different blocks of the same good or service.
► Different groups of customers different prices for the same products.
► Each customer the maximum price that he or she is willing to pay.

Question No: 13 ( Marks: 1 ) - Please choose one
The market structure in which strategic considerations are most important is:


► Monopolistic competition.
► Oligopoly.
► Pure competition.
► Pure monopoly.

Question No: 14 ( Marks: 1 ) - Please choose one
Which of the following best expresses the law of demand?

► A higher price reduces demand.
► A lower price reduces demand.
► A higher price reduces quantity demanded.
► A lower price shifts the demand curve to the right.

Question No: 15 ( Marks: 1 ) - Please choose one
If a sales tax on beer leads to reduced tax revenue, this means:


► Elasticity of demand is < 1.
► Elasticity of demand is > 1.
► Demand is upward-sloping.
► Demand is perfectly inelastic.

Question No: 16 ( Marks: 1 ) - Please choose one
The textbook for your class was not produced in a perfectly competitive industry because:


► There are so few firms in the industry that market shares are not small, and firm's decisions have an impact on market price.
► Upper-division microeconomics texts are not all alike.
► It is not costless to enter or exit the textbook industry.
► All of the given options.

Question No: 17 ( Marks: 1 ) - Please choose one
Which of the following is true about supply curve under monopoly?


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► It is same as the competitive market supply curve.
► It is the portion of marginal cost curve where marginal costs exceed the minimum value of average variable costs.
► It is the result of market power and production costs.
► None of the given statements is true.

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?


► It can be used no matter what a person's preference to risk.
► It can be used if and only if individuals are not risk-loving.
► It can be used if and only if individuals are risk averse.
► It can be used if and only if individuals are risk neutral.

Question No: 19 ( Marks: 1 ) - Please choose one
Which of the following will happen if the cost of computer components falls?


► The demand curve for computers shifts to the right.
► The demand curve for computers shifts to the left.
► The supply curve for computers shifts to the right.
► The supply curve for computers shifts to the left.

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?


► The supply curve will shift to the left.
► The supply curve will shift to the right.
► Output will increase regardless of the market price and the supply curve will shift upward.
► Output will decrease and the market price will also decrease.

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?


► 10.
► 13.
► 20.
► 33.

Question No: 22 ( Marks: 1 ) - Please choose one
Which of the following is TRUE for a Giffen good?


► Its marginal utility is zero.
► Its demand curve is perfectly elastic.
► Its substitution effect is positive.
► Its demand curve is positively sloped.

Question No: 23 ( Marks: 1 ) - Please choose one
Which of the following occur when an isocost line is just tangent to an isoquant?


► Output is being produced at minimum cost.
► Output is not being produced at minimum cost.
► The two products are being produced at the medium input cost to the firm.
► The two products are being produced at the highest input cost to the firm.

Question No: 24 ( Marks: 1 ) - Please choose one
Indifference curves that are concave to the origin reflect:


► An increasing marginal rate of substitution
► A decreasing marginal rate of substitution
► A constant marginal rate of substitution
► A marginal rate of substitution that first decreases then increases

Question No: 25 ( Marks: 1 ) - Please choose one
What will happen to the isocost line if the price of both goods decreases proportionality?


► It shifts farther away from the origin of the graph.
► It shift inward.
► It shifts outward.
► None of the given options.


Question No: 26 ( Marks: 1 ) - Please choose one
Average total costs are the sum of:


► Fixed costs and marginal costs
► Average variable costs and marginal costs
► Average fixed costs and average variable costs
► Average marginal costs and average variable costs

Question No: 27 ( Marks: 1 ) - Please choose one
At the profit-maximizing level of output, the marginal cost is equal to:


► Average revenue
► Total revenue
► Marginal revenue
► None of the given options

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:


► The firm supplies a different good than its rivals.
► The firm's output is a considerable fraction of the entire industry's output.
► The short run market price is determined solely by the firm's technology.
► None of the given options.


Question No: 29 ( Marks: 1 ) - Please choose one
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.

Question No: 30 ( Marks: 1 ) - Please choose one
Maximum number of firms in an oligopoly is about


► 2
► 10
► 15
► 20

Question No: 31 ( Marks: 1 ) - Please choose one
Resources are governed by both government and individuals in:


► Dictatorship.
► Command or planned economy.
► A mixed economy.
► Capitalist economy.

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:


► The demand curve for eggs to shift leftward.
► Quantity demanded of eggs to decrease.
► The demand curve for eggs to shift rightward.
► Quantity demanded of eggs to increase.

Question No: 33 ( Marks: 1 ) - Please choose one
An increase in quantity demand is shown by:


► Shifting the demand curve to the left.
► Shifting the demand curve to the right.
► Upward movement along the demand curve.
► Downward movement along the demand curve.

Question No: 34 ( Marks: 1 ) - Please choose one
If a 7% price reduction causes quantity demanded to rise by 10% then:

► Demand is inelastic.
► Demand is elastic.
► Demand is perfectly elastic.
► Total revenue will remain constant.

Question No: 35 ( Marks: 3 )
What is the key difference between the short run and the long run for the profit-maximizing firm?


Question No: 36 ( Marks: 5 )
A. Why the firm experiences economies of scale and what will be the shape of long run average cost curve in this case?
B. Why the firm experiences diseconomies of scale and what will be the shape of long run average cost curve in this case?
(Marks: 2.5+2.5)


Question No: 37 ( Marks: 5 )
Define price taker firm and price maker firm. Also discuss in which type of market structures these firms exist?