ECO401 Final Term Solved Paper

FINALTERM EXAMINATION · Fall 2009 · ECO401- Economics · Time: 120 min Marks: 87

Q1. The concave shape of the production possibilities curve for two goods X and Y illustrates: (1 marks)

1. Increasing opportunity cost for both goods.
2. Increasing opportunity cost for good X but not for good Y.
3. Increasing opportunity cost for good Y but not for good X.
4. Constant opportunity cost for both goods.

Correct answer: Increasing opportunity cost for both goods.

The shape of a production possibility curve commonly drawn as concave downward to represent increasing opportunity cost with increased output of a good.

Q2. When college students leave town for the summer, the demand for meals at the local restaurants decline. This results in: (1 marks)

1. A decrease in equilibrium price and an increase in quantity of meal.
2. An increase in equilibrium price and quantity of meal.
3. A decrease in equilibrium price and quantity of meal.
4. An increase in equilibrium price and a decrease in quantity of meal.

Correct answer: A decrease in equilibrium price and quantity of meal.

A decrease in equilibrium price and quantity. The demand curve shifts to the left because the town population declines, resulting in lower prices and quantity.

Q3. A demand curve is price elastic when: (1 marks)

1. Changes in demand are proportionately greater than changes in price.
2. Changes in demand are equal to changes in price.
3. None of the given options.
4. Changes in demand are proportionately smaller than changes in price.

Correct answer: Changes in demand are proportionately greater than changes in price.

For elastic demand curve, firm does not increase its prices. Because as prices increases, quantity Demanded decreases much larger. Decrease in quantity demanded is greater than the increase in prices. So firm will earn less revenue. So TR decreases as price increases.

Q4. The numerical measurement of a consumer’s preference is called: (1 marks)

1. Use.
2. Pleasure.
3. Utility.
4. Satisfaction.

Correct answer: Utility.

Utility is a numerical representation of a preference ranking

Q5. Which of the following is TRUE about price-consumption curve for good X? (1 marks)

1. Nominal income falls as the price of X falls.
2. The absolute price of X falls, but the relative price between X and the composite good Y stays the same.
3. It is always downward sloping for a normal good.
4. 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.

Correct answer: 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.

The price consumption curve (PCC) traces out the optimal choice of consumption at different prices. The PCC can be used to derive the demand curve, which shows the relationship between price & quantity demanded.

Q6. Marginal profit is equal to: (1 marks)

1. Marginal revenue minus marginal cost.
2. Marginal revenue plus marginal cost.
3. Marginal cost minus marginal revenue.
4. Marginal revenue times marginal cost.

Correct answer: Marginal revenue minus marginal cost.

marginal profit is the term used to refer to total when marginal cost is subtracted

from marginal revenue.

Q7. The supply curve for a competitive firm is: (1 marks)

1. Its entire marginal cost curve.
2. The upward-sloping portion of its marginal cost curve.
3. Its marginal cost curve above the minimum point of the average variable cost curve.
4. Its marginal cost curve above the minimum point of the average total cost curve.

Correct answer: Its marginal cost curve above the minimum point of the average total cost curve.

A perfectly competitive firm's supply curve is that portion of its marginal cost curve that lies above the minimum of the average variable cost curve.

Q8. Second-degree price discrimination is the practice of charging: (1 marks)

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

Correct answer: Different prices for different blocks of the same good or service.

Second degree price discrimination, allows the supplier to set different prices to the different groups and capture a larger portion of the total market surplus.

Q9. A market with few entry barriers and with many firms that sell differentiated products is: (1 marks)

1. Purely competitive.
2. A monopoly.
3. Monopolistically competitive.
4. Oligopolistic.

Correct answer: Monopolistically competitive.

Monopolistic competition is also characterized by a large number of buyers and sellers and absence of entry barriers.

Q10. The market structure in which strategic considerations are most important is: (1 marks)

1. Monopolistic competition.
2. Oligopoly.
3. Pure competition.
4. Pure monopoly.

Correct answer: Oligopoly.

Q11. The price elasticity of demand for any good must be less than or equal to zero unless: (1 marks)

1. The good is a necessity.

A good for which the "income elasticity of demand" is >0 & <1

1. The good is a luxury.

A good for which the "income elasticity of demand" is > 1.

1. The good is a Giffen good.
2. None of the given options.

Correct answer: The good is a Giffen good.

Goods for which the "quantity demanded" of one good does not depend upon the price of the other. (i.e. Pencils & cars). The "cross elasticity of demand" will be 0.

Q12. Consumption (1 marks)

spending,

investment

expenditures,