MIDTERM EXAMINATION
Spring 2009
ECO401- Economics (Session - 2)
Time: 60 min
Marks: 50
Question No: 1 ( Marks: 1 ) - Please choose one
Microeconomics is the branch of economics that deals with which of the following topics?
► The behavior of individual consumers.
► Unemployment and interest rates.
► The behavior of individual firms and investors.
► The behavior of individual consumers and behavior of individual firms and investors.
Question No: 2 ( Marks: 1 ) - Please choose one
If pen and ink are complements, then an increase in the price of pen will cause:
► An increase in the price of ink.
► Less ink to be demanded at each price.
► A decrease in the demand for pen.
► A rightward shift in the demand curve for ink.
Question No: 3 ( Marks: 1 ) - Please choose one
When college students leave town for the summer, the demand for meals at the local restaurants decline. This results in:
► A decrease in equilibrium price and an increase in quantity of meal.
► An increase in equilibrium price and quantity of meal.
► A decrease in equilibrium price and quantity of meal.
► An increase in equilibrium price and a decrease in quantity of meal.
Question No: 4 ( Marks: 1 ) - Please choose one
An increase in supply is shown by:
► Shifting the supply curve to the left.
► Shifting the supply curve to the right.
► Upward movement along the supply curve.
► Downward movement along the supply curve.
Question No: 5 ( Marks: 1 ) - Please choose one
Assume that the government sets a ceiling on the interest rate that banks charge on loans. If the ceiling is set below the market equilibrium interest rate, the result will be:
► A surplus of credit.
► A shortage of credit.
► Greater profits for banks issuing credit.
► A perfectly inelastic supply of credit in the market place.
Question No: 6 ( Marks: 1 ) - Please choose one
If a 12% price reduction causes quantity demanded to rise by 12% then:
► Demand is inelastic.
► Demand is elastic.
► Demand is perfectly elastic.
► Total revenue will remain constant.
Question No: 7 ( Marks: 1 ) - Please choose one
Which of the following will be TRUE if demand is inelastic?
► The coefficient of elasticity is greater than one.
► The percentage change in quantity demanded is same as the percentage change in the price.
► An increase in price will increase total revenue.
► None of the given options.
Question No: 8 ( Marks: 1 ) - Please choose one
Which of the following is the term that economists use to describe how consumers rank different goods and services?
► Satisfaction index.
► Goodness.
► Utility.
► None of the given options.
Question No: 9 ( Marks: 1 ) - Please choose one
Marginal utility is best described as:
► The total satisfaction gained from the total consumption of the good.
► The change in satisfaction from consuming one additional unit of the good.
► The additional satisfaction gained by consumption of the last good.
► The per unit satisfaction of the good consumed.
Question No: 10 ( Marks: 1 ) - Please choose one
According to the utility model of consumer demand, the law of diminishing marginal utility indicates that the demand curve is:
► Vertical.
► U-shaped.
► Upward-sloping.
► Downward-sloping.
Question No: 11 ( Marks: 1 ) - Please choose one
Law of diminishing marginal utility indicates that the slope of the marginal utility curve is:
► Horizontal.
► Vertical.
► Negative.
► Positive.
Question No: 12 ( Marks: 1 ) - Please choose one
A person with a diminishing marginal utility of income will be:
► Risk averse.
► Risk neutral.
► Risk loving.
► None of the given options.
Question No: 13 ( Marks: 1 ) - Please choose one
Aslam spends all of his money on racquetballs and food. What would happen to Aslam’s budget line if his income increased by 10 percent holding prices constant?
► It would shift inward.
► It would rotate about the axis for food.
► It would rotate about the axis for racquetballs.
► It would shift outward.
Question No: 14 ( Marks: 1 ) - Please choose one
Suppose you are a workaholic (like work a lot) and your friend is a leisure lover. Compared to your friend your indifference curve will be:
► Flatter.
► Steeper.
► Identical.
► None of the given options.
Question No: 15 ( Marks: 1 ) - Please choose one
Which of the following statements about indifference curves is NOT correct?
► Indifference curves are generally negatively sloped.
► Without utility being quantifiable we can say that one indifference curve is higher than (or preferred to) another but we cannot say by how much.
► Two indifference curves cannot intersect unless they are identical throughout.
► Two different indifference curves can intersect but only once.
Question No: 16 ( Marks: 1 ) - Please choose one
Which of the following is a correct statement about the substitution effect?
► The substitution effect is always negative.
► The substitution effect is positive for an inferior good.
► The substitution effect measures how demand changes when income changes.
► The substitution effect is positive for a Giffen good.
Question No: 17 ( Marks: 1 ) - Please choose one
A normal good can be defined as one which consumers purchase more of as:
► Prices fall.
► Prices rise.
► Incomes fall.
► Incomes increase.
Question No: 18 ( Marks: 1 ) - Please choose one
The largest amount of output that a firm can produce with a given combination of inputs is determined by the:
► Marginal product of labor.
► Gains from specialization.
► Cost function.
► Production function.
Question No: 19 ( Marks: 1 ) - Please choose one
Which of the following is most likely to be a fixed input in the short run for a Garage owner?
► The grease used to lubricate cars.
► The part-time labor employed to repair cars.
► The electricity used to heat and light the garage.
► The garage used to repair cars.
Question No: 20 ( Marks: 1 ) - Please choose one
The total cost (TC) of producing computer software diskettes (Q) is given as: TC = 200 + 5Q. What is the average total cost?
► 5Q.
► 5.
► 5 + (200/Q).
► None of the given options.
Question No: 21 ( Marks: 1 ) - Please choose one
A firm maximizes profit by operating at the level of output where:
► Average revenue equals average cost.
► Average revenue equals average variable cost.
► Total costs are minimized.
► Marginal revenue equals marginal cost.
Question No: 22 ( Marks: 1 ) - Please choose one
Revenue is equal to:
► Price times quantity.
► Price times quantity minus total cost.
► Price times quantity minus average cost.
► Price times quantity minus marginal cost.
Question No: 23 ( Marks: 1 ) - Please choose one
A price taker is:
► A firm that accepts different prices from different customers.
► A monopolistically competitive firm.
► A firm that cannot influence the market price.
► An oligopolistic firm.
Question No: 24 ( Marks: 1 ) - Please choose one
Which of the following is an example of a natural monopoly?
► The trademark protecting Gatoraide.
► The talents of Tom Hanks.
► The local water company.
► The patent on an Intel processor.
Question No: 25 ( Marks: 1 ) - Please choose one
A perfectly competitive firm maximizes profit by finding the level of production at which:
► Price = Marginal Cost.
► Price = Average Total Cost.
► Average Total Cost = Marginal Cost.
► Price <>
Question No: 26 ( Marks: 1 ) - Please choose one
If at the profit-maximizing quantity, profits are positive,then:
► Price <>
► Price > Average Total Cost.
► Price <>
► Price = Marginal Cost.
Question No: 27 ( Marks: 1 ) - Please choose one
If a firm experiences economies of scale, then the:
► Long-run average total cost curve is equal to the economies of scope.
► Long-run average total cost curve is positively sloped.
► Long-run average total cost curve is horizontal.
► Long-run average total cost curve is negatively sloped.
Question No: 28 ( Marks: 1 ) - Please choose one
The monopolist has no supply curve because:
► The quantity supplied at any particular price depends on the monopolist's demand curve.
► The monopolist's marginal cost curve changes considerably over time.
► The relationship between price and quantity depends on both marginal cost and average cost.
► Although there is only a single seller at the current price, it is impossible to know how many sellers would be in the market at higher prices.
Question No: 29 ( Marks: 1 ) - Please choose one
A firm never operates:
► At the minimum of its average total cost curve.
► At the minimum of its average variable cost curve.
► On the downward-sloping portion of its average total cost curve.
► On the downward-sloping portion of its average variable cost curve.
Question No: 30 ( Marks: 1 ) - Please choose one
As compared to existing firms, a new firm entering in monopolist market has:
► High costs.
► Low costs.
► Equal costs.
► None of the given options.
Question No: 31 ( Marks: 1 ) - Please choose one
Following are the disadvantages of monopoly EXCEPT:
► Monopolists earn higher profits.
► Monopolists produce high quality goods at higher prices.
► Most of the “surplus” (producer + consumer surplus) accrues to monopolists.
► Monopolists do not pay sufficient attention to increasing efficiency.
Question No: 32 ( Marks: 1 ) - Please choose one
When a firm charges each customer the maximum price that the customer is willing to pay, the firm:
► Engages in a discrete pricing strategy.
► Charges the average reservation price.
► Engages in second-degree price discrimination.
► Engages in first-degree price discrimination.
Question No: 33 ( Marks: 1 ) - Please choose one
Which of the following is NOT regarded as a source of inefficiency in monopolistic competition?
► The fact that price exceeds marginal cost.
► Excess capacity.
► Product diversity.
► The fact that long-run average cost is not minimized.
Question No: 34 ( Marks: 1 ) - Please choose one
What happens to an incumbent firm's demand curve in monopolistic competition as new firms enter?
► It shifts rightward.
► It shifts leftward.
► It becomes horizontal.
► New entrants will not affect an incumbent firm's demand curve.
Question No: 35 ( Marks: 1 ) - Please choose one
Which of the following is true for both perfectly competitive and monopolistically competitive firms in the long run?
► Price = Marginal Cost.
► Marginal Cost = Average Total Cost.
► Price > Marginal Revenue.
► Profit equals zero.
Question No: 36 ( Marks: 1 ) - Please choose one
Which one of the following is TRUE about pure monopoly?
► The monopoly's demand curve and the market demand curve are one and the same.
► The market is dominated by just two firms.
► The monopolist will always charge the highest possible price.
► The monopolist will always charge a high price because it wants to maximize profits.
Question No: 37 ( Marks: 1 ) - Please choose one
If income elasticity is negative, the good is:
► Normal good.
► A substitute good.
► A complementary good.
► Inferior good.
Question No: 38 ( Marks: 1 ) - Please choose one
If indifference curves cross, then:
► The assumption of a diminishing marginal rate of substitution is violated.
► The assumption of transitivity is violated.
► The assumption of completeness is violated.
► Consumers minimize their satisfaction.
Question No: 39 ( Marks: 1 ) - Please choose one
If the demand curve for a good is downward sloping, then the good:
► Must be inferior.
► Must be giffen.
► Can be normal or inferior.
► Must be normal.
Question No: 40 ( Marks: 1 ) - Please choose one
The marginal rate of substitution between food and shelter for a given point on an indifference curve:
► Is equal to the absolute value of the slope of the indifference curve at that point.
► Is equal to the rate at which the consumer is willing to exchange the two goods in the market place.
► Reflects the relative values the consumer attaches to the two good.
► Is described, in part, by each of the given statements.
Question No: 41 ( Marks: 10 )
Explain all the factors which determine the value of price elasticity of demand.
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