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Ollscoil na hÉireann, Gaillimh GX_____
National University of Ireland, Galway
Semester I Examinations 2011/
Exam Code(s) 1BA1, 1BA6, 1BA7,^ 1BCS1, 1BCW1, 1BFS
1BGL1, 1BHR1, 1BIS1, 1BLS1, 1BTP1, 1BWM1, 1OA
1OA5R, 1BF
Exam(s) 1
st
B.A., 1
st
B.A. (PSP), 1
st
B.A. (Psychology), BA Connect,
st
B.I.S.
Module Code(s) EC135, EC
Module(s) Principles of Microeconomics
Paper No. 1
Repeat Paper
External Examiner(s) Dr. Pat McGregor
Internal Examiner(s) Professor John McHale
Dr. Gerard Turley
Instructions: There are three sections to be answered. Students are
required to answer all questions in Section A (20 marks), any
five questions in Section B (20 marks) and any three
questions in Section C (60 marks). Please note that there is
no negative marking in Section A.
Duration 2 hours
No. of Pages 5 in total
Discipline Economics
Course Co-ordinator(s) Gerard Turley, Terrence McDonough
Requirements :
MCQ Release to library : Yes
Handout
Statistical Tables
Graph Paper
Log Graph Paper
Other Material
SECTION A (20 marks) Answer all questions (no negative marking). Please write your answers in the Answer Book provided.
- The two co-ordination mechanisms are the (a) State and the plan; (b) market and the State; (c) the invisible hand and the central planner; (d) market and the invisible hand; (e) both (b) and (c) above.
- Qs = f(P). We know that (a) the supply curve always slopes upward from left to right; (b) quantity supplied is the independent variable; (c) price and quantity supplied are normally negatively related; (d) price determines quantity supplied; (e) both (c) and (d) above.
- Coach and bus services are an inferior good/service. Hence, (a) as income increases, quantity demanded decreases; (b) the income elasticity measure is positive but less than one; (c) the demand curve contravenes the law of demand; (d) all of the above; (e) none of the above.
- Given the following four possibilities, which one results in an increase in total consumer expenditure and revenue? (a) demand is unitary elastic and price falls; (b) demand is elastic and price rises; (c) demand is inelastic and price rises; (d) demand is inelastic and price falls; (e) none of the above.
- If the price elasticity of demand for a particular good is greater than zero but less than one, then the (a) percentage change in quantity demanded is greater than the percentage change in price; (b) price is above the midpoint on the linear demand curve; (c) percentage change in quantity demanded equals the percentage change in price; (d) percentage change in price is greater than the percentage change in quantity demanded; (e) both (b) and (d) above.
- According to the marginal utility approach: (a) the demand curve slopes down because of the law of diminishing marginal returns to the variable input; (b) the consumer chooses the bundle where the indifference cuts the budget line at a point of tangency; (c) the consumer maximizes satisfaction subject to income and prices; (d) as consumers consume more units of a good, both total and marginal utility increase; (e) none of the above.
- Which one of the following statements about the short-run marginal cost curve is true? (a) marginal cost equals average cost when average cost is at a maximum; (b) when average cost is falling, marginal cost is above average cost; (c) marginal cost will rise under conditions of diminishing returns; (d) marginal cost is unaffected by changes in factor prices; (e) marginal cost depends on fixed costs as opposed to variable costs.
P.T.O.
SECTION C (60 marks) Answer any three (and only 3) questions
1. (a) (8 marks) The supply and demand curves for a commodity are given by the following equations Qd = 50 – 5P Qs = 2 + 3P i. Complete Table 1 (in your Answer Book) (4) P 1 2 3 4 5 6 7 8 Qs 11 Qd 40 ii. What is the equilibrium price and quantity? Support your answer. (2) iii. Assume that the demand equation now becomes Qd = 66 – 5P. What happens to the 1. demand curve; 2. supply curve; 3. equilibrium price, and 4. quantity traded? (2) (b) (6 marks) Use appropriate demand and supply diagrams to show the impact of each of the following changes i. an increase in supply; (2) ii. a reduction in demand; (2) iii. a simultaneous decrease (of equal magnitude) in demand and supply (2) on market-clearing prices and quantities. Use separate diagrams in each of the three cases. (c) (6 marks) Using the demand and supply analysis, explain one of the following: the Irish property boom of the early 2000s OR the Irish housing collapse of the late 2000s In your answer identify the main change (and underlying factors) as either demand-side or supply- side. Draw a demand and supply diagram showing the relevant changes in demand and/or supply. 2. (a) (8 marks) Define price elasticity of demand. List and explain the factors that determine price elasticity of demand. What are some of the real world applications of price elasticity of demand? (b) (7 marks) What is the mathematical formula for price elasticity of demand? Calculate the price elasticities of demand for the following two points on a demand curve. Price Quantity 1.20 40 0.90 50 (c) (5 marks) Define cross-price and income elasticities of demand. In terms of the numeric values, how do they differ from the price elasticity measure? Explain your answer.
P.T.O.
3. (a) ( 8 marks) Define the following sets of terms as they relate to consumer choice theory i. willingness to pay and consumer surplus; ii. marginal utility and the law of diminishing marginal utility; iii. substitution effect and income effect; iv. relative prices and marginal rate of substitution; (b) (12 marks) Write a short essay on the indifference-preference analysis in the theory of demand. In your essay, please cover the following aspects of consumer choice theory; - the purpose of the analysis - assumptions of consumer preferences - the indifference curve - the budget line - the consumer equilibrium position Use diagrams wherever appropriate. 4. (a) (10 marks) Using marginal revenue and marginal cost analysis, explain and illustrate the output decision of a profit-maximising firm. In your answer define the marginal revenue and marginal cost concepts, and sketch the relevant diagram (assume the marginal revenue curve is not horizontal). (b) (10 marks) Assume that capital costs € 2 50 per unit and labour costs € 5 00 per unit. Table 2 Units Total Cost Average Cost Capital Labour Output VC FC TC AVC AFC ATC MC 2 0 0 2 1 20 2 2 54 2 3 100 2 4 151 2 5 197 2 6 215 2 7 230 i. Complete Table 2 (in your Answer Book). (7) ii. Is this in the short-run or long-run? Support your answer. (3) 5. (a) (9 marks) In terms of market structures, what is meant by perfect competition? List some of its features. How does it differ from i. monopoly ii. the ‘real’ world? In the Irish or global context, give examples of both perfectly competitive markets and monopolies. (b) (11 marks) In terms of a firm in a perfectly competitive market, explain and show how the short-run equilibrium position is derived i.e. the output decision of the firm. You can assume market price exceeds the firm’s average total cost. Under a similar scenario, repeat the same exercise but this time for the monopolist. Generally, how do the two extreme market structures differ, in terms of price and quantity?
