Sunway University Business School ECN1014 / October 2020 Mid-Term Test

SUNWAY UNIVERSITY BUSINESS SCHOOL

MID-TERM TEST FOR THE BACHELOR OF SCIENCE (HONS) ACCOUNTING AND
FINANCE, BACHELOR OF SCIENCE (HONS) ACTUARIAL STUDIES, BACHELOR
OF SCIENCE (HONS) BUSINESS ANALYTICS, BACHELOR OF SCIENCE (HONS)
BUSINESS MANAGEMENT, BACHELOR OF SCIENCE (HONS) BUSINESS
STUDIES, BACHELOR OF SCIENCE (HONS) FINANCIAL ANALYSIS, BACHELOR
OF SCIENCE (HONS) FINANCIAL ECONOMICS, BACHELOR OF SCIENCE
(HONS) GLOBAL SUPPLY CHAIN MANAGEMENT, BACHELOR OF SCIENCE
(HONS) INTERNATIONAL BUSINESS, BACHELOR OF SCIENCE (HONS)
MARKETING

ACADEMIC SESSION : AUGUST 2020 SEMESTER

SUBJECT : ECN1014 INTRODUCTORY ECONOMICS
MID-TERM TEST : OCTOBER 2020
TIME ALLOWED : 2 HOURS + 10 MINUTES READING TIME

INSTRUCTIONS TO CANDIDATES
This question booklet contains TWO sections.
Section A: Answer ALL questions.
Section B: Answer ALL questions.
This test will contribute 50% to your final grade.
All answers must be written in the answer booklets provided using blue or black INK
(except for diagrams).
IMPORTANT NOTES TO CANDIDATES
Materials Allowed
Standard Items : Pen, Pencil, Eraser or Correction Fluid, Ruler
Special Items : Non Programmable Calculators
It is your responsibility to ensure that you do not have in your possession any
unauthorised notes or any other means that would improperly help you in your work. If
you have any unauthorised materials with you, hand them to the invigilator BEFORE
reading any further.

DO NOT REMOVE QUESTION PAPER FROM THE EXAMINATION HALL

[This paper contains FORTY-ONE questions printed on SIXTEEN pages, including

cover page]

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Sunway University Business School ECN1014 / October 2020 Mid-Term Test

Section A

For each question there are four possible answers, A, B, C, and D. Choose the one you
consider to be correct.

1 Which combination of events must increase the level of scarcity in an economy?

A discovery of new oil reserves and higher saving ratios

B improved application of technology and new invention

C less certain weather patterns and a fashion for greater consumption

D more efficient power generation and a reduced birth rate

2 What is the opportunity cost to an unemployed worker who becomes employed?

A the leisure they would otherwise have had

B the value of the goods and services they produce

C the wages they are paid

D zero

3 Skilled actors deserve to receive a high income because they bring pleasure to those
who attend the theatre.

What can be concluded about this statement?

A It is a normative statement because both goods and services are economic

outputs.

B It is a normative statement because it expresses an opinion.

C It is a positive statement because actors do bring pleasure to people.

D It is a positive statement because greater skill results in higher pay.

4 What is defining characteristic of a mixed economy?

A one in which the allocation of resources is determined partly by the state and partly
by individual consumers and producers

B one in which there are both monopolies and purely competitive industries

C one in which there are features of both more economically developed and less
economically developed economies

D one which produces a mixture of agriculture and industrial products

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Sunway University Business School ECN1014 / October 2020 Mid-Term Test

5 In economics, decisions are usually taken ‘at the margin’.

What does this mean?

A They are concerned with actions that occur in free market not planned economies.

B They are concerned with issues on the boundary between macroeconomics and
microeconomics.

C They are concerned with the choice between normative and positive actions.

D They are concerned with the effect of adding a further action to the current level of
activity.

6 The diagram shows the production possibility curves of two economies, X and Y.

200
capital
goods
100

O 100 200
consumer goods

Which statement about the two economies is correct?

A Both economies always have the identical opportunity costs.

B Both economies have the same future growth prospects.

C The opportunity costs are constant in both economies.

D The two economies can never produce the same combination of products.

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Sunway University Business School ECN1014 / October 2020 Mid-Term Test

7 The diagram shows a country’s production possibility and a number of alternative

production points.

U
capital V
goods Y

Z
O consumer goods

Which change in the country’s output would be most likely to lead to a fall in potential
economic growth?

A U to V B U to X C Y to X D Y to Z

8 Which of the following is consistent with an individual demand curve that slopes down
from left to right?

A As price falls, a person switches away from rival goods towards the product.

B As price falls, a person’s willingness and ability to buy the product will decline.

C As price rises, a person becomes less sensitive to price changes.

D As price rises, a person’s opportunity cost of purchasing the product falls.

9 The table shows the market supply for a raw material and the individual demand of the
three firms, X, Y and Z, which are its only buyers.

market demand demand demand

price $
supply by X by Y by Z
(per kilo)
(000s) (000s) (000s) (000s)
7 30 13 27 20
8 40 12 25 18
9 50 11 23 16
10 60 10 20 15

What is the equilibrium market price of the raw material?

A $7 B $8 C $9 D $10

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10 The diagram shows the demand curve, DD1, and the supply curve, SS1, for eye
operations.

S1
D

price P

D1
O S

number of operations

The operations are provided free of charge to the consumer.

Which statement is correct?

A The price mechanism fails to allocate resources efficiently.

B The equilibrium price is P.

C The equilibrium price is indeterminate, because the supply curve is vertical.

D The equilibrium price is zero.

11 In the diagram S and S1 are the supply curves for an agricultural product in year 1 and
year 2 respectively. D is the demand curve in years 1 and 2.

In year 1 the government purchased an amount necessary to ensure that the price
was OP.

S (year 1) S1 (year 2)

price

D
O W X Y Z
quantity

The price is held at OP in year 2.

How much more must the government buy in year 2 than it bought in year 1?

A WX B XY C XZ D YZ

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Sunway University Business School ECN1014 / October 2020 Mid-Term Test

12 The price elasticity of demand for grapes is –2.0. When the price is $15, quantity
demanded is 5000 units.

How much will be demanded when the price falls to $12?

A 3000 units B 5500 units C 7000 units D 7500 units

13 A government wishes to impose a tax on a good so that the producer and not the
consumer pays most of the tax.

Which type of elasticity would it be best for the good to have to achieve this aim?

A high elasticity of demand

B low price elasticity of demand

C totally inelastic price elasticity of demand

D unitary price elasticity of demand

14 The diagram shows the relationship between the price and the total expenditure on a
commodity.

price

O
total
expenditure

Which of the following statements is correct?

A The income elasticity of demand for the commodity is unity.

B The income elasticity of demand for the commodity is zero.

C The price elasticity of demand for the commodity is unity.

D The price elasticity of demand for the commodity is zero.

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Sunway University Business School ECN1014 / October 2020 Mid-Term Test

15 The cross elasticity of demand between two products, X and Y, is negative.

What would be the immediate effect of a rise in the price of product Y?

A Quantity demanded of product X will fall.

B Supply of product X will rise.

C The cross elasticity of demand will rise.

D The price of product X would rise.

16 The table gives an individual’s demand for four goods at two income levels.

Over this range of income, for which good does the individual have an income elasticity
of demand equals 1?

income level
good
$1 000 $ 1 100

A 50 50

B 50 55

C 50 60

D 50 100

17 Consumer spending decreases in the recession of 2009-10. A firm tried to keep

revenue high by giving discounts to encourage demand. It measured the price elasticity
of demand (PED) for its own product and the cross elasticity of demand (XED) with its
competitors’ products.

When might such promotions achieve the result the company hoped?

A when PED is greater than one and XED is positive

B when PED is less than one and XED is negative

C when PED is less than one and XED is positive

D when PED is unity and XED is negative

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Sunway University Business School ECN1014 / October 2020 Mid-Term Test

18 What can be concluded about a product which has an income elasticity of demand
(PED) of +1.5 and a cross elasticity of demand (XED) of +1.2?

YED figure XED figure

A the product is an inferior good the product has a close complement

B the product is an inferior good the product has a close substitute

C the product is a normal good the product has a close complement

D the product is a normal good the product has a close substitute

19 A manufacturer has estimated that the price elasticity of supply of ice cream is +1.5.

If the demand for ice cream rises and price increases by 10%, how much more will the
manufacturer supply to the market?

A 0.15% B 1.5% C 15% D 50%

20 What is the likely nature of the price elasticity of supply of a crop such as rice?

A highly elastic in both the short and the long run as rice is an essential product

B highly elastic in the short run and more inelastic in the long run as production
methods improve

C highly inelastic in both the short and the long run as the land area of a country is
fixed

D highly inelastic in the short run and more elastic in the long run as it takes time to
plant rice

21 When is a rise in the price of a product likely to cause more resources to be allocated
to its production?

A if demand increases when the supply curve is perfectly inelastic

B if the demand curve shifts to the right when the supply curve is inelastic

C if supply increases when the demand curve is perfectly inelastic

D if the supply curve shifts to the left when the demand curve is elastic

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Sunway University Business School ECN1014 / October 2020 Mid-Term Test

22 Which policy adopted by an airline is the result of an externality?

A price cutting against rival airlines

B the prohibition of smoking on aircraft

C the provision of different classes of seating accommodation

D the use of internet booking facilities

23 Which statement about externalities is correct?

A Externalities are easier to value than private costs and benefits

B Externalities are only associated with industrial production.

C Externalities can be both beneficial and harmful.

D Externalities cannot exceed private costs and benefits.

24 What will be the result, from society’s view, if the market price for a product does not
reflect the negative externalities in its production?

A too little consumption and too little production

B too little consumption and too much production

C too much consumption and too little production

D too much consumption and too much production

25 In a free market in equilibrium, the production of the good illustrated below imposes an
external cost upon society.

Which letter could represent the total cost of producing the free market equilibrium
output?

S (marginal
private cost)
A B

price
C
D D (marginal
private benefit)

O output

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Sunway University Business School ECN1014 / October 2020 Mid-Term Test

26 Which statement is correct?

A External benefit minus private benefit equals social benefit.

B Private benefit minus external benefit equals social benefit.

C Social benefit minus external benefit equals private benefit.

D Social benefit plus private benefit equals external benefit.

27 In Europe it was decided that farm subsidies would be paid to farmers who protect the
environment as well as producing food.

What would this mean for farmers who receive the subsidy?

A They must not increase the price of food.

B They must not make excessive profits.

C They must take into account external costs as well as private costs.

D They should produce additional food only if externalities are zero.

28 UK supermarkets can buy some vegetables at a lower price from Kenyan farmers than
from UK farmers. When the environmental damage caused by transporting the
vegetables is taken into account, the social costs of UK supermarkets purchasing
Kenyan vegetables is higher than the social costs of buying UK home grown ones.

What can be concluded from this information about the purchase by UK supermarkets?

A The external benefit of buying vegetables from Kenya is higher than buying them
from the UK.

B The external cost of buying vegetables from Kenya is higher than buying them from
the UK.

C The private cost of buying vegetables from Kenya is higher than buying them from
the UK.

D The social cost of buying vegetables from Kenya is lower than buying them from
the UK.

29 Why does the production of public goods have to be financed by the government?

A One person’s consumption of a public good means it is not available for anyone
else.

B People are able to consume public goods without paying for them.

C Private sector firms will charge a price significantly above cost for public goods.

D The cost of producing public goods is higher in the private sector.

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Sunway University Business School ECN1014 / October 2020 Mid-Term Test

30 What is a merit good?

A a good that is made available to consumers according to merit

B a good that the government believes consumers will buy too little of if it is provided
by private enterprise at market prices

C a good where any benefit obtained by one consumer is extended to all consumers

D a good where the private benefits of consuming the good exceed its social benefits

31 The government introduces a congestion charge on motorists who drive their vehicles
within a designated urban zone.

What will be the impact on the overall economic welfare of those who continue to use
their cars and on those who switch to travelling by bus?

impact on those who impact on those who switch to

continue to use their cars buses

A loss uncertain

B loss loss

C uncertain loss

D uncertain uncertain

32 An economist calculates that an owner-managed firm has incurred the following costs
over the course of a year.

$ (000)
wages of two employees 150
fee paid to wife for secretarial services 20
opportunity cost of owner’s time 30
materials 80
rent 30
marketing fees 20
interest on bank loans 25
interest forgone on finance provided by owner 15

By how much does total cost as defined by an economist exceed the total cost as
defined by an accountant?

A $15 000 B $30 000 C $45 000 D $65 000

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Sunway University Business School ECN1014 / October 2020 Mid-Term Test

33 What is the name for the relationship between a firm’s output and the quantities of
factor inputs that it employs?

A average cost function

B production function

C productive efficiency

D returns to scale

34 The table shows a firm’s total costs of production.

production (tonnes) 0 1 2 3 4 5
total cost ($) 40 60 70 80 90 100

What is the average variable cost of producing 5 tonnes of output?

A $8.00 B $10.00 C $12.00 D $20.00

35 The diagram shows the cost curves for a firm.

MC
AC
costs ($)

AFC
O

Q1 Q2 output

What does the firm experience as it increases output from Q1 to Q2?

A decreased average variable cost

B diminishing marginal product

C economies of scale

D increased profit

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Sunway University Business School ECN1014 / October 2020 Mid-Term Test

36 A perfectly competitive firm is currently producing at a level of output where its marginal
cost is above both its average total cost and the market price.

What will be the effect on price and output if the firm were to maximise profit?

effect on output effect on price

A falls rises

B falls unchanged

C rises falls

D rises unchanged

37 A government decides to privatise a state monopoly.

What should the government do to try to ensure that this will result in an improvement
in efficiency?

A allocate vouchers to all citizens entitling them to a share in the ownership of the
monopoly.

B encourage competition

C impose a maximum profit margin

D privatise the monopoly as a going concern

38 The diagram shows the cost and revenue curves of a monopoly.

MC

AC
cost,
revenue

AR

O W X Y Z output
MR

Which level of output satisfies the condition for product efficiency?

A OW B OX C OY D OZ

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Sunway University Business School ECN1014 / October 2020 Mid-Term Test

39 The table shows the five-firm concentration ratios for a selection of industries in an
economy.

firms in the percentage of total sales

industry accounted for by the five largest (%)
tobacco 95
steel 60
water supply 60
printing 12

What can be concluded from the table?

A The firms are of equal size in the steel industry and the water supply industry.

B The printing industry is more competitive than the tobacco industry.

C The tobacco industry is a monopoly market.

D There are more firms in the tobacco industry than in the water supply industry.

40 An industry moves from monopolistic competition to oligopoly.

How will this affect barriers to entry and the degree of interdependence between firms.

barriers to entry interdependence

between firms

A strengthen strengthen

B strengthen weaken

C weaken strengthen

D weaken weaken

[Total: 60 marks]

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Sunway University Business School ECN1014 / October 2020 Mid-Term Test

Section B
Read the extracts and then answer all questions.

Extract 1 The fourth step forward for telecoms

Singapore introduced competition in its telecoms industry several years ago by breaking
the monopoly of Singtel. M1’s entry in 1997 and StarHub’s in 2000 were meant to provide
consumers with more choices and lead to higher levels of service at more competitive
prices. Last week, the government announced the award of a fourth licence to Australian
operator TPG Telecom.

The outcome of these liberalisation moves should be good. The three existing telecoms
companies have to up their game or lose their customers, who can switch easily from one
telco to the next. Since the domestic market is now shared among multiple players, they
also are forced to venture outside Singapore for new business. Singtel, in particular, has
done this successfully, with its overseas businesses generating more than half its revenue
and profit. This international exposure is good for Singapore companies because it
strengthens their capabilities and finances. The entry of a fourth player should sharpen the
competition further. That it is from outside Singapore should help to bring fresh ideas into
this country and raise telecommunications standards in one of the most globalised nations
on earth.

While service levels are better now than they were before, there is room for improvement.
Earlier this month, Singtel was hit by a widespread broadband outage, slightly over a month
after a similarly disruptive StarHub breakdown. These incidents, which inconvenienced
customers, show how important it is to maintain high standards of reliability. Telecoms
services, which include broadband and mobile services, are part of a country’s critical
infrastructure and are vital to its smooth and efficient running. This is more so for a place
like Singapore, which is a financial centre and an aviation and shipping hub. There is no
room for complacency.

But the real issue is not domestic competition among local players. The digital revolution
has meant that they have to compete now, not only among themselves, but against entities
such as WhatsApp, Apple, WeChat and numerous other digital platforms that allow users to
communicate, interact and share content with one another. These global giants have
upended the industry. They are a boon to consumers but a nightmare to those whose
businesses they have disrupted. If local telcos are not strong enough to adapt and meet the
needs of their customers, who have many more choices now, they will suffer the
consequences.

Source: Adapted from The Straits Times, 20 December 2016.

Extract 2 Singapore’s big telcos face rude awakening, as the little guys get the last
laugh

Back in 2016, the three major Singapore telcos – Singtel, StarHub and M1 – held various
meetings with investors and shareholders, reassuring them that a fourth telco would not be
a threat to their businesses. The incumbents had felt that if a new competitor appears, it will
be an uphill climb to deliver the same quality of services as them. The telcos believed they
did not need to do anything. Whatever price the fourth telco offers, they will undercut it to
kill off the competition.

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Sunway University Business School ECN1014 / October 2020 Mid-Term Test

But the telecommunications landscape today is far from the oasis of stability that the three
telcos had portrayed to investors back then. There are now 11 telcos in Singapore,
including the mobile virtual network operators (MVNOs) that have since flooded the scene.
Right now, Singapore consumers are enjoying a variety of telco offerings at low prices like
never before. Total mobile service revenue shrank 5.3 per cent in 2018. Industry leader
Singtel’s group earnings fell by 7 per cent in the 2018 financial year compared with the
previous year, while StarHub’s service earnings fell by 11.1 per cent and M1’s shrank by
3.7 per cent.

For one thing, Singaporeans are now less willing to pay for data as before. People are no
longer willing to pay high fees for premium plans that boasted more data. Today, nearly
every telco offers affordable unlimited data plans. Consumers expect to get more data and
pay less, which translates to more data consumption and less data revenue for the telcos.

The popularity of off-contract plans also shows a change in handset replacement patterns
among a segment of consumers, who are increasingly unwilling to be locked in. SIM-only
plans have gradually reduced the dominance of the two-year post-paid contract model in
Singapore, whereby expensive phones are subsidised by the telcos. Part of this is due to
Chinese phone manufacturers such as Huawei and Oppo, whose phones boast lower
prices than that of Apple and Samsung while offering similar performance. The influx of
cheaper phones reduces the attractiveness of subsidised plans, and hence lowers the
ability of telcos to lock customers into two-year plans.

Source: Adapted from Channel News Asia, 8 July 2019.

(a) Using demand-supply analysis, analyse the view that a growing number of
competitors in the telecommunications industry offers ‘a boon to consumers but a
nightmare to those whose businesses they have disrupted’ (Extract 1). [10 marks]

(b) With reference to Extract 1, identify and explain four possible ways in which Singtel
can exclude competitors. [10 marks]

(c) With the aid of a diagram, explain the cost advantages which large telcos enjoy and
consider the reasons for which ‘the little guys may get the last laugh’ (Extract 2).
[10 marks]

(d) Using the theory of perfect competition, explain and illustrate how the entry of the
mobile virtual network operators allows Singapore consumers to enjoy ‘a variety of
telco offerings at low prices like never before’ (Extract 2). [10 marks]

[Total: 40 marks]

END OF PAPER

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