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Sample Final Exam of Introduction to Microeconomics (ECO 101)

1. Discuss the characteristics of a monopolistically competitive market. Which markets in Bangladesh
resemble (are similar to) a monopolistically competitive market?

Characteristics of a monopolistically competitive market: many sellers and buyers, the sellers sell
slightly differentiated product and new sellers can easily enter the market.

The street food market and fast food markets in Bangladesh are similar to a monopolistically
competitive market because the characteristics of these markets match with the monopolistically
competitive market. There are many street food carts and fast food shops all over Bangladesh and
many individuals and households consume street food. Every cart or shop sells slightly differentiated
food items, for example the samosa of one cart or shop is slightly different from that of another cart
or shop. An entrepreneur can easily start a business in the street food market since the start-up cost
is low.

2. Discuss why it may be difficult for new sellers to enter certain markets.

It can be difficult for new sellers to enter certain markets because of strict government rules and
regulations, such as patents and government licenses. It can also be difficult to start a business in
certain markets if the start-up cost is very high, for example, the telecommunication services
market.

3. The NSU cafeteria is similar to which type of market type? Explain the logic (reason) behind your
choice.

NSU cafeteria is similar to an oligopoly market since the characteristics of the NSU cafeteria matches
with the characteristics of an oligopoly market. In the NSU cafeteria there are only a few sellers -
four or five shops selling food items - and there are many buyers. The sellers sell slightly
differentiated food items, for example the coffee of one shop is slightly different from that of
another shop. It is almost impossible for new sellers to enter into the NSU cafeteria because of lack
of space and difficulty in obtaining permission from NSU authority.

4. What is resource allocative efficiency? What is the benefit of resource allocative efficiency for the
society?

Resource allocative efficiency occurs when P = MC. The benefit of resource allocative efficiency is
that products are produced according to buyers’ preferences and the limited resources of a society
are allocated efficiently between competing uses. For example, the land of a country can be used to
produce orange and/or apples. If 50 people prefer orange to apples and 100 people prefer apples to
oranges, then only the amount of oranges for the 50 people and amount of apples for the 100
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people will be produced. So, the land is allocated and the apples and oranges are produced
according to the buyers’ preferences.

5. What is productive efficiency? What is the benefit of productive efficiency to the society?

Productive efficiency means obtaining the maximum output using the given inputs (raw materials or
resources). The main benefit of productive efficiency is that there will be less wastage of valuable
resources such as, water, trees, etc.

6. Do sellers (businesses) in Dhaka practise price-discrimination? Discuss using examples.

Yes, sellers in certain markets of Dhaka practise price discrimination. For example, in the market for
CNG rides, a CNG driver might charge a higher price if he sees that a buyer is very wealthy or in an
emergency. However, the CNG driver might charge a lower price if he sees that he buyer is not very
wealthy or not in emergency. Here, the CNG driver is charging a different price to different buyers
for the same service and this is called price discrimination.

7. Which markets in Dhaka resemble (are similar to) perfectly competitive markets? Discuss the
reason (logic) behind your answer.

In Dhaka, the market for rickshaw rides resembles a perfectly competitive market. There are many
sellers (rickshaw pullers) and buyers (individuals who buy rickshaw rides). There is no difference
between the rickshaw ride services provided by the different rickshaw pullers. Everyone is knows
about the fair between different locations. It is also easy to enter into the market, that is, anyone
can easily become a rickshaw puller.

8. In this course, ECO 101, you have studied many theories, models, concepts and ideas. Which
theory, model, concept or idea did you find the most interesting? Why? Discuss briefly.

I found the concept of opportunity cost most interesting since we can apply the concept in our daily
decision-making. According to microeconomics, every decision or choice has an opportunity cost;
whenever we make a choice, we are giving up something else, that is, the opportunity cost. Being
aware of the opportunity cost can help us make better decisions.

The following are MCQ questions. Circle or tick the correct options. (9 marks)
1) The condition P = SRATC implies (means)

a) negative economic profit b) zero economic profit c) positive economic profit

Explanation: SRATC means short run average total cost, that is, the cost per unit in the short run. If P,
price per unit, is equal to the cost per unit, then it means there is zero economic profit.

2) If a firm produces the output at which MR = MC this implies (means)

a) the firm is not maximizing its profit b) the firm is maximizing its profit

c) the firm should shut down d) none of the above

Explanation: Mathematically profit is maximized when MR = MC.

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3) If P = MC then this implies (means)

a) productive efficiency b) resource allocative efficiency

c) neither a) and b) d) both a) and b)

Explanation: Mathematically it is true

4) Consumer surplus is a measure of the
a) welfare of buyers b) welfare of sellers c) welfare of society

Explanation: Consumer refers to buyers

5) Producer surplus is a measure of the

a) welfare of buyers b) welfare of sellers c) welfare of society

Explanation: Producer refers to sellers

6) Given the following diagram:

If the diagram represents a perfectly competitive market then:

i) the market output (Q) is
a) 50 b) 90 c) 100 d) 140
Explanation: In perfectly competitive markets the D curve (red line) and MR curve is the same. Find
the output (Q) at which MR = MC (where red and blue line meet).
ii) the market price (P) is
a) 50 b) 90 c) 100 d) 140
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Explanation: The price (P) is always given by the demand curve D at the corresponding output (Q).
Here, at Q = 100 the P = 50.
iii) Calculate the consumer surplus of the perfectly competitive market:
1
Using area of a triangle,Consumer surplus= ( 100 ) ( 140−50 )=$ 4500
2
Explanation: The consumer surplus is the area on the left of the output (Q), above the price and
below the demand curve.
If the diagram represents a monopoly market then:
iv) the market output (Q) is
a) 50 b) 90 c) 100 d) 140
Explanation: In monopoly market the yellow curve is the MR line. MR = MC at Q = 50.

iv) the market price (P) is

a) 50 b) 90 c) 100 d) 140
Explanation: The price is given by the demand curve (D)
v) Calculate the consumer and producer surplus of the monopoly market:
1
Using area of a triangle,Consumer surplus= ( 50 ) ( 140−90 )=$ 125 0
2
Using area of a square, Producer surplus=( 50 )( 90−50 )=$ 200 0

Explanation: The consumer surplus is given by the area on the left of output (Q = 50), above the price
(P=90) and below the demand curve (D).

The producer surplus is given by the area on the left of the output (Q=50), above the ATC curve
(ATC=50) and below the market price (P=90).