MAN00016C

BA and BSc Degree Examinations 2017-2018

THE YORK MANAGEMENT SCHOOL

Business Economics

Time allowed: 3 hours

This paper is in two sections: Section A and Section B

Candidates should answer all questions

The standard University calculator is provided

Candidates may not use red pen and/or pencil to write their answers

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 Section A [52 marks] 2 marks per question.

Please Circle your answer for each of the MCQ’s in the table below.

Q Q
1 a b c d 14 a b c d
2 a b c d 15 a b c d
3 a b c d 16 a b c d
4 a b c d 17 a b c d
5 a b c d 18 a b c d
6 a b c d 19 a b c d
7 a b c d 20 a b c d
8 a b c d 21 a b c d
9 a b c d 22 a b c d
10 a b c d 23 a b c d
11 a b c d 24 a b c d
12 a b c d 25 a b c d
13 a b c d 26 a b c d

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1 Which of the following would the production of coal be classified as? i
a Primary Production x
b Secondary Production
c Tertiary Production
d Manufacturing Production

2 A student studying a Masters in Accounting has to pay course fees of £9,000 I

and could otherwise have had a job paying an after tax income of £25,000.
The cost of his accommodation is £6,000 whether she studies or works and
the food bill is £3,000 whether she studies or works. The opportunity cost
of studying for the Masters degree is:
a £9,000.
b £25,000.
c £34,000. x
d £43,000.

3 Which of the following statements explains how price, demand and supply Ii
respond to a shortage?
a Price rises, quantity demanded falls and quantity supplied rises. x
b Price rises, quantity demanded falls and quantity supplied falls.
c Price rises, quantity demanded rises and quantity supplied falls.
d Price rises, quantity demanded rises and quantity supplied rises.

4 If the price of a product rises from £1 to £1.2 and demand falls from 10 to 9 Ii
units, then using the average price elasticity of demand method the price
elasticity of demand is:
a −0.50 x
b −2
c −1
d −0.05

5 Which of the following is a measure of total consumer surplus? Iii

a Marginal utility minus the price of the good.
b The total utility consumers get from the consumption of the good.
c The total utility consumers get from consumption of the good less the x
total expenditure on the good.
d Marginal utility times the price of the good.

6 A monopoly firm faces a linear demand schedule and has positive but Vi
constant marginal costs which are currently below its marginal revenue. If
the firm wishes to maximise profits then it should:
a lower its price and increase output. x
b raise its price and increase output.
c lower its price and decrease output.
d raise its price and decrease output.

7 Under perfect competition: Vi

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a short run excess profits are competed away by firms leaving the industry.
b short run excess profits are competed away by new firms entering the x
industry.
c short run excess profits lead to price rises.
d short run excess profits are caused by barriers to entry and exit.

8 Which of the following will NOT cause a shift in the Supply curve for a Ii
normal good?
a A change in the price of the normal good. x
b A change in the price of other goods.
c A change in consumer incomes.
d A change in consumer tastes.

9 Which of the following is NOT a motive for advertising by an existing firm Iv

in an industry?
a To make the demand for the product more price elastic. x
b To shift the demand for the firm’s product to the right.
c To increase barriers to entry.
d To increase sales and so help the firm exploit economies of scale.

10 A firm’s total costs are £200 when 10 units are produced and the marginal V
cost of the 10th unit is £20. The marginal cost of the 11th unit is £5. Which
of the following is TRUE?
a The average cost for 11 units is greater than that for 10 units.
b The total fixed costs for 11 units are £225.
c The average fixed cost for 11 units is the same as the marginal cost of the
11th unit.
d The average fixed cost for 11 units is less than the marginal cost of the x
11th unit.

11 Over a full year restaurant A makes a profit. During the winter season, it V
has fixed costs of £3,000 per week, total variable costs of £2,000 per week
and prospective total revenue of £1,000 per week. In such circumstances a
profit maximising hotel should:
a close down during the winter season since its revenue is insufficient to
cover its fixed costs.
b stay open during the winter season as it is profitable over the full year.
c close down during the winter season as the expected revenue of £1,000 is x
less than its variable costs.
d close down during the winter season since it would make a loss of £4,000
during the winter season.

12 Which one of the following is NOT a feature of an industry characterised Vii

by monopolistic competition?
a Some degree of monopoly power ensures that in the long run firms can x
make supernormal profits.
b There is freedom of entry and exit into the industry in the long run.
c Firms in the industry produce differentiated products.

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d Firms in the industry charge prices above their marginal costs of
production.

13 Which of the following statements is FALSE? Vii

a For a firm under perfect competition in the short run, marginal revenue
will be equal to the average revenue.
b In an oligopoly industry, firms make decisions taking into account the
possible reactions of their competitors.
c For a monopolist facing a linear demand curve, average revenue is always x
less than marginal revenue.
d A profit maximising monopoly firm with positive marginal costs of
production charges a price in the region of the demand curve where
demand is price elastic.
Ii

14 What is the combined effect of a decrease in the cost of production and a

rise in consumer income on the equilibrium price and quantity of a normal
good?
a The effect on price is indeterminate but the equilibrium quantity will fall.
b The effect on price is indeterminate but the equilibrium quantity will rise. x
c The effect on quantity is indeterminate but the equilibrium price will rise.
d The effect on quantity is indeterminate but the equilibrium price will fall.

15 An example of a conglomerate takeover is a food manufacturer:

a buying a farm.
b buying a supermarket.
c buying a rival food manufacturer.
d buying a publishing company. x

16 In a simple closed economy, consumption is given by the relationship: Xiv

C = 0.5 Y
where C is consumption expenditure and Y is Gross Domestic Product.
If government expenditure is £200 million and investment is £60 million,
what will be the equilibrium value of the Gross Domestic Product of the
economy?
a £260 million
b £130 million
c £520 million x
d £1,040 million

17 Which of the following will result in an improvement in the domestic Xiii

country’s terms of trade? 24
a A rise in the average price of imports relative to the average price of
exports.
b A fall in the quantity of imports relative to the quantity of exports.
c A rise in the quantity of exports while imports remain the same.
d A rise in the average price of exports relative to the average price of x
imports.

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18 Assume that the actual rate of unemployment is above the natural rate of Xiv
unemployment because the expected rate of inflation is above the actual 26
rate of inflation. If the expected rate of inflation falls to equal the actual
rate of inflation then real wage growth will:
a fall and real output will rise. x
b fall and real output will fall.
c rise and real output will rise.
d rise and real output will fall.

19 If a central bank decides to reduce the money supply to fight inflation, then XV
if the country has a floating exchange rate this will assist in the process
because the exchange rate of the domestic currency will tend to:
a appreciate and reduce the price of exports.
b appreciate and reduce the price of imports. x
c depreciate and reduce the price of exports.
d depreciate and reduce the price of imports.

20 Which one of the following will have a negative impact upon money Xvi
demand?
a fall in the rate of interest
b a rise in the real Gross Domestic Product
c the rise in the frequency with which people are paid x
d a higher expectation that stock prices will fall

21 Other things remaining the same, the effect of an increase in the budget XVII
deficit is to:
a lower short term interest rates because the aggregate demand curve shifts
to the left.
b raise short term interest rates because the aggregate demand curve shifts
to the left.
c lower short term interest rates because the aggregate demand curve shifts
to the right.
d raise short term interest rates because the aggregate demand curve shifts x
to the right.

22 In the Keynesian 45° line diagram showing the equilibrium level of GDP in
a country, the marginal propensity to consume domestically produced
goods is: a 13
a the intercept of the line representing the part of income spent on goods
produced in the country.
b the proportion of any rise in GDP withdrawn from the circular flow of
income.
c the slope of the aggregate expenditure line.
d the slope of the line representing the part of income spent on goods x
produced in the country.

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23 As a result of an economic policy change, interest rates and consumption Xviii
rise but investment falls. The new policy was:
a an expansionary fiscal policy. x
b an expansionary monetary policy.
c a contractionary fiscal policy.
d a contractionary monetary policy.

24 Which of the following is NOT a supply side economic policy aimed at

promoting economic growth?
a Cuts in social security benefits designed to encourage more workers to
take work
b Measures designed to reduce trade union powers
c Deregulation
d Tariffs designed to increase production of domestic goods x

25 You are given the following information for an open economy: XiV
Consumer Expenditure £100 million
Investment Expenditure £20 million
Government Expenditure £60 million
Exports £20 million
Imports £60 million
Net Income from abroad £10 million

What is the value of this economy’s Gross Domestic Product?

a £130 million
b £140 million x
c £150 million
d £160 million

26 To prevent the value of the Pound from depreciating against the Euro, the XV
Bank of England might:
a buy the Pound in the foreign exchange market and increase its foreign
exchange reserves.
b buy the Pound in the foreign exchange market and decrease its foreign x
exchange reserves.
c sell the Pound in the foreign exchange market and increase its foreign
exchange reserves.
d sell the Pound in the foreign exchange market and decrease its foreign
exchange reserves.

Section B [48 marks] - Answer all Questions

1. Explain the difference between economic and accounting profit. Why is the
distinction important to economists? Use examples in your answer.
[8 Marks]

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Answer: Economic profit is equal to total revenue minus total cost, with total cost
measured as the opportunity cost of production. Accounting profit is based on a set of
accounting rules that account for issues such as the tax code. Students should use a
numerical example to show the difference

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Students will then discuss the fact that economic profit is necessary to keep a business
running in the long run

2. Define and explain Opportunity Cost. Use examples in your answer.

[6 Marks]

Answer: The opportunity cost of anything action is the highest valued alternative that
must be given up to get it. Students should expand this is their own words incorporating
real examples.

3.
(i) Define what is meant by vertical integration as a business growth strategy. Use
an example in your answer. [3 Marks]

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Answer: Vertical integration is a business strategy that involves expanding within an
existing market but at a different stage of production. Vertical integration can be
“forward” such as moving into distribution and retail or “backward” such as expanding
into raw materials or producing components.

(ii) Explain three reasons why a business might wish to expand via vertical
integration. Use examples in your answer. [3 Marks]

Answer: Greater efficiency, reduced uncertainty, monopoly power, barriers to entry

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4. A firm is polluting the local environment and as a results the Marginal Social
Costs are greater than the firms private Marginal Costs. This is shown in the
table below.

Output (£) 1 2 3 4 5
40 42 45 55 70
Marginal Cost
Marginal Social 52 57 65 72 76
Cost
70 135 195 250 300
Total Revenue
70 67.5 65 62.5 60
Average Revenue
70 65 60 55 50
Marginal Revenue

Based on the information in the above table:

(i) how much should the firm produce to maximise profits and why? [2 Marks]
4 units, where MR=MC

(ii) what is the socially efficient level of output and why? [2 Marks]
3 units where AR=MSC

(iii) how much is marginal external cost at the socially efficient level of output?
[2 Marks]
£20. marginal external cost = MSC-MC (65-45)

(iv) What size tax would be necessary for the firm to reduce its output to the
socially efficient level and is the tax equal to the marginal external cost?
[2 Marks]

£15 per unit of output. This would raise the firm’s MC by £20. At 3 units of
output the firm’s marginal cost would now be £60, which would be equal
to its marginal revenue.

5. Explain the two main characteristics of a public good, giving an example for each.
[6 Marks]

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Public goods have two important characteristics non-rivalry and non-excludability.
Answer: 1. The non-rivalry element means that one person’s consumption of the good
does not prevent someone else consuming the good. An example would be street lighting.
The consumption of street lighting by one person does not prevent someone else
benefiting from it as well.

2. Non excludability means that once the good is produced then it is not possible to
prevent others enjoying the benefits of the good. For example, if one person in a
town is protected from flooding by a dam all the other houses in the town will also benefit
from the protection of the dam. Another good example is defence expenditure; once
money is spent on a country’s defence, then all the people in the country benefit from the
defence expenditure.

6. Workers in two countries A and B can produce either Wood or Coal. The
annual output of a worker in each country is given in units of each good in the
table below.

Country Wood Coal

A 5,000 10,000

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 B 200 5,000
(i) Which country has a comparative advantage in the production of Wood.
Why? [2 Marks]

Country A.

(ii) Does Country B have an absolute advantage in either of the goods. Why?
[2 Marks]

No.

(iii) State whether trade would take place between the two countries if the terms of
trade were 20 units of Coal for 1 unit of Wood and explain how each country would
benefit from trade on these terms. [4 Marks]

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Answer: Yes. Country A will export Wood to Country B in return for imports of Coal. The
terms of trade must lie between 2 units of Coal per one unit of Wood (Country A’s
opportunity cost) and 25 units of Coal per one unit of Wood (Country B’s opportunity
cost). Trade on these terms will benefit Country B because it can import Wood at a cost
of 20 which is cheaper than producing it at a cost of 25. It also benefits Country A since it
sells Good X at 20, higher than the cost of producing it at 2.

7.
(i) With the aid of aggregate supply and demand curves, explain the distinction
between demand pull and cost push inflation. [4 Marks]

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Demand-pull inflation is a type of inflation that results from an initial increase in
aggregate demand as shown in the diagram below. Demand-pull inflation may begin with
any factor that increases aggregate demand:
1. Increase in the quantity of money and lower interest rates
2. An increase in government expenditures or tax cuts
3. Changes in consumer and investment demand
4. An increase in export demand due for example to global economic growth

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A shift to the right of the aggregate demand curve will lead to upward pressure on prices
and some expansion of output. It is more likely to result in higher price rises closer to the
full employment level of output than when there is a high level of unemployment.
Cost-push inflation is a type of inflation that results from an initial increase in costs.

There are three main sources of increased costs:

1. An increase in the money wage rate
2. An increase in the money price of raw materials, such as oil and commodities.
3. A depreciation of the exchange rate which raises import costs

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A shift to the left of the aggregate supply curve will lead to upward pressure on prices
and a fall in the level of output. The precise initial inflationary impact will depend upon
the steepness of the aggregate demand curve. Cost push inflation is likely to be
accompanied by a lower level of output rather than a higher output which is usually
associated with demand pull inflation.

(ii) Give one example of the factors that can cause each type of inflation. [2 Marks]

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Module learning outcomes met in the above:

After successful completion the student is able to:

 discuss the workings of competitive markets;

 discuss and analyse consumer demand;
 discuss and analyse a firm’s output decisions under perfect and imperfect
competition;
 discuss and analyse various pricing strategies for firms with market power;
 describe the role of government intervention in the market;
 discuss the effect of the macroeconomic environment on the business.

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