BUAP034 Class Test Specimen

Summary:
Time allowed: 60 minutes (unless your ARUAA entitles you to additional time)
Module examiner: Dr M Moro
Chief examiner: Dr T Stowasser
Instructions:
The class test becomes available for two hours from 10 AM UK time on Friday 22 March 2024.
It will be available as a Canvas Quiz, entitled 'BUAP034 Class Test'.
Once you begin the test, you will have 60 minutes to complete it, unless your ARUAA entitles you to
additional time. You cannot pause it, and once submitted you cannot take the test again.
You must submit your test by 12 noon. If you want to have the full 60 minutes, you will need to begin
the test at 11 AM UK time at the latest.
There are TWO sections to the class test: Section A is a multiple-choice section, and Section B is an
open question section.
Section A (Multiple Choice Questions)
 There are TEN questions (from 1 to 10)
 Some questions have two correct answers. These will be clearly identified.
 Each correctly answered question is worth 6 points, regardless of how many correct options
there are in a question.
 If you choose an option which is incorrect, it is worth minus 3 points.
 If you do not choose an option which is correct, it is worth minus 3 points.
 The lowest mark for each incorrectly answered question is 0 points.
 The maximum total for Section A is 60 points.
Section B (Open Questions)
 There are TWO questions (11 and 12).
 Any sub-questions will have an allocation of points clearly stated.
 The maximum total for Section B is 40 points.
You are required to answer ALL the questions of both sections.
The maximum total for this Class Test is 100 points. Note, however, that this class test accounts for
30% of the final grade for the module.
You must NOT collaborate or work together during any part of the test. You must also NOT engage
in plagiarism in the open question, which includes the use of any work which is not your own in the
open question, including using Chat GPT or any other AI powered Large Language Model.
Any of these will be considered academic misconduct, and severe penalties will apply accordingly.
Section A – Multiple Choice (60 points) – Feedback in italic
1. Which of the following statements is true?
 Select the correct answer.
A. An order given in a firm is a request for a job that can be rejected by the employee.
B. In a competitive market, prices motivate buyers and sellers’ actions, and are determined
as a result of the actions of a large number of participants.
C. Contracts for products sold in markets temporarily transfer authority over the product
from the seller to the buyer.
D. Asymmetric information in a firm is the details about the asymmetry of authority within
the firm.

2. Which of the following statements are examples of incomplete contracts?

Select the two correct answers.
A. A father lending money to his son, with the condition that if it is not repaid in a week
then it would be subtracted from the son's next pocket money.
B. An elderly mother promising to her children that they would receive an inheritance if
they look after her well.
C. A bet placed on a horse at a major horse racing event.
D. The wedding vow: "I take you to be my wife (or husband), to have and to hold from
this day forward, for better, for worse, for richer, for poorer, in sickness and in health,
to love and to cherish, till death us do part".

3. A firm produces 24 units of output with 10 workers and 4 machines. Which of the following
statements are correct?
Select the two correct answers.
A. If the firm produces 48 units of output with 20 workers and 4 machines, then the firm’s
technology exhibits constant returns to scale.
B. If the firm produces 10 units of output with 5 workers and 2 machines, then the firm’s
technology exhibits increasing returns to scale.
C. If the firm produces 30 units of output with 15 workers and 6 machines, then the firm’s
technology exhibits decreasing returns to scale.
D. If the firm produces 24 units of output with 20 workers and 8 machines, then the firm’s
technology exhibits constant returns to scale.

4. The following is a table of the total cost (TC) of producing output Q for a particular firm.
Based on this information, which of the following statements is correct?
 Select the two correct answers.
A. The average cost at Q = 40 is £7.
B. The marginal cost at Q = 80 is £8.
C. The marginal cost is higher than the average cost at Q = 50.
D. The marginal cost curve intersects the average cost curve at Q = 70.

5. The diagram shows the demand and the supply curves for second hand textbooks. Based on
this figure, which of the following statements is correct?

Select the correct answer.

A. At a price of $12, all 40 books will be sold.
B. At a price of $6, there is an excess demand of 4 books.
C. There are sellers willing to give away their textbooks for free.
D. The competitive market equilibrium price is $8.

6. As Valentine's Day draws near, the demand for roses and chocolate rises. Following a market
study, Marks and Spencer's business analysis reveals that the price of roses experiences a
significantly steeper increase compared to chocolate. What factors contribute to this
difference?
 Select the correct answer.
A. The supply of roses is much less price elastic than the supply of chocolate.
B. The price of roses exceeds the price of chocolate.
C. The demand for roses is much less price elastic than the demand for chocolate.
D. The market for roses is subject to excess demand.

7. During the Covid-19 pandemic, the government temporarily restricted dining in restaurants.
What should the owner of a restaurant consider in deciding whether to close the business?
Select the correct answer.
A. Fixed cost.
B. Variable cost.
C. Marginal cost.
D. All of the above.

8. Microsoft offers Office 365 Education at no charge to educators and students at eligible
institutions. Explain how this free service may affect the own-price elasticity of demand for
Office 365 when the students graduate.
Select the correct answer.
A. The price elasticity is expected to decrease.
B. The price elasticity is expected to increases.
C. The price elasticity is not expected to change.
D. None of the above.

9. Electric power producers have a choice of various fuels, including oil, natural gas, coal, and
uranium, as well as solar and wind energy. The cross-price elasticity between the demand for
wind power plants and the price of coal would be __________.
Select the correct answer
A. Positive.
B. Negative.
C. Zero.
D. All of the above.
 10. A bakery is one of many that operate in the bread market of a large city. The market demand
curve for bread is downward-sloping. The bakery incurs fixed costs and has an upward-
sloping marginal cost curve. Which of the following statements is correct?
Select the two correct answers.
A. The bakery faces a flat demand curve.
B. The bakery’s supply curve is upward-sloping.
C. The bakery always makes a positive profit.
D. The bakery can ensure that the price is above its average cost.

Section B – Open Questions (40 points)

11. The table provided illustrates the own and cross-price elasticities for a selection of US car
models.
Own price elasticities, located on the diagonal, represent the percentage change in quantity
demanded for the same model in response to a 1% change in its price. For instance, the value
of -6.4 in the first column, first row, indicates the own price elasticity of the Mazda 323,
implying that a 1% increase in its price would result in a 6.4% decrease in its quantity
demanded. Conversely, off-diagonal elements represent cross-price elasticities. For example,
the value of 0.2 in the third column, second row, suggests that a 1% increase in the price of
the Accord corresponds to a 0.2% increase in Cavalier sales.

A. Using the concept of elasticity, what are the definitions of a substitute and of a
complement? [4 points]
Substitute: Two goods are substitutes if an increase in the price of one leads to an
increase in the quantity demanded for the other. This is reflected in positive cross-
price elasticities.
Complement: Two goods are complements if an increase in the price of one leads to a
decrease in the quantity demanded for the other. This is reflected in negative cross-
price elasticities.
 B. What are the zeros in the table (0.0)? [4 points]
Zeros in the table indicate that a 1% change in the price of one car model does not
affect the quantity demanded of the other car model. In other words, there is no
responsiveness or relationship between the price changes of these car models.

C. Given the table above, identify which car models are substitutes and which
ones are complements. Explain you used to identify them. [4 points]
Substitutes: Look for positive cross-price elasticities. If the elasticity is positive, it
suggests that an increase in the price of one car model corresponds to an increase in
the quantity demanded for the other. For example, if the elasticity between Accord
and Cavalier is positive, they are substitutes.
Complements: Look for negative cross-price elasticities. If the elasticity is negative, it
suggests that an increase in the price of one car model corresponds to a decrease in
the quantity demanded for the other. For example, if the elasticity between Taurus
and Camry is negative, they are complements.

D. What are the Taurus’s closest competitors and why? [4 points]

To identify Taurus's closest competitors, look for car models with positive cross-price
elasticities with Taurus. These models would experience an increase in quantity
demanded when the price of Taurus increases, suggesting they are substitutes.
E. Compare the own price elasticities of the Mazda 323 (relatively low-budget
car) and the BMW 735i (i.e., a luxury car) and elaborate on why they seem to
differ so much [4 points].
 Mazda 323: A relatively low-budget car might have a higher own price
elasticity, meaning consumers are more responsive to changes in its price. This
could be because consumers have more alternatives in the low-budget car
segment, making them more sensitive to price changes.

 BMW 735i: As a luxury car, it might have a lower own price elasticity. Luxury
cars often cater to a more affluent market where consumers may be less price-
sensitive. The perceived quality, brand, and exclusivity associated with luxury
cars can contribute to a lower own price elasticity compared to budget cars.

12. In general, car rental companies tend to impose significantly higher rates for gasoline
compared to nearby gas stations.
A. Elaborate on how this practice by car rental companies indirectly creates a
distinction between individuals who personally cover their rental expenses and
those whose rentals expenses are covered by their employers. [8 marks]
Car rental companies charging higher rates for gasoline indirectly create a distinction
between individuals personally covering their rental expenses and those whose
expenses are covered by their employers.
Individuals Covering Personal Expenses:
  These individuals are likely to be more cost-conscious and price-sensitive.
They may be motivated to seek lower-priced gasoline options and conserve
fuel to save on overall rental costs.
Employer-Covered Expenses:
 Individuals whose rental expenses are covered by their employers may be
less concerned about the high gasoline rates since they are not personally
bearing the cost. They might be less motivated to actively seek out cheaper
fuel options or conserve fuel, as the cost is borne by their employer.
This practice indirectly influences behavior based on the financial responsibility of
the renter, creating a distinction in their reactions to higher gasoline rates.

B. Can you determine the type of price discrimination that car rental companies
are attempting to apply? [4 points]
Companies that hire cars are making an effort to engage in third-degree price
discrimination. In this kind of discrimination, various customer groups are charged
different prices according to their attributes, such as their ability to pay or desire to
pay the difference. Here, the distinction is drawn between those who pay for their
own bills and those whose employers pay for them.

C. Provide a brief description of price discrimination and how does price

discrimination increase profit as compared with uniform pricing. [8 marks]
Price Discrimination Definition: The practice of charging different rates to different
customers for the same commodity or service based on variables such as the
customer's attributes, location, or time of purchase is known as price discrimination.
Profit Increase with Price Discrimination:
 Uniform Pricing: Under uniform pricing, where the same price is charged to
all consumers, some consumers might be willing to pay more than the
production cost, while others might be willing to pay less.

 Price Discrimination: By charging different prices to different groups based

on their willingness to pay, a company can capture more consumer surplus,
leading to increased overall revenue and profit. It allows the firm to extract
a larger share of the consumer surplus and tailor prices to different
segments' willingness to pay.
Car rental firms are engaging in price discrimination when they charge higher petrol
prices since they know that people who pay for their own expenses and those
whose employers pay for them will have different price sensitivity. By doing this, the
rental company can charge people who are less sensitive to gasoline prices more
money.