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Introduction to Economics final exam for Freshman Natural

Science Strem students
Introduction to economics (Haramaya University)

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HARAMAYA UNIVERSITY

Freshman Program
Directorate
College of Business and Economics
Department of Economics

Course Name: Introduction to Economics (Econ 1012)

Subject: Final exam for Freshman Natural Science Strem students

Date: July 5, 2021 Max Marks: 50%
Time allotted: 2:30 hrs.

Instructions:
• Make sure that the exam has four parts and your exam booklet contain
seven pages including cover page and answer sheet
• Write your answers only on the space provided for each part.
• Do not detach any piece of paper from the exam booklet
• Having cell phone on exam will nullify your mark
• Use only your own Scientific calculator, do not take from and give to
others

Students’ information

Name: -------------------------------------------------------------------

ID-----------------------------------------------------------------------

Section-----------------------------------------------------------------

➢ Best of luck!
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Part I: Say True if the statement is correct and False if the statement is
incorrect (1pt each)
1) The convexity of indifference curve implies that the two commodities are
imperfect substitute for each other.
2) The average cost curve lies under marginal cost curve as far as the latter
is greater than the former.
3) Production without cost is impossible and cost without production is
economically meaningless
4) The demand curve of the perfect competitive firm is downward sloping
5) When the price of each commodity rises proportionally, the budget line
moves outwards.

Part II: Choose the best answer from the given alternatives (1pt.each)
1) Indifference curves shall never cross each other. If they cross each other
one of the following will happen;
A. The assumption of diminishing marginal utility will be violated.
B. The assumption of transitivity of indifference curves will be violated.
C. The assumption of diminishing marginal rate of substitution will be
violated.
D. All of the above

2) Which one of the following statements is true about the relationship among
MC, AC, and TC curves?
A. The marginal cost curve crosses the average fixed cost and average
variable costs at their minimum points.
B. All cost curves are U shaped, because of law of variable proportion
C. The Marginal cost curve crosses the average variable cost and average
cost curves at their minimum point
D. The average fixed cost curve can be negative but others cannot

3) Which of the following statement is incorrect about the utility measurement

approaches?
A. The ordinal approach assumes that utility cannot be measured in
absolute terms
B. The cardinal approach states that utility can be measured objectively.
C. The ordinal approach is based on the consumer ‘s budget line and
indifference curves
D. The cardinal approach expresses the utility in relative terms

4) If the utility function of a consumer is given by U = A2B2 then what is the

MRSAB?
A. A2/B2 C. A/B
B. B2/A2 D. B/A

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5) What is the price and quantity that maximize TR, if Q= 6 - P?

A. 1 and 2 C. 3 and 2
B. 2 and 2 D. 3 and 3

6) Which one is true, if price of a firm is given as P = 100 – 0.05Q?

A. Total revenue (TR) function of firm will be; 100Q – 0.05Q2
B. Marginal revenue (MR) function of firm will be; 100 – 0.1Q
C. Total revenue (TR) is maximized at 1000 unit of output
D. All of the above are correct

7) Given the utility function U = 40Q – 2.5Q2 what quantity of good gives
highest utility for the consumers?
A. 10 unit C. 8 unit
B. 5 unit D. 12 unit

8) Suppose that, perfectly competitive firm produces goods and services where
the average cost is greater than the market price, then the firm is;
A. Generating positive profits
B. Incur loss
C. Making normal profits
D. Shutting down the business

9) What is the value of average variable cost of a firm at 8 units of output if the
short run cost function of the firm is given as 𝑇𝐶 = 20𝑄 3 − 20𝑄 2 + 10𝑄 + 100
A) 1,150 C) 1,130
B) 9,040 D) 1,040

10) Which of the following statement states the relationship between average
product of labour and marginal product of labour correctly?
A) When average product of labour has negative slope, marginal product
of labour is falling and become negative
B) When average product of labour crosses marginal product of labour,
marginal product of labour reaches its maximum point
C) When average product of labour rises, marginal product of labour less
than average product of labour
D) When average product of labour crosses marginal product of labour,
average product of labour reaches its minimum point

11) Which one of the following is the source of monopoly power for Ethio-
telecom in the production of telephone services in Ethiopia?
A. Efficiency B. Patent right
C. Legal restriction D. Control over key raw
materials

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12.Given the utility function 𝑈(𝑋, 𝑌) = 𝑋𝑌 + 2𝑌.The prices of the two

commodities X and Y are 2 birr and 4 birrs respectively. A consumer has
a total income of 76 birr to be spent on the two goods. Then, which of the
following is utility maximizing quantities of good X and Y respectively.
A) 12 and 6
B) 14and 8
C) 6 and 9
D) None
13.In which form of market structure would price be the key factor when
competing?
A) Monopoly competition C) Monopoly
B) Oligopoly D) Perfect competition
14.Which of the following would create a natural monopoly?
A) Requirement of a government license before the firm can sell the
good or service
B) Technology enabling a single firm to produce at a lower average cost
than two or more firms
C) An exclusive right granted to supply a good or service
D) Ownership of all the available units of a necessary input

15.What is the difference between perfect competition and monopolistic

competition?
A) Perfect competition has a large number of small firms while
monopolistic competition does not.
B) In perfect competition, firms produce identical goods, while in
monopolistic competition, firms produce slightly different goods.
C) Perfect competition has no barriers to entry, while monopolistic
competition does.
D) Perfect competition has barriers to entry while monopolistic
competition does not.

16. In the short run, when capital is a fixed factor, a rise in the cost of labour;
A) shifts the AVC curve down.
B) leaves the MC curve unchanged.
C) shifts the total product curve downwards.
D) shifts the marginal cost curve downward

17.If you know that with 8 units of output, average fixed cost is birr 12.50
and average variable cost is birr 81.25, then total cost at this output level
is:
A) Birr 93.75. C) Birr 880.0
B) Birr 97.78. D) Birr 750.0

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18. From the features of oligopoly market which one is major feature?
A) Many sellers
B) Mutual interdependence
C) Economies of scale
D) Has significant barrier to entry

19.One of the following is incorrect concerning the profit maximization of

firm in short run
A) The point where MR = MC, the profit maximizing output is chosen
B) When MR>MC so more profit can be gained by increasing output
C) When MC>MR, increasing output will increase profits
D) When MC>MR, more profit can be gained by decreasing output

20.Mr.X derives utility from pairs of red shoes (x) and T-shirt (y). The
marginal utility of a pair of red shoes is Mux = 1/x, and marginal utility
of a unit of T- shirt is MUy = 1. Mr X has an income of $2. Suppose a
pair of red shoes costs $1, and a unit of T-shirt costs $1. What is the
optimum pairs of red shoes and T-shirt of these bundles should Mr X
consume?
A) 1 pairs of red shoes and 0 units of T-shirt
B) 0 pairs of red shoes and 2 units of T-shirt
C) 1 pair of red shoes and 1 unit of T-shirt
D) 0.5 pairs of red shoes and 1 unit of T-shirt

21.All ofthe following are true except;

A) MC = ATC, (at the minimum of the ATC)
B) MC = AVC, (at the minimum of the AVC)
C) When the average product of labour (APL) is at its maximum, the
average variable cost of production (AVC) is at its minimum
D) When the marginal product of labour (MPL) is at its minimum, the
marginal cost of production (MC) is at its maximum.
22. One of the following alternatives does not correctly matched with the
corresponding fact
A) Because of the law of diminishing marginal returns the second
stage is considered to as the rational stage of production as
compared to the first and third stage
B) Because of law of increasing marginal returns the second stage is
considered to as the rational stage of production as compared to
the first and third stage
C) The second stage is rational stage because TP is still increasing
D) Due to the law of variable proportion the second stage is
considered to as the rational stage of production as compared to
the first and third stage

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23.Which one of the following is the characteristics of perfectly competitive

market?
A. Identical product
B. Differentiated product
C. Interdependence
D. Relatively easy to entry and leave the market

24.MC is given by:

A) The slope of the TFC curve
B) The slope of the TVC curve, but not by the slope of the TC curve
C) The slope of the TC curve, but not by the slope of the TVC curve
D) Either by the slope of the TC curve or by the slope of the TVC curve

25. Based on the relationship between Price and Average cost in short run
perfect competitive market, which one of the following is wrong?
A) Firm gets zero profit If market price only able to cover its average
costs
B) Firm Continue the production if minimum ATC > P > minimum AVC
C) Firm Shut down the operation if minimum ATC > P < minimum AVC
D) Firm incur loss if market price equal to marginal cost

Part III: Discuss the following questions (2pt. each)

1) Show how marginal cost is an inverse function of marginal Product of

labour and Average variable cost is an inverse function of Average
product of labour, both mathematically and graphically.
2) What is the law of diminishing marginal utility? And how it holds valid?
3) In which stage of production Average variable cost is greater than
Marginal cost? which stage is a rational for a producer? Why it is
rational and why the remaining others are not?
4) Compare and contrast the Perfect competitive market with
Monopolistic market and Monopoly market structure

Part IV: Workout (show the necessary steps!)

1) Suppose the average revenue of a short run perfectly competitive firm is 2
and its Marginal cost and fixed cost is given as:
MC = 3Q2 − 8Q + 6 and TFC = 10 then,
A. Find the profit at the equilibrium point and identify whether the firm
makes positive profit, normal profits or incurs loss. (2pt.)
B. What price is needed for the firm to stay in the market? (2pt.)

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2) Consider a consumer with a utility function U (x, y) =X2 + Y2, the

consumer intends to spend birr 80 on the two goods and price of good X
and price of good Y are birr 2 and birr 4, respectively
A) Find the maximum utility that consumer obtain from consuming the
two goods? (2 pt.)
B) Calculate MRSxy at equilibrium, and interpret your result (2pt.)

3) If the total production function given as: TP = 16L2 - 0.4L3 then;

A. Find the maximum value of APL and MPL. (2pt.)
B. Calculate the maximum production (2pt.)

ANSWER SHEET

Name: ______________________________________________

ID: ___________________________________________________

Section: ____________________________________________

Part I: True/False
1. 2. 3. 4. 5.

Part II: Multiple choice

1. 6. 11. 16. 21.
2. 7. 12. 17. 22.
3. 8. 13. 18. 23.
4. 9. 14. 19. 24.
5. 10. 15. 20. 25.

Part III and Part IV: Use the following attached white paper for this part.

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