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# END-OF-SEMESTER EXAMINATION SEMESTER II, 2004/2005 SESSION KULLIYYAH OF ECONOMICS AND MANAGEMENT SCIENCES

Programme Time Duration : : : B.ENGINEERING 2.30 p.m. - 5.00 p.m. 2 Hr(s) 30 Min(s) ECON 1550 Level of Study : 2-4 Date : 22/3/2005

Section(s)

: 1-6

## INSTRUCTION (S) TO CANDIDATES DO NOT OPEN UNTIL YOU ARE ASKED TO DO SO

1. 2. Section A: Multiple choice questions. Answer ALL questions. Section B: Essay questions. Answer ALL questions.

Any form of cheating or attempt to cheat is a serious offence which may lead to dismissal

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Final Examination Introductory Economics for Engineering ECON 1550 Sem. 2, 2004/05

## Use the following to answer question 1

Product

2 1 Variable input

1.

. In the above diagram curves 1, 2, and 3 represent the: A) average, marginal, and total product curves respectively. B) marginal, average, and total product curves respectively. C) total, average, and marginal product curves respectively. D) total, marginal, and average product curves respectively. Use the following to answer questions 15-16:

Answer the next questions 2 and 3 on the basis of the following cost data:
Average fixed cost \$50.00 25.00 16.67 12.50 10.00 8.37 7.14 6.25 Average variable cost \$100.00 80.00 66.67 65.00 68.00 73.33 80.00 87.50

Output 1 2 3 4 5 6 7 8

Refer to the above data. If the firm closed down and produced zero units of output, its total cost would be: A) zero. B) \$50. C) \$150. D) \$100.

3.

. Refer to the above data. The marginal cost of the fifth unit of output is: A) \$3. B) \$62. C) \$80. D) \$78.

4.

. The long-run average total cost curve: A) will rise if diminishing returns are encountered. B) will fall if diminishing returns are encountered. C) will rise if economies of scale are incurred. D) is based on the assumption that all resources are variable.

5.

. Price is constant or given to the individual firm selling in a purely competitive market because: A) the firm's demand curve is downsloping. B) of product differentiation reinforced by extensive advertising. C) each seller supplies a negligible fraction of total supply. D) there are no good substitutes for its product.

6.

The demand curve in a purely competitive industry is ______, while the demand curve to a single firm in that industry is ______. A) perfectly inelastic, perfectly elastic B) downsloping, perfectly elastic C) downsloping, perfectly inelastic D) perfectly elastic, downsloping

## Use the following to answer question 7

7.

. Refer to the above short-run data. The profit-maximizing output for this firm is: A) above 440 units. B) 440 units. C) 320 units. D) 100 units.

## Use the following to answer questions 8-9

8.

Refer to the above diagram. At P2, this firm will: A) produce 44 units and realize an economic profit. B) produce 44 units and earn only a normal profit. C) produce 66 units and earn only a normal profit. D) shut down in the short run.

9.

Refer to the above diagram. At P1, this firm will produce: A) 47 units and break even. B) 47 units and realize an economic profit. C) 66 units and earn only a normal profit. D) 24 units and earn only a normal profit.

10.

Allocative efficiency is achieved when the production of a good occurs where: A) P = minimum ATC. B) P = MC. C) P = minimum AVC. D) total revenue is equal to TFC.

11.

A firm finds that at its MR = MC output, its TC = \$1000, TVC = \$800, TFC = \$200, and total revenue is \$900. This firm should: A) shut down in the short run. B) produce because the resulting loss is less than its TFC. C) produce because it will realize an economic profit. D) liquidate its assets and go out of business.

12.

Which of the following is correct? A) Both purely competitive and monopolistic firms are "price takers." B) Both purely competitive and monopolistic firms are "price makers." C) A purely competitive firm is a "price taker," while a monopolist is a "price maker." D) A purely competitive firm is a "price maker," while a monopolist is a "price taker."

## Use the following to answer questions 13-14

13.

Refer to the above diagram for a pure monopolist. Monopoly price will be: A) e. B) c. C) b. D) a.

14.

Refer to the above diagram for a pure monopolist. Monopoly output will be: A) between f and g. B) h. C) g. D) f .

15.

In the short run a pure monopolist's profit: A) will be maximized where price equals average total cost. B) may be positive, zero, or negative. C) are always positive. D) will be zero.

16.

To maximize profit a pure monopolist must: A) maximize its total revenue. B) maximize the difference between marginal revenue and marginal cost. C) maximize the difference between total revenue and total cost. D) produce where average total cost is at a minimum.

17.

X-inefficiency refers to a situation in which a firm: A) is not as technologically progressive as it might be. B) encounters diseconomies of scale. C) fails to realize all existing economies of scale. D) fails to achieve the minimum average total costs attainable at each level of output.

18.

The practice of price discrimination is associated with pure monopoly because: A) it can be practiced whenever a firm's demand curve is downsloping. B) monopolists have considerable ability to control output and price. C) monopolists usually realize economies of scale. D) most monopolists sell differentiated products.

19.

A monopolistically competitive industry combines elements of both competition and monopoly. The monopoly element results from: A) the likelihood of collusion. B) high entry barriers. C) product differentiation. D) mutual interdependence in decision making.

20.

In an oligopolistic market: A) one firm is always dominant. B) products may be standardized or differentiated. C) the four largest firms account for 20 percent or less of total sales. D) the industry is monopolistically competitive.

Use the following to answer question 21 Assume an economy that is producing only one product. Output and price data for a three-year period are as follows. Answer the next question(s) on the basis of these data.
Year 1 2 3 Units of output 20 25 30 Price per unit \$ 4 4 6

21.

Refer to the above data. If year 2 is chosen for the base year, in year 3 nominal GDP and real GDP, respectively, are: A) \$180 and \$30 B) \$30 and \$5 C) \$180 and \$120 D) \$120 and \$100

22.

Which of the following is a final good or service? A) diesel fuel bought for a delivery truck B) fertilizer purchased by a farm supplier C) a haircut D) Chevrolet windows purchased by a General Motors assembly plant

Use the following to answer question 23 Assume an economy that is producing only one product and that year 3 is the base year. Output and price data for a five-year period are as follows. Answer the next question(s) on the basis of these data.
Year 1 2 3 4 5 Units of output 3 4 6 7 8 Price per unit \$3 4 5 7 8

23.

Refer to the above data. Real GDP for year 5 is: A) \$160. B) \$49. C) \$40. D) \$64.

24.

A nation's stock of capital goods will decline when: A) gross investment exceeds net investment. B) net investment is positive, but less than gross investment. C) depreciation exceeds gross investment. D) gross investment exceeds depreciation.

25.

In an economy experiencing a declining production capacity: A) the nation's stock of capital goods is expanding. B) net exports are necessarily zero. C) depreciation exceeds gross investment. D) NDP exceeds GDP.

26.

For a nation's real GDP per capita to rise during a year: A) consumption spending must increase. B) real GDP must increase more rapidly than population. C) population must increase more rapidly than real GDP. D) investment spending must increase.

27.

The natural rate of unemployment is: A) higher than the full-employment rate of unemployment. B) lower than the full-employment rate of unemployment. C) that rate of unemployment occurring when the economy is at its potential output. D) found by dividing total unemployment by the size of the labor force.

28.

The GDP gap measures the difference between: A) NDP and GDP. B) NI and PI. C) actual GDP and potential GDP. D) nominal GDP and real GDP.

29.

Assume the natural rate of unemployment in the U.S. economy is 5 percent and the actual rate of unemployment is 9 percent. According to Okun's law, the negative GDP gap as a percent of potential GDP is: A) 4 percent. B) 8 percent. C) 10 percent. D) 2 percent.

30.

If actual GDP is less than potential GDP: A) potential GDP will fall. B) the price level will rise. C) investment spending will fall. D) the actual unemployment rate will be higher than the natural unemployment rate.

31.

If the consumer price index falls from 120 to 116 in a particular year, the economy has experienced: A) inflation of 4 percent. . B) inflation of 3.33 percent. C) deflation of 3.33 percent D) deflation of 4 percent.

32.

If the rate of inflation is 12 percent per year, the price level will double in about: A) 4 years. B) 6 years. C) 10 years. D) 12 years.

33.

Fiat money is: A) composed only of checkable deposits. B) money because the government asserts that it is. C) money that is in a commercial bank vault. D) money that can be redeemed for a valuable commodity such as gold.

34.

Other things equal, an excessive increase in the money supply will : A) increase the purchasing power of each dollar. B) decrease the purchasing power of each dollar. C) have no impact on the purchasing power of the dollar. D) reduce the price level.

35.

It is costly to hold money because: A) deflation may reduce its purchasing power. B) in doing so one sacrifices interest income. C) bond prices are highly variable. D) the velocity of money may decline.

36.

The asset demand for money is downsloping because: A) the opportunity cost of holding money increases as the interest rate rises. B) it is more attractive to hold money at high interest rates than at low interest rates. C) bond prices rise as interest rates rise. D) the opportunity cost of holding money declines as the interest rate rises.

37.

If in the money market the quantity of money demanded exceeds the money supply, the interest rate will: A) fall, causing households and businesses to hold less money. B) rise, causing households and businesses to hold less money. C) rise, causing households and businesses to hold more money. D) fall, causing households and businesses to hold more money.

S 10 8 6 4 2

D1

## 100 200 300 400 Amount of money demanded (billions of dollars)

38. Refer to the above money market diagrams. The asset demand for money is shown by: A) D1. B) D2. C) D3. D) S.

39.

Refer to the above money market diagrams. Curve D1 represents the: A) speculative demand for money. B) transactions demand for money. C) asset demand for money. D) stock of money.

40.

Refer to the above money market diagrams. If the interest rate was at 8 percent, people would: A) sell bonds, which would cause bond prices to fall and the interest rate to fall. B) buy bonds, which would cause bond prices to rise and the interest rate to fall. C) have insufficient liquidity, which would cause them to reduce their spending on consumer goods. D) buy bonds, which would cause bond prices to fall and the interest rate to rise.