Section A: Identify the letter of the choice that best completes the statement or

answers the question.

1. The price of tomatoes in Melbourne goes from $3.00 to $5.00 per kilogram and
demand drops from 650,000 kilograms per week to 350,000 kilograms per week.
The best estimate of the price elasticity of demand for tomatoes is:
a. -0.6.
b. -1.2.
c. -1.8.
d. indeterminate.

2. A technological advance will shift the:

a. demand curve to the right.
b. demand curve to the left.
c. supply curve to the right.
d. supply curve to the left.

3. Suppose you make jewellery. If the price of gold falls, we would expect you to:
a. be willing and able to produce more jewellery than before at each possible
price.
b. be willing and able to produce less jewellery than before at each possible
price.
c. face a greater demand for your jewellery.
d. face a weaker demand for your jewellery.

4. If, at the current price, there is a shortage of a good:

a. the price is below the equilibrium price.
b. the market can be in equilibrium.
c. sellers are producing more than buyers wish to buy.
d. all of the above are correct.

Graph 1

1
5. Refer to Graph 1. It is correct to say that:
a. at a price of $25 about 600 units of output will be sold.
b. at a price of $15 about 400 units of output will be sold.
c. at a price of $25 there is an excess demand for the product.
d. at a price of $10 the amount sold will be 800 units.

6. Alice says that she would buy one banana split a day regardless of the price. If
this is the case:
a. Alice’s demand for banana splits is perfectly inelastic.
b. Alice’s price elasticity of demand for banana splits is 1.
c. Alice’s income elasticity of demand for banana splits is negative.
d. None of the above answers is correct.

7. Last year, Sheila bought 10 DVD movies when her income was $40,000. This
year, her income is $50,000 and she purchased 20 DVD movies. All else being
constant, it is obvious that Sheila:
a. prefers DVD movies to VHS videos.
b. considers DVD movies to be a normal good.
c. considers DVD movies to be an inferior good.
d. has a price-elastic demand for DVD movies.

8. If a tax is imposed on a market with inelastic demand and elastic supply:

a. buyers will bear most of the burden of the tax.
b. sellers will bear most of the burden of the tax.
c. the burden of the tax will be shared equally between buyers and sellers.
d. it is impossible to determine how the burden of the tax will be shared.

9. The particular price that results in quantity supplied being equal to quantity
demanded is the best price because it maximises:
a. costs of the seller.
b. the total welfare of buyers and sellers.
c. the expenditure of buyers.
d. the profit of buyers.

Graph 2

2
10. According to Graph 2, the deadweight loss of the indicated tax is:
a. $40.
b. $120.
c. $65.
d. indeterminate without data on demand and supply elasticities.

11. According to Graph 2, the reduction in consumer surplus caused by the tax is:
a. $100.
b. $80.
c. $70.
d. $60.

12. Use the following information to answer the following question.

Assume that Jane cleans Joe’s house weekly for $80. Joe would be willing to pay
as much as $100 weekly to have his house cleaned. Jane’s opportunity cost is
$70.

If Jane cleans Joe’s house, the consumer surplus is:

a. $100.
b. $80.
c. $70.
d. $20.

13. If a country allows trade and the domestic price of a good is higher than the world
price:
a. the country will become an exporter of the good.
b. the country will become an importer of the good.
c. the country will neither export nor import the good.
d. additional information about demand is needed to determine whether the
country will export or import the good.

14. Compared with free trade a tariff and an import quota will both:
a. increase the quantity of imports and raise domestic price.
b. increase the quantity of imports and lower domestic price.
c. reduce the quantity of imports and raise domestic price.
d. reduce the quantity of imports and lower domestic price.

3
 Graph 3

15. In Graph 3, the equilibrium price and quantity after the quota would be:
a. P1, Q1.
b. P1, Q4.
c. P2, Q2.
d. P2, Q3.

Graph 4

16. According to Graph 4, how many units of this product would be exported after
trade is allowed?
a. 200.
b. 400.
c. 600.
d. 800.

4
Graph 5

17. According to Graph 5, the gains from trade achieved when the economy moves
from autarky to free trade are:
a. $400.
b. $1200.
c. $1800.
d. $0.

Graph 6

This graph reflects the market for outdoor concerts in a public park surrounded by
residential neighbourhoods that are subject to a noise externality. Use this graph to
answer the following question.

18. Refer to Graph 6. The gain from internalising the noise externality is given by the
area:
a. g.
b. e + g.

5
 c. c + d.
d. a + b + c.

19. What characteristics do public goods and common property resources have in
common?
a. Both types of good are non-excludable.
b. Both types of good are excludable.
c. Both types of good are rival.
d. Both types of good are non-rival.

20. Diminishing marginal product suggests that:

a. marginal cost is downward-sloping.
b. additional units of output are more expensive.
c. the firm is at full capacity.
d. All of the above are true.

21. Marginal cost is equal to average total cost when:

a. marginal cost is at its minimum.
b. average total cost is at its minimum.
c. average variable cost is falling.
d. average fixed cost is rising.

Table 1
Adrienne’s Premium Boxing Service subcontracts with a chocolate manufacturer
to box premium chocolates for their mail order catalogue business. Adrienne
rents a small room for $150 a week in the downtown business district that serves
as her factory. She can hire workers for $275 a week. Costs are in dollars per
week.

22. Refer to Table 1. What is the total cost associated with making 890 boxes of
premium chocolates per week?
a. $975
b. $1100
c. $1250
d. $1375

6
23. Imposing a tax on rents derived from a resource like land in fixed supply in a
competitive market:
a. will reduce consumer surplus.
b. will generate deadweight losses that have an impact on both consumers and
producers.
c. will transfer resources from land owners with no deadweight loss.
d. will normally increase the rents charged from consumers.

24. Which of the following statements best reflects a price-taking firm?

a. If the firm were to charge more than the going price, it would sell none of its
goods.
b. The firm has an incentive to charge more than the going price.
c. The firm can increase profits through price discrimination.
d. All of the above are true.

Graph 7

This graph depicts the cost structure of a profit-maximising firm in a competitive

market. Use the graph to answer the following question.

25. Refer to Graph 7. In the long run this firm will exit the market for any price on the
line segment:
a. AB.
b. BC.
c. CD.
d. None of the above are correct.

7
Graph 8

This graph depicts the cost structure of a firm in a competitive market. Use the
graph to answer the following question.

26. Refer to Graph 8. In this graph a profit-maximising firm’s short-run supply curve
is:
a. the portion of the MC curve above minimum ATC.
b. the portion of the MC curve above minimum AVC but less than ATC.
c. the portion of the MC curve above minimum AVC.
d. not shown since profit maximising firms have no short-run supply curve.

27. The socially efficient level of production occurs where the marginal cost curve
intersects which of the following curves?
a. Demand.
b. Marginal revenue.
c. Supply.
d. Average cost.

28. OPEC often holds oil production below capacity in an effort to:
a. keep prices above the competitive level.
b. create a shift in the demand for oil.
c. compel consumers to search for oil substitutes.
d. compel consumers to conserve oil.

Graph 9

8
29. Refer to Graph 9. The firm depicted faces a horizontal demand curve. If the firm
is a profit-maximising firm:
a. it would be operating in a monopolistically competitive market.
b. it would not have excess capacity in its production as long as it is earning zero
economic profit.
c. it is able to choose the price at which it sells its product.
d. All of the above are true.

Table 2

Two discount superstores (Ultimate Saver and SuperDuper Saver) in a growing

urban area are interested in expanding their market share. Both are interested in
expanding the size of their stores and parking lots to accommodate potential
growth in their customer base. The following table depicts the strategic outcomes
that result from the game. Growth-related profits of the two discount superstores
under two scenarios are shown.

30. Refer to Table 2. If the owners of SuperDuper Saver and Ultimate Saver meet for
a friendly game of golf one afternoon and happen to discuss a strategy to
optimise their growth-related profits, they should both agree to:
a. share the context of their conversation with the Australian Competition and
Consumer Commission.
b. be more competitive in capturing market share.
c. not increase their store sizes or parking lots.
d. increase their store sizes and parking lots.

31. During the 1990s, the members of OPEC operated independently from one
another, causing the world market for crude oil to become close to a(n):
a. monopoly market.
b. oligopoly market.
c. competitive market.
d. duopoly market.

32. The extent of excess capacity under monopolistic competition will be greater:
a. the more elastic the demand is.
b. the less elastic the demand is.
c. the flatter is the long run average cost curve.

9
 d. the smaller the long-run cost disadvantages faced by this structure compared
to perfect competition.

33. A profit-maximising firm in a monopolistically competitive market always

operates:
a. at the minimum of average total cost.
b. at the point of unit elasticity of demand.
c. with excess capacity.
d. at the efficient scale.

10
Section B: Answer each of the following questions

I. Graphically illustrate the effects of a tariff and a binding quota on the gains-
from-trade derived from importing a good. Explain the equivalence between a
quota on imports which is auctioned off to the highest bidder and a certain
tariff that protects the local industry.

II. How can the Prisoner’s Dilemma model of game theory rationalise the
instability of cartel arrangements under oligopoly? What factors might promote
enduring cartels?

III. Graph the price and output equilibrium of a monopoly producer. Include in
your figure the average cost curve of the monopolist and show graphically the
profits the monopolist obtains. Illustrate the deadweight losses that result
from monopoly.

IV. Consider the effects of an increase in demand in a competitive industry in the

short-run when the number of firms is fixed. Draw a graph to illustrate your
answer. Now allow free entry of new firms into the industry and analyse the
long-run effects of an increase in demand.

V. A country that exports steel subsidises these exports. How does this affect
the domestic price of steel, the quantity of steel produced, the quantity of steel
consumed and the quantity of steel exported? How does this subsidy affect
consumer and producer surplus, government revenue and total surplus?

VI. When should higher education be provided free, when should it be sold in
private markets and when should it be provided partly on a user pays basis
but with a government subsidy? What factors determine the size of the
subsidy that should be provided?

VII. When a person drives on a road they account for the costs they create but not
for the costs they impose on other motorists buy slowing down their journeys.
Show that travel on congested roads which provides private benefits should
be charged for at a rate that reflects the difference between public and private
costs.

VIII. The government has decided that the free-market price of wheat is too low.
Suppose the government imposes a binding price floor in the wheat market.
Draw a supply-and demand diagram to show the effect of this policy on the
price of wheat and the quantity of wheat sold. Is there a shortage or surplus of
wheat?
Producers of wheat complain that the price floor has reduced their total
revenue. Is this possible? Explain.
In response to wheat producers’ complaints, the government agrees to
purchase all the surplus wheat at the price floor. Compared to the basic price
floor, who benefits from this new policy?

11
IX. An early freeze in California harms the lemon crop.
Explain what happens to consumer surplus in the market for lemons.
Explain what happens to consumer surplus in the market for lemonade.
Illustrate your answers with graphs.

X. In the class we analysed the welfare effects of a tax on a commodity. Now

consider the opposite policy. Suppose that the government subsidises a good;
for each unit the government pays $2 to the buyer.
How does the subsidy affect consumer surplus, producer surplus, tax
revenue, and total surplus?
Does this subsidy lead to a deadweight loss?
Explain using graphs.

XI. Imagine that you are sharing a room with a musician. According to the Coase
theorem, what determines whether your roommate practices music in the
room? Is this outcome efficient? How do you and your roommate reach this
solution?

XII. Wireless, high-speed Internet is provided for free at Islamabad airport. With
less flights in the morning, only a few people use the service. What type of a
good is this and why?
In the evenings as traffic increases, more people start using it and the speed
of the connection begins to fall. Now what type of a good is the wireless
Internet service? What is one possible way to correct this problem?

12