ECO401- Economics MIDTERM EXAMINATION Spring 2010 (Session - 2)

ECO401 Final term 2010 Paper - Economics - s1 - vii

Question No: 1    ( M - 1 )    .

 Government authorities have managed to reduce the unemployment rate from 8% to 4% in a hypothetical economy. As a result:

       ► The economy's production possibilities curve will shift outward.

       ► The economy's production possibilities curve will become steeper.

       ► The economy will move downward along its production possibilities curve.

       ► The economy will move from a point inside to a point closer to its production possibilities curve.

   

Question No: 2    ( M - 1 )    .

 Which of the following measures the percentage change in quantity demanded given a percentage change in consumer's income?

       ► Price elasticity of demand.

       ► Income elasticity of demand.

       ► Supply price elasticity.

       ► Cross price elasticity.

   

Question No: 3    ( M - 1 )    .

 If the income elasticity of demand for boots is 0.2, a 10% increase in consumer's income will lead to a:

       ► 20 percent decrease in the quantity of boots demanded.

       ► 2 percent increase in the quantity of boots demanded.

       ► 0.2 percent increase in the quantity of boots demanded.

       ► 20 percent increase in the quantity of boots demanded.

   

Question No: 4    ( M - 1 )    .

 Increase in pension benefits leads to income and substitution effect which:

       ► Encourage workers to retire later.

       ► Encourage workers to work more hours.

       ► Have no effect on incentive to retire.

       ► Encourage workers to retire earlier.

   

 Question No: 5    ( M - 1 )    .

 Marginal profit is equal to:

       ► Marginal revenue minus marginal cost.

       ► Marginal revenue plus marginal cost.

       ► Marginal cost minus marginal revenue.

       ► Marginal revenue times marginal cost.

   

Question No: 6    ( M - 1 )    .

 The good produced by a monopoly:

       ► Has perfect substitutes.

       ► Has no substitutes at all.

       ► Has no close substitutes.

       ► Can be easily duplicated.

   

Question No: 7    ( M - 1 )    .

 If a firm experiences economies of scale, then the:

       ► Long-run average total cost curve is equal to the economies of scope.

       ► Long-run average total cost curve is positively sloped.

       ► Long-run average total cost curve is horizontal.

       ► Long-run average total cost curve is negatively sloped.

   

Question No: 8    ( M - 1 )    .

 When the marginal revenue product of labor is greater than the marginal input cost of labor then the profit maximizing firm will:

       ► Hire more labor.

       ► Hire less labor.

       ► Maintain the same employment.

       ► Decrease output.

Question No: 9    ( M - 1 )    .

 An increase in the wage rate:

       ► Will usually lead to more people employed.

       ► Will decrease total earnings if the demand for labour is wage elastic.

       ► Is illegal in a free market.

       ► Will cause a shift in the demand for labour.

   

Question No: 10    ( M - 1 )    .

 Keynesian economics rejected the classical assumption that:

       ► Supply creates its own demand.

       ► Prices and wages are inflexible.

       ► Self-correction takes a long time.

       ► Consumption expenditures depend on disposable income.

   

Question No: 11    ( M - 1 )    .

 A nation's balance of payments can be affected by changes in:

       ► Foreign income.

       ► The differential between domestic and foreign interest rates.

       ► The real exchange rate.

       ► All of the given options.

   

Question No: 12    ( M - 1 )    .

 According to Keynesian economics, aggregate expenditures are the sum of desired or planned spending undertaken by:

       ► All four sectors only when the economy is at full employment.

       ► All four sectors at a specific aggregate production level.

       ► The household sector after taxes.

       ► The business and government sectors.

   

Question No: 13    ( M - 1 )    .

 All of the following conditions lead to the successful operation of a cartel EXCEPT:

       ► Market demand for the good is relatively inelastic.

       ► The cartel supplies all of the world's output of the good.

       ► Cartel members have substantial cost advantages over non-member producers.

       ► The supply of non-cartel members is very price elastic.

    

Question No: 14    ( M - 1 )    .

 If the total product of labor per day is as shown in the table below and the price of the product is $20/unit. What is the value of the marginal product of labor (VMPL) of the 5th worker?

Labor	Total output
1	8
2	23
3	33
4	38
5	41

       ► 100.

       ► 10.

       ► 40.

       ► 60.

   Reference: by salman

5th worker MPL = 41 - 38 = 3

3*20 = 60  

Question No: 15    ( M - 1 )    .

 All of the following are the reasons of downward sloping curve of aggregate demand EXCEPT:

       ► The exchange-rate effect.

       ► The wealth effect.

       ► The classical dichotomy / monetary neutrality effects.

       ► The interest-rate effect.

   

Question No: 16    ( M - 1 )    .

 Why calculations of Gross Domestic Product (GDP) count only final goods and services?

       ► Because it is difficult to measure the prices of intermediate goods produced.

       ► Because these are the only goods and services that are purchased in an economy.

       ► Because counting all goods and services would lead to double-counting of many activities.

       ► Because one cannot calculate the quantities of intermediate goods produced.

Question No: 17    ( M - 1 )    .

 Suppose in a macroeconomic model, there is no foreign trade or government spending. In this case, aggregate demand is the sum of:

       ► Personal saving and private investment.

       ► Personal saving and personal consumption.

       ► Personal consumption and personal income.

       ► Personal consumption and private investment.

   

Question No: 18    ( M - 1 )    .

 According to the quantity theory of money, which of the following is TRUE for the equation MV = PQ?

       ► M has no effect on the price level.

       ► V is the number of times each dollar is spent per year.

       ► Q is the real price level.

       ► P rises as V falls, other things constant.

   

Question No: 19    ( M - 1 )    .

 Potential Gross Domestic Product (GDP) measures the economy’s ability to produce goods and services in which of the following conditions?

       ► If labor force is fully employed.

       ► If price level is stable.

       ► If trade balance is zero.

       ► If federal budget is balanced.

   

Question No: 20    ( M - 1 )    .

 Suppose in an economy, a war destroys a large portion of a country's capital stock but the saving rate is unchanged. In this situation, the exogenous model predicts that output will grow and the new steady state will approach towards:

       ► A higher output level than before.

       ► The same output level as before.

       ► A lower output level than before.

       ► The Golden Rule output level.

   

Question No: 21    ( M - 1 )    .

 International data suggest that economies which have different steady states level will converge to:

       ► The steady state below the Golden Rule level.

       ► The same steady state.

       ► Their own steady state.

       ► The Golden Rule steady state.

Question#16

Question No: 22    ( M - 1 )    .

 Suppose there are two producers and two products. Which of the following is not TRUE in this situation?

       ► A producer has an absolute advantage on one product.

       ► A producer has the comparative advantage on both products.

       ► A producer has the comparative advantage on one product.

       ► A producer has an absolute advantage on both products.

   

Question No: 23    ( M - 1 )    .

 The relationship between hours provided by labor and wage rate is:

       ► Positive.

       ► Negative.

       ► Ambiguous.

       ► Very strong.

   

Question No: 24    ( M - 1 )    .

 Which of the following is equal to the number of people unemployed?

       ► The number of people employed minus the labor force.

       ► The labor force plus the number of people employed.

       ► The number of people employed divided by the labor force.

       ► The labor force minus the number of people employed.

   

Question No: 25    ( M - 1 )    .

 Structural unemployment occurs:

       ► With economic fluctuations; it increases during bad times and decreases during good times.

       ► Because of a mismatch between the jobs that are available in the economy and the skills of workers seeking jobs.

       ► Naturally during the normal workings of an economy, as people change jobs, move across the country, etc.

       ► Because the government labels some people who aren't really in the labor force as unemployed.

   

Question No: 26    ( M - 1 )    .

 Suppose real output in the economy increased. We would expect:

       ► A decrease in unemployment.

       ► A decrease in profit margins.

       ► An increase in unemployment.

       ► An increase in the natural rate of unemployment.

Question No: 27    ( M - 1 )    .

 Which of the following would be expected to increase the natural rate of unemployment?

       ► An increase in the growth rate of the capital stock.

       ► A reduction in the corporate profits tax.

       ► An increase in the level of unemployment compensation paid to unemployed workers.

       ► A reduction in the number of new entrants into the labor force.

   

Question No: 28    ( M - 1 )    .

 If foreign interest rate is 3% and expected depreciation is 10% then what will be the domestic interest rate?

       ► 3%.

       ► 10%.

       ► 7%.

       ► 13%.

   Reference: by salmanmajeed

Domestic interest rate = Foreign interest rate + Expected depreciation

Question No: 29    ( M - 1 )    .

 One of the implications of Solow growth model is that all other things remaining the same, countries with rapidly growing population will tend to:

       ► Be poorer than countries with lower population growth.

       ► Grow slower than countries with lower population growth.

       ► Grow higher than countries with lower population growth.

       ► Have lower marginal products of capital than countries with lower population growth.

   

Question No: 30    ( M - 1 )    .

 The relationship between tax rates and total tax collections by government is known as:

       ► Laffer curve.

       ► Demand curve.

       ► Supply curve.

       ► Investment curve.

   

Question No: 31    ( M - 1 )    .                                             

 Which of the following shows the inverted-U shape when plotted on a graph?

       ► Consumption curve.

       ► Supply curve.

       ► Laffer curve.

       ► Investment curve.

   

Question No: 32    ( M - 1 )    .

 In a period of recession, credit creation is:

       ► Small.

       ► Heavy.

       ► Unchanged.

       ► Zero.

   

Question No: 33    ( M - 1 )    .

 LM curve shows the equilibrium in:

       ► Money Market.

       ► Goods Market.

       ► Labor Market.

       ► Financial Market.

   

Question No: 34    ( M - 1 )    .

 A country has a comparative advantage:

       ► If it can produce a good at a higher opportunity cost than other nations.

       ► If it can produce a good at a lower opportunity cost than other nations.

       ► If it can produce a good by using less resources than other nations.

       ► If it can produce a good that lies outside its production possibilities curve.

   

Question No: 35    ( M - 1 )    .

 Which of the following is an important feature of modern economic growth?

       ► Substantial rise in product per capita.

       ► Increased productivity per unit of labor input.

       ► Increasing use of modern scientific knowledge.

       ► All of the given options.

Question No: 36    ( M - 1 )    .

 Suppose a consumer buys two goods X and Y. The demand for X is elastic, then a rise in the price of X will cause:

       ► Total spending on good Y to rise.

       ► Total spending on good Y to fall.

       ► Total spending on good Y to remain unchanged.

       ► An indeterminate effect on total spending on good Y.

   

Question No: 37    ( M - 1 )    .

 Assume that pen and ink are complements.  When the price of pen goes up, the demand curve for ink:

       ► Shifts to the left.

       ► Shifts to the right.

       ► Remains constant.

       ► Shifts to the right initially and then returns to its original position.

   

Question No: 38    ( M - 1 )    .

 Which of the following will happen if two indifference curves cross each other?

       ► The assumption of a diminishing marginal rate of substitution will be violated.

       ► The assumption of transitivity will be violated.

       ► The assumption of completeness will be violated.

       ► Consumers will minimize their satisfaction.

   

Question No: 39    ( M - 1 )    .

 Constant returns to scale imply that by:

       ► Increasing the inputs by 1% leads to a 0.75% increase in output.

       ► Increasing the inputs by 1.6% leads to a 1.5% increase in output.

       ► Increasing the inputs by 2% leads to a 4% increase in output.

       ► None of the given options.

    

Question No: 40    ( M - 1 )    .

 Average total costs are the sum of:

       ► Fixed costs and marginal costs

       ► Average variable costs and marginal costs

       ► Average fixed costs and average variable costs

       ► Average marginal costs and average variable costs

   

Question No: 41    ( M - 1 )    .

 Theory of firm is not clearly discussed & established in

       ► Monopoly.

       ► Perfect competition.

       ► Oligopoly.

      ► None of the given options.

   

Question No: 42    ( M - 1 )    .

 If a 7% price reduction causes quantity demanded to rise by 10% then:

       ► Demand is inelastic.

       ► Demand is elastic.

       ► Demand is perfectly elastic.

       ► Total revenue will remain constant.

   

Question No: 43    ( M - 1 )    .

 Which of the following is not a component of aggregate demand?

       ► Consumption spending.

       ► Investment expenditures.

       ► Government expenditures.

       ► Household income.

   

Question No: 44    ( M - 1 )    .

 If the simple Keynesian expenditure multiplier is 2, the Marginal Propensity to Consume (MPC) is:

       ► 0.75

       ► 0.50

       ► 0.25

       ► 1.00

   

Question No: 45    ( M - 1 )    - Please v uzs choose one

 Monetarists believed that the economy generally:

       ► Lies above full-employment.

       ► None of the given options.

       ► Lies below full-employment.

       ► Gravitated around a full-employment.

   

Question No: 46    ( M - 1 )    .

 Balance of payment is an accounting record of a country’s transactions with:

       ► South Asian countries.

       ► Middle East.

       ► Rest of the world.

       ► USA and China.

   

Question No: 47    ( M - 1 )    - Please choose vu zs one

 How an economy will be affected if money supply is increased in the country?

       ► Interest rate increases, investment and GDP reduces.

       ► Interest rate increases, investment increases and GDP reduces.

       ► Interest rate reduces,  investment and GDP increases.

       ► Interest rate reduces, investment and GDP reduces.

Question No: 48    ( M - 1 )    .

 The demand for money to buy bonds is called:

       ► Transactions demand for money.

       ► Precautionary demand for money.

       ► Speculative demand for money.

       ► All of the given options.

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Question No: 1    ( Marks: 1 )    - Please choose one

 Which of the following is a normative statement?

       ► Intermediate microeconomics should be required of all economics majors in order to build a solid foundation in economic theory.

       ► The minimum wage should not be increased, because to do so would increase unemployment.

       ► Smoking should be restricted on all airline flights.

       ► All of the given options.

   

Question No: 2    ( Marks: 1 )    - Please choose one

 Ceteris paribus means:

       ► Equal access to public transportation.

       ► Other things being equal.

       ► Other things not being equal.

       ► All things considered.

   

Question No: 3    ( Marks: 1 )    - Please choose one

 An increase in supply is shown by:

       ► Shifting the supply curve to the left.

       ► Shifting the supply curve to the right.

       ► Upward movement along the supply curve.

       ► Downward movement along the supply curve.

   

Question No: 4    ( Marks: 1 )    - Please choose one

 Which of the following is calculated as the percentage change in quantity demanded of a given good with respect to the percentage change in the price of another good?

       ► Price elasticity of demand.

       ► Income elasticity of demand.

       ► Cross price elasticity of demand.

       ► Price elasticity of supply.

   

Question No: 5    ( Marks: 1 )    - Please choose one

 In order to calculate the price elasticity of supply, you need to know:

       ► Two prices and two quantities supplied.

       ► The slope of the supply curve.

       ► The equilibrium price and quantity in the market.

       ► The quantity supplied at two different prices, all else equal.

   

Question No: 6    ( Marks: 1 )    - Please choose one

 Which of the following is the term that economists use to describe how consumers rank different goods and services?

       ► Satisfaction index.

       ► Goodness.

       ► Utility.

       ► None of the given options.

   

Question No: 7    ( Marks: 1 )    - Please choose one

 If a consumer’s marginal rate of substitution equals 2 eggs for 1 hamburger then:

       ► The consumer’s indifference curve must be positively sloped.

       ► The consumer’s indifference curve must be convex with respect to the origin of the graph.

       ► The ratio of the consumer’s marginal utility of 1 egg to that of 1 hamburger must equal ½.

       ► All of the given options.

   

Question No: 8    ( Marks: 1 )    - Please choose one

 As long as all prices remain constant, an increase in money income results in:

       ► An increase in the slope of the budget line.

       ► A decrease in the slope of the budget line.

       ► An increase in the intercept of the budget line.

       ► A decrease in the intercept of the budget line.

   

Question No: 9    ( Marks: 1 )    - Please choose one

 The income effect of a price change:

       ► Is always positive.

       ► Is always negative.

       ► May be positive or negative.

       ► Is associated with a change in nominal income.

   

Question No: 10    ( Marks: 1 )    - Please choose one

 Which of the following is considered to be a variable cost in the long run?

       ► Expenditures for wages.

       ► Expenditures for research and development.

       ► Expenditures for raw materials.

       ► All of the given options.

   

Question No: 11    ( Marks: 1 )    - Please choose one

 _______________ arises when an increase in all inputs leads to a more-than-proportional increase in the level of output. _____________ means that as inputs are added to the production process, output increases proportionally.

       ► Economies of scale; constant returns to scale.

       ► Constant returns to scale; decreasing returns to scale.

       ► Decreasing returns to scale; economies of scale.

       ► Economies of scale; decreasing returns to scale.

   

Question No: 12    ( Marks: 1 )    - Please choose one

 If isoquants are straight lines, it means that:

       ► Only one combination of inputs is possible.

       ► There is constant returns to scale.

       ► Inputs have fixed costs at all use rates.

       ► The marginal rate of technical substitution of inputs is constant.

   

Question No: 13    ( Marks: 1 )    - Please choose one

 Costs determine all of the following EXCEPT:

       ► Demand for a product.

       ► Firm's behaviour.

       ► How firms should expand?

       ► Firm's profitability.

   

Question No: 14    ( Marks: 1 )    - Please choose one

 At the profit-maximizing level of output, marginal profit:

       ► Is positive.

       ► Is increasing.

       ► Is zero.

       ► Is also maximized.

   

Question No: 15    ( Marks: 1 )    - Please choose one

 A perfectly competitive firm maximizes profit by finding the level of production at which:

       ► Price = Marginal Cost.

       ► Price = Average Total Cost.

       ► Average Total Cost = Marginal Cost.

       ► Price < Marginal Cost.

   

Question No: 16    ( Marks: 1 )    - Please choose one

 As compared to existing firms, a new firm entering in monopolist market has:

       ► High costs.

       ► Low costs.

       ► Equal costs.

       ► None of the given options.

   

Question No: 17    ( Marks: 1 )    - Please choose one

 Cartels are likely to fail when:

       ► The members adhere to their output quotas.

       ► The non-cartel members increase output.

       ► The members charge identical prices.

       ► None of the given options.

   

Question No: 18    ( Marks: 1 )    - Please choose one

 Which of the following best expresses the law of demand?

       ► A higher price reduces demand.

       ► A lower price reduces demand.

       ► A higher price reduces quantity demanded.

       ► A lower price shifts the demand curve to the right.

   

Question No: 19    ( Marks: 1 )    - Please choose one

 If the cross price elasticity of demand between two goods X and Y is positive; it means that goods are:

       ► Independent.

       ► Complements.

       ► Substitutes.

       ► Inferior.

   

Question No: 20    ( Marks: 1 )    - Please choose one

 If the income elasticity of demand is 1/2, the good is:

       ► A luxury.

       ► A normal good (but not a luxury).

       ► An inferior good.

       ► A Giffen good.

   

Question No: 21    ( Marks: 1 )    - Please choose one

 If the demand curve for a good is downward sloping, then the good:

       ► Must be inferior.

       ► Must be giffen.

       ► Can be normal or inferior.

       ► Must be normal.

   

Question No: 22    ( Marks: 1 )    - Please choose one

 What is meant by freedom of enterprise in pure capitalism?

       ► It means that businesses are free to produce products that consumers want.

       ► It means that consumers are free to buy goods and services that they want.

       ► It means that resources are distributed freely to businesses.

       ► It means that government is free to direct the actions of businesses.

   

Question No: 23    ( Marks: 1 )    - Please choose one

 What questions are related with explanation? What questions are related with what ought to be?

       ► Positive, negative.

       ► Negative, normative.

       ► Normative, positive.

       ► Positive, normative.

   

Question No: 24    ( Marks: 1 )    - Please choose one

 Which of the following will happen if the current market price is set below the market clearing level?

       ► There will be a surplus to accumulate.

       ► There will be downward pressure on the current market price.

       ► There will be upward pressure on the current market price.

       ► There will be lower production during the next time period.

   

Question No: 25    ( Marks: 1 )    - Please choose one

 What is meant by the term utility?

       ► Useless.

       ► Require.

       ► Necessary.

       ► Satisfaction.

   

Question No: 26    ( Marks: 1 )    - Please choose one

 The total cost (TC) function is given as: TC = 200 + 5Q. What is the variable cost?

       ► 5Q.

       ► 5.

       ► 5 + (200/Q).

       ► 200.

   

Question No: 27    ( Marks: 1 )    - Please choose one

 Which of the following is NOT included in the perfect information assumption of perfect competition?

       ► Consumers know their preferences.

       ► Consumers know their income levels.

       ► Consumers know the prices available.

       ► Consumers can anticipate price changes.

   

Question No: 28    ( Marks: 1 )    - Please choose one

 Which of the following is TRUE for third-degree price discrimination?

       ► Charging different prices to different groups based upon differences in elasticity of demand.

       ► Charging each consumer the same two part tariff.

       ► The use of increasing block rate pricing.

       ► Charging lower prices the greater the quantity purchased.

   

Question No: 29    ( Marks: 1 )    - Please choose one

 The government can regulate monopolies to ensure that they set a price where the AR curve intersects the

       ► Marginal revenue curve.

       ► Average variable cost.

       ► Marginal cost curve.

       ► None of the given options.

   

Question No: 30    ( Marks: 1 )    - Please choose one

 A reduced price may be offered if you buy two t-shirts instead of just one. This is an example of

       ► Perfect competition.

       ► First-degree price discrimination.

       ► Monopoly.

       ► Second-degree price discrimination.

   

Question No: 31    ( Marks: 1 )    - Please choose one

 When different prices are charged to customers who purchase different quantities, this is an example of

       ► Second-degree price discrimination.

       ► First-degree price discrimination.

       ► Monopoly.

       ► Perfect competition.

   

Question No: 32    ( Marks: 1 )    - Please choose one

 The demand curve for eggs is downward-sloping. Suddenly the price of eggs decreases from Rs.60/- per dozen to Rs.50/- per dozen. This will cause:

       ► The demand curve for eggs to shift leftward.

       ► Quantity demanded of eggs to decrease.

       ► The demand curve for eggs to shift rightward.

       ► Quantity demanded of eggs to increase.

   

Question No: 33    ( Marks: 1 )    - Please choose one

 Slope and elasticity of demand have

       ► A direct relation.

       ► An inverse relationship.

       ► No relation between slope and elasticity.

       ► None of the given options.

   

Question No: 34    ( Marks: 1 )    - Please choose one

 If you sum the marginal utilities obtained by consumption from one unit to five units of any commodity, you will get:

       ► The marginal utility for the consumption of the fifth unit.

       ► The marginal utility for the consumption of the sixth unit.

       ► The total utility for the consumption of the first five units.

       ► The average utility for the consumption of the first five units.