PART A

This section is worth 20 marks

Mark your answer on Answer Sheet provided

THE UNIVERSITY OF NEW SOUTH WALES

SCHOOL OF ECONOMICS
SESSION 1,2007

Question 1

In a perfectly competitive market, the demand curve faced by a typical firm:

ECONllOl MICROECONOMICS I

FINAL EXAMINATION

(a) is significantly more elastic for price increases than for price decreases
(b) is perfectly elastic at the current market price
(c) is perfectly inelastic at the current market price

TIME ALLOWED

- 2 HOURS

THIS PAPER IS WORTH 60% OF THE TOTAL SUBJECT MARK

(d) is of unitary elasticity (11 = 1) at the current market price

Question 2

A profit maximising firm, operating in a perfectly competitive market, will make a loss but

This examination paper consists of two parts - Part A and Part B

Part A consists of 20 multiple choice questions each worth one (1) mark.
Answer all the questions in Part A on the answer sheet provided, using pencil only:
(a) Print your student number, name and initials in the space provided and mark
the appropriate boxes below your student number, name and initials.
(b) For each question, mark the appropriate response (a), (b), (c), or (d).
There is only one correct response to each question in Part A.

continue to produce in the short run when:

(a) price is below average total cost but above average variable cost
(b) price is below average variable cost but above average fixed cost
(c) price is below average variable cost but above marginal cost
(d) price is below marginal cost but above average total cost

Question 3

Which of the following statements is true?

(a) A profit maximising monopolist will always set price and output at a level where
demand is price elastic.

Part B consists of four (4) essay-type questions, each worth TWENTY (20) marks.

(b) A profit maximising monopolist always produces where Average Revenue equals

Answer only TWO (2) questions from Part B.

Average Cost

ANSWER EACH PART B QUESTION IN A SEPARATE EXAMINATION

BOOKLET

that minimises long run Average Costs.

Answers to questions in Part B must be written in ink. Pencil may be used in answers
to Part B for drawing, sketching or graphical work only.

(c) A profit maximising monopolist will, in long run equilibrium, always use a scale of plant

(d) A profit maximising monopolist will always produce where marginal cost is greater than
price.

This question paper may be retained by the candidate

Question 4

Question 8

Which of the following statements about the Monopolistic Competition market model is

The following table gives the demand schedule for a monopolist.

true?

(a) The typical firm tends to experience diseconomies of scale

Price ($)

(b) In the long run, surviving firms make zero economic profit.

10

(c) The market is characterised by a small number of rival firms each selling a slightly

differentiated product
(d) The demand for each firm's product is infinitely elastic.

Qustion 6

Quantity Demanded
0

Which of the following has the "non excludability" characteristic that defines a pure public
good?
The Marginal Cost of production for the monopolist is constant at $3 per unit.

(a) a local council swimming pool

(b) a mosquito eradication program

Marginal Revenue from the sale of the 4 th unit is:

(c) a local bus service

(a) $8
(b) $2

(d) primary school education

(c) -$2
(d) -$4

Question 7

A monopolist estimates that at the current price being charged for the product, price

Question 9

elasticity of demand is -0.8. Marginal cost is constant over all levels of production at $5.50

Refer to the data in Question 8. The profit maximizing level of output is:

per unit.

(a) 2 units

To increase profit the monopolist can and should:

(a) Increase price and sell less

(b) 3 units

(b) Increase price and sell more

(c) 4 units

(c) Decrease price and sell less

(d) 5 units

(d) Decrease price and sell more

Question 10

Question 12

The publishers of two daily city newspapers THE BUGLE and THE CLARION compete

Cornfeel PIL produces leather sandals. Cornfeel is a price taker and must decide on its hourly

vigorously for sales. Each publishing company is considering whether to cut the price of its

production rate. The costs of production are:

Pairs of Sandals
(per hour)

newspaper. Total demand for newspapers in the city is relatively price inelastic, but a price
cut by one company can be expected to increase their newspaper's market share and hence

company profits, as long as the rival company rival maintains its current price.

Total Cost
(per hour)
20

26

Assume that the strategy choices for each company can be modelled as a choice between
two alternative strategies:

31

Cut Price or Maintain Price.

35

The following pay-off matrix gives the expected monthly profits (in $'000) for each

48

newspaper (BUGLE, CLARION) under alternate strategies:

70

102

CLARION
Maintain Price

Maintain Price

Cut Price

(66, 72)

(36, 90)

(96, 30)

(54, 42)

(only completed pairs are counted)

If the price of a pair of sandals is $15-per pair, Cornfeel's profit maximising production rate
is:

BUGLE
Cut Price

(a) 3 pairs per hour

Which of the following statements is True

(b) 4 pairs per hour

(a) A Nash equilibrium is for both to maintain price.

(c) 5 pairs per hour

(b) The collusive (co-operative) equilibrium is for both to cut price.

(d) 6 pairs per hour

(c) Cutting price is a dominant strategy for THE BUGLE

Question 13

(d) Maintaining price is a dominant strategy for THE CLARION

Consider the data of Question 12

Question 11

The price below which Comfeet should shut down operations in the short run

Which of the following statements defines a "natural monopoly"?

(the "shut-down price") is:

(a) The firm is the only producer in a natural resource industry

(b) Marginal Cost is always greater than Average Cost for the firm

(a) $3.00

(c) Economies of scale are significant but the market size is limited

(b) $5.00

(d) The firm has exclusive ownership of an essential factor of production

(c) $5.50
(d) $7.00

Question 14

Question 16

The table below presents data on the productivity of workers in a meat processing factory.

A seller in an oligopolistic market believes that rival firms will match a price cut, but rivals

The meat processing industry can be assumed to be competitive.

will maintain current prices if the seller raises price, and therefore both strategies will

Number of workers

Quantity of meat processed per day (kg)

reduce profits. This means that:

(a) Demand for the seller's product is perceived as significantly more elastic for price

40

100

increases than for price decreases.

180

(b) Demand for the seller's product is perceived as significantly less elastic for price

240

increases than for price decreases.

290

(c) Price cutting is a dominant strategy for the seller.

(d) Raising price is a dominant strategy for the seller.

330

360

380

Question 17

Successful collusion to maximise joint profits is more likely in an oligopolistic market:

The market price of processed meat is $2.50 per kilo.

(a) the larger the number of rival firms

The wage rate for meat processors is $90 per day

(b) the higher the barriers to entry to the industry for new firms

The Marginal Revenue Product from employing the 4 th worker is:

(c) the easier it is for disguised price cutting to escape detection

(a) $60

(d) the easier it is for firms to differentiate their product.

(b) 60 kg
(c) $150
(d) 150 kg

Question 18

Question 15

(a) marginal social cost of production is greater than private marginal cost of production.

Ifproduction of a commodity generates an unfavourable externality:

Consider the data for Question 14.

(b) marginal social benefit is greater than private marginal benefit.

To maximise profit the factory should employ:

(c) the commodity will be over-priced and under-supplied in a competitive market.

(a) 5 workers

(d) the commodity will be over-priced and over-supplied in a competitive market.

(b) 6 workers
(c) 7 workers
(d) 8 workers

Question 19

PARTB
Each question in this part is worth 20 marks
Answer only TWO (2) questions from this part
ANSWER EACH QUESTION IN A SEPARATE EXAMINATION BOOK

Which of the following statement is true for a firm operating in an imperfectly competitive
market in which the firm has some market power?

(a) The demand curve facing the firm is perfectly inelastic at the current market price.
Question B.t
(a) Construct a diagrammatic model of a market which is supplied by a single firm with
monopoly power, showing the average and marginal cost curves and the average and
marginal revenue curves for the monopolist.
(6 marks)

(b) The demand curve facing the firm is significantly less elastic for price increases than for
price decreases.
(c) Marginal Revenue is less than Average Revenue.
(d) Average Revenue is less than Marginal Revenue.

(b) Use your diagram to distinguish between the production and pricing decisions of the
monopolist if:
(i) the aim of the firm is to charge a single price to maximise profit;
(ii) the aim of the firm is to charge a single price to maximise revenue;
(iii) the aim of the firm is to charge a single price to maximise the volume of sales, subject
(3 marks)
to making a "normal "profit".

Question 20

A seller with monopoly power is able to discriminate in the price charged to two separate
groups of consumers. The costs of supplying each group are identical. To maximize profits

(c) Use a diagram to explain why profit maximising behaviour by the monopolist results in
(6 marks)
an inefficient allocation of resources from society's point of view.

the monopolist should charge a different price to each group so as to

(a) make the marginal revenue from each group equal.

(d) Under what circumstances might a monopoly provide a better outcome from society's
(5 marks)
point of view than a more competitive market structure?

(b) make the total revenue from each group equal.

(c) make the price-elasticity of demand for each group equal.
(d) make the average revenue from each group equal.

Question B.2
(a) Explain what is meant by an "externality" in the production or consumption of a
commodity. Illustrate your explanation with examples.
(5 marks)

(b) Use supply and demand analysis to demonstrate that a commodity with unfavourable
externalities in production will, in an unregulated market, be priced and produced at levels
which are socially inefficient.
(5 marks)
(c) Explain the Coase Theorem. Under what circumstances does this approach solve the
problem of misallocation of resources when there are unfavourable externalities in
production.
(5 marks)
(d) Discuss other possible forms of intervention by government to correct this form of
market failure.
(5 marks)

10

THIS PAGE IS LEFT BLANK FOR ROUGH WORKING

Question B.3
(a) What are the characteristics of an industry whose market structure is described as
(3 marks)
"oligopolistic"?

(b) Explain why firms in an oligopolistic industry have an incentive to collude, but also the
(6 marks)
incentive to cheat on any collusive agreement.
(c) Explain why, even in the absence of formal collusion, oligopolistic firms are unwilling to
engage in competition on the basis of price. What forms of non-price competition do
oligopolists typically engage in?
(6 marks)
(d) What are the advantages and disadvantages for society of these forms of non-price
competition?
(5 marks)

Question B.4
(a) Construct a diagrammatic model of a Monopsony Labour Market for a particular
(6 marks)
category of labour.

(b) Use your model to compare the equilibrium wage and employment levels under
monopsony with the competitive equilibrium.
(6 marks)
(c) Use your model to show the effect of the imposition of a legislated Minimum Wage
which is set at a level slightly above the competitive equilibrium wage. What can you
conclude about the effects of minimum wage legislation on a monopsony labour market as
compared with the effects of a minimum wage on a competitive labour market? (8 marks)

12

11

Part A - 20 Multiple Choice Questions

The University of New South Wales

You should attempt all Questions. Select the best answer from the alternatives provided. Any double
answers will count as being incorrect. No marks will be deducted for an incorrect response.

School of Economics

Answer must be written in pencil on the Computer Answer Sheet. Write your name and Student 10
number in the spaces provided.

ECON 1101 MICROECONOMICS I

1) The short-run market supply curve for a perfectly competitive market is the
A) horizontal sum of each firm's AVC curve that lies above MC.

Final Examination

B) vertical sum of each firm's MC curve that lies above AVC.

C) horizontal sum of each firm's MC curve that lies above AVC.

November 2007

D) vertical sum of each firm's AVC curve that lies above MC.

Time Allowed: Two (2) Hours

2) As firms leave an industry because they are incurring an economic loss, the economic
loss of each remaining firm

This paper is worth 60% of the total course mark

A) decreases and the price of the product falls.

B) increases and the price of the product rises.

This exam is comprised of Two Parts.

C) increases and the price of the product falls.

Part A - 20 Multiple-choice questions - worth 1 mark each.

D) decreases and the price of the product rises.

Answer all questions. Answer this Part on the Computer Answer Sheet.

Part B - Four short-answer/essay type questions - worth 20 marks each.

3) In a perfectly competitive market with no external economies or diseconomies, an

increase in market demand will
A) have no effect on price since firms are price takers.

Only answer Two (2) of these questions

B) generate long-run economic profits for the firms in the industry.

Write in the answer books provided.

Answer each question in a separate book.
Indicate the question number in the space provided
on the cover of the answer book.

C) raise the price in the short run and attract new firms in the long-run.
D) raise the price in the short run and the long-run.

4) If a monopoly were regulated so that a socially efficient solution prevails, production

would be set at the point where
A) the MC curve intersects the AVC curve
This paper may be retained by the candidate.

B) the MC curve intersects the ATC curve

Answers to Part B must be written in ink. Except where they are expressly required, pencils may be
used only for drawing, sketching or graphical work.

C) the MC curve intersects the AR curve

D) the MC curve intersects the MR curve

/?/?s

9) According to the kinked demand curve theory of oligopoly, each firm thinks that the
demand curve just below the existing price is

5) Any attempt to capture a consumer surplus, a producer surplus, or an economic profit is

called
A) efficiency gain.

A) steeper than the curve just above the existing price.

B) profit-maximising.

B) flatter than the curve just above the existing price.

C) price discriminating.

C) has the same slope as the curve just above the existing price.

D) rent-seeking.

D) None of the above, because in the kinked demand curve theory, the firms are
concerned with how the kink in their supply curve affects their consumers' demands.

6) Which of the following is FALSE regarding a profit maximising monopolistically

competitive firm in long run equilibrium?

Table 10.1

A) Output is produced at minimum average cost.

B) Marginal cost equals average cost.

Firm A

__..., ..

R&D

C) Economic profits can exist because of differentiation.

R&D
FirmB

D) All of the above.

A:
B:

A:

R&D
7) Which of the following is not a characteristic of long run equilibrium under monopolistic
competition?

B:

NoR&D
$25
$15
$60
-$3

A:
B:
A:
B:

-$3
$60
$50
$35

10) Firms A and B can conduct research and development (R&D) or not conduct it. R&D is
costly but can increase the quality of the product and thus possibly increase sales. The
payoff matrix (see Table 10.1) is the economic profits of the two firms, where the
numbers are millions of dollars. The Nash equilibrium occurs when

A) price exceeds marginal cost

B) price equals average variable cost

A) both A and B conduct R&D.

C) marginal costs equals marginal revenue

B) only B conducts R&D.

D) price equals minimum average cost.

C) only A conducts R&D.

D) neither A nor B conduct R&D.

8) Price competition in oligopoly will

A) reduce industry profit.

11) Because of diminishing marginal returns to labour,

B) hurt consumers.

A) marginal revenue product declines as output increases.

C) increase industry profit if demand is inelastic.

B) marginal product is negative.

D) damage technical efficiency.

C) the law of supply will not hold.

D) output declines as more labour is hired.

12) A firm's demand curve for labour shifts

Comfeet PIL produces leather sandals. Comfeet is a price taker and must decide on its hourly

A) rightward when the wage rate decreases.

production rate. The costs of production are:

B) rightward when the price of the firm's output decreases.

Pairs of Sandals
(per hour)

C) leftward when the wage rate decreases.

D) leftward when the price of the firm's output decreases.

13) If a firm finds that MRP > W, it will

Total Cost
(per hour)

20

26

31

A) decrease the amount of labour it hires.

35

B) be minimising profits.

48

C) increase the amount of labour it hires.

70

D) be maximising profits.

102

(only completed pairs are counted)

14) Which of the following DOES NOT affect the elasticity of demand for labour?
15) If the price of a pair of sandals is $15-per pair, Comfeet's profit maximising production rate
is:

A) The elasticity of demand for the good.

B) The labour intensity of the production process.

A) 3 pairs per hour

C) The elasticity of supply for labour.

B) 4 pairs per hour

D) The substitutability of capital for labour.

C) 5 pairs per hour

D) 6 pairs per hour

16) Consider the data of Question 15

The price below which Comfeet should shut down operations in the short run
(the "shut-down price") is:
A) $3.00
B) $5.00
C) $5.50
D) $7.00

The table below presents data on the productivity of workers in a meat processing factory. The
meat processing industry can be assumed to be competitive.
Number of workers

A) horizontally summing the marginal benefit curves for all individuals.

Quantity of meat processed per day (kg)

40

100

180

240

290

330

B) horizontally summing the total benefit curves for all individuals.

C) vertically summing the marginal benefit curves for all individuals.
D) vertically summing the total benefit curves for all individuals.

20) The quantity demanded of a product per month decreases from 525 units to 475 units as
a result of a price rise from $ 9 to $ 11, the elasticity of demand for this change is

7
8

19 )The market demand curve for a public good is found by

380

A) 0.5

B) 0.2
17) The market price of processed meat is $2.50 per kilo.

C) 2.5

The wage rate for meat processors is $90 per day

D) 5.0

The Marginal Revenue Product from employing the 4th worker is:
A) $60
B) 60 kg
C) $150
D) 150 kg

Consider the data for Question 17

18) To maximise profit the factory should employ:
A) 5 workers
B) 6 workers
C) 7 workers
D) 8 workers

Question 2.

Part B
Answer only Two (2) of the following questions.
Each question in this part is worth 20 marks

(a)

(5 marks)

Explain the characteristics of perfect competition and how

they differ from those of a single priced monopoly firm. Draw two diagrams,

ANSWER EACH QUESTION IN A SEPARATE ANSWER BOOK

one showing a single price monopolist the other showing a perfectly

competitive firm in the long run.

Question 1.

(b)

According to the ABC news website 31 August, 2007 the Chinese

Government has declared the Olympic Games in Beijing next year as
'smoke free'. Some 100,000 people are thought to die from passive
smoking in China every year, with about 45 per cent of those deaths
from chronic lung disease.

(5 marks)

Why does a single price monopoly produce a smaller

output and charge a higher price than would prevail if the industry was
perfectly competitive?

(c)

Researchers from Birmingham University estimate that this year almost

two million people in China over the age of 50 will die of bronchitis and
emphysema caused by passive smoking.

(5 marks)

What are the options available for government in

regulating the pricing behaviour of a monopolist?

The researchers estimate that treatment for passive smokers in China

costs about $4 billion in medical costs a year. They say bad air pollution
and dangerous working conditions intensify the problem.

(d)

(5 marks)

Distinguish between a price discriminating and single

price monopoly and explain what prevents all monopolies from price
discrimination.

a.

(5 marks)

Explain what is meant by an externality in the production

or consumption of a good. Passive smoking is an example of a negative

externality. Give two examples of positive externalities.

b.

(5 marks)

Use supply and demand diagrams to demonstrate how a

negative externality prevents a competitive market from allocating resources

efficiently.

c.

(5 marks)

Explain how an externality can be eliminated by assigning

property rights, refer to Coase theorem. Do you think this would work in the
case of passive smoking? Why/ Why not?

d.

(5 marks)

Discuss other forms of intervention by government that

could be used to correct this type of market failure.

10

Question 3.
Question 4.

a.

(5 Marks)

Both monopolistic competition and oligopoly are

examples of imperfect competition. What are the distinguishing characteristics

a.

of monopolistic competition? Use a diagram to explain the price and output

gauge the degree of income inequality.

(5 Marks)

Illustrate a Lorenz curve and explain how we use it to

decisions of this type of firm in the long run.

b.
b.

(5 marks)

Explain how the advertising expenditure of a

monopolistically competitive firm affects both its cost and demand curves.

c.

(5 marks)

(5 marks)

One source of income inequality is skill differentials. Use

the market for low skill workers compared to highly skilled workers.

What does the kinked demand curve model of oligopoly

c.

predict and what are the models main weakness?

d.

(5 marks)

a diagram to illustrate and explain the difference in equilibrium wage rates in

(5 marks)

Explain and illustrate how a minimum wage law will lead

to inefficiency in the labour market.

Explain why firms in an oligopolistic industry have an

d.

(5 marks)

Using a diagram to explain and illustrate the equilibrium

incentive to collude, but also an incentive to cheat on any collusive

wage and employment outcome in a monopsony labour market. What

agreement.

happens to employment in this market if a minimum wage law is introduced?

11

12

PART A

This section is worth 20 marks

Mark your answer on Answer Sheet provided

THE UNIVERSITY OF NEW SOUTH WALES

SCHOOL OF ECONOMICS
SESSION 1, 2008
ECONllOl MICROECONOMICS I

Question 1
If

Output
Average Total Cost

FINAL EXAMINATION

Total Fixed Cost

TIME ALLOWED

Marginal Cost

- 2HOURS
then

THIS PAPER IS WORTH 60% OF THE TOTAL SUBJECT MARK

= 400 units
= $70
= $12000
= $90

Average Variable Cost equals:

(a) $20
(b) $40
(c) $50

This examination paper consists of two parts - Part A and Part B

(d) $160

Part A consists of 20 multiple choice questions each worth one (1) mark.
Answer all the questions in Part A on the answer sheet provided, using pencil only:
(a) Print your student number, name and initials in the space provided and mark
the appropriate boxes below your student number, name and initials.
(b) For each question, mark the appropriate response (a), (b), (c), or (cl).

Question 2
In an imperfectly competitive market, in which a firm has some market power:
(a) The demand curve faced by a typical firm is perfectly elastic at the current market price
(b) Marginal revenue is greater than average revenue at all levels of production.

There is only one correct response to each question in Part A.

(c) The demand curve faced by the typical firm is significantly less elastic for price
increases than for price decreases.

Part B consists of four (4) essay-type questions, each worth TWENTY (20) marks.

(d) For the typical firm, price is greater than marginal cost at the profit-maximising output
level.

Answer only TWO (2) questions from Part B.

ANSWER EACH PART B QUESTION IN A SEPARATE EXAMINATION
BOOKLET
Answers to questions in Part B must be written in ink. Pencil may be used in answers
to Part B for drawing, sketching or graphical work only.

Question 3
At the level of production at which short run average cost is minimized:
(a) Marginal cost equals average cost.
(b) Marginal cost is decreasing.
(c) Average cost is less than marginal cost.

This question paper may be retained by the candidate

(d) Average cost is less than average variable cost.

Question 7

Question 4

Big&Beefy PIL produces frozen meat pies in packets of 20. Big&Beefy has the following

Which of the following has the "non excludability" characteristic that defines a pure public
good?

costs of production:
Packets

(a) A local council car park.

(per hour)

(b) Suburban street lighting.

(c) A toll road.
(d) Primary school education.

Question 5
Which of the following statements is true?
(a) A profit maximising monopolist will always set price and output at a level where
demand is price elastic.
(b) A profit maximising monopolist always produces where Average Revenue equals
Average Cost

Total Cost

($ per hour)

90

96

101

107

118

140

172

(only completed packets are produced)

At an output level of 5 packets per hour, Big&Beefy's average variable cost is:

(c) A profit maximising monopolist will, in long run equilibrium, always use a scale of plant
that minimises Long Run Average Costs.

(a) $10

(d) A profit maximising monopolist will always produce where Marginal Cost is greater
than Price.

(c) $22

(b) $18

(d) $28

Question 6
Assessment of a financial investment opportunity for a merchant bank provides the
following estimates of possible profit levels and corresponding probabilities;
Profit
$lAm
$0.7m

-$OAm

Question 8

Refer to the data in Question 7

At an output level of 2 packets per hour, Big&Beefy's average fixed cost is:

Probability
0.3
0.6
0.1

(a) $2.50
(b) $3

(c) $45

The Expected Value of profit for this opportunity is:

(d) $50.50
(a) $0.70m
(b) $0.80m
(c) $0.84m
(d) $0.88m

Question 9

Question 11

Vesty PIL produces cotton shirts. Vesty is a price taker and must decide on its hourly

The following table gives the demand schedule for a monopolist

Price ($)

production rate. The costs of production are:

Shirts
(per hour)

Total Cost
(per hour)

Quantity Demanded

24

20

1
2

20

16

26

12

31

35

48

70

The Marginal Cost of production for the monopolist is constant at $5 per unit.

102

Marginal Revenue from the sale of the 5th unit is:

(only completed shirts are counted)

(a) -$12

If the market price of a shirt is $15, Vesty's profit maximising production rate is:

(c) $4

(b) -$4

(d) $12

(a) 3 shirts per hour

(b) 4 shirts per hour

Question 12

(c) 5 shirts per hour

Refer to the data in Question 11. The profit maximizing level of output is

(d) 6 shirts per hour

(a) 2 units
(b) 3 units

Question 10

(c) 4 units

Consider the data of Question 9

(d) 5 units

The price below which Vesty should shut down operations in the short run
(the "shut-down price") is:

Question 13
(a) $3.00

If the supply curve of a factor of production facing a competitive firm is perfectly elastic,

(b) $5.00

then from the firm's point of view:

(a) none of the factor's earnings is necessary transfer payment

(c) $5.50

(b) all of the factor's earnings is producer surplus

(d) $7.00

(c) none of the factor's earnings is rent

(d) all of the factor's earnings is rent

Question 16

A seller in an oligopolistic market believes that rival firms will match a price cut, but rivals

Question 14

The table below presents data on the productivity of workers in a meat processing factory.

will maintain current prices if the seller raises price. Therefore both strategies will reduce

The meat processing industry can be assumed to be competitive.

profits. This means that:

Number of workers

Quantity of meat processed per day (kg)

40

100

180

(a) Demand for the seller's product is perceived as significantly more elastic for price
increases than for price decreases.
(b) Demand for the seller's product is perceived as significantly less elastic for price
increases than for price decreases.

240

(c) Price cutting is a dominant strategy for the seller.

290

(d) Raising price is a dominant strategy for the seller.

330

360

380

Question 17
If production of a commodity generates an unfavourable externality:

The market price of processed meat is $2.50 per kilo.

(a) marginal social cost of production is greater than private marginal cost of production.

The wage rate for meat processors is $90 per day

(b) marginal social benefit is greater than private marginal benefit.

The Marginal Revenue Product from employing the 4th worker is:

(c) the commodity will be over-priced and under-supplied in a competitive market.

(a) $60

(d) the commodity will be over-priced and over-supplied in a competitive market.

(b) 60 kg
(c) $150

(d) 150 kg

Question 18

Which of the following statements about the Monopolistic Competition market model is
true?

Question 15

Consider the data for Question 14.

(a) The market is characterised by a small number of rival firms each selling a slightly
differentiated product

To maximise profit the factory should employ:

(a) 5 workers

(b) The typical firm tends to operate with excess capacity and unexploited economies of
scale

(b) 6 workers
(c) 7 workers

(c) In the long run, surviving firms charge a price which is higher than average cost and
make economic profits.

(d) 8 workers

(d) The demand for each firm's product is infinitely elastic.

Question 19
Assume two rival car rental companies (Ace Rentals and Bob's Rentals) are considering

PARTB
Each question in this part is worth 20 marks
Answer only TWO (2) questions from this part
ANSWER EACH QUESTION IN A SEPARATE EXAMINATION BOOK

whether to discount their rates as a method of increasing market share.

The following pay-off matrix gives the expected monthly profits (in $'000) of each
company (Ace, Bob's) under alternate strategies:

Question B.l
Consider a small firm which is operating in a perfectly competitive market and is a pricetaker in both the market where it buys its inputs and the market where it sells its product.

BOB'S
Discount

Do Not Discount

Discount

(12, 10)

(24, 6)

Do Not Discount

(8, 20)

(16, 14)

(a) Explain the difference between the Short Run and the Long Run in the analysis of this
(2 marks)
firm's costs of production.

ACE

(b) Explain why this firm's Short Run Average Cost Curve, depicting how per unit costs of
production change as output is increased, is typically U-shaped. What is the significance of
the output level at which Short Run Average Cost is minimized?
(5 marks)
(c) Explain the circumstances in which a profit-maximising firm would find it worthwhile to
shut down operations in the short run.
(4 marks)

(a) The Nash equilibrium is for neither firm to discount.

(d) What factors determine the shape of this firm's Long Run Average Cost Curve.
(4 marks)

(b) The Nash equilibrium is for both firms to discount

(c) The Nash equilibrium is for Ace to discount and Bob's to not discount.

(e) Explain why in the long run this firm will be unable to make more than a normal profit
(5 marks)

(d) The Nash equilibrium is for Bob's to discount and Ace to not discount.

Question 20
A government postal service charges a lower postage rate for cards than for ordinary letters.
This price discrimination will be profitable for the postal service if

Question B.2
(a) Explain what is meant by a "natural monopoly".

(4 marks)

(b) Construct a diagram showing the average and marginal cost curves, and the demand and
marginal revenue curves for a natural monopoly. Use your diagram to explain why profit
maximising behaviour by the monopolist is inefficient from society's point of view.
(8 marks)
(c) Suppose the government seeks to regulate the behaviour of the monopolist by price
regulation. Consider the advantages and disadvantages of alternative criteria for setting the
regulated price.
(8 marks)

(a) The demand for card postal services is less elastic than the demand for ordinary
letter postal services
(b) The demand for card postal services is more elastic than the demand for ordinary
letter postal services
(c) The demand curve for card postal services shifts to the right
(d) The demand curve for ordinary letter postal services shifts to the left

10

THIS PAGE IS LEFf BLANK FOR ROUGH WORKING

Question B.3

Consider an industry whose production process emits a gaseous pollutant into the
atmosphere.
(a) Use the simple Supply and Demand model to demonstrate that, in the absence of any
regulation, the industry will overproduce from the point of view of allocative efficiency.
(6 marks)
(b) Explain the Coase Theorem. What are the limitations of the Coase theorem which might
make its approach to resolving the externality problem inapplicable for this industry?
(6 marks)
(c) Discuss alternative forms of intervention by government aimed at correcting the
externality problem in this case.
(8 marks)

Question B.4

(a) What are the characteristics of an industry whose market structure is described as
"oligopolistic"?
(3 marks)
(b) Explain why firms in an oligopolistic industry have an incentive to collude, but also the
incentive to cheat on any collusive agreement.
(6 marks)
(c) Explain why, even in the absence of formal collusion, oligopolistic firms are unwilling to
engage in competition on the basis of price. What forms of non-price competition do
oligopolists typically engage in?
(6 marks)
(d) What are the advantages and disadvantages for society of these forms of non-price
competition?
(5 marks)

12

11

PART A

THE UNIVERSITY OF NEW SOUTH WALES

SCHOOL OF ECONOMICS

This section is worth 20 marks

SESSION 2, 2008

Mark your answer on the Answer Sheet provided

ECONll01 MICROECONOMICS I
FINAL EXAMINATION
Question 1

TIME ALLOWED - 2 HOURS

In an imperfectly competitive market, in which a firm has some market power:

THIS PAPER IS WORTH 60% OF THE TOTAL SUBJECT MARK

(a) The demand curve faced by a typical firm is perfectly elastic at the current market
pnce
(b) Marginal Revenue is less than Average Revenue at all levels of production.

This examination paper consists of two parts - Part A and Part B

Part A consists of 20 multiple choice questions each worth one (1) mark.
Answer all the questions in Part A on the answer sheet provided, using pencil
only:
(a) Print your student number, name and initials in the space provided and
mark the appropriate boxes below your student number, name and
initials.
(b) For each question, mark the appropriate response (a), (b), (c), or (d).
There is only one correct response to each question in Part A.

(c) The demand curve faced by the typical firm is significantly more elastic for price
increases than for price decreases.
(d) For the typical firm, price equals Marginal Cost at the profit-maximising output
level.

Question 2

At the level of production at which short run average variable cost is minimized:
(a) Marginal Cost equals Average Variable Cost
(b) Marginal Cost is decreasing.
(c) Average variable cost is less than Marginal Cost.

Part B consists of four (4) essay-type questions, each worth TWENTY (20)
marks.

(d) Average Cost is less than Average Variable Cost.

Answer only TWO (2) questions from Part B.

Question 3

ANSWER EACH PART B QUESTION IN A SEPARATE EXAMINATION

BOOKLET

In a perfectly competitive market, the Marginal Revenue curve faced by a typical

Answers to questions in Part B must be written in ink. Pencil may be used in

answers to Part B for drawing, sketching or graphical work only.

(a) is horizontal but lies above the demand curve

This question paper may be retained by the candidate.

(b) is horizontal but lies below the Average Revenue curve

[]fm;

(c) Marginal Revenue is less than Average revenue at all output levels
(d) is the same curve as the Average Revenue curve

Page 1

Page 2

Question 4
A fIrm operating in a perfectly competitive market will break-even in the short run

Question 7

when:

A monopolist estimates that at the current price being charged for the product,

(a) Price equals Average Cost

Marginal Revenue is greater than Marginal Cost, and the absolute price elasticity of

Cb) Price equals Average Fixed cost

demand is 1.2. To increase profit the monopolist should:

(c) Price equals Average Variable Cost

(a) Increase price and sell less

(d) Price equals Total Cost

(b) Increase price and sell more

(c) Decrease price and sell less
(d) Decrease price and sell more

Question 5
Which of the following statements is true?
(a) A profIt maximising monopolist will always set price and output at a level where

Question 8

demand is price-elastic.

Assume two rival airline companies (Gold Air and Silver Air) are considering whether

(b) A profIt maximising monopolist always produces where Average Revenue equals

to discount their fares as a method of increasing market share.

Average

The following pay-off matrix gives the expected monthly profits (in $'000) of each

(c) A profIt maximising monopolist will, in long run equilibrium, always use a scale

company (Gold, Silver) under alternate strategies:

of plant that minimises long run Average Costs.

(d) A profIt maximising monopolist will produce where Marginal Cost equals price.

SILVER
Discount

Question 6

Do Not Discount

Discount

(24,20)

(48, 12)

Do Not Discount

(16,40)

(32,28)

K;OLD

Which of the following statements about the Monopolistic Competition market model
is true?
(a) The market is characterised by a small number of interdependent rival fIrms each
selling a slightly differentiated product.
(b) The typical fIrm tends to operate with excess capacity and unexploited economies

a) The Nash equilibrium is for Silver to discount and Gold to not discount.

of scale in the long-run.

b) The Nash equilibrium is for both firms to discount

(c) In the long run, surviving fIrms charge a price which equals Average Cost and

c) The Nash equilibrium is for Gold to discount and Silver to not discount.

make economic profIts.

d) The Nash equilibrium is for neither firm to discount.

(d) The demand for each fIrm's product is inelastic at all price levels.

Page 3

Question 9

Page 4

Question 12

Which of the following has the "non rivalry" characteristic that defines a pure public

The table below shows the input of the variable factor Labour and the output of the

good?

product for a fIrm operating in a perfectly competitive market.

(a) A local council car park

Q of Variable Input (labour)

Output Tonnes of Corn

(b) Suburban street lighting

(c) A toll road

14

(d) School education

30

42

52

Question 10

68

If consumption of a commodity generates a favourable externality, then compared to

65

social optimum;
a) Marginal Social Benefit of consumption is less than Private Marginal Benefit of

At what output level does the Law of Diminishing Marginal Returns set in?

consumption.
b) Marginal Social Benefit of production is less than Private Marginal Benefit of

a) 2
b) 3

consumption
c) The commodity will be under-priced and under-supplied in a competitive market.

c) 4

d) The commodity will be over-priced and under-supplied in a competitive market.

d) 6

Question 13
If the demand for a commodity is given by the demand curve is given by the equation

Question 11

Which of the following statements about the Oligopolistic market model is true?

Qd = 150 -3P

a) The market is characterised by a small number of rival firms who recognise their

and the supply curve is given by the equation

Qs=5P-IO

interdependence.
b) The typical firm tends to match rivals price increases but not price decreases

The absolute value of point Elasticity of demand at the equilibrium (market price) is

c) The demand for each firm's product is perfectly elastic

equal to

d) The market is characterised by a small number of independent rival firms each

selling slightly differentiated product

a) 3.0
b)

1.5

c) 0.67
d) 0.067

Page 5

Page 6

Question 14

Question 17

Using the information from question 13 and state which ofthe following answers is

The quantity demanded of a product per month decreases from 400 units to 240

true:

units as a result of a rise in price from $60 to $68. The loss in consumer surplus

a) In equilibrium, the absolute value of elasticity of supply equals the absolute

value 0 f elasticity 0 f demand

is equal to
I

b) In equilibrium, the absolute value elasticity of supply is greater than the

absolute value of elasticity of demand

a) $2560
b) $1920

c) $640

c) In equilibrium, the absolute value elasticity of supply is smaller than the

d) $960

absolute value elasticity of demand

d) In equilibrium, the absolute value elasticity of demand cannot be compared
with the absolute value elasticity of supply
Question 18

Question 15

Which ofthe following is a necessary condition for the Coase Theorem to hold

In the case of a regulated

monopoly, a price set to equal long run Marginal

Cost will result in:

a) There are a large number of people involved

b) Transactions costs are high

a) an efficient outcome because price equals Marginal Cost

c) Property Rights are clearly defined

b) a normal profit for the producer

d) There are economies of scale present in the production process

c) a loss equal to average total costs for monopolist

d) an inefficient outcome because price is greater than Average Cost

Question 16

Question 19

The Short-Run Average Cost curve reaches its minimum point at an output level

Public goods are usually provided by the government because:

where:

a) There are "spill-over" benefits involved in their production

a) The perfectly competitive firm is making a normal profit.

b) They usually invo1ve large economies of scale

b) The Average Product curve equals the Marginal Product curve.

c) Because the free rider problem means that consumers will not reveal their

c) Diseconomies of scale start to set in.

willingness to pay.

d) The fIrm is combining both the fixed and variable factors at the most efficient
level.

d) Because there is rivalry in consumption consumers are not willing to pay for
them.

Page 7

Page 8

Question 20
Olympic PIL produces cotton T Shirts. Olympic is a price taker and must decide on its

PARTB

hourly production rate. The costs of production are:

Each question in this part is worth 20 marks

T Shirts

Total Cost

(per hour)

(per hour)

Answer only TWO (2) questions from this part

ANSWER EACH QUESTION IN A SEPARATE EXAMINATION BOOK

10

12

21

38

56

82

112

(Only compbted shiIts are counted)

Question 1

a) What is meant by the term Comparative Advantage? Explain the reason for its
existence. ( 4 marks)
b) Assume that each of two counties Japan and Korea, have constant opportunity
costs in the production of cars and computers. Draw a production possibilities
curves for each of these two countries assuming that Japan has a comparative

The price below which Olympics should shut down operations in the short run
(the "shut-down price") is:

advantage in car production while Korea has a comparative advantage in

computer production. ( 6 marks)
c) On the same diagram show how if these countries specialise and trade, they

a) $3.00

can gain from trade. (4 marks)

b) $5.00

d) Assuming that free trade leads to an increase in world output explain why

c) $7.50

some countries may impose barriers to trade. (4 marks)

d) $2.00

e) Which of these reasons for protection have economic justification? (2 marks)

Page 9

Page 10

Question 2

Question 4

a) Explain and give an example of a favourable externality in production. ( 2

a) Draw a Supply and Demand model carefully labelling your diagram and show

marks)

how the imposition of an indirect sales tax will affect the equilibrium price

b) Explain and give an example of a unfavourable externality in consumption.(2

marks)

and output ofthe product. ( 4 marks)

b) Show on your diagram, how the incidence of the tax is shared between the

c) Use a Supply and Demand diagram to explain how the presence of pollution in

producer and the consumer and explain what determines the relative shares of

a firm's production process leads to an inefficient allocation of resources. ( 4

the tax paid by the producer and the consumer (5 marks)

marks)

c) Explain why the tax is inefficient and leads to a distortion in the allocation of

d) Show clearly on your diagram the efficient and inefficient output levels and

resources. (3 marks)

explain why the firm's output level is inefficient. ( 4 marks)

e)

d) Use your diagram to explain how the inefficiency of the tax is measured? (2

How might the government correct the inefficient working ofthe market in

marks)

the face of a;

e) What determines the size ofthis inefficiency? (2 marks)

a. Positive externality in consumption

f)

b. Negative externality in production ( 8 marks)

Ifthe intention ofthe government in imposing the tax was to discourage

consumption of a particular good. On what type of good would this tax be
successful? Why? (2 marks)

Question 3

g) If the intention ofthe government is to raise a large amount of revenue with a

minimum distortion to resource allocation, on what type of good should the
tax be imposed? Why? (2 marks)

a) What are the reasons for the existence of a monopoly? (4 marks)

b) What distinguishes a "natural monopoly" market structure from other
monopoly market structures? (2 marks)
c) Show how a monopolist result is inefficient when compared with a perfectly
competitive result. Use an appropriate diagram to illustrate your answer. (8

END OF EXAM

marks)
d) Use a diagram to show how when trying to regulate the natural monopoly the
regulation might lead to a loss for the firm. (3 marks)
e) What policy could the government use to achieve a more efficient outcome
without the monopolist making a loss? (3 marks)

Page 11

Page 12

Page 2 of 14

Page 1 of 14

THE UNIVERSITY OF NEW SOUTH WALES

PART A

SCHOOL OF ECONOMICS

This section is worth 25 marks

Mark your answer on Answer Sheet provided

SESSION 1, 2009

ECONllOl MICROECONOMICS I

Question 1

FINAL EXAMINATION
, I

A monopo list estimates that at the current pnce being charged for the product,

TIME ALLOWED

- 2HOURS

Marginal Cost is greater than Marginal Revenue and the abso lute price elasticity of

THIS PAPER IS WORTH 65% OF THE TOTAL SUBJECT MARK

demand is 1.8. To increase profit the monopolist should:

a) Increase price so that price equals the maximum the consumer is willing to

This examination paper consists of two parts - Part A and Part B

pay

Part A consists of 20 multiple choice questions each worth onc and one quarter
(1.25) marks.

b) Decrease price and sell more

c) Set price equal to the minimum average cost

Answer all the questions in Part A on the answer sheet provided, using pencil
. only:

d) Increase price and sell less

Print your student number, name and initials in the space provided and mark

the appropriate boxes below your student number, name and initials.
For each question, mark tbe appropriate response (a), (b), (c), or (d).
Question 2

There is only one correct response to each question in Part A.

The Coase theorem suggests that private markets may not be able to solve the

Part B consists of four (4) essay-type questions, each worth TWENTY (20)
marks.

problem of externalities,
a) Unless the government becomes involved in the process

Answer only TWO (2) questions from Part B.

b) When the number of parties is large and the bargaining costs are high

ANSWER EACH PART B QUESTION IN A SEPARATE EXAMINATION

BOOKLET

c) If the firm in the market is a monopoly

Answers to questions in Part B must be written in ink. Pencil may be used in

answers to Part B for drawing, sketching or graphical work only .

d) If some people benefit from the externality

This question paper may be retained by the candidate

There are 14 pages in this exam paper.
TURN OVER THE PAGE

'.

Page 3 of 14

Page 4 of 14
Question 5

Question 3

Use the table to answer this question.

Consider the following graph where a legally enforced ceiling price operates

Quantity Total Revenues Explicit Costs Implicit Costs

Price

10
15
20
25

_ _ _ __ _ _ _ _---,

J __ _

H
L_
c
, ,

50
75

100
125
150

30

36
63
93

125
161

5
6
7
8
9

___

G- - - -

I
01

___ L ___

,:F

,:

::J'
I

At what output level or levels are the business owners doing better than their next best

---

alternative?

a) 10 units

O---d-2- b-1--b3

b) ID, 15,20, and 25 units

Quantity

The maximum dead weight loss due to the price ceiling is represented by the areas:

c) lOand IS units
d) 10, IS and 20 units,

a) FEC.
b) DAC.
c) GJECF.

Question 6

d) JAE + DGF.

The ground used for the AFL Grand Final can hold 80 000 people and the demand
curve for Grand Final tickets, which is downward-sloping, intersects the price axis at

Question 4

a very high level. Since this is a very popular game, the AFL organisers have decided

Perfect competition is efficient and monopoly is not, because in perfect competition

to place a price ceiling below the equilibrium price, so that the consumers with lower

_ _ _ _ , while in monopoly _ _ _ __

willingness to pay can also have an opportunity to watch the game. This decision will

a) P

MC; P>MC

b) P

MC; P<MC

a) A decrease in consumer surplus.

MR; P<MR

c) An increase in producer surplus.

result in:

c)

b) No change in quantity traded.

d) P

d) No change in producer and consumer surplus.

Page 6 of 14

Page 5 of 14
Question 7

Question 9

Use the following graphs to answer the question.

$/ltr

Suppose a competitive fir m and a monapal ist each charge $5 for their respective

Firm

Industry

outputs. One can conclude that:

$/ltr

S'

S-

20

25

a) Marginal revenue is $5 fo r both firms.

ATC

b) Marginal revenue is $5 fo r the competitive firm and less than $S for the

201----"r'---;-f--7"'--- P

15

15

10

10

p'

monopolist.
c) Marginal revenue is less than $5 for both firms.

4 6
8 10
Millions of litres Iweek

d) The competitive firm is charging too much and the monopolisl too little.

1
3 4
2
5
Thousands of litres Iweek

If S2 is the short-run supply curve for the syrup industry. what

IS

Question 10

the profit-

A finn that emerges as being able to sell all of the output required in a market at a
cost lower than could be done by two or more firms is said to be;

maximising output for a single firm in this industry?

a) A monopoly.

a) 500 litres per week

b) 1500 litres per week

b) An oligopoly.

c) 2000 litres per week

c) A natural ol igopoly .

d) 2,500 litres per week.

d) A natural monopoly.

Question It

Question 8

In a market which is classified as o ligopo ly, a dominant strategy for a player occurs

Use the graph in the previous question to answer the question below.
If S2 is the short-run supply curve for the syrup industry, what is the profit (loss) for a

when:

a) That player has a strategy that yields the highest payoff independent of the

single firm in this industry?

other player 's choice.

a) $10 000

b) Both players have a strategy that yields the highest payoff independent of the

b) $ 14000

other's choice.

c) $20000

c) Both players make the same choice.

d) $30 000

d) The payoff to a strategy depends on the choice made by the other player.

Page 7 of 14

Page 8 of 14

Question 12

Question 14

Consider two petrol stations A and B in a small suburb, which can set their prices

The optimal amount of infonnation to acquire before making a purchase is:

either low or hi gh . If they both set high prices then both make a medium profit, and if

a) As much as technically possible.

they both set low prices then both make a low profit. However, if one sets a low price

b) The amount where the marginal cost of acquiring information equals the
marginal benefit.

and the other a high price, the petrol station that sets the low price wi ll make a high
profit and the petrol station with the high price will make a loss. Which petrol station

c) The amount where the total cost of acquiring information equals the total
benefit.

has a dominant strategy?

d) Dependent on the value of the purchase being made

a) Petrol station A has a dominant strategy.

b) Petrol station B has a dominant strategy.
c) Only one petrol station has a dominant strategy, but it is not possible to say

Question 15
The "free-rider" problem occurs when:

which.

a) Buyers pay less than their reservation price.

d) Both petro l stations A and B have a dominant strategy.

b) Sellers receive more than their reservation price

Question 13

c) Non-paying buyers caMol be excluded from consuming a good or service.

The demand curve for public goods is constructed by:

d) Paying buyers are excluded from conswning a good or service.

a) Summing each voter's desired quantity of a public good at various reservation

Question 16

pnces.
b) Surveying voters on how much of a particular public good they would desire

Frank is considering moving to Brisbane. There is a 70 per cent chance that he will
find a job that pays $ 1000 more than what he currently earns, and a 30 per cent

at various reservation prices.

c) Summ ing each voter's reservation price for a given level ofa public good.

chance he will fi nd one that pays $3000 less. The expected value of moving to

d) Summing the average of the individual demand curves.

Brisbane is:
a) -$200.

b) $200.
c) $700.

d) $900.

Page \0 of 14

Page 9 of 14
Question 17
Asymmetric information exists when:

a) The seller knows everything and the buyer knows nothing.

Question 19

b) Both the buyer and the seller possess perfect knowledge

Government subs idises education because:

a) It is a pure public good.

c) The buyer knows the same as the seller.

b) Education is thought to have positive externalities.

cl) Neither the buyer nor the seller possess any knowledge

c) Private firms will not provide education.

d) Of custom and tradition.

Question 18

Two types of houses are for sale: those with cracked foundations and those without.
In all other respects, they are identical. Houses without cracked foundations are worth

$200000. Houses with cracked foundations are worth $180 000 ($200 000 minus

Question 20

$20 000 to fix the cracks). The frequency of solid foundatio ns is 80 per cent. Sellers

A seller with mo nopoly power is able to discrim inate in the price charged to two

know which type of house they have, hut buyers cannot detect any cracks. No seller

separate groups of consumers. The costs of supplying each group are identical. To

'must' sell their house in order to move and thus no one accepts anything less than its

maxi mize profits the monopolist should charge a different price to each group so as

value.

to:
a) make the marginal revenue from each group equal

The long-run equilibrium in the housing market is:

a) 80 per cent homes with solid foundations. 20 per cent with cracked

b) make the total revenue from each group equal

c) make the price elasticity of demand fo r each group equal

foundations, and a reservation price of $ 180 000.

d) make the average revenue from each group equal

b) 100 per cent homes with cracked foundations and a reservation price of
$ 180 000.
c) 100 per cent homes with solid foundations and a reservation price of
$200000.
d) 100 per cent homes with cracked foundations and a reservation price between
$200 000 and $ 180 000.

T URN OVER T HE PAGE

TURN OVER THE PAGE

10

Page 120f14

Page 11 of14

PARTB
Each question in this part is worth 20 marks

Question B2

Answer only TWO (2) questions from this part

a) Explai n the concepts of producer and consumer surplus. (4 marks)

ANSWER EACH QUESTION IN A SEPARATE EXAMINATION BOOK

b) Use a demand and supply diagram to explain how allocative efficiency is

determined in economics. (2 marks)

Question Bl

c) Why do economists emphasise allocative efficiency as an important goal of

a) Briefly describe the characteristics of perfect competition. (4 marks)

public policy? (2 marks)

b) Explain the Law of Diminishing Returns. (2 marks)

d) Use the same diagram as above to show how the imposition of a per unit tax

c) Draw the short-run Average Total Cost Curve and the Marginal Cost Curve.

imposed on the supplier will lead to a decrease in allocative efficiency.

(2 marks)

Explain how thi s loss of efficiency is measured. (4 marks)

d) What economic principles exp lai n the shape of the Average Total Cost Curve

e) Why mi ght the loss in consumer and producer surplus experienced by

and what is the significance of the minimum point of the Average Total Cost

participants in the market for a good which is taxed overstate the loss in

Curve? (4 marks)

welfare that results from the tax? (2 marks)

e) Tn the competiti ve model , explain the shape of the short-run supply curve for

f) Use a diagram to illustrate how the deadweight loss of a per unit tax varies

an individual finn. (4 marks)

f)

with the elasticity of demand and supply. (6 marks)

How do the features of perfect competition explain the long-run equilibrium

position ofa perfectly competitive firm? (4 marks)

TURN OVER THE PAGE

TURN OVER THE PAGE

12

11

Page 13 of 14

Page 14 of 14

Question B3.

Question B4

a) Explain what is meant by the term "market power". Briefly describe the

is not efficient when the seller does not take into account all the costs associated with

sources of "market power." (S marks).

b) What

characteristics

distinguish

imperfect

Use Supply and Demand analysis to explain why the competitive market equilibrium

competition

from

perfect

competition and what characteristics distinguish oligopoly from other foons of

"

producing a good. (8 marks)

State and explain the Coase Theorem and give an example to explain how efficient
so lutions to externalities can be achieved according to this theorem. (8 marks)

imperfect market structure? (Smarks)

c) Why are there incentives for firms in the oligopoly market structure to

List and ex plain some other solutions to externalities. (4 marks)

conspire to coordinate production and pricing decisions? (2 marks).

d) Assume two rival airline companies Airjet and Boing are considering
discounting their airfare as a means of increasing market share. The following

pay.off matrix gives the expected monthly profits (in $'0005) of each
company under alternate strategies.

Airjet

Boing

Discount

Do Not Discount

Discount

(24,20)

(48,12)

Do Not Discount

(16,40)

(32,28)

1. If this game can be modelled as a single competitive game. If there is a Nash

equilibrium, what is it? Give reasons for your answer. (3 marks)

2. Does this situation provide an incentive for collusion? Why? (2 marks)

THIS IS THE END OF THE EXAM

.,

3. If there is a collusive equilibrium, is it likely to last? Why? Why not? (3 marks)

TURN OVER THE PAGE

13

14

SI

THE UNIVERSITY OF NEW SOUTH WALES

PART A

SCHOOL OF ECONOMICS
SESSION 2, 2009

,.

This section is worth 30 marks

ECONllOl MICROECONOMICS I

Mark your answer on the Answer Sheet provided

FINAL EXAMINATION

Question 1
In the competitive market model, the supply curve for a commodity will shift upwards to the
left if:
(a) The productivity of inputs increases
Cb) The price of the commodity rises
(c) The number of producers increase
(d) The price of inputs increases

TIME ALLOWED - 2 HOURS

THIS PAPER IS WORTH 50% OF THE TOTAL SUBJECT MARK
This examination paper consists of two parts - Part A and Part B
Part A consists of 30 multiple choice questions each worth one (1) mark.
Answer all the questions in Part A on the answer sheet provided, using pencil only:
(a) Print your student number, name and initials in the space provided and mark
the appropriate boxes below your student number, name and initials.
(b) For each question, mark the appropriate response (a), (b), (c), or (d).

There is only one correct response to each question in Part A. There is no negative
marking.

Part B consists of two (2) essay-type questions, each worth TWENTY (20) marks.
Answer only ONE (1) question from Part B.

Answers to questions in Part B must be written in ink. Pencil may be used in answers to
Part B for drawing, sketching or graphical work only.
This question paper may be retained by the candidate.
Students may bring non programmable hand held calculators.

Question 2
In the competitive market model, the demand curve for a commodity will shift upwards to the
right if:
(a) Income of consumers increase
Cb) The price ofa complement good rises
(c) The price ofa substitute good falls
(cl) The level of technology rises
Question 3
Veal and Beef are considered substitute goods for consumers. In a competitive market model
for Veal, a fall in the price of Beefwill cause:
(a) A movement downward along the demand curve for Veal
(b) A movement upward along the demand curve for Veal
(c) A shift leftwards of the demand curve for Veal
(d) A shift rightwards of the demand curve for Veal.

Question 4
Sausages and tomato sauce are considered to be complementary goods for consumers. In a
competitive market model for sausages and tomato sauce, a rise in the price of sausages will
cause:
(a) A movement downward along the demand curve for sausages
(b) A shift leftwards of the demand curve for sausages
(c) A shift leftwards of the demand curve for tomato sauce
(d) A shift rightwards of the demand curve for tomato sauce
Question 5
Assume that there are only two counuies in the world and they produce two goods, Cars and
Cotton. The opportunity cost of a car in Country A is 50 units of cotton and the opportunity
cost of a car in country B is 300 units of cotton. The maximum amount of cotton country A
can possibly produce is 100,000 units of cotton and the maximum amount of cotton country
B can produce is 300,000. In this example:
(a) Country A has a comparative advantage in cotton
(b) Country B has a comparative advantage in cars
(c) Country A has an absolute advantage in cotton
(d) Countl:)' B has an absolute advantage in cotton

There are nine (9) pages in this paper

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DJ

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>014448459

Question 6
Assume there are two types of land in a small country on which either wheat or corn may be
grown, There are 10 acres ofland (Type A) more suitable for growing wheat and 10 acres of
land (Type B) more suitable for growing corn. Type A land will give 4 tons per acre if used
for wheat and I tons per acre ifused for corn. Type B land will give 4 tons per acre if used
for corn and I tons per acre ifused for wheat. If they allocate land efficiently which of the
following output combinations will be on their production possibilities curve?
(a) 24 tons of wheat and 46 tons of corn
(b) 50 tons of wheat and 50 tons of corn
(c) 45 tons of wheat 25 tons of corn
(d) 40 tons of wheat and 40 tons of corn

Question 7
Which statement about the "substitution effect" is true?
(a) It is the effect of a percentage decrease in quantity substituted equal to the percentage
decrease'in price of a commodity.
(b) It forms the basis of the "rational spending rule"
(c) It refers to the extent to which consumers of substitute commodities are better off as a
result of a price change,
(d) Always causes demand for the good to increase following a decrease in the price of
the good.
Question 8
Assume that the demand for alcoholic drinks is inelastic. The competitive market model
predicts that the effect of a restriction of supply of this commodity by introducing early
closing hours on clubs and hotels is, ceteris paribus
(a) A higher price and lower total expenditure on the commodity by drinkers
(b) A lower price and lower total expenditure on the commodity by drinkers
(c) A lower price and higher total expenditure on commodity by drinkers
(d) A higher price and higher total expenditure on the commodity by drinkers
Question 9
Which of the following statements about a monopolist is true?
(a) The supply curve for a monopolist is the Short-run Marginal Cost Curve above the
minimum point on the Average Variable Cost Curve
(b) It is possible for a monopolist to produce an efficient level of output
(c) A monopoHst will always produce an output level where Long- run Average Costs are
falling
(d) A monopoIist will always make an economic profit.

Page 3 of9

Question 10
The diagram below illustrates two parallel demand curves for a commodity. Price elasticity
of supply for this commodity is:
;

Price
$

(
Supply

Demand

Dema
Litres per Week
(a) The same at B as at A and equal to I
(b) The same at B as at A and greater than 1
(c) Greater at A than at B
(d) Greater at B than at A

Question 11
Which of the following statements about an oligopolistic market is true?
(a) The market is characterised by a large number of rival finns each selling a slightly
differentiated product
(b) The typical firm tends to operate at the minimum point of the Long -run Average Cost
curve.
(c) In the long run, surviving finns charge a price which is equal to Average Cost and
make zero economic profit.
(d) The finns operating in the market are mutually dependent

Question 12
A perfectly competitive firm will, in the short-run:
(a) Shut-down if price falls below the minimum point of the Average Total Cost Curve
but lies above the minimum point of the Average Variable Cost Curve
(b) Make a nonnal profit ifprice equals its Average Variable Costs
(c) Maximise profit if price is above Marginal Costs but equal to the Marginal Revenue
(d) Shut down if Marginal Revenue is below the minimum point of the Average Variable
Cost curve.

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Question 13
The Ground used for the NRL Grand Final between the Bulldogs and the Titans can hold
50,000 people. The downward sloping demand curve for tickets for the event intersects the
supply curve at a very high price. The NRL organisers decide to make the game more
affordable for the low income fans by placing a price ceiling below the equilibrium price.
This action will result in:
(a) A decrease in consumer surplus
(b) No change in quantity sold
(c) An increase in consumer surplus
(d) No change in producer surplus

Question 14
The deadweight loss created by a per unit sales tax imposed on the producer of a good, ceteris
paribus:
(a) Increases as the demand for the good becomes less price elastic.
(b) Decreases as the demand for the good becomes less price elastic.
(c) Decreases as the elasticity of supply becomes more price elastic
(d) Increases as the elasticity of supply becomes less price elastic

Question 15
Which of the following statements is true for a firm operating in an imperfectly
competitive market in which the firm has some market power?
(a) The demand curve facing the finn is perfectly inelastic at the current market price
(b) The demand curve facing the firm is significantly less elastic for price increases than
for price decreases
(c) Marginal Revenue is less than Average Revenue
(d) Average Revenue is less than Marginal Revenue

Question 16
The Coase theorem says that
(a) Government action is required to correct an externality
(b) Where Bargaining costs are high an efficient outcome may notbe achieved in the
presence of an externality
(c) The level of output will depend upon how property rights are assigned
(d) If the two parties involved are the same size, an efficient outcome can be achieved
Question 17
If a per-unit sales tax is imposed on a commodity for which the price elasticity of demand is
equal to one (in absolute vale) and the price elasticity of supply is greater than I:
(a) The incidence of the tax will fall entirely on consumers
(b) The incidence of the tax will fall more on producers than on consumers
(c) The incidence of the tax will fall more on consumers than on producers
(d) The incidence of the tax will be shared equally by consumers and producers

Page 50f9

Question 23
The equation of the demand curve for a product has been reliably estimated as:
Qd
48 - 0.6 P
P is measured in $
The point elasticity of demand when the price is $20 can be estimated as
(a) -0.6
(b) -0.8
(c) -1.33
(d) -0.33

Question 18
The minimum point on the Short-run Average Total Cost curve:
(a) Is the point where the Law of Diminishing returns sets in
(h) Is the point where the profit earned hy the firm is normal
(c) Is the output level where the firm is using both the fixed and variable factors in the
optimum combination
(d) Shows the price level where the firm's Marginal Cost Curve becomes the firm's
short-run Supply curve
Question 19
Which of the following statements about a monopoHst is true?
(a) A profit maximising monopolist will always set price and output at a level where demand
is price-elastic.
(b) A profit maximising monopohst always produces where Average Revenue equals
Average Cost
(c) A profit maximising monopolist will, in long run equilibrium, always use a scale of plant
that minimises Long- run Average Costs.
(d) A profit maximising monopolist will produce where Marginal Cost equals price.
Question 20
In the competitive market for wool, the imposition of a legally enforced minimum price
above the market equilibrium price will, ceteris paribus:
(a) Create more excess supply of wool, the higher the elasticity of supply,
(b) Create more excess demand for wool, the greater the elasticity of demand,
(c) Create more excess supply of wool, the lower the elasticity of supply,
(d) Create more excess demand for wool, the greater the elasticity of supply
Question 21
Assume that demand and supply curves for a pal1icular chemical product are given by the
following equations:
Demand:
Qd
150 15 P
Supply:
Qs
5 P . 30
Price is measured in $ per ton; quantity is measured in tons
The equilibrium price and quantity is:
(3) $5, 30 tons
(b) $9, 15 tons
(c) $6, 50 tons
(d) $10, 50 tons
Question 22
If consumption of a commodity generates a favourable externality,
(a) Marginal social cost of production is greater than marginal private cost of product
(b) Marginal social benefit is greater than marginal private benefit
(c) The commodity will be under-priced and over-supplied in a competitive market
(d) The commodity will be over-priced and over-supplied in a competitive market

Page 6 of9

Question 27
In the case of a regulated natural monopoly with high fixed costs, a price set by the
government to equal long -run Average Cost will result in:
(a) An efficient outcome because Marginal Revenue equals Marginal Cost
(b) An economic profit for the producer
(c) A loss equal to average fixed costs for the producer
(d) An inefficient outcome because price is greater than Marginal Cost
Question 28
Frank: is considering moving to Perth. There is a 70 per cent chance that he will find ajob that
pays $1000 a month more than what he currently earns, and a 30 per cent chance that he will
find one that pays $3000 a month less. The expected value per month of moving to Perth is;
(a) $200
(b) - $200
(c) $700
(d) $900

Question 24
Which of the following may not be a cause of "market failure"?
(a) The presence of barriers to entry
(b) The presence of economies of scale
(c) The presence of government intervention in the market
(d) The presence of externalities in production and consumption
Question 25
The publishers of two rival newspapers, Thymes and Oobe are consideling their pricing
strategies.
Assume that their strategy choices can be modelled as a choice between two alternative
strategies: High Price or Low Price.
The following pay-off matrix gives the expected monthly profits (in $'000) for each
magazine (rhymes, Oobe) under alternate strategies:

Question 29
Dave is risk averse while Scat! is risk neutral. Both are confronted with the following
gamble: win $5000 with the probability of 65 per cent or lose $9000 with the probability of
35 per cent. One can predict that:
(a) Both might accept the gamble
(b) Only Scat! will accept the gamble
(c) Only Dave will accept the gamble
(d) Neither will accept the gamble

GOBE

High Price

THYMES

Low Price

High Price

Low Price

(25, 29)

(I 7, 35)

(37, is)

(23, 19)

Question 30
A cinema charges a lower admission price for oon- working patrons over the age of 60
(seniors) than for other adults seeking entry to see a movie. This price discrimination might
be profitable for the cinema if:
(a) The demand for admission by seniorS is less elastic than the demand by other adults
(b) The demand for admission by seniors is more elastic than the demand by other adults
(c) TIle demand for admission by seniors increases at all price level for all movies
(d) The demand curve for admission by seniors shifts to the left

Which of the following statements is true?

(a) The Nash equilibrium is for both to set a high price.
Cb) The collusive (co-operative) equilibrium is for both to set a low price
(c) Setting a low price is a dominant strategy for lHYMES
(d) Setting a high price is a dominant strategy for GOBE
Question 26
A public good is one that
(a) Is non-rival but mayor may not be non-excludable
(b) Has some degree of being both non-rival and non-excludable
(c) Is non-excludable but may or may not be non-rival
(d) Has some degree of being either non-rival or non- excludable

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Page 8 of9

PARTB
Each question in this part is worth 20 marks

Answer only ONE (1) question from this part

Question Bl
1. Construct a diagrammatic model of a market which is supplied by a single fmn with
monopoly power, showing the Average and Marginal Cost curves and the Average
and Marginal Revenue curves for the monopolist. (5 marks)
2. Use your diagram to help you to explain the firm's pricing and production decisions
if:

a. The aim is to maximise profit

b. The aim is to maximise revenue
c. The aim of the fum is to maximise the volume of sales, subj eet to making at

least "normal profit." (3marks)

3. Explain why the profit maximising behaviour by the monopalist results in an
inefficient allocation of resources from society's point of view. (6 marks)
4. Under what circumstances might a monopoly provide a better outcome from society's
point of view than a more competitive market structure? (6 marks)

OR

Question B2
1. Consider an industry whose production process releases chemicals into a large river in

a heavily populated area.

Use the competitive market model to show that in the absence of any regulation, the
industry will over produce from the point of view of allocative efficiency. Use a
diagram to illustrate your answer. (8 marks)

2. Explain the Coase Theorem. Will the Coase Theorem be applicable in this case? Give

reasons for your answer. (6 marks)

3. Discuss other fonns of intervention by government aimed at correcting the market
failure problem in this case. (6 marks)

This is the end of the exam.

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