SAMPLE FINAL EXAMINATION 05//2020

Section A: (25 marks)

Circle your responses to QUESTIONS 1 TO 25 (Section A) in the Multiple-Choice Answer Sheet.

The concept of opportunity cost is best represented by the:

A. shift of a production possibilities frontier outwards
B. shift of a production possibilities frontier inwards
C. movement along a production possibilities frontier from one point to another
D. movement from a point on a production possibilities frontier to a point inside the same curve

Table 1
Labour hours needed to make 1 kg of Kgs produced
in 20 hours
Meat Potatoes Meat Potatoes
Potato farmer 10 5 2 4
Cattle farmer 4 1 5 20

2. Refer to Table 1. For the potato farmer, the opportunity cost of 1 kg of meat is:
A. eight hours of labour
B. four hours of labour
C. 1/2 kg of potatoes
D. 2 kg of potatoes

3. According to Table 1:
A. the potato farmer has an absolute advantage in meat, and the cattle farmer has a comparative
advantage in meat
B. the potato farmer has an absolute advantage in potatoes, and the cattle farmer has a
comparative advantage in potatoes
C. the potato farmer has an absolute advantage in neither goods, and the cattle farmer has a
comparative advantage in meat
D. the potato farmer has an absolute advantage in neither goods, and the cattle farmer has a
comparative advantage in potatoes

4. At the equilibrium price:

A. everyone in the market has been satisfied
B. it is possible for there to be a shortage
C. firms have an incentive to increase production
D. buyers have an incentive to buy more

5. Assume that at the current prices there is a surplus of sugar in the market. This must mean that:
A. the price of sugar is currently higher than the equilibrium price
B. the price of sugar is currently lower than the equilibrium price
C. less sugar is being produced by sellers than buyers want to buy
D. the demand for sugar has fallen

6. Suppose that the incomes of buyers in a particular market for a normal good decline and there is also
a reduction in input prices. What would we expect to occur in this market?
A. the equilibrium price would increase but the impact on the amount sold in the market would
be ambiguous
B. the equilibrium price would decrease but the impact on the amount sold in the market would
be ambiguous
C. both equilibrium price and equilibrium quantity would increase

MCD2020 Page 1 of 8
 SAMPLE FINAL EXAMINATION 05//2020

D. equilibrium quantity would increase but the impact on equilibrium price would be
ambiguous

7. In a free market system, what coordinates the actions of millions of people with their varying
abilities and desires?
A. producers
B. consumers
C. prices
D. the government

8. Which of the following would NOT be correct, if the demand curve is linear and downward sloping?
A. elasticity and slope will both remain constant along the curve
B. the upper part of the demand curve is more elastic than the lower part
C. elasticity will change with a movement down the curve
D. the lower part of the demand curve will be less elastic than the upper part

9. Suppose the government increases the tax on petrol in order to raise revenue. Since raising the petrol
tax would increase the price of petrol, the government must be assuming that the:
A. demand for petrol is price elastic
B. demand for petrol is price inelastic
C. demand for petrol is price unit elastic
D. tax on petrol will not affect the consumption of petrol

10. If an increase in the demand for Monet paintings increases their equilibrium price but not the
equilibrium quantity, this means that:
A. the supply of Monet paintings is perfectly elastic
B. the supply of Monet paintings is perfectly inelastic
C. the price elasticity of demand for Monet paintings is perfectly elastic
D. the price elasticity of supply for Monet paintings is perfectly inelastic

11. In which of the following cases will total revenue increase?

A. price falls and demand is inelastic
B. price falls and supply is elastic
C. price rises and demand is inelastic
D. price rises and demand is elastic

12. Last year, Joan bought 50 kg of hamburger mince when the household income was $40,000. This
year, the household income was only $30,000 and Joan bought 60 kg of hamburger mince. All else
being constant, Joan’s income elasticity of demand for hamburger is:
A. positive, so Joan considers hamburger to be an inferior good
B. positive, so Joan considers hamburger to be a normal good and a necessity
C. negative, so Joan considers hamburger mince to be an inferior good
D. negative, so Joan considers hamburger mince to be a normal good

13. In the end, tax burden

A. is determined by the policymakers
B. falls mostly on the buyers
C. depends on the relative elasticities of supply and demand
D. falls entirely on the sellers

MCD2020 Page 2 of 8
 SAMPLE FINAL EXAMINATION 05//2020

Graph 1

Graph 1 shows the total cost function of a firm that produces cookies. Use the graph to answer
questions 13 and 14.

14. Refer to Graph 1. Which of the statements below is most consistent with the shape of the total cost
curve?
A. producing additional cookies is equally costly, regardless of how many cookies are already
being produced
B. producing additional cookies becomes increasingly costly only when the number of cookies
already being produced is large
C. producing an additional cookie is always more costly than producing the previous cookie
D. total production of cookies decreases with additional units of input

15. Refer to Graph 1. Identify the true statements from the list below.
(i) the marginal cost of cookie production is increasing
(ii) cookie production exhibits diminishing marginal product
(iii) the slope of the production function increases at an increasing rate

A. (i) only
B. (i) and (ii)
C. (i) and (iii)
D. (i), (ii) and (iii)

16. Which of the following describes the marginal product of labour?

A. the increase in labour necessary to generate a one-unit increase in output
B. the additional profit created with a one-unit increase in labour
C. the cost of one additional unit of output by one additional worker
D. the increase in output obtained from a one-unit increase in labour

17. The value of the marginal product of labour is equal to the change in:
A. total revenue with the addition of the last worker
B. total cost with the addition of the last worker
C. total profit with the addition of the last worker
D. marginal cost with the addition of the last worker

18. When deciding how much labour to hire, a profit-maximising firm should hire workers until:
A. marginal profit equals the wage rate
B. marginal revenue equals marginal profit
C. marginal product equals the wage rate

MCD2020 Page 3 of 8
 SAMPLE FINAL EXAMINATION 05//2020

D. marginal profit is zero

19. For a firm in a perfectly competitive market, the price of the good is always equal to:
A. marginal revenue
B. average revenue
C. equilibrium market price
D. all of the above

20. Suppose a firm is operating in a competitive market where the price of the good is $12. At the
current level of output, the firm’s average cost is $15, marginal cost is $17, and fixed costs are $10,
then the firm will:
A. increase profit by increasing output
B. decrease loss by decreasing output
C. maximize profit by keeping output constant
D. we cannot say without more information

21. Binding agreements concerning production levels between oligopolists can lead the involved firms
to:
A. bankruptcy
B. higher prices and less profit
C. lower prices and more profit
D. monopoly profit

22. The self-interest causes the duopoly’s output level to be which of the following?
(i) above the monopoly level
(ii) above the oligopoly level
(iii) below the competitive level

A. (i) and (iii)

B. (i) and (ii)
C. (ii) and (iii)
D. (i), (ii) and (iii)

23. Australia exports cattle to Indonesia. If Australia puts an export subsidy on cattle and the Australian
supply of cattle is elastic while the demand for cattle in Indonesia is inelastic then:
A. Australian sellers of cattle will enjoy most of the subsidy’s benefit
B. Indonesian buyers of cattle will enjoy most of the subsidy’s benefit
C. the benefit of the subsidy will be shared equally
D. it is impossible to determine how the burden of the tax will be shared

24. Which of the following statements about a market that is affected by a positive production
externality is correct?
A. the optimum level of output is less than the free market level of output and the optimum
price is greater than the free market price
B. the optimum level of output is greater than the free market level of output and the optimum
price is greater than the free market price
C. the optimum level of output is less than the free market level of output and the optimum
price is less than the free market price
D. the optimum level of output is greater than the free market level of output and the optimum
price is less than the free market price

25. Which of the following would NOT shift the demand curve for beef?
A. a reduction in the price of cattle farm fencing
B. a change in the incomes of beef consumers
C. an effective advertising campaign by pork producers
D. a widely publicised study that indicates beef increases cholesterol

MCD2020 Page 4 of 8
 SAMPLE FINAL EXAMINATION 05//2020

Section B (25 Marks)

Question 1 (9 marks)

Assume that meat industry operates in a competitive market structure and is in the long run equilibrium.
Now assume that a new research, which links meat to a number of additional health benefits, gets wide
publicity.

a. Draw diagrams of the

i. market for meat, and
ii. a profit maximising individual firm supplying meat
To illustrate the short run changes following this new research.

(4 marks)

b. Using your diagrams, explain the short run changes in

i. price and quantity in the market
ii. price and quantity of the individual firm, and
iii. the profit of the individual firm

(Hint: Long run changes are not required)

3 marks)

c. What is the difference between a firm’s decision to shut down and its decision to exit the
market?
(2 marks)

MCD2020 Page 5 of 8
 SAMPLE FINAL EXAMINATION 05//2020

Question 2 (8 marks)

Graph 2 - Monopoly

The above graph relates to a monopolist selling a unique clothing item in regional Australia. Assume that
the monopolist is operating at the profit maximising output level.

a. Find the following information for the monopolist.

i. Current output and price
ii. Total revenue
iii. Total cost
iv. Total profit
(4 marks)

b. What is the socially efficient price and quantity?

(1 mark)

c. Does the monopoly depicted in this graph create deadweight loss (DWL)?
Explain why or why not.
(3 marks)

MCD2020 Page 6 of 8
 SAMPLE FINAL EXAMINATION 05//2020

Question 3 (8 marks)

a. Australia currently imports wine from Spain. Australian importers are required to pay a tariff on
imported wine.
Draw a clearly labelled diagram to illustrate the current Australian market for wine.
(3 marks)

b. Now suppose Australia signs a free trade agreement with Spain, which removes all tariffs between
the two countries.
Describe how removal of tariff will affect the Australian market for wine, in regard to the following:

i. domestic quantity produced

ii. domestic quantity consumed
iii. level of imports
iv. government revenue

Hint: Use the diagram in part a. to provide your answers in table format.
(2 marks)

c. Will Australia lose or gain due to the removal of tariff? Explain using the concepts of
i. consumer surplus
ii. producer surplus
iii. total surplus.
(3 marks)

MCD2020 Page 7 of 8
 SAMPLE FINAL EXAMINATION 05//2020

Section C: (15 Marks)

a. Compare and contrast private goods, club goods, common resources and public goods using
the characteristics ‘excludable’ and ‘rival’.
Note: you could use a table to show your answer
(2 marks)

Most Australians are well aware of negative externalities of consumption created by plastic packaging
(e.g. plastic bottles and bags). Increasingly, state governments are taking actions to interanalise these
externalities.

b. Draw a fully labelled diagram to show the effect of negative externality created by the use of
plastic packaging.
(3 marks)

c. Explain how plastic packaging creates a negative externality in consumption.

Hint: Use the definition of negative externality, and examples in your answer
(3 marks)

d. What type of solutions are available to the government to internalise the externality?
Use examples to Explain.
(4 marks)

e. Is it possible for private parties involved in this situation to arrive at a solution that will
internalize the externality caused by plastic packaging? Explain why or why not.
(3 marks)

End of Examination

MCD2020 Page 8 of 8