Arsi University

College of Business and Economics

Department of Economics

Introduction to Economics Course

Final Exam
Target Group: 1st Year Students
Exam Date: January 21/2022
Time Allowed: 1:30 hrs
Total Weight (50%)

I. Student’s Information:

Student’s Name:

ID. No.:

Group/Section:

IF ADD:

Instructor’s Name:
II. Instruction:

1. Follow the instruction for each of the exam parts

2. Do not use pencil and red pen
3. Your work should be legible and neat
4. Write your answers on the attached answer sheet only
5. Switch off your cell phone
6. Any attempt to cheat and cheating will disqualify your exam result
7. Don’t turn this page until you are told to do so by invigilators
Part I. Write TRUE if the statement is correct and FALSE if the statement is wrong
(0.5 pt each)

1. Indifference curves assumed to be convex to the origin to show that the goods consumed are
not perfect substitute of each other.
2. In the short run, a rational producer would produce in a stage of production that extends from
a point where MPL and APL equate to a point where MPL reaches zero.
3. Short run production refers to a period of time which is less than a year where as long run
production refers to a time period above a year.
4. According to Ordinal approach utility cannot be measured objectively but different
consumption bundles are ordered according to preferences.
5. Implicit costs are the costs of the factors of production which are owned by the firm.
6. Long run refers to that period of time in which the quantity of at least one input is fixed.
7. The technical relationship between inputs and outputs is called cost function.
8. Stage III of short run production is inefficient since the fixed input is over utilized.
9. When a seller expects the price of a commodity will fall in the future, his/her current supply
will also decrease.
10. The rise in income of the consumer (keeping the prices of the commodities unchanged), will
cause an upward parallel shift of the budget line.

Part II. Choose the best answer among the given alternatives (1pt each)

1. If a short run production function is given by 𝑄 = 𝐾2 − 2𝐾𝐿 + 𝐿2 and K is fixed at 5 then,

the average product of the 10th labor is:
A. 5 C. 2.5
B. 7.5 D. None.
2. In the short run firms should operate:
A. Where marginal product of labor is above average product of labor
B. Where marginal product of labor is below average product of labor
C. Between points where the average product of labor is maximum to the point where
the marginal product of labor is zero
D. Up to the point where average product of labor equals with marginal product of labor
3. The law variable proportion (law of diminishing marginal return) begins to operate beyond
the point where:
A. MP of the variable input is zero D. MP of the variable input starts rising
B. AP of the variable input is E. None
maximum
C. MC of the variable input is
Minimum
4. Which of the following is False about short run production function
A. Whenever MPL is increasing, APL is increasing
B. When MPL take its maximum TPL start to increase at decreasing rate
C. When MPL is decreasing, APL is decreasing always
D. None
5. One of the following is not true about utility
A. It represent amount of satisfaction derived from consumption of goods & services
B. Utility is subject to individual’s own need
C. Utility is derived when consuming useful products
D. Utility varies from time to time and from place to place
E. None
6. Which one of the following reasons shifts the budget line to the right (outward)?
A. An increase in consumer’s income
B. An increase in price of both goods
C. A decrease in consumer’s income
D. An increase in the price of one good
7. The extra utility that consumers obtain from consumption of additional unit of a good is
A. Total Utility
C. Cardinal Utility
B. Marginal Utility
D. Marginal Rate of Substitution
8. According to cardinals a rational consumer will choose to when 𝑃𝑥 > 𝑀𝑈𝑥?
A. Decrease the consumption of X
C. Increase the price of X
B. Increase the consumption of X
D. Decrease the price of X
9. Moving down along an indifference curve makes the consumer
A. Worse off
C. Neither better off nor worse off
B. Better off
D. Such a case is impossible
10. In the theory of consumers’ behavior, what does a budget line show?
A. Government’s revenue and expenditure plan
B. Various combinations of two goods that bring the same level of satisfaction
C. Bundle of goods that could be purchased with given income & prices of goods
D. B & C.
11. Suppose a consumer consumes two goods X and Y with prices of Px and Py respectively. If
𝑀𝑈𝑋 𝑀𝑈𝑌
> , in order to return back to equilibrium position, the consumer should:
𝑃𝑋 𝑃𝑌

A. Consume additional units of X

B. Consume additional units of Y
C. Reduce consumptions of X
D. Consume additional units of both X and Y
12. Suppose a 2% decline in price results in 4% increase in quantity demanded of a given
product, then demand is said to be
A. Elastic C. Unitary
B. Inelastic D. Perfectly elastic
13. Which of the following statement is true regarding the determinants of price elasticity of
demand?
A. Availability of substitutes for product makes its demand less price elastic
B. Price elasticity of demand tends to be more elastic in the short run
C. Price elasticity of demand for a luxury good tends to be more elastic
D. The higher the proportion of income spent on a product, the less elastic its demand
14. For which of the following pairs of goods will the cross price elasticity of demand likely
assume a negative value?
A. Toshiba and Lenovo laptops C. Sanitizer and alcohol
B. Harar and Badele Beers D. Internet and Google Chrome
15. Given the market demand curve for a commodity, a rightward shift in the supply curve causes
A. A fall in the equilibrium price but an increase in equilibrium quantity
B. A rise in the equilibrium price but a reduction in equilibrium quantity
C. A rise both in the equilibrium price and quantity
D. A reduction in both the equilibrium price and quantity
16. What is the effect of increase in demand keeping the supply constant?
A. Lowering the new market- clearing price and raising the new equilibrium quantity
B. Raising the new market- clearing price and lowering the new equilibrium quantity
C. Lowering both the market- clearing price the equilibrium quantity
D. Raising both the market- clearing price and the equilibrium quantity
17. If both the market demand and the market supply increase, then
A. Equilibrium quantity increases and price might fall
B. Equilibrium quantity decreases and price falls
C. Equilibrium quantity increases and price might remain unchanged
D. Equilibrium quantity increases and price might also increase
E. All except ‘B’
18. Which of the following will always increase the equilibrium price?
A. A rise in demand combined with a fall in supply
B. a fall in both demand and supply
C. a rise in both demand and supply
D. a fall in demand combined with a rise in supply
19. The law of supply states that, all other things being constant,
A. As price rises, the corresponding quantity supplied increases
B. As price rises, the corresponding quantity supplied decreases
C. As price decreases, the corresponding quantity supplied increases
D. None
20. Using the theory of supply, we can deduce that the price of wheat in Ethiopia can decrease if
A. A higher tax is imposed on farmers
B. An improved seed is discovered by Kulumsa research institute
C. All wheat farmers started producing three times a year using irrigation and rain
D. The price of fertilizer is increased
21. Which of the following short run cost curves is not U-shaped?
A. Average variable cost
C. Average cost
B. Average Fixed cost
D. Marginal cost

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22. If the supply curve has a horizontal shape, then it means
A. Supply is perfectly inelastic
B. Supply is perfectly elastic
C. Very small changes in price level affect the quantity supplied to a great extent
D. A very small change in price results a smaller changed in quantity supplied
23. Identify the correct relationship between average costs and marginal costs.
A. When AC is falling MC lies above AC
B. When AC is raising MC lies below AC
C. MC crosses AC at its minimum
D. When MC is minimum AC is rising
E. None
24. Which one of the following is true about the relationship between MP, AP and MC, AVC?
A. Production functions are the mirror reflection of cost functions
B. When the MP Product is minimum, average product is at its maximum
C. When the average cost is at its minimum MP is at its maximum
D. When the AP is at its maximum MC is at its minimum
E. None
25. Suppose the firm faces cost function given 𝑏𝑦 𝐶(𝑄) = 0.1𝑄2 + 𝑄 + 10, then the AFC and
the ATC of producing 2 units of outputs are and respectively.
A. 1.5 & 7.2 C. 5 & 6.2
B. 5 & 3.5 D. 2 & 3.5
26. Which one of the followings is false about cost curves?
A. TFC is a horizontal line.
B. The vertical distance between AVC and AC decreases as output increases.
C. Both AVC and AC curves are “U” shaped.
D. None.
27. If a Total Cost Function of a firm is given by 𝑇𝐶 = 𝑄2 − 2𝑄 + 4, then the marginal Cost of
the 4th unit is:
A. 6 B. 4 C. 12 D.8

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28. Which of the following statements is not correct about costs in the short run?
A. Fixed costs are constant.
B. Variable costs change as output changes.
C. Average fixed costs are constant.
D. Average variable cost curves are typically U-shaped.
29. Marginal cost equals to:
A. 𝑇𝐶
𝑄 B. 𝑑𝐴𝑇𝐶 C. 𝑑𝑇𝐶 D. 𝑑𝑄
𝑑𝑄 𝑑𝑄 𝑑𝑇𝐶

30. If marginal cost is equal to average total cost, then

A. Marginal cost is minimized. C. Average variable cost is minimized.
B. Average total cost is minimized. D. Marginal cost is zero.

Part III. Calculate the correct answer (show all the necessary steps; neat work has value)

1. Suppose a firm faces a cost function TC = 10+12Q+3Q2. Given the cost functions, find
expressions that represent the following functions (1 point each)
A. AFC B. AVC C. ATC D. MC
2. Use the following cost schedule of a hypothetical firm producing output using fixed,
capital and variable input, labor.

Q TFC TVC TC MC AFC AVC AC

0 50 0 50 - - - -
1 50 A 50 50
2 78 B 25 39
3 98 32.7 E
4 112 14 C 40.5
5 180 18 36
6 200 D

A. The value of “A” = (1 pt)

B. The value of “B” = (1 pt)
C. The value of “C” = (1 pt)
D. The value of “D” = (1 pt)
E. The value of “E” = (1pt)

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3. Suppose an increase in price of a good from Birr 4 to Birr 5 results in increase in quantity
supplied from 1,000 unit to 1,500 units. Then compute price elasticity of supply, ES; and
interpret your result (2 points)
4. Given market demand Qd = 50 - P, and market supply P = Qs + 5
A. Find the market equilibrium price and quantity? (2 points)
B. What would be the state of the market if market price was fixed at Birr 25 per
unit? (2 points)

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 Answer Sheet

Name; ID:

Section: Department:

PART I: TRUE OR FALSE (0.5 Point each = 5 points)

1. 6.
2. 7.
3. 8.
4. 9.
5. 10.
PART II: Choose (1 Point each= 30 points)
1. 16.
2. 17.
3. 18.
4. 19.
5. 20.
6. 21.
7. 22.
8. 23.
9. 24.
10. 25.
11. 26.
12. 27.
13. 28.
14. 29.
15. 30.

PART III: WORKOUT (15 points)

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