UNIVERSITY OF ZIMBABWE

DEPARTMENT OF ECONOMICS
ECON101 Economic Principles
November 2010 Supplementary Examination
Time Allowed: 3 hours
Instructions: Answer ALL questions in Section A, ONE question in Section B, and ONE
question in Section C. Answer all questions in Section A on the separate sheet provided
by marking the appropriate answer with an ‘X’. Marks for each question are indicated in
parentheses.

SECTION A (40 Marks)

1. The production possibility frontier is concave to the origin because

A. An additional unit of one good can be produced only if more and more of the
other good is given up
B. Resources are not perfect substitutes
C. As resources are moved from the production of one goods into the production
of the other, each additional resource unit produce less than the previous one
D. All of the above

2. If the point elasticity of demand is less than one a price reduction will lead to
A. Increase in total revenue
B. A decrease in profits
C. A decrease in total revenue
D. An increase in profits

3. When household incomes go up and the quantity of a product demanded goes

down, the product is
A. Necessity
B. Luxury

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 C. Inferior
D. Normal good

4. If a potential renter offers a bribe to a landlord for a rent-controlled apartment, this

is an example of
A. A distortion caused by a price floor
B. Black market activity
C. Tax incidence
D. A deadweight loss

5. If you are willing to pay $20 for a shirt but you only have to pay $16, the $4
difference is
A. Your consumer surplus
B. The producer’s deficit
C. Your consumer deficit
D. The producer’s surplus

6. If the price of good X is $15 and the price of good Y ius $45, the trade-off
illustrated on the budget line is
A. Three X for one Y
B. One X for one Y
C. One X for 1/3Y
D. Both A and C above

7. Indifference curves slope downward to the right because

A. Goods are substitutable
B. Goods are not substitutable
C. More is always preferable to less
D. Inferior goods are crowded out at some point

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8. To maximize one’s satisfaction when buying units of A and B, one should ensure
that the marginal utility of the dollar spent on product A is
A. As high as possible
B. As low as possible
C. Greater than the marginal utility of the last dollar spent on B
D. Equal to the marginal utility of the last dollar spent on B.

9. In which of the following circumstances will consumer surplus be zero?

A. Demand is perfectly inelastic
B. Demand is perfectly elastic
C. Elasticity of demand is one.
D. Supply is perfectly inelastic.

10. Suppose that a tobacco farmer increases all inputs fourfold and his output increases
three fold. What does this illustrate?
A. Decreasing marginal cost
B. Decreasing returns to scale
C. Economies of scale
D. The law of diminishing returns.

11. When a monopolist is able to sell its product at different prices, it is engaging in
A. Quality adjusted pricing
B. Distribution pricing
C. Price discrimination
D. Price differentiation

12. An industry is classified as monopolistic competition when

A. There are few sellers
B. Sellers are faced with several markets
C. There are barriers to entry
D. There are differences between the products of firms

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13. An agreement among firms over production and price is called
A. Collusion
B. Conspiracy
C. Trade agreement
D. Multinational cooperation

14. A firm’s Fixed Costs are $500, Average Total Costs of its output is $2 and
Average Variable Cost is $1.50. What is the firm’s total output?
A. 100 units
B. 1000 units
C. 250 units
D. 150 units

15. In the theory of the firm, the Short Run is defined as the period of time when
A. Output is fixed
B. All factor inputs are fixed
C. Supply cannot adjust to a change in demand
D. At least one factor input is fixed

16. Which of the following conditions should hold for a firm to make normal profits
A. AC=AR
B. MC=AC
C. MR=MC
D. AC=MR

17. Abnormal profits cannot be earned under conditions of

A. Oligopoly in the long run
B. Monopolistic competition in the long run
C. Oligopoly in the short run
D. All of the above

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18. Which is not a characteristic of a perfectly competitive industry?
A. Consumers have no reason to prefer one firm’s product to another
B. There are enough firms so no one can influence market price
C. Any firm can enter and leave the industry
D. Industry demand is perfectly elastic

19. Which of the following necessarily declines continuously?

A. Average Fixed Cost
B. Marginal Cost
C. Average Variable Cost
D. Total Fixed Cost

20. If the self-correcting mechanisms of market economies work slowly, then

A. Discretionary fiscal policy is likely to do more harm than good
B. Discretionary monetary policy is likely to do more harm than good
C. Periods when the unemployment rate exceeds the economy’s natural
unemployment rate will be brief
D. Policy makers may be able to help stabilize the economy through the use of
discretionary macroeconomic policies.

21. Which of the following would be counted as frictional unemployment?

A. Due to the negative growth of GDP, Susan was laid off
B. John was fired from his job after he got into an argument with his foreman
C. Although there were jobs available, Jones was unable to find an employer
with an opening
D. When the plant was modernized, Jones lost her job because she did not have
the skill needed to operate the new equipment.

22. Which of the following would be counted as structural unemployment?

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 A. Due to the negative growth of GDP, Susan was laid off
B. John was fired from his job after he got into an argument with his foreman
C. Although there were jobs available, Jones was unable to find an employer
with an opening
D. When the plant was modernized, Jones lost her job because she did not have
the skill needed to operate the new equipment

23. Given the hypothetical information below about the conditions in the labour
market, what is the unemployment rate?

Employed 177 000

Discouraged workers 2000
Unemployed 13 000
Household workers 20 000
Students 15 000
Retirees 19 000
Disabled 5000
Labour force 190 000
Population 16 years and above 249 000

A. 5.3%
B. 6.0%
C. 6.8%
D. 7.9%

24. According to the Keynesian view, an increase in which of the following would
most likely decrease current aggregate demand?
A. Budget deficit
B. Transfer payments
C. Personal income tax rates
D. Government expenditures

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25. When using countercyclical fiscal policy, should the government generate a budget
surplus or deficit to fight a threatened recession and inflation?
To fight a recession To fight inflation
A. Budget surplus Budget deficit
B. Budget deficit Budget surplus
C. Budget deficit Budget deficit
D. Budget surplus Budget surplus

26. The economy is in recession, and countercyclical fiscal policy has been enacted. If
the policy has been effective and the AD curve has moved upward to the right, the
result is
A. Lower prices and more output
B. Higher prices and more output
C. Lower prices and lower unemployment
D. Higher prices and higher unemployment

27. The RBZ purchased $10 million in treasury bills (T-Bills) from the public during a
period when there were no excess reserves in the banking system. The reserve
requirement is 20% . the money supply has the potential to
A. Fall by $50 million
B. Fall by $20 million
C. Increase by $10 million
D. Increase by $50 million

28. The money supply schedule is vertical because the

A. Money supply is dependant upon interest rates
B. Demand schedule is downward sloping
C. Money supply is independent of interest rates
D. Money supply is set by senate

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29. Regarding macroeconomic policy lags, which of the following is typically the
shortest?
A. Impact lag for fiscal policy
B. Impact lag for monetary policy
C. Implementation lag for fiscal policy
D. Implementation lag for monetary policy

30. For two countries to gain from trade it is necessary that

A. One is richer than the other
B. They have different opportunity cost ratios
C. They have a similar of consumption
D. They have similar levels of economic development

31. Devaluation would be most appropriate for a country that is facing a

A. Deficit in its current account balance
B. Surplus in its current account
C. Huge budget deficit
D. None of the above

32. Public goods can be defined as

A. Goods supplied to all taxpayers
B. Goods supplied to all people whether they pay for them or not
C. Goods supplied to people who consume in groups
D. Goods supplied to welfare recipients

33. A tax that takes the same amount from everyone, regardless of income, is
A. Regressive
B. Progressive
C. Proportional

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 D. Not fair at all

34. Given that the exchange rate is R7 = US$1, and shoes sell for US$20, then (barring
transport costs) the competitive South African shoe price would be
A. R2.86
B. R20
C. R7
D. R140
35. An item designated as money that is intrinsically worthless is:

A. precious metals
B. barter items
C. fiat money
D. commodity money

36. The difference between a bank's actual reserves and its required reserves is its:

A. required reserve ratio

B. net worth
C. excess reserves
D. profit margin

37. When economists speak of the 'demand for money', which of the following
questions are they asking?

A. How much cash do you wish you could have?

B. How much wealth would you like?
C. What proportion of your financial assets do you want to hold in non-interest
bearing forms?
D. How much income would you like to earn?

38. Which of the following events will lead to an increase in the demand for money?

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 A. An increase in the level of aggregate output.
B. An increase in the interest rate.
C. An increase in the supply of money.
D. A decrease in the price level.

39. The main reason that people hold money - 'to buy things' - is referred to as the:

A. transactions motive
B. profit motive
C. precautionary motive
D. speculation motive

40. In the equation C = a + bY, which describes the aggregate consumption function,
'b' stands for?

A. The amount of income when consumption is zero.

B. The marginal propensity to consume
C. The amount of consumption when income is zero
D. The average consumption level.

41. The marginal propensity to save (MPS) is:

A. the fraction of a change in income that is saved

B. the ratio of saving to income
C. the average amount of income that is saved
D. the ratio of income to saving

42. The ratio of the change in the equilibrium level of output to a change in some
autonomous variable is the:

A. elasticity coefficient
B. automatic stabiliser
C. multiplier.

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 D. marginal propensity of the autonomous variable

43. Assuming there is no government or foreign sector, the formula for the multiplier
is:

A. 1/MPC
B. 1 – MPC
C. 1/MPS
D. 1/(1 + MPC)

SECTION B

Answer ONE question only in this section (35 marks)

1.
a) State and explain the three motives for demanding money.

b) Give two components of narrow money.

c) A credit card is money. True or False?

d) What major tools does a central bank use to control money supply?

e) Differentiate between nominal GDP and real GDP.

f) State three alternatives measures of welfare besides the GDP

g) What is the difference between the MPC and the APC?

h) Why must the sum of the MPC and MPS equal 1?

i) Fill in the blank spaces in the table below?

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 Y C S APC APS MPC MPS
240 -4 - -
260 0 - - - -
280 4 - - - -
300 8 - - - -
320 12 - - - -

j)
i) Distinguish accounting profits from economic profits.

ii) Briefly explain the difference between technical and economic efficiency.

Use the following table to answer question iii), iv) and v)

Labour Units Total Product Marginal Product Average Product

1 10 A B
2 C 12 D
3 36 E 12
4 32 F 8

iii) Draw the table and calculate figures represented by A, B, C, D, E and F.

iv) According to the table when do diminishing returns set in?

v) Explain the relationship between marginal product and average product?

vi) State the difference between a quota and a tariff?

vii) Briefly explain the advantages of operating a fixed exchange rate regime
over floating exchange rate system.

2.
a) Using diagrams an a brief written explanation, illustrate the effect in the
market for rice of the following.

i) a rise in the price of mealie meal

ii) development of new seed variety which significantly increases rice yields.

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 [ 4 marks]

b) i) “Elasticity of demand is the same at all points along a straight line demand
curve”. True or False . Explain briefly. [ 3 marks]

ii) Explain briefly any two determinants of price elasticity of demand and
price elasticity of supply.

c) In response to complaints about falling prices from farmers, the government

decides to impose a price floor on the price of wheat. Using a diagram
illustrating the market of wheat, illustrate and explain the whether the price
floor would need to be fixed at a point above or below the equilibrium market
price. [4 marks]

d) State the difference between

i) Cardinal utility and ordinal utility [1 mark]
ii) An indifference curve and a budget line [1 mark]

e) Derive the demand curve for a normal good using indifference curves.
[ 2 mark]

f)
i) Distinguish between statutory from excess reserves. Why are statutory
reserves important? [ 3 marks]

ii) Explain briefly how banks create money. [5 marks].

iii) Using an example explain how the following monetary policy tools work:

Discount rate.
Open market operation [ 3 marks]

iv) “Monetary policy is more effective than fiscal policy”. Comment briefly
on the statement. [ 3 marks]

g) Write concise notes on the following

i) Natural rate of unemployment (NAIRU)
ii) Short run Phillips curve .
iii) Hysteresis [3 marks]

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 SECTION C

Answer ONE question only. (25 marks)

1. a)
i) With the aid of clearly labelled diagrams, explain the causes of three types of
inflation. [10 marks]

ii) Briefly discuss the economic policies that you would recommend to control
each type of inflation. [5 marks]

b) Why do perfectly competitive firms earn normal profits in the long run?
Clearly explain the adjustment processes. [10 marks]

a) Why might a country resort to restricting international trade? What tools may it
use in the process? [13 marks]
b) Clearly explain why firms in a perfectly competitive industry earn normal profits
in the long run [12 marks]

-END-

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