INTRODUCTION TO ECONOMIC

PSCI 1500: Introduction to

EconomicsMIDTERM EXAM 1

Review

1 April 2013

MIDTERM EXAM 1

Range (20%)

Total Percentage

Remarks

25.5 – 30.0

1 2% Excellent

20.5 – 25.0

4 8% Good

15.5 – 20.0

17 34% Safe zone

10.5 – 15.0

22 44% Need more effort

10 and below

6 12% Need the most effort

Gentle reminder : Midterm 2 – 29 April 2013

1. Economics deals primarily with the concept ofA. change.B. power.C. poverty.D. scarcity.

2. The opportunity cost of an item isA. what you give up to get that item.B. always equal to the dollar value of the item.C. always less than the dollar value of the

item.D. the number of hours needed to earn the money

to buy it.

PART A - MCQ

3. Which of the following is not a factor of production? A. LandB. WagesC. LaborD. Capital

4. Producers _______ factors of production in the _______ market. A. Buy; factorB. Sell; stockC. Buy; stockD. Sell; product

PART A - MCQ

5. Ceteris paribus, the demand curve for a good will shifts to the right in response to: A. A decrease in incomeB. An increase in the costs of productionC. An increase in tastes or preferences for the goodD. A higher price for the good

6. A shift of the demand curve is referred to as a change in: A. Quantity demandedB. Quantity demanded due to a change in priceC. DemandD. Supply

PART A - MCQ

7. Ceteris paribus, according to the law of supply, if the price of lawn mowing service changes from $50 per lawn to $45 per lawn, then the: A. Quantity supplied of lawn mowing will decreaseB. Supply curve for lawn mowing will shift to the rightC. Quantity supplied of lawn mowing will increaseD. Quantity supplied of lawn mowing will stay the same

8. If a market surplus exists: A. The only resolution is for the government to set the priceB. Consumers will compete for the product buy offering to pay moreC. Producers will compete for customers by reducing pricesD. The equilibrium price is equal to the price ceiling

PART A - MCQ

9. A price ceiling is: A. A lower limit on the price of a goodB. Above the equilibrium priceC. An upper limit on the price of a goodD. A limit on the price of goods sold abroad

10.Which of the following would cause an increase in the equilibrium price of apples? A. People decide to drink more apple juiceB. The wages paid to apple pickers decreaseC. More farmers decide to grow applesD. The government pays a subsidy to apple farmers

PART A - MCQ

11.To produce a combination of goods and services beyond the current production possibilities curve, an economy must: A. Use more of the available resources and technologyB. Raise the prices of goods and services so that firms will produce moreC. Find more resources or develop new technologyD. Experience population growth

12.Output per labor hour is used to measure: A. Production possibilitiesB. Nominal GDPC. Employment rateD. Productivity

PART A - MCQ

13.If the total output for an economy is equal to $840 billion and the total number of labor hours is 24 billion, then labor productivity is equal to: A. $201.60 per hourB. $35.00 per hourC. $24.00 per hourD. $18.00 per hour

14.Which of the following combinations of indicators would be most consistent with a booming economy that is approaching full employment? A. High consumer confidence, high unemployment, rising rates of inflationB. High consumer confidence, high unemployment, low inflationC. High consumer confidence, low unemployment, rising rates of inflationD. Low consumer confidence, low unemployment, low inflation

PART A - MCQ

15.Productivity is definitely enhanced by: A. Higher taxesB. More government regulationC. Education and training activitiesD. Limits on immigration

16.Suppose that in a population of 100 million people, 50 million are in the labor force and 47 million are employed. The unemployment rate is: A. 6.0 percentB. 6.4 percentC. 53.0 percentD. 94.0 percent

PART A - MCQ

17.Which of the following types of unemployment would best characterize a swimming instructor's unemployment during the winter months? A. Structural unemploymentB. Frictional unemploymentC. Seasonal unemploymentD. Cyclical unemployment

18.Automobile workers in Detroit are unemployed

because robots are now being used on assembly lines but, at the same time, job vacancies exist for computer programmers. In this case, the automobile workers are an example of: A. Cyclical unemploymentB. Structural unemploymentC. Frictional unemploymentD. Seasonal unemployment

PART A - MCQ

19.Gross Domestic Product (GDP) is defined as the market value ofA. all final goods and services produced by a country’s

citizens in a given period of time.B. every good and service produced within a country in a

given period of time.C. all final goods and services produced within a country

in a given period of time.D. all goods and services produced by a country’s

citizens in a given period of time.

20.Goods and services produced and sold illegally areA. excluded from GDP.B. included in GDP.C. included in GDP only if income from the sales is

reported on income tax returns.D. included in GDP to the extent that they can be measured

PART A - MCQ

a) Ahmed enjoys playing tennis, but the more he spends on tennis, the lower is his grades in economics. The graph shows the trade-off he faces.

i. Identify Ahmed's opportunity costs of 2 hours playing tennis if he increases the time he plays from 4 to 6 hours a week

Answer : 75 % – 70 % = 5% of economics grade ii.Describe the relationship between the time Ahmed spends

playing tennis and the opportunity costs of an hour of tennis

Answer : The more hours spent to play, the lower the economics grade, vice versa

PART B – QUESTION 1

b) Explain TWO (2) reasons why companies merge horizontally.

Answer: Any 2 of the following points with explanation. reduce competitionincrease market powercost savingseconomies of scale and scopeSave the ailing company


“The pr ice elastic ity of demand for tobacco is 0 .51”

c) Interpret the above information. Analyse the usefulness in knowing the elasticity coefficient from the perspective of:

i. Business firmsii. Government


Answer : Inelastic – less sensitive. Large percentage of the price only lead to small percentage change in quantity.i.Business firmsHelp firm decide whether to change prices in order to maximize their goal of profit maximization. Since the demand were relatively inelastic, the firm would increase the price to increase total revenue (since buyer will not reduce their consumption much or drop in sales is not that big).

ii.Government Tax charges raise the price of the goods affected, governments tend to charge taxes on goods that have a relatively inelastic demand, i.e. petrol and tobacco to gain more revenue from taxation, since the buyer has less responsive change in demand.

d) Evaluate GDP gap in measuring the economic performance.

Answer: Refers to the difference between potential GDP and actual GDP or actual output Y*–Y = GDP GapY* is actual GDP/output Y is potential GDP/output Actual GDP - what the country actually producesPotential GDP - what the economy would produce if all its resources were fully utilized.

If Y*–Y yields a positive number (inflationary gap) (Y* > Y) - inflation tends to rise If Y*–Y yields a negative number (recessionary gap)(Y* < Y) - Downward pressure on inflation, signifying deflation.


a) Describe the legal separation between limited and unlimited liability.

Answer: Limited liability - Business owner’s financial liability is limited to the value of a person's investment in the business, there is a legal separation between ownership and liability since a stockholder can lose not more than he paid for the shares of ownership, regardless of the firm's financial obligations.Unlimited Liability - Business owner’s personal assets are subject to use as payment for business debts, it can be seized if the business's assets are insufficient to satisfy claims against it.


b) Explain the structure of an Islamic economic system.

Answer:Islamic Economic System belongs under the categories of a mixed economic system. However, it has the most distinct characteristic where it operates within the boundary of Shari’ah law and Islamic teaching based on Al-Qur ’an & As-Sunnah.

Important characteristic is the production of halal (Islamic permissibility) goods & services, the prohibition or condemnation of interest (riba) and the fiscal policy that levy zakat (Islamic tax) system as the basis of taxation.

Has a very distinguishable system for distribution of wealth: Those who have a primary right – those who have right to wealth directly in consequence of participation in the process of production

Those who have a secondary right – those who have no direct part in the process of production, but charged upon the owners of factors of production to make them co-sharers in their wealth.


c) Analyse the economic effects from the following events by specifying the consequent changes in the equilibrium price and equilibrium quantity of the affected goods. You are highly encouraged to utilize the graphical method to support analysis.

i. Market demand for chicken - the month of Ramadhan is expected to end soon.

Answer : Demand shift rightward, price and quantity equil ibrium increases.ii. Market demand for white bread - many consumers

adopts a low carbohydrate diet.Answer : Demand shift leftward, price and quantity equilibrium decreases.iii.Market supply for corn - an increase in the price

of fertilizer.Answer : fertil izer used to grow corn makes it more costly to grow corn at each and every price, supply of corns decreases thus increasing the equilibrium price and decreasing the equilibrium quantity.


“Government-set prices undermine the rationing function of competitive prices.”

d) Discuss the above statement carefully in terms of both price ceilings and price floors.

Answer : A ceiling price - government may hold prices at a level that is below the market equilibrium price

Any price below that would find an excess quantity demanded over that supplied (shortage would develop and the market would fail to ration) (QD > QS).

In unregulated competition, this situation could not persist because competition would drive up the price until the equilibrium quantity and price were reached.

A price floor - government may hold prices above the market equilibrium price by agreeing to pay the price for any unsold surplus.

The rationing function of the competitive price system will not work because sellers will have no competitive pressure to lower prices to get rid of the surplus (QS > QD).


a) Differentiate between the conventional and Islamic view on scarcity.

Answer: Scarcity - situation when human wants are unlimited, but the means to satisfy it are limited

The view of ‘scarcity’ from the conventional perspective (textbook view) is absolute scarcity that human wants are unlimited and not possible to be fulfilled due to the limited of resources.

In contrast, from Islamic perspective, resources are abundance, since Allah is bountiful. Human should differentiate between ‘needs’ and ‘desire’ or ‘lust’. Scarcity exist, but not at the level of necessities, but relative to desire or lust, (relative scarcity, not absolute scarcity)


b) Using a “Circular Flow Diagram”, evaluate the flow that result from more household able to work and gain money income, at the same time improve their purchasing behaviour.

Answer:In the input market, increase the flow of factors of production from households to businesses and flow of income from businesses to households

In the output market, increase the money flow from households to businesses and flow of goods and services from businesses to households

Diagram is a MUST– 2 marks


c) Based on the information provided in the table below, analyse the unemployment pattern between Year 2012 and 2013.


Year 2012 2013 Population 290 million 230 million Labor Force 150 million 190 million

Number of Employed 120 million 160 million Answer: Between the 2 years;Number of unemployed labor force remain the same – 30mUnemployment rate has decreases 20% (2012) to 15.8% (2013).Possible reasons

Decrease in total population – could be due to emigration, low birth rate, brain drain etc.

Increase in number of employed – could be due to changing or improving economic activity, education and HRD, productivity etc.

d) Discuss the role of expectation towards inflation. How will inflation affect those who own real asset?

Answer:

Demand-pull side : fear of high price, current spending increase, gives upward pressure to the current price

Cost-push side : firm expects cost will increase, will raise price in anticipation of the future higher cost

Inflation will appreciate the assets, thus it will benefit those who have assets and hurt those who just started to own wealth or those who wants to purchase assets.


PSCI 1500: Introduction to

Economics

Introduction : Business Cycle

Business cycle refers to wave-like fluctuations in aggregate economic activities i.e. national income, employment and output.

It is composed of periods of good trade with rising prices and low unemployment percentages and followed by periods of bad trade with falling prices and high unemployment percentages.

BUSINESS CYCLE

What is a business cycle?

PEAK OR BOOM The period where the economy is at full

employment. Maximum output and lowest unemployment rate.

Real GDP

Year

PEAK

RECESSION

TROUGH

RECOVERY

PEAK

RECESSION The period where real GDP declines. Output decreases and unemployment rate

increases. A deep and long recession is known as

depression. TROUGH The period where the output

is. minimum and unemployment rate is maximum.

RECOVERY The period where the

output level increases and unemployment rate declines.

PHASES OF BUSINESS CYCLE

NEXT CLASS

Wednesday 3 April 2013

8.00 - 9.20 pmLR22

Continue withTopic 8 - Business Cycle & Causes Of Economic Fluctuations

See ya!!

INTRODUCTION TO ECONOMIC

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