EC1101E/EC1301

NATIONAL UNIVERSITY OF SINGAPORE

EC1101E INTRODUCTION TO ECONOMIC ANALYSIS/
EC1301 PRINCIPLES OF ECONOMICS
(SEMESTER III : AY2006-2007)
Time Allowe : 2 !o"#$
INSTRUCTIONS TO CANDIDATES
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EC1301
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or
answers the question.
1) Which of the following best describes a production possibilities schedule:
A) The concept of achieving an impossible goal.
B) The concept of unlimited possibilities.
C) The concept o opportunit! cost.
D) The elimination of scarcity.
) The concept of a good
!roduction !ossibility for "omputers and T# sets
"ombination "omputers T# $ets
A % &
B 1' '
" (' )
D ** *
*+ (
, )( 1
- )* %
() .efer to above Table. A combination of (% computers and ( television sets
A) re/uires an increase in technology
") illustrates an unemplo!ment o resources
") is possible only with efficient use of resources
D) is unattainable because it re/uires resources that are not available
) cannot be achieved with the current resources
*) 0ou own a building that has four possible tenants: a caf1 business2 a craft store
business2 a boo3store business2 and a hardware store business. ach tenant is willing to
pay the following monthly rental 4(2%%%5 4*2%%%5 4)2%%%5 and 4'2%%%2 respectively. 0ou
will have to pay electricity costs of 4'%%2 4(%%%2 41%%%2 4('%% respectively according to
the different tenants. 0ou decide to rent to the boo3store. Which statement is correct6
A) The opportunity cost of your choice is 4*'%%
B) The opportunity cost of your choice is 4)%%%
") The ne7t best alternative is to rent to both the hardware store and the caf1 owners
#) The opportunit! cost o !our choice is $%&''
) The opportunity cost of your choice is 4'%%%
)) 0ou are the owner and only employee of a company that writes computer software.
8ast year2 you earned total revenues of 4+%2%%%. 0our costs for e/uipment2 rent2 and
supplies were 4&%2%%%. To start this business you /uit a 9ob at another computer software
firm that paid 4)%2%%% a year. During the year2 your economic costs were:
() $)''*'''. B) 4&%2%%%.
") 4)%2%%%. D) 41*%2%%%. ) 41'%2%%%
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EC1301
') :f the price of product ; falls and this causes the demand for product 0 to shift to the
right2 then we can conclude that ; and 0 are
A) normal. B) inferior. C) complements. D) substitutes. ) not related
+i,ure %
&) .efer to ,igure (. Assume that there are only two people li3e !erson A and three
people li3e !erson B in the mar3et for compact discs and the mar3et supply curve is given
by !<%.**= > *. The e/uilibrium price of "Ds in the mar3ets will be between????????2
and /uantity sold would be between ????????.
A) 41%@41(5 A@1( "Ds B) 4(%@4()5 *@' "Ds ") 41%@41(5 1*@1B "Ds
D) 41(@4(%5 1%@1B "Ds E) $)'-$)%* ).-%& C#s
+i,ure /
A) .efer to ,igure *. The number of videotapes Amy rents per wee3 increases from * to '.
This is caused by:
A) a decrease in the price of popcorn2 which is a complement to videotapes.
") a 0ecrease in the rental price o vi0eotapes.
") an increase in income if videotapes are a normal good.
D) either A or B
) either B or "
B) $uppose there are 12%%% identical consumers of ballpoint pens. ach consumer would
buy three pens at the price of 41 each and one pen at the price of 4( each. Which of the
following is a point on the mar3et demand curve for ballpoint pens6
A) 12%%% pens at 41 each B) 1 pen at 4(
") (2%%% pens at 4( each #) /*''' pens at $) each ) )%%% pens at 4* each
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EC1301
!rice =uantity Demanded =uantity $upplied
4%.+% (% '%
4%.B% (' )%
4%.A% *% *%
4%.&% *' (%
4%.'% )% 1%
Table )
+) .efer to Table 1. :f the current price is 4%.'%2
A) producers are not able to sell all they are willing to sell
B) a surplus of *% units results.
") producers are willing to produce more than is actually bought
#) consumers are willin, to bu! more than is actuall! pro0uce0
) consumers are willing to buy the same amount as what is produced
1%) A government energy policy that focuses on new technologies for conservation and
new sources of energy would result in
A) an increase in both demand and supply for gasoline
B) a decrease in both the supply and demand for gasoline
C) an increase in the suppl! o ,asoline alon, with a 0ecrease in the 0eman0
or
,asoline
D) an decrease in the supply of gasoline along with a increase in the demand for
gasoline
) Co change to either demand or supply for gasoline
+i,ure 1
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EC1301
11) .efer to ,igure &. :f $1 and D1 are the original curves2 when a tsunami hit Banda
Aceh in (%%) and destroys 3ey industries and claimed 1%%2%%% lives2 what li3ely happened
in the economy of Aceh6
A) an decrease in /uantity demanded and an decrease in supply.
") an 0ecrease in 0eman0 an0 an 0ecrease in suppl!.
") an decrease in /uantity demanded and an decrease in /uantity supplied.
D) an decrease in demand and an decrease in /uantity supplied.
) an increase in demand and supply
1() "arla buys one soft drin3 a day regardless of the price. Which of the following
statements is correct with respect to "arla6
A) price elasticity of demand for soft drin3s is infinite
") price elasticit! o 0eman0 or sot 0rin2s is 3ero
") price elasticity of demand for soft drin3s is 1
D) cross@price elasticity of demand for soft drin3s is 1
) cannot be determined
+i,ure 4
1*) .efer to ,igure A. Dsing the midpoint formula2 if the price of a gardenburger is
increased from 4B to 41%2 the price elasticity of demand e/uals:
() 5.&. B) +.%. ") %.'. D) %.%). ) 1
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EC1301


















Table %
1)) .efer to Table (. :f price of movies are 4& and price of boo3s are 4)2 and the
consumer wants to spend 4*%2 how many movies should : watch6
A) Eero. B) 1. ") (. #) /. ) )
1') 8ynn is consuming ) sandwiches and 1( drin3s. :f drin3s cost half as much as
sandwiches then:
A) 8ynn is ma7imiEing her utility if she derives three times as much utility from
the last sandwich as from the last drin3.
B) 8ynn is ma7imiEing her utility if she derives three times as much utility from
the last drin3 as from the last sandwich.
C) L!nn is ma6imi3in, her utilit! i she 0erives twice as much utilit! rom the
last san0wich as rom the last 0rin2.
D) 8ynn is ma7imiEing her utility if she derives twice as much utility from the last
drin3 as from the last sandwich.
) 8ynn should reduce drin3s to buy more sandwiches
$cenario 1: A firm produces (%% units of output per day2 and hires 1% wor3ers at a cost of
4(%% per day per wor3er. The price of the output is 41' per unit. The firm pays a daily
rental rate of 4'% on their factory. They have a three year lease on the factory and have no
other e7penses.
1&) The firmFs average variable cost is:
() $)' per 0a!. B) 4'% per day. ") 4&% per day. D) 4(%%% per day. ) 4(%'% per day
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EC1301
+i,ure )%
1A) .efer to ,igure 1(. The 7clusive -ift "ompany has a monopoly over the sale of gold
hula hoops. This company is currently selling '% gold hula hoops at a price of 4'2%%%. 0ou
are hired as an economic consultant to this company. 0ou should advise this monopolist to:
A) produce in the short run and e7pand capacity in the long run.
") pro0uce in the short run but e6it the in0ustr! in the lon, run i con0itions
0o not chan,e.
") shut down in the short run and e7it the industry in the long run.
D) shut down in the short run but e7pand capacity in the long run if conditions do
not change.
) 3eep things unchanged
Price Output Mar,inal
Cost
/. % %1
/1 / %4
/5 5 %.
/% & %7
/' 1 /'
%. 4 /)
%1 . /%
%5 7 //
Table &.
1B) .efer to Table '. The profit ma7imiEing monopolist will choose to produce ????????
units of output.
A) ' B) & ") * #) 5 ) (
+i,ure )/
1+) .efer to ,igure 1*. What is the loss in consumer surplus when the mar3et goes from
perfectly competitive to a monopoly mar3et structure6
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EC1301
A) 4'%% B) 4('%% ") 4*%%% #) $/&'' ) 4)%%%
,irm A
Duopoly !rice "artel !rice
,irm B Duopoly !rice ,irm A !rofit: %
,irm B !rofit: %
,irm A !rofit: @4'%%%
,irm B !rofit: 41'%%%
"artel !rice ,irm A !rofit: 41'%%%
,irm B !rofit: @4'%%%
,irm A !rofit: 41%%%%
,irm B !rofit: 41%%%%
(%) .efer to ,igure 1*. :f the duopoly game is played once2 each firm will price such that
A) one charges the cartel price the other charges the duopoly price
B) both charge the cartel price
C) both char,e the 0uopol! price
D) both ma3e positive economic profits
) one charges a substantially lower price than the other
(1) Which of the following is not an e7ample of price discrimination6
A. supermar3et that offers coupons to its customers
". an electronics superstore char,es a lower price than a small retailer or the
same television set.
". an electric company that charges different rates to its business and residential
customers
D. a restaurant offers senior citiEens a discount
(() .efer to ,igure 1'.1. $i7 firms that produce chewing gum have formed a cartel. The
cartel faces the mar3et demand curve given by D. To maximize profits, the cartel should
produce ???????? pac3s of chewing gum and the price should be ????????.
A) 1)2%%%5 4.*% B) 41&2%%%5 4.*'
") 1(2%%%5 4.(' #) )%*'''8 $.5' ) 1&2%%%5 4*1
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EC1301
(*) .efer to ,igure 1'.&. :f both firms follow their dominant strategies2 ,irm 0 will earn
profits e/ual to:
() $/''. B) 4&%%. ") 4(%%. D) 4)%%. ) 4B%%
()) When there is a positive e7ternality2
() the current level o pro0uction o the ,oo0 is too low
B) the marginal benefit of producing the unit is overstated
") the marginal cost of producing the good is understated
D) all of the above
) none of the above
+i,ure )1
(') .efer to ,igure 1&. Assume that there are only two people li3e !erson A and two
people li3e !erson B in the mar3et for a public par3 Ga public ,oo0). Which statement is
true6
A) ,or * 3m
(
of par3 space2 the mar3et is willing to pay 4)B
B) ,or ) 3m
(
of par3 space2 the mar3et is willing to pay 4))
C) +or & 2m
%
o par2 space* the mar2et is willin, to pa! $5'
D) At 41%2 (% 3m
(
of par3 space should be built
) At 41(2 1' 3m
(
of par3 space should be built
9
!ar3 space G3m
(
) par3 space G3m
(
)
EC1301
Macroeconomics
(&) -raduated students from CD$ entering the labour force for the first time in Hune cause
A) A cyclical decrease in unemployment
B) A cyclical increase in unemployment
") A seasonal decrease in unemployment
D) ( seasonal increase in unemplo!ment
) A structural increase in unemployment
(A) :f the actual unemployment falls below the natural rate of employment
A) -D! falls
B) .eal output e/uals potential output
") !otential output e7ceeds real output
D) All of the above
E) 9one o the above
%''1 %''4
!rice =uantity !rice =uantity
Bananas ( 1%% ) 1('
:ce "ream ' &% ) A'
(B) .efer to the Table above. Assuming the country of Banana $plit only produces
bananas and ice@cream2 and using (%%& as the base year2 the -D! deflator for (%%A is
A) B%
B) 1('
C) )%.
D) 1&%
) 1*%
(+) A 9ob paid 4('%% in 1++%. -iven that the "!: in 1++% is &1.1 compared with 11(.* for
(%%A2 in (%%A2 what salary would be given that would be e/uivalent to that 9ob in
1++%. G"hoose the closest answer)
A) 4*%%%
B) 4*'%%
") 4)''%
#) $51''
) 4'%%%
*%) Which of the following statements is true6
A) :f real -D! grows faster than population2 the real -D! per capita will
decrease
") I real :#P an0 population ,row at the same rate* the real :#P per
capita will remain constant
") :f real -D! grows slower than population2 the real -D! per capita will
increase
D) All of the above
) Cone of the above
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EC1301
Date .eal -D!
Han (%%% 1%%
April (%%% 11%
Huly (%%% 1(%
Ictober (%%% 11'
Han (%%1 1(%
April (%%1 1('
Huly (%%1 1*%
Ictober (%%1 1('
Han (%%( 1(%
April (%%( 1('
Huly (%%( 1*%
Ictober (%%( 1*'
*1) .efer to above Table2 the recession ended in
A) Huly (%%%
B) Ictober (%%% and Huly (%%(
") Hanuary (%%1
#) ;anuar! %''%
) April (%%(
*() :n a simple economy2 $ingerpour !te 8td grows cotton and uses it to ma3e clothes. :n
the current year2 the firm produces clothes valued at 41%%%%2 half of which it sells to
consumers and half it sells to a T@shirt design company which ta3es the shirts and
adds special designs which it sells to surfers in the region for 4*%%%%. $ingapour !te
8td also sells 4*%%% worth of cotton directly to a store that sells handicrafts. Jow
much is -D! increased in the economy6
A) 41*%%%
B) 4*%%%%
C) $/&'''
D) 4*B%%%
) 4)*%%%
**) Which best e7plains what happens when a business firm purchases a drill press
manufactured in -ermany
A) There will be an increase in e7ports
B) There will be an increase in imports spending
") There will be an increase in investment spending
#) There will be an increase in both investment an0 imports spen0in,
) There will be an decrease in investment spending and an increase in imports
spending
*)) :f aggregate demand is growing faster than potential output2 then the central ban3 is
li3ely to
A) 8ower interest rates because the rate of inflation is falling or li3ely to fall
B) <aise interest rates because the rate o inlation is risin, or li2el! to rise
") .aise interest rates because the rate of inflation is falling or li3ely to fall
D) 8ower interest rates because the rate of inflation is falling or li3ely to rise
) Do nothing because it is not clear how inflation will react
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EC1301
*') Which of the following se/uence of events follows a contractionary fiscal policy6
A) K aggregate demand L K real -D! L K money demand L M real interest rate
L K investment
B) K aggregate demand L K real -D! L M money demand L M real interest rate
L K investment
") = a,,re,ate 0eman0 > = real :#P > = mone! 0eman0 > = real interest
rate > ? investment
D) K aggregate demand L K real -D! L K money demand L M real interest rate
L M investment
) M aggregate demand L K real -D! L M money demand L M real interest rate
L K investment
*&) The severity of the crowding-out effect will be reduced if:
() the central ban2 increases the mone! suppl! at the same time as the
,overnment increase ,overnment spen0in,.
B) the central ban3 decreases the money supply at the same time as the
government increase government spending.
") the central ban3 does not change the money supply when the government
increases government spending.
D) business firms become pessimistic about the future.
) the central ban3 increases the money supply at the same time as the
government increase government ta7es
*A) $uppose the consumption function in a closed economy is given by " < "
a
>%.A'02
and a economic shoc3 reduces "
a
by 4(% million2 how much will e/uilibrium income
decrease by6
A) 4(% million
B) 4&% million
C) $.' million
D) 41'% million.
) 4*' million
*B) According to classical economics2 a reduction in aggregate demand should result in:
A) an increase in the price level.
") an increase in the unemplo!ment rate.
") an increase in real -D!.
D) all of the above
) none of the above
*+) Which of the following statements is true6
() In an open econom!* the lar,er a nation@s mar,inal propensit! to import* the
smaller the multiplier.
B) :n an open economy2 the larger a nationFs marginal propensity to consume2 the
smaller the multiplier.
") :n an open economy2 the larger a nationFs marginal propensity to e7port2 the smaller
the multiplier.
D) :n an open economy2 the smaller a nationFs marginal propensity to import2 the smaller
the multiplier.
) :n an open economy2 the marginal propensity to import has no influence on the
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EC1301
multiplier
,igure 1
)%) .efer to ,igure 1. The consumption functions

and

:
A) have the same marginal propensity to save.
B) have the same marginal propensity to consume.
") differ in terms of the amount of consumption that does not depend on income.
#) all o the above
) none of the above
)1) .efer to ,ig 1.The consumption functions moves from "
1
to "
*
. This is caused by
A) increasing the marginal propensity to consume
B) reducing the marginal propensity to import
") reducing income ta7
#) all o the above
) none of the above
)() Whenever the unemployment rate is pushed ?????????????the natural rate2 wages
begin to ????????? thus pushing ???????.
A) above5 fall5 down aggregate output
") above* all8 0own costs
") above5 rise2 up costs
D) below5 fall5 down costs
) below2 rise2 down costs
)*)Which of the following monetary policy could be pursued if currently
unemployment is too high and e7ceeds the natural rate of unemployment6
() "u! ,overnment bon0s
B) $ell government bonds
") .aise reserve re/uirement
D) :ncrease -overnment spending
) :ncrease ta7es
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EC1301
+i,ure %
))) .efer to +i,ure %. $uppose the economy is currently at !oint A producing
potential output

. :f the government increases spending2 the economy moves to
!oint ?????????in the short-run and to !oint ??????????in the long-run.
A) D; E
B) B; C
) ; !
D) !; D
E) A; !
)') .efer to +i,ure %. :f the economy is currently producing

and the ,ed decreases
the money supply2 the economy will move to !oint ???????? in the short run and to
!oint ???????? in the long run.
A) E; D !) ; ! C) D; E D) !; E) D;
)&) :n order to prevent a wage@price spiral from emerging when the economy is
producing above full employment2 the monetary authority could:
A) e7pand the money supply.
B) lower ta7es.
C) contract the mone! suppl!.
D) increase government spending.
) both A and D
)A)When inflation falls in $ingapore2 which statement is true6
A) money demand rises2 interest rates rises2 $4 e7change rates falls
B) money demand falls2 interest rates falls2 $4 e7change rates rises
") money demand falls2 interest rates rises2 $4 e7change rates rises
#) mone! 0eman0 alls* interest rates alls* A$ e6chan,e rates alls
) money demand falls2 interest rates falls2 $4 e7change rates falls
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EC1301
,igure *
)B) .efer to ,igure *. The theory of comparative advantage suggests that:
() the Unite0 Atates shoul0 e6port cars an0 import truc2s.
B) the Dnited $tates should e7port both truc3s and cars.
") ngland should import truc3s and e7port cars.
D) ngland should e7port both truc3s and cars.
) both should not e7port but continue producing where they are









Table *
)+) .efer to Table *. The most that $outh Norea will be willing to pay for a computer
is:
() )B%' o a car. B) 1O' of a car.
") 1O*% of a car. D) 1O1% of a car. ) 1O1' of a car
'%) ,ree trade causes employment losses in industries in which a country has:
A) a lower opportunity cost of production.
B) an absolute advantage.
") a comparative advantage.
#) a comparative 0isa0vanta,e.
) cheaper products

C E9# O+ P(PE< C
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