UNIVERSITY OF COLOMBO, SRI LANKA

FACULTY OF SCIENCE
LEVEL-1 EXTERNAL DEGREE EXAMINATION IN SCIENCE - SEMESTER 1 2015

FE1001 - Economics I for Finance

(Two Hours)
Electronic calculators are allowed.
Answer all questions

No. of questions: 4
No. of pages: 2
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Important Instructions to the Candidates

If a page or a part of this question paper is not printed, please inform the supervisor
immediately.

MCQ TYPE: The MCQ answer sheet is provided as the last page of the question
paper. Before you answer the multiple choice questions, do the following:
Check whether the same code has been printed on the English and Sinhala medium
question papers as well on the MCQ answer sheet. If not, please inform the
supervisor immediately.
Copy the code in the relevant box on the MCQ answer sheet.
Now, to each of the multiple choice questions choose the correct response and
shade the appropriate box on the MCQ answer sheet with a pen.

ESSAY TYPE: Write the answers to these questions on the writing paper that is
provided.

Enter your Index Number in the relevant space on the MCQ answer sheet and on each
page of the answer script.

Electronic devices capable of storing and retrieving text, including electronic dictionaries
and mobile phones are not allowed.

At the end of the examination detach the MCQ answer sheet from the exam paper.
Hand over the MCQ answer sheet and all answer scripts attached together.

1.
a) Suggest three conditions which you think determine the supply and
demand curves in a retail fruit and vegetable market.
b) Define the law of demand. Why do demand curves for most goods
slope downwards to the right?
c) Explain the relationship between Price and the Quantity demanded for
Complementary and Substitutes goods with the use of examples.
d) With the aid of a diagram explain the movement of prices
I.
when there is an excess demand
II.
when there is an excess supply.
25
Marks

2.
a) What is utility? How is it measured?
b) Explain the difference between the following concepts:
i. Cardinal utility
ii. Marginal Utility
c) What is the Marginal rate of substitution? How does MRS vary as one
consumes more of good A and less of the other good B.
d) Compare the indifference curve analysis of demand with the
Marshallian cardinal utility analysis. Which do you think is superior?
e) The consumer spends all his income on 2 goods (food and clothing). At
the current prices of food price = Pf= Rs.10 and clothing price = Pc =
Rs.5, he maximises his utility by purchasing 20 units of food and 50
units of clothing.
I.
What is the consumers income?
II.
What is the marginal rate of substitution of food for clothing at the
equilibrium position?
25
Marks
3.
a) Derive the long-run average cost curve from the short run average
cost curve. How are they related to each other?
b) How can a firm in a perfect competitive market make supernormal
profits? Explain with the aid of a diagram.
c) A decrease in demand facing a competitive industry can never bring
about a decrease in the number of firms (in the long run) as the profits
in the long run will always remain the same. True or false explain.
d) Explain the concept of total fixed costs, total variable costs and total
costs. How are they related to each other? Explain with the aid of a
diagram.
25
Marks

4. Essay questions
a) Define price discrimination. Under what conditions are monopolists
able to discriminate? Give a real life example.
b) What is a monopoly firm? How is it different from a perfectly
competitive firm? Explain the three conditions necessary for the
existence of a monopoly?
c) Explain perfect price discrimination? Discuss what additional profits will
the firm get by practising perfect price discrimination?
d) How are price and output determined under a monopoly? Show why
the price is higher under a monopoly than under a perfect competitive
situation.
Total:
25marks

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