Friday, August 18

HI5003 - Economics for Business - Mock Test and Preparation

Question 1

What happens when a cyclone destroys the banana plantation?

·       The damaging effect of the cyclone means that farmers are only able to supply fewer bananas at each possible price and supply decreases.

·       There is no effect of a cyclone on market prices.

·       The damaging effect of the cyclone means that farmers are able to produce apples instead of bananas with no effect on the supply of bananas.

·       The prices for bananas will increase permanently.

 

Answer

The correct answer to this question is that the damaging effect of the cyclone means that farmers are only able to supply fewer bananas at each possible price and supply decreases.

A cyclone's destruction of a banana plantation would lead to a reduction in the availability of bananas, causing the supply to decrease. This can lead to a temporary increase in prices for bananas as there is less supply to meet demand, but it doesn't necessarily mean that prices will increase permanently. Therefore, the first option is the best answer.

 

Question 2

Which of the following is true about the market equilibrium?

·       As the price increases, the quantity demanded and the quantity supplied increases.

·       As the price increases, the quantity demanded and the quantity supplied decreases.

·       As the price increases, the quantity demanded increases and the quantity supplied

·       As the price increases, the quantity demanded decreases and the quantity supplied

 

Answer

The correct statement about market equilibrium is:

As the price increases, the quantity demanded decreases and the quantity supplied increases.

In a typical supply and demand model, an increase in price will lead to an increase in the quantity supplied, as producers are generally willing to produce and sell more at a higher price. Conversely, as the price increases, consumers are generally less willing to buy the product, so the quantity demanded decreases.

 

Question 4

A shortage of a product means a/an:

excess supply of the product.

situation where the quantity demanded is less than the quantity supplied

situation where the quantity demanded exceeds the quantity supplied.

situation where the quantity supplied exceeds the quantity demanded.

 

Answer

A shortage of a product means a situation where:

situation where the quantity demanded exceeds the quantity supplied.

When demand for a product is greater than the supply, there is a shortage of that product in the market. This is often a result of the product's price being below the equilibrium price, where the quantity demanded would equal the quantity supplied.

 

Question 5

Assume that brand X is an inferior good and name brand Y is a normal good. An increase in consumer income, other things being equal, will cause a/an:

 

upward movement along the demand curve for name brand Y.

downward movement along the demand curve for brand X.

rightward shift in the demand curve for brand X.

leftward shift in the demand curve for brand X.

 

Answer

In the context of economics, an inferior good is one where the demand decreases as consumer income rises, and a normal good is one where the demand increases as consumer income rises.

So, given that brand X is an inferior good and brand Y is a normal good, an increase in consumer income, other things being equal, will cause a:

leftward shift in the demand curve for brand X.

The demand for an inferior good decreases as incomes rise, so the entire demand curve for brand X will shift to the left. Conversely, the demand for a normal good like brand Y would typically increase with higher incomes, but the given options do not include the correct response for brand Y, so the best answer is the one related to brand X.

 

Question 6

Consider the market for grapes. An increase in the wage paid to grape pickers will cause the:

demand curve for grapes to shift to the right, resulting in a higher equilibrium price for grapes and a reduction in the quantity consumed.

demand curve for grapes to shift to the left, resulting in a lower equilibrium price for grapes and an increase in the quantity consumed.

supply curve for grapes to shift to the left, resulting in a lower equilibrium price for grapes and a decrease in the quantity consumed.

supply curve for grapes to shift to the left, resulting in a higher equilibrium price for grapes and a decrease in the quantity consumed.

 

Answer

An increase in the wage paid to grape pickers will increase the cost of producing grapes. This increase in production costs will generally lead to a decrease in the supply of grapes, as it becomes more expensive for producers to produce the same quantity.

The correct option is:

supply curve for grapes to shift to the left, resulting in a higher equilibrium price for grapes and a decrease in the quantity consumed.

As the supply decreases (shifts to the left), the equilibrium price will increase due to the reduced quantity available, and the quantity consumed will decrease because of the higher price.

 

Question 7

If the government prevents the market price from rising above $10, it can set a/an:

optimum price.

minimum price.

price ceiling.

price floor.

 

Answer

When the government sets a limit on how high a price can be charged for a good or service, this is referred to as a price ceiling.

So the correct answer is:

price ceiling.

 

Question 8

When an economy's resources are not fully employed, then it must be true that the:

production point is located outside and to the right of the production possibilities frontier.

production point is located along the production possibilities frontier.

production point is located inside and to the left of the production possibilities frontier.

production possibilities frontier shifts to the right.

 

Answer

The production possibilities frontier (PPF) represents the maximum feasible amount of two goods that can be produced with available resources and technology. If an economy's resources are not fully employed, then it is producing below its potential, meaning that it is operating at a point inside its PPF.

The correct answer is:

production point is located inside and to the left of the production possibilities frontier.

 

Question 9

The opportunity cost to a city for using local tax revenues to construct a new park is the:

best alternative option foregone by building the park.

dollar cost of constructing the new park.

dollar cost of the old park.

increased taxes necessary to pay for maintenance of the new park.

 

Answer

The opportunity cost of a decision is the value of the next best alternative that must be forgone when that decision is made. In this case, the opportunity cost to a city for using local tax revenues to construct a new park would be the best alternative use of those funds that is foregone by choosing to build the park.

So the correct answer is:

best alternative option foregone by building the park.

 

Question 10

Marginal cost is:

change in total cost divided by change in quantity.

change in total fixed cost divided by change in quantity.

change in average variable cost divided by change in quantity.

change in average fixed cost divided by change in quantity.

 

Answer

Marginal cost refers to the additional cost incurred by producing one more unit of a good or service. It is calculated as the change in total cost divided by the change in quantity.

So the correct answer is:

change in total cost divided by change in quantity.

 

Question 11

In the long run, total fixed cost:

falls.

does not exist.

is constant.

increases.

 

Answer

In the long run, all costs are variable, and there are no fixed costs. This means that businesses can adjust all their inputs, including those that are typically fixed in the short run like capital or land. In the long run, firms can enter or exit an industry, build new factories or close existing ones, so there is no cost that remains constant when considering these long-term adjustments.

So the correct answer is:

does not exist.

 

Question

Output Quantity       Total Fixed Costs ($)         Total Variable Cost ($)

0        100     0

1        100     50

2        100     84

3        100     108

4        100     127

5        100     150

 

the average total cost of producing five units is:

$0.

$27.

$50.

$100.

 

Answer

Average total cost (ATC) is the sum of the total fixed costs and total variable costs, divided by the quantity of output. In this case, to find the average total cost of producing five units, you would add the total fixed costs ($100) and total variable costs ($150) for that level of output, and then divide by the quantity produced (5).

So the correct answer is:

$50.

 

Question 13

Marginal cost is defined as the increase in total cost resulting from an increase in:

one unit of output.

output of 100 units.

a firm's plant size.

one unit of labour.

 

Answer

Marginal cost is the additional cost incurred by producing one more unit of a good or service. It is defined as the increase in total cost resulting from an increase in one unit of output.

So the correct answer is:

one unit of output.

 

Question 14

Which of the following pairs is the most likely to exhibit an inverse relationship?

The amount of time you spend studying and your final marks.

Waiter's tips and his/her service.

The annual income and demand for overseas travel.

People's annual income and their expenditure on second-hand clothes.

 

Answer

An inverse relationship means that as one variable increases, the other variable decreases.

The most likely pair to exhibit this kind of relationship from the given options is:

People's annual income and their expenditure on second-hand clothes.

This is because as people's income increases, they are generally more likely to buy new clothes instead of second-hand clothes, thus decreasing their expenditure on second-hand clothes. It's a general observation that often applies to what is known as an "inferior good," where demand decreases as income increases.

 

Question 15

Scarcity:

is a problem only in the poorer countries of the world.

will disappear if the country is rich.

is a problem that exists in every economy with limited resources.

is not a problem for the developed countries.

 

Answer

Scarcity is a fundamental concept in economics that refers to the basic economic problem that arises because people have unlimited wants but resources are limited. It's not confined to any particular economic status or type of country.

The correct answer is:

is a problem that exists in every economy with limited resources.

 

Question 16

A positive relationship exists when:

there is no association between two variables.

one variable increases and there is no change in the other variable.

one variable increases and the other variable increases too.

one variable increases and the other variable decreases.

 

Answer

A positive relationship between two variables means that as one variable increases, the other variable also increases. The two variables move in the same direction.

So the correct answer is:

one variable increases and the other variable increases too.

 

Question 17

If demand price elasticity measures 2, this implies that consumers would:

buy twice as much of the product if the price drops 10 per cent.

require a 2 per cent drop in price to increase their purchases by 1 per cent.

buy 2 per cent more of the product in response to a 1 per cent drop in price.

require at least a $2 increase in price before showing any response to the price in-crease.

 

Answer

Price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.

If demand price elasticity measures 2, it means that a 1% change in price leads to a 2% change in the quantity demanded.

So the correct answer is:

buy 2 per cent more of the product in response to a 1 per cent drop in price.

 

Question 18

If a farmer lowers the price of his product from $15 to $5 and finds that sales increase from 500 to 1000 units per week, then the demand for the farmer's product in this range is (assuming midpoint formula for price elasticity of demand):

price inelastic.

price elastic.

unit elastic.

cross elastic.

 

Answer

Since the absolute value of the price elasticity of demand is equal to 1, the demand is:

unit elastic.

 

Question 19

An economist estimates that 0.67 is the price elasticity of demand for disposable diapers. This suggests that disposable diaper producers could:

advertise more to raise the price elasticity of demand.

encourage more parents to use cloth diapers.

lower the price of disposable diapers to raise more revenue.

raise the price of disposable diapers to raise more revenue.

 

Answer

The price elasticity of demand tells us how responsive the quantity demanded of a good is to a change in price. If the elasticity is less than 1 (in absolute value), then the demand is considered inelastic. This means that a percentage change in price will result in a smaller percentage change in quantity demanded.

Given that the price elasticity of demand for disposable diapers is 0.67, the demand is inelastic. Therefore, if the price of disposable diapers were to increase, the percentage decrease in quantity demanded would be smaller than the percentage increase in price. This would lead to an increase in total revenue.

So the correct answer is:

raise the price of disposable diapers to raise more revenue.

 

Question 20

Tara buys four music CDs when the price is $10 and two CDs when the price is $14. Her price elasticity of demand is (using the mid-point formula):

0.

1.

2.

3.

 

Answer

The absolute value of the price elasticity of demand is 1, so the correct answer is:

1