THIS PAPER IS NOT TO BE REMOVED FROM THE EXAMINATION HALL
EC1002 ZB
BSc DEGREES AND GRADUATE DIPLOMAS IN ECONOMICS, MANAGEMENT,
FINANCE AND THE SOCIAL SCIENCES, THE DIPLOMA IN ECONOMICS AND
SOCIAL SCIENCES AND THE CERTIFICATE IN HIGHER EDUCATION IN SOCIAL
SCIENCES EXAMINATION
Introduction to Economics
Thursday 2 May 2019: 14:30 – 17:30
Time allowed: 3 hours
DO NOT TURN OVER UNTIL TOLD TO BEGIN
This paper consists of THREE sections:
Section A (40 marks): TEN multiple choice questions, each worth FOUR marks.
Candidates must answer ALL questions. No explanation is needed.
Section B (30 marks): Candidates must answer ONE of TWO questions on
microeconomics. It is essential that candidates explain their answers.
Section C (30 marks): Candidates must answer ONE of TWO questions on
macroeconomics. It is essential that candidates explain their answers.
Graph paper is provided at the end of this question paper. If used, it must be detached
and fastened securely inside the answer book.
© University of London 2019
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SECTION A: Multiple Choice Questions
Please mark the correct answer in the special multiple choice answer sheet
provided using an HB pencil.
Candidates should write their candidate number in the boxes and then mark up their
appropriate letter and numbers in the grid.
The date, candidate first name(s) and surnames should be written in the appropriate
space.
Candidates should use an eraser to remove any unwanted marks as fully as possible.
If an eraser is unavailable, please put a cross (X) through the incorrect mark.
The sheets should not be folded or creased in any way as this will make them
unreadable.
Candidates should not write anywhere else on the sheet other than to mark their
answers as shown on the sheet; any writing or marks in an inappropriate place could
make the sheet unreadable.
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Candidates should answer ALL questions from this section.
Choose one answer for each question: no explanation is needed.
Note that some questions ask you to choose which statement IS correct and other
questions ask you to choose which statement IS NOT correct.
4
1. Consider a market where the demand is given by 𝑄 𝐷 = 80 − 5 𝑃 and supply is
1
given by 𝑄 𝑆 = 5 𝑃. What are the consumer and producer surplus?
a) Consumer surplus is 240 and producer surplus is 450.
b) Consumer surplus is 160 and producer surplus is 640.
c) Consumer surplus is 800 and producer surplus is 1280.
d) Consumer surplus is 1600 and producer surplus is 980.
2. Assume that festival tickets and all-inclusive holidays are substitutes. Which of
the following statements IS correct?
a) If the price of festival tickets goes down the quantity of all-inclusive holidays
demanded will decrease.
b) If the price of festival tickets goes down the quantity of all-inclusive holidays
demanded will not change.
c) If the price of festival tickets goes up the quantity of all-inclusive holidays
demanded will decrease.
d) If the price of festival tickets goes up the quantity of all-inclusive holidays
demanded will not change.
.
3. Which of the following statements IS NOT correct?
a) A tax does not always lead to the inefficient output.
b) Monopolies do not always create a deadweight loss.
c) If two firms compete in prices (Bertrand competition) they will set a higher
price than if they compete in quantities (Cournot competition).
d) A monopolist chooses the price based on the elasticity of demand with
respect to price (PED).
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4. A winery is located next to a farm. The grapes are cultivated out in the open and
benefit from the fertilizer used for the crops cultivated by the farm. The profit
function for the winery is 𝜋 𝑊 = 6𝑊 − 𝑊 2 + 4𝐹 where W is the bottles of wine the
winery produces and F is the animals the farm has. The profit function for the
farm is 𝜋 𝐹 = 12𝐹 − 𝐹 2 . The two firms merge to internalise the externality. What
are the outputs they end up producing as one merged firm?
a) W=3 and M=6.
b) W=6 and M=8.
c) W=6 and M=6.
d) W=3 and M=8.
5. Choose the correct statement. The labour supply curve IS:
a) Always downward sloping.
b) Always upward sloping.
c) Upward sloping for monopsonies.
d) Perfectly elastic.
6. Choose the correct statement. Potential output IS:
a) The output demanded by households as consumption and by firms as
investment.
b) The output obtained when there is no unemployment.
c) The output obtained by trading with other countries.
d) The output obtained when all inputs are fully employed.
7. The Fisher equation tells us that:
a) Nominal interest rates are less volatile than the real ones.
b) Real interest rates are always higher than nominal ones.
c) Nominal interest rates can be the same as the real ones.
d) Inflation is always positive.
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8. In a time of political stability demand for financial assets may increase and create
a bubble. In the context of the IS-LM model which of the following statements IS
NOT correct?
a) Decreasing government spending might be an appropriate response.
b) Income will fall because of a rightward shift in the IS curve.
c) If there is no intervention the interest rate will be higher.
d) The central bank can raise the interest rate to slow investments.
9. Which of the following statements IS correct?
a) The real exchange rate cannot be equal to the nominal exchange rate.
b) The real exchange rate depends only on the rates of inflation in the two
countries.
c) The purchasing power parity exchange rate is the path of the nominal
exchange rate that maintains a constant real exchange rate.
d) The purchasing power parity exchange rate can be computed by looking at
the market for one good.
10. What does the convergence theory in the Solow model imply?
a) Rich nations will stop growing
b) Poor nations will grow slower than rich nations
c) Growth will only arise if a nation is not in steady state
d) Poor countries will grow faster than rich countries
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SECTION B: Microeconomics
Candidates should answer ONE of the following long questions. It is essential that you
explain your answers.
11.
a) Define the concept of "externality". Why do economists care about
externalities? (4 marks)
b) A wind farm is built in a seaside town that earns most of its profits from
tourism. Assume that the profits for the town depend on the number of tourists
T and the number of windmills W and are given by the expression 𝜋 𝑇 = 100 +
16𝑇 − 𝑇 2 − 4𝑊 and the profits for the wind farm, which depend on the number
of windmills W, are 𝜋 𝑊 = 16𝑊 − 𝑊 2 . What would the profits and quantities be
if the town cannot stop the wind farm from expanding? What are the efficient
amounts and the associated profits? If the quantities differ explain why.
(12 marks)
c) Now consider the externality cars impose on pedestrians by creating pollution.
Can this externality be fixed with a Pigouvian tax? If so, what should be its
value? Show this on a graph. (8 marks)
d) There are a number of international agreements aimed at reducing pollution.
Can you explain how the free-rider problem applies to countries who decide
not to sign these agreements? (6 marks)
12.
a) The market for videogames has a downward sloping demand given by the
equation 𝑄 𝐷 = 126 − 7𝑃 and an upward sloping supply curve given by the
equation 𝑄 𝑆 = 14𝑃. What are the equilibrium price and quantity? Use a supply
and demand diagram to show the equilibrium in the perfectly competitive
market for videogames. On the same graph show the consumer and producer
surplus. (8 marks)
b) If a tax is set on consumers who will bear the burden of the tax? Show
graphically the effect of setting a tax in this market. (6 marks)
c) The government has introduced a tax of £3 on suppliers for every videogame
sold. What will be the new quantity sold? What are producer and consumer
surpluses after the tax is introduced? How much will the government obtain in
tax revenues? Is there a deadweight loss? If so compute its value. (10 marks)
d) The government realises that raising a tax has damaged consumers and
producers. Because of this it allows all producers of videogames to merge
and become a cartel. The cartel is free to offer the same videogame at
different prices, so that the cartel can first-price discriminate. What does this
imply? Is there still a deadweight loss? (6 marks)
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SECTION C: Macroeconomics
Candidates should answer ONE of the two following long questions. It is essential that
you explain your answers.
13.
a) How can we represent the Solow model graphically? (6 marks)
b) How does the Solow model show that the process of capital accumulation can
generate economic growth? Can growth be indefinite if savings keep
increasing and there is no technological growth and a constant population
growth? (8 marks)
c) Discuss the effects of an improvement in technology in the Solow model.
Focus on its effects on living standards in the short run and in the long run.
Show this graphically. (8 marks)
d) How does the Solow model differ from Romer's model? What is the long-run
growth rate of output per worker in each of the models? What does this imply
in terms of policy? (8 marks)
14.
a) What does the Phillips curve represent? Is there a difference between the
Phillips curve in the short-run and long-run? Explain and show it in a diagram.
(6 marks)
b) What is the impact of a short-term negative shock on output, unemployment
and inflation? Explain and draw a diagram. (6 marks)
c) What is the relationship between the current and capital accounts in a flexible
exchange rate regime? (4 marks)
d) What is Okun's law? (4 marks)
e) Assume that we are in a floating exchange rate regime. The price of oil went
up, driving the economy to a much higher unemployment rate. Use a standard
IS-LM-BP model to explain what happens to income, interest rates and the
balance of payment if the central bank uses monetary policy to stabilise the
economy at potential output.
(10 marks)
END OF PAPER
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