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SCHOOL OF ECONOMICS
ECONOMICS 1 (ECNM08013)
Sunday 35th August 2023
Exam paper information
There are two sections:
Section A – 40% of available marks – multiple choice (20 questions, 2% each)
Section B – 60% of available marks – written (6 questions, 10% each)
Please do all of the following:
Fill in the information on MCQ sheet correctly and completely.
Complete each of the questions in Section B in a separate booklet (i.e. you should use a
total of six booklets), with the personalised barcode attached, and your information filled
in completely and correctly. You must fill in all booklet covers with question numbers even
if some booklets are left blank inside.
Scientific (but non-programmable) calculators are allowed.
Please read full instructions in each section before writing.
This exam will be marked anonymously.
Section A – Multiple choice questions.
Answer all questions in the machine-readable MCQ form provided.
Answer all twenty questions.
(40 points total — 2 points each)
Multiple choice questions – Instructions
Use only a pencil.
Write your student number and name on the multiple choice answer sheet.
Each question contains up to sixteen possible answers, only one of which is correct. Place a firm horizontal pencil
mark in the appropriate place, e.g., if the answer to question 5 was (C)
Q5 A B C [ D [ E ] [ F ] [ G ] [ H ] [ I ] [ J ] [ K ] [ L ] [ M ] [ N ] [ O ] [ P ]
Faint lines will not be read!
Very thin marks made with a sharp, hard pencil may not be read.
If a soft pencil is used there should be no need to press heavily.
This should make clear rubbing out easy.
Erasures must be completed clean without smudging. An unclean or incomplete erasure may be read as an answer!
All multiple choice questions are weighted equally.
No points are subtracted for a wrong answer.
No mark is either given or subtracted for no attempt or if a line is placed through more than one option.
The multiple choice answer sheets are machine marked and that mark is final. Please take care to obey the above
instructions.
Q1. Consider an individual whose utility function over quantities of and takes the form:
=
1
2
2
where is an index of the individual’s utility and and are the weekly quantities of the two items consumed (for
both items, quantities must be non-negative, so ≥ 0 and ≥ 0).
i. Are the indifference curves upward sloping or downward sloping
ii. Are the indifference curves concave or convex
iii. Is a ‘good’ or a ‘bad’
iv. Is a ‘good’ or a ‘bad’
A) i. upward, ii. concave, iii. good, iv. good
B) i. upward, ii. concave, iii. good, iv. bad
C) i. upward, ii. concave, iii. bad, iv. good
D) i. upward, ii. concave, iii. bad, iv. bad
E) i. upward, ii. convex, iii. good, iv. good
F) i. upward, ii. convex, iii. good, iv. bad
G) i. upward, ii. convex, iii. bad, iv. good
H) i. upward, ii. convex, iii. bad, iv. bad
I) i. downward, ii. concave, iii. good, iv. good
J) i. downward, ii. concave, iii. good, iv. bad
K) i. downward, ii. concave, iii. bad, iv. good
L) i. downward, ii. concave, iii. bad, iv. bad
M) i. downward, ii. convex, iii. good, iv. good
N) i. downward, ii. convex, iii. good, iv. bad
O) i. downward, ii. convex, iii. bad, iv. good
P) i. downward, ii. convex, iii. bad, iv. bad
Q2. Find the following derivatives:
i. For the function =

2
2

+
3
5

, find the derivative

.
ii. For the function = ln( ) +
4

2
2
, find the derivative

.
A) i.
=
3
2
ii.
=
1

4
2 +
4
3
B) i.
= 2
3
2
ii.
=
1

4
2 +
4
3
C) i.
=
6
2 2
(2
15
+5)
2
ii.
=
1

4
2 +
4
3
D) i.
=
2
(
2
2
+

10 15
+5)
2
ii.
=
1

4
2 +
4
3
E) i.
=
3
2
ii.
=
1

+
4
2
4
3
F) i.
= 2
3
2
ii.
=
1

+
4
2
4
3
G) i.
=
6
2 2
(2
15
+5)
2
ii.
=
1

+
4
2
4
3
H) i.
=
2
(
2
2
+

10 15
+5)
2
ii.
=
1

+
4
2
4
3
I) i.
=
3
2
ii.
=
( 2)
2

3
J) i.
= 2
3
2
ii.
=
( 2)
2

3
K) i.
=
6
2 2
(2
15
+5)
2
ii.
=
( 2)
2

3
L) i.
=
2
(
2
2
+

10 15
+5)
2
ii.
=
( 2)
2

3
M) i.
=
3
2
ii.
=

+
3
2
N) i.
= 2
3
2
ii.
=

+
3
2
O) i.
=
6
2 2
(2
15
+5)
2
ii.
=

+
3
2
P) i.
=
2
(
2
2
+

10 15
+5)
2
ii.
=

+
3
2
Q3. A consumer with an income of consumes only two goods – and – available at prices and . Which of
the following sets of changes might cause the budget line to rotate around a fixed vertical intercept
i. rises; constant; constant
ii. constant; rises; constant
iii. constant; constant; rises
iv. constant; rises; rises
A) (i.) & (ii.) & (iii.) & (iv.)
B) (i.) & (ii.) & (iii.)
C) (i.) & (ii.) & (iv.)
D) (i.) & (ii.)
E) (i.) & (iii.) & (iv.)
F) (i.) & (iii.)
G) (i.) & (iv.)
H) (i.)
I) (ii.) & (iii.) & (iv.)
J) (ii.) & (iii.)
K) (ii.) & (iv.)
L) (ii.)
M) (iii.) & (iv.)
N) (iii.)
O) (iv.)
P) None of (i.) to (iv.)
Q4. You loan a friend ￡1000, and at the end of one year she transfers you back ￡1000 to pay off this loan. If the
annual interest rate on your savings account is 3%, the inflation rate is 8%, your wages are growing at 4%, your
friend’s wages are growing at 5%, the unemployment rate is 2%, and you have large outstanding credit card debts
with an interest rate of 20%, what was your opportunity cost (OC) of making this loan
A) < 0% B) 0% ≤ < 2% C) 2% ≤ < 4% D) 4% ≤ < 6% E) 6% ≤ < 8% F) 8% ≤ < 10% G) 10% ≤ < 12% H) 12% ≤ < 14% I) 14% ≤ < 16% J) 16% ≤ < 18% K) 18% ≤ < 20% L) 20% ≤ < 22% M) 22% ≤ < 24% N) 24% ≤ < 26% O) 26% ≤ < 28% P) ≥ 28% Q5. Consider the markets for (i) refrigerators and (ii) pineapples, in the short run (SR) and the long run (LR). i. Which of the following diagrams best illustrates the market for refrigerators ii. Which of the following diagrams best illustrates the market for pineapples D1) D2) D3) D4) A) i. D1; ii. D1 B) i. D1; ii. D2 C) i. D1; ii. D3 D) i. D1; ii. D4 E) i. D2; ii. D1 F) i. D2; ii. D2 G) i. D2; ii. D3 H) i. D2; ii. D4 I) i. D3; ii. D1 J) i. D3; ii. D2 K) i. D3; ii. D3 L) i. D3; ii. D4 M) i. D4; ii. D1 N) i. D4; ii. D2 O) i. D4; ii. D3 P) i. D4; ii. D4 Q6. Suppose you’re nearing the end of your degree and you’re looking for a job, and the job search is proceeding in the same way as the search problems we’ve worked on in tutorials. You think that your potential wage distribution is uniform on the interval (￡25 000, ￡40 000), and your first offer is for ￡31 000. If search is too costly, you should accept the current offer. But if searching is cheap enough (and you can delay saying ‘yes’ or ‘no’) then you should put the current offer on hold and search again. What is the maximum cost of search (in terms of cash, time, mental anguish, etc.) that you are willing to pay to get another job offer (Round your answer to the nearest ￡100.) A) ￡500 or less B) ￡600 C) ￡700 D) ￡800 E) ￡900 F) ￡1000 G) ￡1100 H) ￡1200 I) ￡1300 J) ￡1400 K) ￡1500 L) ￡1600 M) ￡1700 N) ￡1800 O) ￡1900 P) ￡2000 or more Q7. In John Maynard Smith’s evolutionary Hawk-Dove game, the fraction of doves in the population will stay between 0% and 100% because: i. Doves do relatively badly when there are many doves ii. Doves do relatively well when there are many hawks iii. Hawks do relatively badly when there are many doves iv. Hawks do relatively well when there are many hawks A) i. is true, ii. is true, iii. is true, iv. is true B) i. is true, ii. is true, iii. is true, iv. is false C) i. is true, ii. is true, iii. is false, iv. is true D) i. is true, ii. is true, iii. is false, iv. is false E) i. is true, ii. is false, iii. is true, iv. is true F) i. is true, ii. is false, iii. is true, iv. is false G) i. is true, ii. is false, iii. is false, iv. is true H) i. is true, ii. is false, iii. is false, iv. is false I) i. is false, ii. is true, iii. is true, iv. is true J) i. is false, ii. is true, iii. is true, iv. is false K) i. is false, ii. is true, iii. is false, iv. is true L) i. is false, ii. is true, iii. is false, iv. is false M) i. is false, ii. is false, iii. is true, iv. is true N) i. is false, ii. is false, iii. is true, iv. is false O) i. is false, ii. is false, iii. is false, iv. is true P) i. is false, ii. is false, iii. is false, iv. is false Q8. Psychologists Keith Stanovich and Richard West coined the terms System 1 and System 2 to reflect the dual processes seemingly at work in our mind. Evaluate the truth (or falsehood) of the following statements about them. i. System 1 is emotional ii. System 2 is rational iii. System 1 will only work if it is ‘switched on’ by System 2. A) i. is true, ii. is true, iii. is true, B) i. is true, ii. is true, iii. is false, C) i. is true, ii. is false, iii. is true, D) i. is true, ii. is false, iii. is false, E) i. is false, ii. is true, iii. is true, F) i. is false, ii. is true, iii. is false, G) i. is false, ii. is false, iii. is true, H) i. is false, ii. is false, iii. is false, Q9. What is the difficulty with the tit-for-tat strategy as a possible solution to social dilemmas i. Interactions may be repeated a finite number of times ii. There may be more than two players iii. Some players may start by defecting while others start by cooperating iv. Tit-for-tat requires third party enforcement A) (i.) & (ii.) & (iii.) & (iv.) B) (i.) & (ii.) & (iii.) C) (i.) & (ii.) & (iv.) D) (i.) & (ii.) E) (i.) & (iii.) & (iv.) F) (i.) & (iii.) G) (i.) & (iv.) H) (i.) I) (ii.) & (iii.) & (iv.) J) (ii.) & (iii.) K) (ii.) & (iv.) L) (ii.) M) (iii.) & (iv.) N) (iii.) O) (iv.) P) None of (i.) to (iv.) Q10. Suppose a competitive industry has the supply curve = 10 + 2Q. Suppose the market demand curve is = 80 5 . What is the producer surplus in this market (Round your answer to the nearest ten) A) 0 or less B) 10 C) 20 D) 30 E) 40 F) 50 G) 60 H) 70 I) 80 J) 90 K) 100 L) 110 M) 120 N) 130 O) 140 P) 150 or more Q11. A perfectly competitive market is characterized by the following demand and supply functions, where is measured in pounds per unit of the good: = 50 2 = 20 + 4 The government is planning to introduce a tax = ￡18 per unit of the good. Compare the following: i. The pound value of he consumer surplus before the tax is introduced. ii. The pound value of the government’s tax revenue. iii. The pound value of the deadweight loss from the tax. A) > >
B) > >
C) > >
D) > >
E) > >
F) > >
G) > =
H) < = I) > =
J) < = K) > =
L) < = Q12. How is a firm’s decision to either keep producing or shut down different in the short run and the long run i. In the short run, revenues must exceed variable costs for the firm to keep producing. ii. In the short run, revenues must exceed total costs for the firm to keep producing. iii. In the long run, revenues must exceed variable costs for the firm to keep producing. iv. In the long run, revenues must exceed total costs for the firm to keep producing. A) i. is true, ii. is true, iii. is true, iv. is true B) i. is true, ii. is true, iii. is true, iv. is false C) i. is true, ii. is true, iii. is false, iv. is true D) i. is true, ii. is true, iii. is false, iv. is false E) i. is true, ii. is false, iii. is true, iv. is true F) i. is true, ii. is false, iii. is true, iv. is false G) i. is true, ii. is false, iii. is false, iv. is true H) i. is true, ii. is false, iii. is false, iv. is false I) i. is false, ii. is true, iii. is true, iv. is true J) i. is false, ii. is true, iii. is true, iv. is false K) i. is false, ii. is true, iii. is false, iv. is true L) i. is false, ii. is true, iii. is false, iv. is false M) i. is false, ii. is false, iii. is true, iv. is true N) i. is false, ii. is false, iii. is true, iv. is false O) i. is false, ii. is false, iii. is false, iv. is true P) i. is false, ii. is false, iii. is false, iv. is false Q13. What are some of the key differences between economic profits and accounting profits i. Accounting profit includes only explicit costs. ii. Economic profit includes only implicit costs. iii. Firms should consider accounting profit when making production decisions. iv. Firms should consider economic profit when making production decisions. A) i. is true, ii. is true, iii. is true, iv. is true B) i. is true, ii. is true, iii. is true, iv. is false C) i. is true, ii. is true, iii. is false, iv. is true D) i. is true, ii. is true, iii. is false, iv. is false E) i. is true, ii. is false, iii. is true, iv. is true F) i. is true, ii. is false, iii. is true, iv. is false G) i. is true, ii. is false, iii. is false, iv. is true H) i. is true, ii. is false, iii. is false, iv. is false I) i. is false, ii. is true, iii. is true, iv. is true J) i. is false, ii. is true, iii. is true, iv. is false K) i. is false, ii. is true, iii. is false, iv. is true L) i. is false, ii. is true, iii. is false, iv. is false M) i. is false, ii. is false, iii. is true, iv. is true N) i. is false, ii. is false, iii. is true, iv. is false O) i. is false, ii. is false, iii. is false, iv. is true P) i. is false, ii. is false, iii. is false, iv. is false Q14. Assess each of these three statements about the Hotelling’s location model where two ice cream vendors are free to position themselves wherever they wish along a straight beach: i. To minimise the average distance their clients have to travel, the vendors will choose to position themselves in the middle of the beach. ii. To minimise the average distance their clients have to travel, the vendors will choose to position themselves 1/4 and 3/4 of the way along the beach. iii. To minimise the average distance their clients have to travel, the vendors will choose to position themselves 1/3 and 2/3 of the way along the beach. iv. To minimise competitive pressure on the price of their ice creams both vendors will choose to position themselves at the opposite ends of the beach. A) i. is true, ii. is true, iii. is true, iv. is true B) i. is true, ii. is true, iii. is true, iv. is false C) i. is true, ii. is true, iii. is false, iv. is true D) i. is true, ii. is true, iii. is false, iv. is false E) i. is true, ii. is false, iii. is true, iv. is true F) i. is true, ii. is false, iii. is true, iv. is false G) i. is true, ii. is false, iii. is false, iv. is true H) i. is true, ii. is false, iii. is false, iv. is false I) i. is false, ii. is true, iii. is true, iv. is true J) i. is false, ii. is true, iii. is true, iv. is false K) i. is false, ii. is true, iii. is false, iv. is true L) i. is false, ii. is true, iii. is false, iv. is false M) i. is false, ii. is false, iii. is true, iv. is true N) i. is false, ii. is false, iii. is true, iv. is false O) i. is false, ii. is false, iii. is false, iv. is true P) i. is false, ii. is false, iii. is false, iv. is false . Q15. Members of two groups, the blues and the greens, each have productivity values that range from ￡10 to ￡30/hr. Even though the ranges are the same, however, the averages are different: the productivity of the blues is ￡15/hr and the corresponding average for the greens is ￡24/hr. It is easy for anyone to see whether an individual is blue or green, and it is common knowledge that the group average productivities are ￡15/hr and ￡24/hr, but it is not easy to see how productive any individual is. A new productivity test has been devised though, and 1/3rd of the time it is able to give a correct measurement of an individual’s productivity, but the other 2/3rds of the time it gives random productivity value drawn from the relevant colour-group distribution. Employers are free to pay workers the productivity values that they expect. i. Assuming labour markets are competitive, how much will a blue with a test value of 24 be paid ii. Will a green with a test value of 12 be paid less, more, or the same amount as a blue who scores 24 A) i. ￡15/hr ii. less B) i. ￡16/hr ii. less C) i. ￡18/hr ii. less D) i. ￡22/hr ii. less E) i. ￡24/hr ii. less F) i. ￡15/hr ii. same G) i. ￡16/hr ii. same H) i. ￡18/hr ii. same I) i. ￡22/hr ii. same J) i. ￡24/hr ii. same K) i. ￡15/hr ii. more L) i. ￡16/hr ii. more M) i. ￡18/hr ii. more N) i. ￡22/hr ii. more O) i. ￡24/hr ii. more Q16. In the loanable funds market i. The demand curve for loanable funds shifts leftwards if the interest rate falls. ii. The demand curve for loanable funds shifts rightwards if the interest rate falls. iii. The supply curve for loanable funds shifts leftwards if the interest rate falls. iv. The supply curve for loanable funds shifts rightwards if the interest rate falls. A) i. is true, ii. is true, iii. is true, iv. is true B) i. is true, ii. is true, iii. is true, iv. is false C) i. is true, ii. is true, iii. is false, iv. is true D) i. is true, ii. is true, iii. is false, iv. is false E) i. is true, ii. is false, iii. is true, iv. is true F) i. is true, ii. is false, iii. is true, iv. is false G) i. is true, ii. is false, iii. is false, iv. is true H) i. is true, ii. is false, iii. is false, iv. is false I) i. is false, ii. is true, iii. is true, iv. is true J) i. is false, ii. is true, iii. is true, iv. is false K) i. is false, ii. is true, iii. is false, iv. is true L) i. is false, ii. is true, iii. is false, iv. is false M) i. is false, ii. is false, iii. is true, iv. is true N) i. is false, ii. is false, iii. is true, iv. is false O) i. is false, ii. is false, iii. is false, iv. is true P) i. is false, ii. is false, iii. is false, iv. is false . Q17. On any point on the contract curve: i. Incomes are the same for the two consumers ii. Quantities consumed are the same for the two consumers iii. Marginal rates of substitution are the same for the two consumers iv. Levels of utility are the same for the two consumers A) (i.) & (ii.) & (iii.) & (iv.) B) (i.) & (ii.) & (iii.) C) (i.) & (ii.) & (iv.) D) (i.) & (ii.) E) (i.) & (iii.) & (iv.) F) (i.) & (iii.) G) (i.) & (iv.) H) (i.) I) (ii.) & (iii.) & (iv.) J) (ii.) & (iii.) K) (ii.) & (iv.) L) (ii.) M) (iii.) & (iv.) N) (iii.) O) (iv.) P) None of (i.) to (iv.) Q18. Evaluate the following statements about general equilibrium in an exchange economy: i. A Pareto optimal allocation is one in which it is possible to make one person better off without making at least one other person worse off. ii. In a pure exchange economy with only two consumers and two goods, for any given initial allocation of the two goods, a competitive exchange process will never exhaust all possible mutually beneficial gains from trade. iii. If consumers have convex indifference curves, any efficient allocation can be sustained as a competitive equilibrium. A) i. is true, ii. is true, iii. is true B) i. is true, ii. is true, iii. is false C) i. is true, ii. is false, iii. is true D) i. is true, ii. is false, iii. is false E) i. is false, ii. is true, iii. is true F) i. is false, ii. is true, iii. is false G) i. is false, ii. is false, iii. is true H) i. is false, ii. is false, iii. is false Q19. Consider a steel mill dumping waste into a loch where a salmon farm is located. The mill’s waste reduces the farm’s profit. The mill can install a filter system to reduce its waste, or the farm can pay for the installation of a water treatment plant. Their profits are presented in the matrix below (first number being the mill’s profit). Farm No treatment plant Treatment plant Mill No filter ￡600, ￡100 ￡600, ￡200 Filter ￡200, ￡500 ￡200, ￡350 Assess each of these three statements: i. The socially optimal outcome will be achieved even if the mill and the farm make their decisions individually (assuming they are both profit maximisers). ii. The socially optimal outcome will be reached if the mill has the property right to dump waste into the loch. iii. The socially optimal outcome will be reached if environmental regulations require the mill to install the filter. You should assume that the mill and farm make their decisions independently, and that negotiation between them is very costly/difficult (perhaps because the owners hate each other). When thinking about the social optimum in the context of this question consider only the information provided in the table and ignore all other considerations not mentioned here. A) i. is true, ii. is true, iii. is true, B) i. is true, ii. is true, iii. is false, C) i. is true, ii. is false, iii. is true, D) i. is true, ii. is false, iii. is false, E) i. is false, ii. is true, iii. is true, F) i. is false, ii. is true, iii. is false, G) i. is false, ii. is false, iii. is true, H) i. is false, ii. is false, iii. is false, Q20. Which (if any) of the following medical services is a public good i. Dental services ii. Basic biological research iii. Hospital parking lots iv. Public broadcasts about a new virus A) (i.) & (ii.) & (iii.) & (iv.) B) (i.) & (ii.) & (iii.) C) (i.) & (ii.) & (iv.) D) (i.) & (ii.) E) (i.) & (iii.) & (iv.) F) (i.) & (iii.) G) (i.) & (iv.) H) (i.) I) (ii.) & (iii.) & (iv.) J) (ii.) & (iii.) K) (ii.) & (iv.) L) (ii.) M) (iii.) & (iv.) N) (iii.) O) (iv.) P) None of (i.) to (iv.) Section B – Written questions. Answer each question in a separate booklet. Answer all six questions. (60 points total — 10 points each) Written questions - Instructions You must write your answers to each of the questions in a separate booklet. You should write neatly and draw clearly – you cannot earn credit for answers that we cannot read. When deriving mathematical results, show your work – you will not earn full credit otherwise. If you make any important assumptions, state them clearly. Q21. The aggregate production function for a given economy is = , where represents output, represents inputs of capital, represents the number of workers, represents the amount of land, and , , , and are all strictly positive constants. a) Draw a sketch of the total product of labour (holding capital and land fixed at arbitrary levels) [3 points] b) Draw a sketch of the marginal product of labour (again holding capital and land fixed at arbitrary levels) [3 points] c) Now suppose = 0.3 and = 0.5 and = 0.2. If capital and labour grow continuously at 3% and 2% respectively while the supply of land is fixed, what growth rate of output should be expected [4 points] Q22. Demand curves. a) What kind of market conditions (if any) might cause a demand curve to be vertical (or nearly vertical) [2 marks] b) What kind of market conditions (if any) might cause a demand curve to be horizontal (or nearly horizontal) [2 marks] c) What kind of market conditions (if any) might cause a demand curve to be upward sloping Give an example. [2 marks] d) How (and why) do industry-level and firm-level demand curves differ [2 marks] e) How (and why) do short-run and long-run demand curves differ [2 marks] Q23. Trees and stages. (a) Write down the payoffs to a game where the equilibrium (or set of equilibria) is different in the stage game than it is in a sequential game with the same payoffs. [4 marks] (b) Write down the payoffs to a game where (the / an) equilibrium is Pareto dominated by another possible outcome, and where (the / a) Pareto-dominated outcome is an equilibrium both: (i) when the payoffs are expressed in the form of a stage game, and (ii) when they are expressed in the form of a sequential game. [6 marks] Q24. Suppose a monopolist faces a demand curve of = 100 2 and has zero fixed or marginal costs. a) What will be the monpolist’s profits if they charge a single price for their output Illustrate their pricing decision with a graph [4 marks] b) What will be the monpolist’s profits if they are a perfect price discriminators Illustrate their pricing decision with a graph [4 marks] c) What will be the monpolist’s profits if they turn into a duopolist faced with a Bertrand competitor [2 marks] Q25. Interest rates. a) Why do higher interest rates make future events economically less important [4 marks] b) How might the interest rate you use when considering future events – like how to respond to future climate change by making adjustments right now – matter for real-world decisions (Ideally, your answer should address the climate change example and also introduce another example where interest rates matter over long time horizons.) [6 marks] Q26. When aggregating individuals’ preferences, in what circumstances should demand curves be summed horizontally and in what circumstances should they be summed vertically Explain, supporting your explanation with diagrams, giving a real-world example for each type. [10 marks]