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SCHOOL OF ECONOMICS
ECONOMICS 1 (ECNM08013)
Sunday 35th April 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. For which of the following functions is it true that
2

2 > 0 for all ≥ 0
i. For =
2
,

2

2 > 0 for all ≥ 0.
ii. For =
3
,

2

2 > 0 for all ≥ 0.
iii. For =
4
,

2

2 > 0 for all ≥ 0.
iv. For =
5
,

2

2 > 0 for all ≥ 0.
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
Q2. Suppose that the demand for taxi rides from the airport in a certain area is = 100 2 and the supply
is = 20 + 3 . The market is initially in a competitive equilibrium but the local government is
considering imposing a fixed price for taxi rides from the airport at one of the two following price points:
i. = 10
ii. = 20
For each of these two prices, you have been asked to forecast whether the fixed price causes a state of
excess supply (ES), excess demand (ED), or both ES & ED, or neither ES nor ED.
A) i. excess supply & ii. excess supply
B) i. excess supply & ii. excess demand
C) i. excess supply & ii. both
D) i. excess supply & ii. neither
E) i. excess demand & ii. excess supply
F) i. excess demand & ii. excess demand
G) i. excess demand & ii. both
H) i. excess demand & ii. neither
I) i. both & ii. excess supply
J) i. both & ii. excess demand
K) i. both & ii. both
L) i. both & ii. neither
M) i. neither & ii. excess supply
N) i. neither & ii. excess demand
O) i. neither & ii. both
P) i. neither & ii. neither
Q3. In the 1980s, Robert Axelrod ran a series of computer tournaments based on a repeated prisoners’ dilemma.
Let’s call the two players in a given game “Blue” and “Red”. If both players cooperate, they both receive the reward
R for cooperating. If both players defect, they both receive the punishment payoff P. If Blue defects while Red
cooperates, then Blue receives the temptation payoff T, while Red receives the “sucker’s” payoff, S. Similarly, if
Blue cooperates while Red defects, then Blue receives the sucker’s payoff S, while Red receives the temptation
payoff T.
The point scores that Axelrod used for these payoffs were: 0, 1, 3, and 5. But which payoff corresponds to which
point score (Hint: you don’t need to have memorised the payoffs – you can reason this from the general structure
of a prisoners’ dilemma.)
A) = 0; = 1; = 3; = 5
B) = 0; = 1; = 5; = 3
C) = 0; = 3; = 1; = 5
D) = 0; = 3; = 5; = 1
E) = 0; = 5; = 1; = 3
F) = 0; = 5; = 3; = 1
G) = 1; = 0; = 3; = 5
H) = 1; = 0; = 5; = 3
I) = 1; = 3; = 0; = 5
J) = 1; = 3; = 5; = 0
K) = 1; = 5; = 0; = 3
L) = 1; = 5; = 3; = 0
Q4. A consumer with an income of consumes only two goods – and – available at prices and . Which of
the following sets of changes might cause a parallel shift of the budget line
i. rises; rises; rises
ii. rises; falls; rises
iii. rises; rises; falls
iv. falls; falls; falls
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.)
Q5. Edith is walking through the countryside and she happens upon a Coke machine (the first one she’s seen for
miles). She’s a bit thirsty and she realises that a good characterisation of her demand for coke would be the
equation = 3 . At what price for a can will she buy exactly one can of Coke
i. At a price of ￡2.25 per can, Edith will buy exactly one can
ii. At a price of ￡1.75 per can, Edith will buy exactly one can
iii. At a price of ￡1.25 per can, Edith will buy exactly one can
iv. At a price of ￡0.75 per can, Edith will buy exactly one can
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
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, ￡35 000), 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
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
Q7. 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,
Q8. Which of the following production functions is associated with straight-line isoquants when depicted in –
space
i. ( , ) = 2 + 3
ii. ( , ) = min [3 , 6 ]
iii. ( , ) = 5
iv. ( , ) =
0.5
0.5
A) i & ii & iii & iv
B) i & iii & iv
C) i & ii & iv
D) i & ii & iii
E) ii & iii & iv
F) i & ii
G) ii & iii
H) iii & iv
I) i & iii
J) i & iv
K) ii & iv
L) i
M) ii
N) iii
O) iv
P) None of i, ii, iii and iv
Q9. Consider two firms:
Firm Alpha is a small firm in a large city. Any reasonable amount of labour or capital that it might buy won’t affect
the local price of either (i.e. the firm takes the prices of labour and capital as being fixed). What shape will this
firm’s isocost curves be
Firm Beta operates in labour and capital markets where bulk discounts are available on both factors of production:
workers are hired via an agency, and the agency charges a bit less per worker the more workers are hired, and
capital gets a similar discount for bigger quantities bought in (the discount is such that Beta always pays more in
total when more labour or capital is bought in, but the per-unit cost does decline). What shape will Beta’s isocost
curves be
A) Alpha’s will be concave; Beta’s will be concave
B) Alpha’s will be concave; Beta’s will be convex
C) Alpha’s will be concave; Beta’s will be linear
D) Alpha’s will be concave; Beta’s will be linear
E) Alpha’s will be convex; Beta’s will be concave
F) Alpha’s will be convex; Beta’s will be convex
G) Alpha’s will be convex; Beta’s will be linear
H) Alpha’s will be linear; Beta’s will be concave
I) Alpha’s will be linear; Beta’s will be convex
J) Alpha’s will be linear; Beta’s will be linear
Q10. Suppose a competitive industry has the supply curve = 10 + 3Q. Suppose the market demand curve is =
50 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. The figure below shows a firm’s long-run total cost curve:
Which of the following statements is (are) true if the prices of inputs are constant
i. Long-run marginal costs are constant and equal to long-run average costs.
ii. The firm’s production exhibits constant returns to scale.
iii. The curve going through the origin indicates that only labour is used in production.
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,
Q12. Suppose a car park at the Trossachs National Park is run by a perfectly discriminating monopolist. The fixed
costs are zero, and the marginal costs are constant and equal to ￡5. The market demand is given by
= 1000
10P. What is the maximum per-period licence fee the government could charge the firm and have it stay in the
business Round your answer down to the nearest ￡5,000.
A) ￡30,000 or less
B) ￡35,000
C) ￡40,000
D) ￡45,000
E) ￡50,000
F) ￡55,000
G) ￡60,000
H) ￡65,000
I) ￡70,000
J) ￡75,000
K) ￡80,000
L) ￡85,000
M) ￡90,000
N) ￡95,000
O) ￡100,000 or more
Q13. 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
.
Q14. In your tutorial sheets on imperfect competition, there was a discussion of data on mark-ups based on the
work of Jan De Loecker and Jan Eeckhout.
Their data looked at country-level average mark-ups, where the mark-up for each country was calculated as the
average mark-up of corporations whose headquarters were located in that country.
Suppose (and this is controversial!) that the difference in markups arises from differences in market structure (i.e.
not from e.g. the shape of marginal cost curves). Given this way of measuring mark-ups, what do you think about
the following statements about the effects on domestic welfare of higher mark-ups (other things being equal):
i. For the world as a whole, higher mark-ups will typically lead to lower worldwide welfare.
ii. For small-open economies like Denmark, higher mark-ups will typically lead to lower domestic
welfare.
iii. For larger economies like the USA, higher mark-ups will typically lead to lower domestic welfare.
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
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 18 be paid
ii. Will a green with a test value of 18 be paid less, more, or the same amount as a blue who scores 18
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. As noted in your tutorial sheets, the working age female labour force participation rate in Japan has risen
sharply over the past decade, and has now overtaken the rate for the United States (which has been declining
recently). You were asked to read an economist article explaining the reasons behind this trend. What reasons
were given for the relatively high Japanese rate
i. “Top down” cultural changes, with many women CEOs being appointed to top companies.
ii. “Bottom up” cultural changes, with fewer women being slotted into lowly administrative jobs and
being referred to as “office flowers”.
iii. Japanese birth rates are declining, and this has left more time for women to work.
iv. Japanese men do a lot of housework, and this has released time for women to work.
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 the above.
Q17. Evaluate the following statements about general equilibrium in an exchange economy:
i. A Pareto optimal allocation is one in which it is impossible 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 always 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
Q18. There are 40 natural history students in the village of Berik. They can either work part-time in a local book
shop for ￡64 per day or give guided tours of local wildlife in the evenings.
The income from the tours depends on how many of them offer their services and is given by = 112 4
2
,
where L is the number of tour guides and T is daily income from tour guiding. The students prefer to give tours
unless the job in the book shop pays more.
Assess each of these three statements if the students decide individually whether to work in the book shop or give
tours and their goal is to earn as much as possible:
i. The number of tour guides will be double the socially optimal number of them.
ii. Half of the students will choose to work in the book shop.
iii. The number of students working in the book shop will be half the socially optimal amount.
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 factory’s profit).
Farm
No treatment plant Treatment plant
Mill No filter ￡400, ￡100 ￡400, ￡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. A student society consisting of 20 economists, 20 sociologists, and 20 physicists is about to elect its next
president. Arnold, Bo, and Chuck are the three candidates. Members of each group have the ranking schemes given
in the table:
Group Best Next best Last
Economists Arnold Bo Chuck
Sociologists Bo Chuck Arnold
Physicists Chuck Arnold Bo
The tradition in the society is to pit two candidates against each other and then pit the winner of that contest against
the third candidate. How does the pairing that a person would wish for match up with their discipline
i. Physicists should want round #1 to consist of Arnold vs. Bo
ii. Sociologists should want round #1 to consist of Chuck vs. Bo
iii. Economists should want round #1 to consist of Arnold vs. Chuck
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,
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. If a set of indifference curves for two items are shaped like upward sloping convex curves, what does this
mean Give an example. What does the slope of the line at any given point represent What about the
intercept(s) [10 marks]
Q22. All about elasticity…
(a) Write down the standard equation for the price elasticity of demand. [1 mark]
(b) Summarize the relationship between price elasticity, changes in price, and changes in total expenditure. [3
marks]
(c) Why don’t we measure the responsiveness of demand to price changes by the slope of the demand curve
instead of using the more complicated expression for elasticity [3 marks]
(d) Why do long-run elasticities of demand differ from short-run elasticities [3 marks]
Q23. Explain how a firm’s decision to either keep producing or to shut down is different in the short run and the
long run. Which costs are most relevant and least relevant in each case Support your answer with a diagram or
diagrams. [10 marks]
Q24. When are the social costs of monopoly highest and when are they lowest Are the cases when the social costs
are low (i.e. the social benefits are high) also cases where aggregate consumer surplus is high Support your answer
with diagrams. [10 marks]
Q25. On July 1
st Brewster won ￡10,500 in a lottery. According to the lottery’s terms and conditions he will be paid
in two instalments, ￡3000 immediately and ￡7500 on August 1
st, and he must spend the prize by the end of August.
Brewster has no other money before the end of August.
Brewster’s utility function is ( 1, 2
) = ln 1 + ln 2, where 1 and 2 represent his consumption of prize money in
July and August respectively.
Brewster’s bank offers him an incredibly generous deposit interest rate of 25% per month. The same interest rate
applies if Brewster borrows from the bank.
a) Write down Brewster’s budget constraint. [2 marks]
b) Find the optimal values of 1 and 2. [5 marks]
c) What would happen to the budget constraint if the interest rate decreased to 0% Illustrate your answer
diagrammatically. [3 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]