A government wants to reduce electricity consumption by 10%. The price elasticity of

demand for electricity is 0.1. The government must __________ the price of

electricity by __________.

A. raise; 1%

B. lower; 20%

C. raise; 10%

D. raise; 100%

2. Good X has a relatively inelastic demand curve. This means that __________.

A. Good X has a vertical demand curve

B. Good X has a perfectly horizontal demand curve

C. when the price of good X increases, quantity demanded falls but a smaller portion

than the increase in price

D. when the price of good X increases, the decreased quantity demanded is

proportionately greater than the increase in price

3. A firm is currently producing in the elastic portion of its demand curve. What course

of action do you recommend for it assuming it wants to raise revenue?

A. Continue selling at the same price, but increase the amount it produces.

B. Reduce price, because if it reduces price and demand is elastic, total revenue will

increase.

C. Increase price, because if it increases price and demand is elastic, total revenue

will increase.

D. Continue producing at the current output level, because it maximises its total

revenue by producing in the elastic portion of its demand curve.

4. The owner of a local Roti John stall has estimated that if he lowers the price of Roti

John from RM2.00 to RM1.50, he will increase sales from 400 to 500 Roti John per

day. Based on this situation, the demand for Roti John is __________.

A. elastic

B. inelastic

C. unit elastic

D. perfectly inelastic

5. When there are fewer substitutes for a product, the __________ for the product is

__________.

A. income elasticity; smaller

B. income elasticity; greater

C. demand; less price elastic

D. demand; more price elastic

Continued...

PPE0044 BASIC MICROECONOMICS 5 JUNE 2020

TLY 3/9

6. Luxury items tend to have __________ demand, and necessities tend to have

__________ demand.

A. relatively elastic; inelastic

B. relatively inelastic; elastic

C. unit elastic; perfectly inelastic

D. perfectly elastic; perfectly inelastic

7. A perfectly price inelastic supply curve will be a (n) __________ line.

A. vertical

B. horizontal

C. upward sloping

D. downward sloping

8. If the supply of parking space in a shopping mall is perfectly inelastic and when price

falls, quantity supplied will __________.

A. fall

B. rise

C. fall to zero

D. remain unchanged

9. The income elasticity of demand for education is 3.5. Thus, a 4% increase in income

will __________.

A. increase the quantity of education demanded by 4%

B. increase the quantity of education demanded by 14%

C. decrease the quantity of education demanded by 3.5%

D. decrease the quantity of education demanded by 14%

10. Which of the following, if true, would most effectively undermine the argument that

raising cigarette taxes reduce the number of people who smoke cigarettes?

A. The supply for cigarettes is relatively elastic.

B. The supply for cigarettes is relatively inelastic.

C. The demand for cigarettes is relatively elastic.

D. The demand for cigarettes is relatively inelastic.

11. A teacher left her RM100,000-a-year teaching position and work full-time in her own

private tuition. In the first year, she had total revenue of RM200,000 and business

expenses of RM 50,000. Thus, she made RM50,000 __________.

A. economic loss

B. economic profit

C. accounting loss

D. accounting profit

Continued...

PPE0044 BASIC MICROECONOMICS 5 JUNE 2020

TLY 4/9

12. Refer to Exhibit 1 to answer question 12.

Exhibit 1

Exhibit 1 shows the total product function. Based on Exhibit 1, the average product

with three workers is ___________.

A. 10

B. 14

C. 16

D. 30

13. When total product is maximised, marginal product __________.

A. and average product are zero

B. and average product are positive

C. is zero but average product is positive

D. is positive but average product is zero

14. When the marginal product of labour __________ the average product of labour, then

the average product is maximised.

A. equals

B. is less than

C. is greater than

D. the average product of labour is never maximised

15. Average fixed costs __________.

A. fall as output rises

B. provide a per unit measure of costs

C. are the costs associated with producing an additional unit of output

D. reach their minimum at the output level where the average fixed cost curve is

intersected by the marginal cost curve

16. All of the following statements about variable costs are true EXCEPT __________.

A. they are zero if output is zero

B. they are constant as output increases

C. they are equal to total costs in the long run

D. they are equal to the product of average variable cost and the output level

Continued...

PPE0044 BASIC MICROECONOMICS 5 JUNE 2020

TLY 5/9

17. A company that provides home-care for the elderly is able to provide monthly

services for 4 patients at a total cost of RM2,000 and monthly services for 5 patients

at a cost of RM2,350 The marginal cost of providing monthly services for the 5 th

patient is __________.

A. RM350

B. RM550

C. RM2,000

D. RM2,350

18. Refer to Exhibit 2 to answer question 18.

Output (office shirt per

hour)

Total cost (RM) Total variable cost (RM)

8

10

12

76

84

100

56

64

80

Exhibit 2

Exhibit 2 shows the cost of producing office shirts. The total fixed cost is

__________ and the marginal cost of increasing production from 10 to 12 Polo shirts

is __________.

A. RM8; RM20

B. RM20; RM8

C. RM56; RM16

D. RM16; RM56

19. Suppose Great City Bank determines that it must lower its average cost of providing

banking services in the long run to become profitable. If the bank experiences

economies of scale, it __________.

A. could lower its long-run average costs by providing more services

B. could lower its long-run average costs by providing fewer services

C. could lower its long-run average costs by providing more or fewer services

D. could lower its long-run average costs by providing the same quantity of services

20. Constant returns to scale occur when __________.

A. total costs are rising

B. total costs are decreasing

C. average total cost is rising

D. average total cost is constant

21. A perfectly competitive firm __________.

A. has a perfectly elastic supply

B. has a perfectly inelastic demand

C. sells a product that has perfect substitutes

D. none of the above

PPE0044 BASIC MICROECONOMICS 5 JUNE 2020

TLY 6/9

Continued...

22. For a perfectly competitive firm, the price of its good is equal to the firm's marginal

revenue because __________.

A. there are only a small number of firms in the market

B. price and marginal revenue are the same economic concepts

C. information about price changes is hard to come by for small sellers

D. individual perfectly competitive firms could not influence the market price by

changing their output

Refer to Exhibit 3 to answer question 23.

Quantity Total cost (RM) Variable cost (RM)

0

100

200

300

400

500

600

1,000

1,360

1,560

1,960

2,760

4,000

5,800

0

360

560

960

1,760

3,000

4,800

Exhibit 3

23. Exhibit 3 shows the short-run cost data of a perfectly competitive firm that produces

plastic camera cases. Assume that output can only be increased in batches of 100

units. If the market price of each camera case is RM8, what is profit-maximising

quantity?

A. 250 units

B. 400 units

C. 450 units

D. 500 units

Refer to Exhibit 4 to answer question 24.

Exhibit 4

PPE0044 BASIC MICROECONOMICS 5 JUNE 2020

TLY 7/9

Continued...

24. Exhibit 4 shows cost and demand curves facing by a typical agricultural firm in a

perfectly competitive industry. Suppose that the agricultural firm is currently

producing at its loss-minimising quantity, what is the firm's total fixed cost?

A. RM5,400

B. RM6,850

C. RM8,200

D. RM8,350

25. Suppose that each of 10,000 perfectly competitive firm in an industry produces 1,000

units of a good and earns an economic profit when the price of the good is RM10. In

the long run, definitely __________.

A. producer surplus increases

B. consumer surplus decreases

C. the number of firms is less than 10,000.

D. the number of firms is more than 10,000.

26. We define a monopoly with __________.

A. one supplier with barriers to entry

B. one supplier and no barriers to entry

C. a few suppliers and barriers to entry

D. many suppliers with barriers to entry

27. ABC's Airlines decides to offer different fares to different customers for the same

trip. ABC's price discriminates because ABC __________.

A. wants to help some buyers with lower fares

B. wants to convert consumer surplus to economic profit

C. wants to convert consumer surplus to deadweight loss

D. wants to convert producer surplus to consumer surplus

28. In the long run, a firm in monopolistic competition will __________.

A. over utilise its insufficient capacity

B. produce so that its price equals marginal cost

C. be dependent on the other firms in the industry

D. produce so that its price equals average total cost

29. In the long run, a firm in monopolistic competition __________ excess capacity and a

firm in perfect competition __________ excess capacity.

A. has; has

B. has; does not have

C. might have; might have

D. does not have; does not have

30. The fact that firms in oligopoly are interdependent means that __________.

A. there are barriers to entry

B. one firm's profits are affected by other firms' actions

C. they can produce either identical or differentiated goods

D. they definitely compete with each other so that the price is driven down to the

monopoly level

PPE0044 BASIC MICROECONOMICS 5 JUNE 2020

TLY 8/9

Continued...

SECTION B: STRUCTURED QUESTIONS [70 MARKS]

Instructions: Answer ALL questions in this section.

Question 1

Part A

Exhibit 5 shows Adrian's total utility and marginal utility from energy drinks (E) and

protein bars (P).

Energy Drinks (E) Protein Bars (P)

Quantity MU TU Quantity MU TU

1 84 84 1 36 36

2 72 156 2 30 66

3 60 216 3 24 90

4 48 264 4 18 108

5 36 300 5 12 120

6 24 324 6 6 126

7 12 336 7 0 126

Exhibit 5

Based on Exhibit 5,

a) suppose that the price of energy drink is RM3.00 per bottle and that the price of

protein bars is RM1.50 per bar. Compute the marginal utility per price ratios for

energy drinks and protein bars.

(7 marks)

b) Adrian has RM21 weekly allowance. If he spends all his weekly allowance on energy

drinks and protein bars, how many bottles of energy drinks and protein bars will

Adrian consume each week to maximise his total utility?

(3 marks)

c) In part (b), what is Adrian's total utility?

(2 marks)

d) In order to maximise Adrian's total utility, can he choose 3 bottles of energy drinks

and 2 protein bars? Show your working and briefly explain your answer.

(3 marks)

Part B

Diamond-water paradox helps to explain why the things that have greatest value in use

have frequently little or no value in exchange; and on the other hand, those which have

the greatest value in exchange have frequently little or no value in use. Use the

knowledge you have gained in Microeconomic class, think a pair of goods that are in

contrast in terms of the value in use and value in exchange. Explain and solve it using the

paradox.

(10 marks)

PPE0044 BASIC MICROECONOMICS 5 JUNE 2020

TLY 9/9

Continued...

Part C

Karen receives an allowance of RM5 per week. She spends all her allowance on ice

cream cones and cans of Lime Fizz soda.

a) If the price of ice cream cones is RM0.50 per cone and the price of Lime Fizz is RM1

per can, draw a diagram showing Karen's budget constraint with ice cream cones on

vertical axis. Be sure to indicate in your diagram the maximum number of ice cream

cones and the maximum number of cans of Lime Fizz that Karen can buy.

(2 marks)

b) Derive Karen's budget equation.

(1.5 marks)

c) Karen buys 6 ice cream cones and 2 cans of Lime Fizz. Draw an indifference curve

representing Karen's choice, assuming she has chosen the optimal combination.

(1.5 marks)

[TOTAL 30 MARKS]

Question 2

Part A

Exhibit 6 depicts the daily production function for a manufacturer of study tables. The

manufacturer has a fixed cost associated with space and equipment of RM400 a day.

Each worker is paid RM200 per day.

No. of worker Total output of study tables

0

1

2

3

4

5

6

0

25

60

85

105

115

120

Exhibit 6

Based on Exhibit 6,

a) calculate the average product (AP) and marginal product (MP) at each quantity of

worker.

(3 marks)

b) briefly explain the economic theory "Law of Diminishing Marginal Returns'. Is this

principle a short-run concept?

(3 marks)

c) at which level of input does MP begin to diminish?

(1 mark)

d) state the formula for total cost (TC). Calculate the total variable cost (TVC) and

marginal cost (MC) of the manufacturer at each level of input.

(7 marks)

PPE0044 BASIC MICROECONOMICS 5 JUNE 2020

TLY 10/9

Continued...

Part B

Why is average total costs (ATC) U-shaped? Use the appropriate principle and carefully

explain your answer.

(6 marks)

Part C

a) Exhibit 7 illustrates the production of ABC Fruit Farm. Assume that the farm is a

profit maximiser operating in a perfectly competitive market.

Exhibit 7

Based on Exhibit 7,

i) how many units of output will ABC Fruit Farm produce and sell?

(1 mark)

ii) calculate TR, ATC, AVC and TFC at this level of output?

(6 marks)

iii) will ABC Fruit Farm earn economic profit or incur an economic loss? Show your

working.

(3 marks)

iv) should ABC Fruit Farm operate in the short run? Why or why not?

(2 marks)

v) what will happen to the fruit farm industry in the long run?

(1 marks)

Part D

Suppose that the market price of a perfectly competitive firm is so low that the firm's

total revenue is less than its total cost. In addition, the firm exhibits the market price is

less than its average variable cost. Should the firm continue to operate at a loss or should

the firm shut down? Briefly explain your answer in words and graphs.

(7 marks)