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A past economics examination paper from january 2010, focusing on economic principles 1. The paper includes various questions related to microeconomics concepts such as price elasticity of demand, income elasticity of demand, normal goods, inferior goods, giffen goods, consumer surplus, producer surplus, monopolies, and more. Students are required to answer questions using diagrams and calculations.
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Ionawr 2010 January 2010
Time allowed: TWO hours
Answer QUESTION 1 from Section A, and any ONE question from Section B.
Casio FX83ES/FX85ES calculators only may be used.
Section A
Question 1
a) Provide definitions for and explanations of:
i) Price elasticity of demand; ii) Income elasticity of demand. (9 marks)
b) Use the Mid-Point Method to calculate an approximate measure of price elasticity of demand for the case of a greengrocer’s shop selling tomatoes, where at a price of £1. per kilogram the amount sold weekly is 850 kilograms, and at a price of £1.50 the amount sold weekly is 800 kilograms. Are tomatoes in this instance elastic or inelastic in demand with relation to price? (15 marks)
c) Explain and illustrate what is meant by normal, inferior and Giffen goods. (14 marks)
d) Provide examples of complements and substitutes, and explain how you would expect such pairs of goods to be related in terms of cross-price elasticity of demand. (12 marks) (Total 50 marks)
Question 2.
Britain now has some of the highest taxes on petrol in Europe. Examine the impact on consumer demand for car, bus, and train travel of a further increase in the costs of motoring. In your answer, you should make use of various elasticity concepts. (50 marks)
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Question 3.
a) A consumer chooses between two normal goods, X and Y. The price of X rises. On a diagram, illustrate the income and substitution effects on the quantity of X consumed. Also, explain the income and substitution effects on the quantity of Y consumed. (15 marks)
b) If inflation leads to a doubling of all prices and incomes, explain and illustratewhat change might be expected in consumption decisions? (20 marks)
c) Show how indifference curve analysis can be used to determine whether or not an individual would work longer hours in response to a wage rise. (15 marks) (Total 50 marks)
Question 4.
a) What do you understand by the following terms?
i) Consumer surplus ii) Producer surplus (15 marks)
b) Consider the implications of the imposition of a tariff on imports of motor vehicles for consumer and producer surplus, in a country which is a net importer of cars. (18 marks)
c) In general, do you think free trade is a good idea? Explain. (17 marks) (Total 50 marks)
Question 5.
a) Draw a clear and well-labelled diagram of a monopoly firm showing short run average cost (AC) and marginal cost (MC) curves and average and marginal revenue (AR and MR) curves. (15 marks)
b) Explain, using this diagram, how the level of output and price are determined in this situation. (5 marks)
c) Explain the concept of economic profit and why excess profit may persist in the long run in a monopoly. Indicate the profit made by the monopolist in your diagram. (15 marks)
d) Using a diagram, briefly explain how the price and output of a profit maximising monopoly and a perfectly competitive industry would differ if each is faced by the same demand and cost curves. (15 marks) (Total 50 marks)
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