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UNIVERSITY OF LONDON
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BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the Social Sciences, the Diploma in Economics and Access Route for Students in the External Programme
Introduction to Economics
Thursday, 8th May 2008 : 10.00am to 1.00pm
Candidates should answer FOUR of the following EIGHT questions: QUESTION 1 and ONE further question from Section A, and QUESTION 5 and ONE further question from Section B. All questions carry equal marks.
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Page 1 of 5
Answer question 1 and one further question from this section. 1.
Answer THREE of the following questions:
A consumer always spends 40% of his income on good x and the rest on good y. The price elasticity of the demand for both x and y will be unity. True or false? Explain your answer.
When there are increasing returns to scale throughout, the minimum of the short run average costs would never be tangent to the long run average costs. Therefore, the short run marginal cost will never intersect the long run marginal cost function. True or false? Explain your answer.
Analyse the effects of an increase in the cost of capital on a competitive industry. Consider both the short run and long run effects on equilibrium price and quantity, the number of firms and their output.
A lump-sum tax, which is levied on a monopolist, will cause a fall in the quantity supplied and an increase in price. True or false? Explain your answer.
Two economies produce only two goods, x and y. Economy 1 can produce either 80 units of y or 20 units of x (or any linear combination of the two). Economy 2 can produce either 40 units of y or 20 units of x (or any linear combination of the two). Therefore, there exists no price for which economy 1 will gain from trading with economy 2. True or false? Explain your answer.
The Nash Equilibrium in a Duopolistic Industry is a form of a prisoner’s dilemma. True or false? Explain your answer.
Uncle Joe has a dairy farm. His output per period is y units of dairy products. The family consumes two types of goods: dairy product y and other goods x. The difficulty of processing dairy products means that Joe has to sell his output to a corporation, Milky Devils, which prepares it for the market. The price which he receives from the corporation, c
per unit of his output, is given by: p y . The price of the goods in the market is given by
p y 0 , p x 0 respectively.
Describe and explain the initial choice which the family will make;
If Milky Devils always pays the farmer a fixed fraction of the market price of the dairy product, could the family become worse off when the price of dairy products goes up?
The corporation offers Joe to pay him less for each unit of his output but it promises that it would also reduce the market price of the dairy product. Assuming that what the corporation pays Joe is not a fixed proportion of the market price, could the family become worse off?
Under what conditions would the family become better off?
Suppose now that the family has become distinctly better off by experiencing an increase in real income. Would the family necessarily buy more of y if dairy products were normal goods?
Page 2 of 5
The Market for Calendars is comprised of two types of producers. There are commercial firms and there are charities which employ disadvantaged people. The market is competitive and the costs, which charities face, are higher than those of commercial firms which use more capital intensive technologies. The charities cover their losses through donations. (a)
The government wishes to support the charities and suggests levying a lump sum tax on the commercial firms. What are the...
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