BASIC ECONOMICS June 2002 SECTION ONE Question 1 (Total: 20 marks) Answer all questions. Read the following statements and choose the best answer by writing the alphabetical letter on the answer sheets.
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1.1 Mr Wang, a lawyer, is a better typist than his secretary, but he still has her to do the typing. What economic principle, much used in trade theory, does this illustrated? `$ Y4 y. |' Q
(a) absolute advantage (b) economies of scale (c) diminishing returns (d) comparative advantage
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1.2 The following four events may all increase the amount of apples demanded, but which one causes a movement along the demand curve? , u' o- f* g: T1 K, l% k4 E
(a) an increase in average incomes (b) a decrease in the price of apples : O/ n+ \6 x' ]1 f1 r
(c) an increase in the price of pears (d) a popular movie star says she likes apples 7 t- {& ]! \! s/ Q: Y7 {
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1.3 If a price rise increases revenue for the good being sold, then the demand for the good must be 9 o% J& N. D9 |6 N
(a) elastic (b) inelastic (c) reflexive (d) unitary elastic
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1.4 A company that makes cars buys companies which makes tyres, glass and steel. This is an example of (a) vertical integration (b) horizontal integration (c) monopoly (d) oligopoly
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& K# ?: h9 S, v: W" H/ B1.5 The kinked demand curve in an oligopoly arises from assuming that
3 _6 y$ Z! `6 h W' A" M7 }" P(a) firms will follow an expansion in output but not a contraction
Z. V4 y% g4 i( E& s) ^4 m(b) firms will follow an increase in revenue but not a decrease
|. }- r; ?" c6 `) `$ V(c) firms will follow prices rises but not price cuts " O O0 ^3 {+ G2 ^" y6 H" P
(d) firms will follow prices cuts but not price rises
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% O3 z# W1 `4 L& |; t1.6 The permanent income hypothesis implies # o" _, E( B. ~% P8 q( r6 K
(a) the short run marginal propensity to consume is negative
/ L. e7 C7 L4 e: L5 d; w(b) the short run marginal propensity to consume is greater than one
; O8 B( H6 Z* d/ i( M+ F* {(c) the long run marginal propensity to consume is higher than the short run propensity 1 T: h0 s* E- Y8 a
(d) the short run marginal propensity to consume is higher than the long run propensity ' }# ?- \) \0 W) Q) ~& S6 X
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1.7 Progressive taxes mean
F, U# A* S2 g* d% ~(a) high income earners pay more tax than low income earners 7 t6 o& B) O- h+ C4 ]6 b+ h5 K
(b) high income earners pay a higher proportion of their incomes in tax than low income earners, T! q2 M( I" i& v$ u) ]
(c) income earners pay more tax if their income increases- r' a8 _* s c% h4 ~# v
(d) taxes are levied on income rather than consumption , }- l! H# E: O; A/ d
! l' ~, F/ A( [ c7 E1.8 Street lighting, lighthouses and defense are examples of
* R* }5 k3 Y3 u( K, j: {3 i- S$ I(a) public goods (b) merit goods (c) giffin goods (d) inferior goods
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1.9 Which of the following must increase the terms of trade?
# Q* \8 a* o& y6 x6 \# G(a) an increase in export prices and a fall in import prices : T; i; m: e2 K) [
(b) an increase in export prices and an increase in import prices , k0 ? H6 k" X7 `
(c) an increase in export quantities and a fall in import quantities " c/ a5 V' G6 V8 D. R
(d) a fall in export prices and an increase in import prices ( w! Q* p# \& R% W
# `0 L0 i+ ?1 a$ I9 m' y1.10 The “J—curve” shows that following a depreciation
3 V5 r+ h4 j7 B; x$ [; y(a) the quantity of exports falls, making the current account balance worse
3 c! r: F1 s& A k; N(b) there is an improvement in the balance of payments so long as the Marshall—Lerner conditions are met# z. L! g$ |) u4 ]0 X7 R
(c) the cost of imports rises immediately from the price effect, worsening the current account balance, but later quantities of imports and exports respond and the current account balance improves
/ x/ z( K' s0 V/ t2 w4 Q* ^(d) there is an initial drop in imports but this is later reversed |