Microeconomics Exam Questions and Solutions

Question 1

Question 1

(a) Nepal is a major exporter of textile and plastics. The following production possibility curve (PPC) represents the textile and plastics output of the economy, with various production bundles:

State if the following statements are TRUE or FALSE. Provide a short explanation for your answer.

(i) A decision to produce bundle D instead of bundle B will lead to an opportunity cost of 70 units of plastics.

(ii) Production bundle F is unattainable.

(iii) There is no difference between production bundles C and E in terms of resource utilisation.

(iv) Production bundle A can be attained with technological advancement.

(v) B, C and D represent efficient production bundles.

(vi) The shape of the PPC will not be concave if the textile output was plotted on the vertical axis and plastics output was plotted on the horizontal axis.

South Korea is one of the world’s leading smartphone producer. Explain the effects of the following incidences on the equilibrium price and output in the market for Android smartphones in South Korea. Use a demand and supply diagram for each scenario to illustrate your answers.

(i) A recent diplomatic row between Japan and South Korea had resulted in Japan restricting the exports of semiconductor materials used to produce smartphones to South Korea.

(ii) The trade war between the United States and China had led to a ban on China’s Huawei Android mobile phones from access to updated apps, including popular services such as Google Maps, Music, YouTube and others.

Question 2

The table shows elasticity of demand for various items.

(a) If the organiser of the BlackyPink Kpop concert wishes to increase total revenue, explain the pricing strategy it can adopt. Use a diagram to illustrate your answer.

(b) If the median income in Singapore rose from $4,000 to $4,700, calculate the change in demand for air-conditioners.

(c) If the price of the related good to wireless headphones rises by 15%, calculate the change in demand for wireless headphones. Give an example of such a related good.

Question 3

Food blogger Danial Fries decided to act on his love for fast food by setting up his very own burger joint, the Shakey Shacky. The following table shows the output and cost of the burger joint.

(a)

(i) Find the missing variables in the table above. Show all working and label each variable correctly.

(ii) Identify one fixed factor and one variable factor of production.

(iii) Identify the point where the burger joint first experiences the law of diminishing marginal returns in production. Provide a brief explanation for your answer.

(iv) Assume that Danial’s burger joint currently hires 3 waiters. If he were able to vary all factors of production to hire 6 waiters to operate 2 shops equipped with 8 grill ovens, suggest a possible output that would illustrate increasing returns to scale in production.

(b) Danial discovered that he could only sell each burger for $24. If he raised the price above $24, he would not have any customers at all.

(i) Identify the market structure for burgers and provide relevant justification.

(ii) Find the optimal number of burgers to be produced by Danial’s burger joint.

(iii) Calculate the profit made based on the output in (b) part (ii).

(iv) Use relevant diagrams to illustrate and explain the long run profit of the burger joint.