Principles of Economics Short Answer Questions

Question 1: Refer to Chapter 6- Imperfect Competition

(a) Define and explain with an example why firms resort to product differentiation under monopolistic and oligopolistic market structures. (1.5 marks each= 3 marks)

(b) In Table 1 below, an oligopolistic firm faces two demand schedules. The current price is given as $185. Study the table and answer the following questions:

(i) What would the demand curve be under the kinked demand curve hypothesis? Explain.

(ii) Plot the marginal revenue curve corresponding to the kinked demand curve and explain.

(iii) Given that Marginal Cost is $150 at every level of output, copy the table and calculate Marginal Revenue. Determine the profit-maximising level of output and plot it on the graph.

Table-1

Question 2: Refer to Chapter 7- Market Failure and Government Policy

(a) Define, illustrate, and explain with examples market failure in the context of the external costs of production (MSC > MC) of coal fired power station and the external cost of consumption (MSB < MB) of alcohol to the society.

(b) Many economists have argued that a form of 'congestion tax' ought to be imposed on the motorists who use their cars on busy roads, to take account of the external costs they impose on other road users and pedestrians. List and compare the advantages and disadvantages of the following three measures to reduce congestion in Australia:

(i) An increase in the rate of excise duty on petrol.

(ii) The use of bus and cycle lanes at peak times.

(iii) Using a system like Singapore (see box 7.2) where charges are deducted from a pre-paid smart card inserted into a device in the car, and charges vary according to the time of day and /or the level of congestion.

Question 3: Refer to Chapter 9- Introduction to Macroeconomics

(a) Explain in terms of the Australian circular flow of income if the following are net injections, net withdrawals or neither. If there is uncertainty, explain your assumptions.

(i) Firms spend money on research and development.

(ii) The public invests more money in credit unions.

(iii) The government runs a budget deficit and finances it by printing more money.

(iv) Australian investors earn higher dividends on overseas investments.

(b) Table 2 below gives the national accounts data for a hypothetical economy called Disney Island for a given year. Study the data from the table and calculate the following:

(i) Gross Domestic Product (GDP= C+I+G+NX) using the expenditure approach

(ii) Withdrawals (S+T+M)

(iii) Injections (I+G+X)

Table 2

Question 4: Refer to Chapter 10- The Determination of GDP

(a) Define, illustrate and distinguish between the following:

(i) Inflationary gap

(ii) Deflationary gap

(b) Illustrate and explain what effect the following will have on the expenditure line:

(i) An increase in the proportion of people's income that is saved.

(ii) A rise in Australian exports.