Eco - May 2002

Examination Question and Answer Book Write here your full examination number Centre Code: Hall Code: Desk Number:

Foundation Level

Economics for Business

3a

FECB 20 May 2002 Day 1 – morning

INSTRUCTIONS TO CANDIDATES Read this page before you look at the questions THIS QUESTION PAPER BOOKLET IS ALSO YOUR ANSWER BOOKLET. Sufficient space has been provided for you to write your answers, and also for workings where questions require them. For section B questions, you must write your answers in the shaded space provided. Additional blank pages (16-18) are included towards the back of this booklet if you require more space for notes or workings. Please note that you will NOT receive marks for your notes or workings. Do NOT remove any sheets from this booklet: cross through neatly any work that is not to be marked. Avoid the use of correction fluid. You are allowed two hours to answer this question paper. All questions are compulsory. Answer the ONE question in section A (this has 26 sub-questions and is on pages 2-8) Answer the THREE questions in section B (these are on pages 9-15) You are advised to spend 10 minutes reading through the paper before starting to answer the questions. You should spend no more than 55 minutes on answering the ONE question in section A, which has 26 sub-questions. You should spend no more than 55 minutes on answering the THREE questions in section B. Hand this entire booklet to the invigilators at the end of the examination. You are NOT permitted to leave the examination hall with this booklet. Do NOT write your name or your student registration number anywhere on this booklet. TURN OVER

For office use only Marks awarded (First marker) for each question Marks awarded (Second marker) for each question © The Chartered Institute of Management Accountants 2002

Total

One

Two

Three

Four

SECTION A — 52 MARKS ANSWER ALL TWENTY-SIX SUB-QUESTIONS – 2 MARKS EACH

Each of the sub-questions numbered from 1.1 to 1.26 inclusive, given below, has only ONE correct answer. REQUIRED: Place a circle “O” around the letter A, B, C or D that gives the correct answer to each sub-question. If you wish to change your mind about an answer, block out your first answer completely and then circle another letter. You will NOT receive marks if more than one letter is circled. Please note that you will NOT receive marks for any notes or workings to these sub-questions.

Question One 1.1

Which ONE of the following is NOT a factor of production?

A

Land.

B

Entrepreneurship.

C

Labour.

D

Money.

1.2

All of the following government policies would tend to raise the long-term rate of economic growth EXCEPT which ONE?

A

Increased expenditure on the economic infrastructure.

B

Tax cuts to encourage higher demand from consumers.

C

Measures to increase the mobility of labour.

D

Financial incentives to encourage personal and corporate saving.

1.3

All of the following are features of modern economic growth in developed economies EXCEPT which ONE?

A

Increased importance of human capital as a source of growth.

B

An increased role for public sector industries.

C

A declining share of manufacturing in the economy.

D

An increased role for multinational companies.

Total

For office use only

1.1

1.2

1.3

Marks awarded (First marker) for each sub-question Marks awarded (Second marker) for each sub-question FECB

2

May 2002

1.4

A country’s production possibility frontier (curve) would shift outwards if

A

more resources became available.

B

unemployment was reduced.

C

aggregate demand for goods and services increased.

D

labour productivity fell.

1.5

Which ONE of the following is true of the corporate form of business organisation?

A

Owners do not share in the profits of the corporation.

B

Corporations are, by definition, large companies.

C

Owners always exercise day-to-day decision making.

D

The liability of the owners for the debts of the corporation is limited.

1.6

A rise in the price of a good accompanied by a fall in the quantity sold would result from

A

a decrease in supply.

B

an increase in demand.

C

a decrease in demand.

D

an increase in supply.

1.7

If the demand curve for Good A shifts to the left when the price of Good B rises, we may conclude that

A

the goods are substitutes.

B

Good A is an inferior good.

C

the goods are complements.

D

the demand for Good A is price elastic.

TURN OVER Total

For office use only

1.4

1.5

1.6

Marks awarded (First marker) for each sub-question Marks awarded (Second marker) for each sub-question May 2002

3

FECB

1.7

1.8

The introduction of a national minimum wage will lead a business to reduce its number of employees most when

A

the demand for its final product is price inelastic.

B

wage costs are a small proportion of total costs.

C

there is a high degree of substitutability between capital and labour.

D

the supply of substitute factors of production is price inelastic.

1.9

All of the following will lead to an imperfect allocation of resources EXCEPT which ONE?

A

There are some production costs that are not borne by the producer.

B

Consumers only wish to buy a limited amount of the product.

C

There are spillover benefits in consumption.

D

Consumers have limited knowledge of market prices.

1.10 Constant returns to scale mean that as all inputs are increased, A

total output remains constant.

B

long-run average cost rises at the same rate as inputs.

C

long-run average cost remains constant.

D

profits remain constant as output rises.

1.11 All of the following statements about oligopoly are true EXCEPT which ONE? A

Oligopolistic firms may make excess profits in the long run.

B

Oligopolistic firms do not generally produce where average costs are lowest.

C

Non-price competition is a normal feature of oligopolistic competition.

D

Oligopolistic firms can never achieve lower long-run average costs than could competitive firms in the same industry.

For office use only Marks awarded (First marker) for each sub-question Marks awarded (Second marker) for each sub-question FECB

4

Total

1.8

1.9

1.10

May 2002

1.11

1.12 All of the following are benefits for firms participating in horizontal mergers EXCEPT which ONE? A

Control over sources of supply of inputs.

B

Reduction of competition.

C

Economies of scale.

D

Sharing of technical knowledge.

1.13 Which ONE of the following would tend to increase the degree of monopoly power of a company? A

The ending of one of its patents.

B

An increase in excess profits.

C

A fall in the cross price elasticity of demand for its product.

D

Diversification into a wider range of products.

1.14 Which ONE of the following forms of government intervention would be most appropriate for dealing with a failure by the business sector to provide public goods? A

Taxes and subsidies.

B

Government provision of goods and services.

C

Legal controls.

D

Price controls.

1.15 In a boom period in the economy, the demand for electrical goods will rise more rapidly than the demand for groceries because A

the demand for groceries is price inelastic.

B

the demand for electrical goods is income elastic.

C

groceries are inferior goods.

D

electrical goods are cheaper in booms than in recessions.

TURN OVER For office use only Marks awarded (First marker) for each sub-question Marks awarded (Second marker) for each sub-question May 2002

5

Total

1.12

1.13

1.14

FECB

1.15

1.16 The best measure of the standard of living in a country is A

gross domestic product per capita.

B

per capita personal consumption.

C

gross national product per capita.

D

personal disposable income.

1.17 If a consumer price index rises, it shows that A

the value of the currency has increased.

B

real consumer income has fallen.

C

all prices in the economy have risen.

D

the purchasing power of money has decreased.

1.18 Which ONE of the following would lead a country’s balance of payments current account to move towards a surplus? A

A rise in commodity imports.

B

An inflow of foreign capital into the economy.

C

An increase in foreign tourism into the country.

D

An increase in government tax receipts.

1.19 All of the following would normally lead to a rise in the exchange rate for a country’s currency, EXCEPT which ONE? A

An increase in the country’s exports.

B

An increased inflow of foreign direct investment into the country.

C

A rise in interest rates in the country.

D

An increase in the export of capital from the country.

For office use only Marks awarded (First marker) for each sub-question Marks awarded (Second marker) for each sub-question FECB

6

Total

1.16

1.17

1.18

May 2002

1.19

1.20 All of the following are benefits for a business from a depreciation (reduction) in the rate of exchange for the country’s currency EXCEPT which ONE? A

The business could charge lower prices for its exports.

B

Imported raw materials used by the business would be cheaper.

C

The business could raise profit margins on exports without losing sales.

D

In its home market, the business would face reduced competition from imports.

1.21 To maximise its gains from trade, a country should

A

try to maximise net exports.

B

export products in which it has an absolute advantage.

C

protect domestic producers from competition from cheap imports.

D

export products in which it has a comparative advantage.

1.22 Multinational companies locate production in more than one country for all of the following reasons EXCEPT which ONE? A

The existence of trade barriers.

B

High transport costs.

C

Capital is internationally immobile.

D

To increase market share.

1.23 All of the following are the likely consequences of increased international mobility of factors of production EXCEPT which ONE? A

Narrower interest rate differentials between countries.

B

Increased foreign exchange transactions.

C

Increasing differences in average wages between countries.

D

Increased flows of profits, dividends and factor earnings on balance of payments current accounts.

TURN OVER For office use only Marks awarded (First marker) for each sub-question Marks awarded (Second marker) for each sub-question May 2002

7

Total

1.20

1.21

1.22

FECB

1.23

1.24 The terms of trade are defined as A

the ratio of export prices to import prices.

B

the total value of exports minus the total value of imports.

C

the change in volume of exports compared to changes in the volume of imports.

D

the commercial conditions under which international trade takes place.

1.25 The balance of payments accounts are defined as A

the difference between the government’s receipts and its expenditure over the period of a year.

B

the difference between the exports of goods and services and imports of goods and services over the period of a year.

C

the surplus or deficit on a country’s international trade over a given period.

D

a statement of the economic transactions between residents of a country and the rest of the world over a given period.

1.26 All of the following statements are true EXCEPT which ONE? A

Import quotas tend to reduce prices.

B

Trade protection tends to reduce consumer choice.

C

Trade protection tends to reduce exports.

D

Tariffs tend to reduce competition.

(Total = 52 Marks)

End of Section A

For office use only Marks awarded (First marker) for each sub-question Marks awarded (Second marker) for each sub-question FECB

8

Total

1.24

1.25

1.26

May 2002

SECTION B – 48 MARKS ANSWER ALL THREE QUESTIONS IMPORTANT MARKS ARE AWARDED FOR CORRECTLY COMPLETING THE SHADED BOXES WITH THE CORRECT ANSWER WHERE A MARK IS INDICATED IN THE RIGHT-HAND COLUMN. DO NOT WRITE IN THE MARGINS NOR IN THE COLUMNS FOR USE BY MARKERS.

Question Two The following diagram shows the rate of growth of GDP in an economy: GDP growth (% per year)

5 4

C

3

D

2 1

27

25

23

21

19

17

15

13

B 11

7

5

3

-1

9

A

0 1

GDP growth (% per annum)

6

-2

E

-3

Years (1 - 28)

Required: Use your knowledge of economic theory and the diagram above to answer the following:

Write your answers in the shaded boxes below

Do not write in these columns below

Marks available

(a)

Identify which of the periods A to E on the diagram correspond to:

(i)

a recession;

1

(ii)

a recovery phase of the trade cycle;

1

(iii)

a boom phase of the trade cycle.

1

What is the average duration (length) of the trade cycle in this economy?

For use by the second marker

For use by the first marker

1 Sub-total: 4

Parts (b) and (c) of Question Two are on page 10 TURN OVER May 2002

9

FECB

Question Two continued

Required: Use your knowledge of economic theory and the diagram on page 9 to answer the following:

Do not write in these columns below

In the shaded boxes below, circle the correct answers. Marks available

(b)

As the economy moves from A to E, other things being equal, would you expect

(i)

the level of unemployment to

rise

fall

1

(ii)

the rate of inflation to

rise

fall

1

(iii)

the trade balance to move towards

surplus

deficit

1

(iv)

business investment to

rise

fall

For use by the second marker

For use by the first marker

1 Sub-total: 4

(c)

For each of the following, identify the effect on the level of economic activity in the short to medium run of

(i)

a fall in the average propensity to save

Rise

Fall

Unchanged

1

(ii)

a rise in interest rates

Rise

Fall

Unchanged

1

(iii)

a depreciation in the exchange rate

Rise

Fall

Unchanged

1

(iv)

a reduction in the value of the multiplier

Rise

Fall

Unchanged

1 Sub-total: 4

Space for workings and/or notes for question two

Part (d) of Question Two is on page 11 FECB

10

May 2002

Question Two continued Do not write in these columns below

Marks available

(d)

For use by the second marker

For use by the first marker

Complete the following sentences If a government wishes to limit a boom in the economy, it should shift the government budget towards a and the growth of the money supply. (one word in each shaded area) The effectiveness of fiscal policy in preventing recessions is often reduced by which lead to policy working too late, and by uncertainty over the value of the

……..

which leads to

too much or too little fiscal stimulation. (one word in each shaded area)

4 Sub-total: 4

Total for Question Two = 16 Marks

Section B continues overleaf

TURN OVER May 2002

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Question Three The following diagram shows the cost and revenue curves for a firm. The cost curves are of the normal U shape. Assume the demand for the product is price elastic.

Price, revenue & costs

P1 P2 P3 P4

Q1

Q2

Q3

Q4

Output

Required: Use your knowledge of economic theory and the diagram above to answer the following.

Write your answers in the shaded boxes below

Do not write in these columns below

Marks available

(a)

Assuming the firm is a profit maximiser, identify from the diagram:

(i)

the equilibrium level of output

1

(ii)

the equilibrium price

1

(iii)

excess (abnormal) profits

1

(iv)

the optimal level of output

1

For use by the second marker

For use by the first marker

Sub-total: 4

(b)

Using the diagram, state (in no more than 10 words in the shaded areas below) what would happen to the equilibrium price and output if

(i)

the firm’s costs rose? 2

(ii)

there was a fall in the incomes of the firm’s customers? 2

Parts (c) to (d) of Question Three are on page 13 FECB

12

SubTotal: 4 May 2002

Write your answers in the shaded boxes below

Marks available

(c)

Complete the following sentences:

(i)

If this firm was operating in a perfectly competitive market, the equilibrium price would be and the equilibrium output would be

For use by the first marker

. (one word in each shaded area)

(ii)

For use by the second marker

2

The monopoly firm can earn in the long run because of the existence of

(maximum of three words in each shaded area)

2 Sub-total: 4

In the shaded boxes below, circle the correct answers.

(d)

State whether the following are true or false.

(i)

A discriminating monopolist can charge different prices in different markets only if the price elasticity of demand in each market is different.

(ii)

If there are large economies of scale, a monopoly industry may produce more output and charge lower prices than does a perfectly competitive industry.

(iii)

Vertical integration is a common source of monopoly power.

(iv)

Natural monopolies occur when the supply of raw materials is concentrated in one country.

TRUE

FALSE

TRUE

FALSE

TRUE

FALSE

TRUE

FALSE

1

1

1 1 Sub-total: 4

Total for Question Three = 16 Marks

Section B continues overleaf

TURN OVER May 2002

13

FECB

Question Four The following data refer to the public expenditure and taxation revenue of a government for the year 2000/2001. Tax Revenue

$bn

Expenditure

$bn

Income tax Social Security Contributions Excise Duties Corporation Tax Value Added Tax Business Rates Other

144 89 56 51 90 24 104

Total

558

Social Security National Health Service Education Defence Debt Interest Law and Order Housing and Environment Industry and Agriculture Transport Other Total

155 81 69 35 42 30 22 21 15 88 558

Required: Use your knowledge of economic theory and the data in the table above to answer the following.

Write your answers in the shaded boxes below

Do not write in these columns below

Marks available

(a)

Identify from the above table ONE example of each of the following:

(i)

indirect taxation

1

(ii)

direct taxation

1

(iii)

government purchase of goods and services

1

(iv)

transfer payments

1

For use by the second marker

For use by the first marker

Sub-total: 4

(b) (i)

Complete (in a maximum of 15 additional words in the shaded box below) the following sentence: A progressive tax is defined as one where

2

(ii)

From the above table, give ONE example (in the shaded boxes below) of a progressive tax and ONE example of a regressive tax A progressive tax

1

A regressive tax

1 Sub-total: 4

Parts (c) and (d) of Question Four are on page 15 FECB

14

May 2002

Required:

Do not write in these columns below

Use your knowledge of economic theory to answer the following. In the shaded boxes below, circle the right answers.

(c)

State whether each of the following is true or false.

(i)

The burden of an indirect tax falls most heavily on a business when the demand for its product is price elastic.

(ii)

(iii)

(iv)

A reduction in income tax will raise the demand for the products of a business only if the product has an income elasticity of demand exceeding +1∙0. If the government ran a budget deficit, it would be necessary for it to borrow money from overseas to finance that deficit. The existence of automatic stabilisers means that in a recession an existing government budget deficit would become larger.

Marks available

TRUE

FALSE

1

TRUE

FALSE

1

TRUE

FALSE

1

TRUE

FALSE

1

For use by the second marker

For use by the first marker

Sub-total: 4

(d) Complete the following sentences: (i)

A public good is one where the

sector will not

provide the good because of the

problem.

(maximum of two words in each shaded area) (ii)

The state often provides

2

goods since private

producers would supply less than the optimum amount because of the existence of external social . (one word in each shaded area)

2 Sub-total: 4

(Total for Question Four = 16 Marks)

End of Question Paper

TURN OVER FOR ADDITIONAL SPACE FOR WORKINGS AND NOTES May 2002

15

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You may use this sheet for notes and workings (no marks are awarded for workings)

FECB

16

May 2002

You may use this sheet for notes and workings (no marks are awarded for workings)

May 2002

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You may use this sheet for notes and workings (no marks are awarded for workings)

FECB

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DO NOT WRITE ON THIS SHEET

May 2002

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FECB

3a

FECB

Economics for Business

Day 1 – morning

FECB

20

May 2002