Eco - May 2003

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

Foundation Level

Economics for Business

3a

FECB 19 May 2003 Monday 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. Do not exceed the stated number of words. 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 10-15) 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. © The Chartered Institute of Management Accountants 2003

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

For a business producing shirts and dresses, the opportunity cost of a dress is

A

the market price that the business can obtain for a dress.

B

the cost of the labour and raw materials used in making the dress.

C

the shirts that could have been produced with the resources used to make the dress.

D

the total cost of all the resources used to make one dress.

1.2

An increase in labour productivity in a business can be caused by all of the following EXCEPT which ONE?

A

An increase in the stock of capital equipment.

B

An increase in the quantity of labour employed.

C

An increase in the rate of technical innovation.

D

An increase in the level of training of the labour force.

1.3

The term economic welfare refers to

A

the stock of wealth in an economy.

B

the expenditure on social welfare by the government.

C

the private consumption levels of the population as a whole.

D

the overall standard of living in an economy.

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1.4

Long term economic growth is encouraged by all of the following policies EXCEPT which ONE?

A

The encouragement of research and development.

B

An expansion of aggregate demand to increase the level of employment.

C

The establishment of education and training centres to improve human capital.

D

Tax allowances for business investment expenditure.

1.5

A slow down in economic growth in the US would be transmitted to the rest of the world by all EXCEPT which ONE of the following processes?

A

A fall in US interest rates.

B

A fall in the US demand for imports.

C

A decline in the level of US capital flows to the rest of the world.

D

Falling US stock market prices leading to similar falls in other countries.

1.6

An economy is usually described as a mixed economy when production

A

is partly for the home market and partly for export.

B

consists partly of capital goods and partly of consumer goods.

C

takes place in all three sectors; agriculture, industry and services.

D

is partly in the private sector and partly in the public sector.

1.7

What does the elasticity of supply measure?

A

The time taken for supply to adjust to changes in price.

B

The responsiveness of the quantity supplied to a change in demand.

C

The responsiveness of the quantity supplied to a change in price.

D

The change in the quantity supplied divided by the price.

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1.8

A business producing an inferior good will find that the demand for the good

A

will not respond to a reduction in price.

B

will fall when consumer incomes rise.

C

has a very low price elasticity of demand.

D

has a positive, but low, income elasticity of demand.

1.9

Which ONE of the following would lead the demand curve for a good to shift to the right?

A

A rise in consumer income.

B

A decrease in the supply of a complementary good.

C

An increase in the supply of a substitute good.

D

A fall in the price of the good.

1.10 The law of diminishing returns applies to a business only when the quantity of A

all factors of production used in the production process can be varied.

B

all factors of production used in the production process are fixed.

C

at least one factor of production which is used in the production process is fixed.

D

capital used in the production process is fixed but the amount of labour employed can be varied.

1.11 If a business is taxed by an amount equal to the external costs it imposes on the rest of society by its production activity, then A

there will be a misallocation of resources because the price mechanism has been interfered with.

B

the increase in costs will lead the business to produce more in order to maintain its profits.

C

there will be no change in production and resource allocation because costs and prices will adjust.

D

resource allocation will be improved since prices will more accurately reflect costs and benefits.

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1.12 All of the following are internal economies of scale for a firm EXCEPT which ONE? A

The firm is able to reduce administration costs per unit of output when it opens a second production plant.

B

The firm can buy raw materials from other firms at lower prices when it buys in bulk.

C

TV advertising costs can be spread over a larger output.

D

Training costs are reduced when the firm can draw on the pool of skilled labour in the region.

1.13 What is meant by the divorce of control from ownership in modern market economies? A

The employment of salaried senior managers who do not have significant shareholdings in the companies that employ them.

B

The increased rights and roles of employees in business organisations.

C

The growth in government regulation and control of business through regulatory bodies.

D

The increased importance of institutional shareholders relative to individual shareholders.

1.14 If the total revenue from the sales of a good rises by 10% when its price is increased by 10%, then the demand for the good must A

be perfectly price elastic.

B

be perfectly price inelastic.

C

be of unitary elasticity.

D

have a price elasticity of -1.

1.15 On scheduled airflights, airlines sell standby passenger tickets at discounted (lower) prices because A

the demand for seats is always price elastic.

B

the marginal cost is low up to the point where all seats on the aeroplane are occupied.

C

the average cost for standby seats is less than the marginal cost.

D

this price discrimination raises marginal revenue.

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1.16 A perfectly competitive market has all of the following features EXCEPT which ONE? A

There are many buyers and sellers.

B

Buyers and sellers have full information.

C

Sellers can earn only normal profits in both the short and the long run.

D

There are no barriers to entry into, and to exit from, the market.

1.17 A merger between two companies producing similar products might be in the public interest for all of the following reasons EXCEPT which ONE? A

Rationalisation of production may permit economies of scale.

B

The new company may be able to afford higher levels of research and development.

C

The new company may be able to compete more effectively with an established large company.

D

Increased control of the market by the company will limit the opportunities for overseas companies to compete.

1.18 Which ONE of the following would lead to a fall in the value of the multiplier? A

A decrease in the marginal propensity to consume.

B

A fall in the level of public expenditure.

C

Consumers saving a lower proportion of their income.

D

A decrease in the marginal propensity to import.

1.19 The weights used in an index of retail (consumer) prices take account of A

changes in the quality of goods.

B

the redistribution of income that occurs when prices change.

C

the relative importance of different goods in the pattern of consumer expenditure.

D

seasonal variations in the prices of some goods.

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1.20 All of the following statements about the monetary system are true EXCEPT which ONE? A

Financial intermediation links net savers and net debtors.

B

In developed economies cash and notes form only a very small part of the money supply.

C

The capital market deals in long term financial assets.

D

The more liquid a financial asset is, the higher is the expected rate of return.

1.21 The downswing phase of the trade cycle usually has each of the following features EXCEPT which ONE? A

A fall in the level of government revenue from taxation.

B

A rise in structural unemployment.

C

A reduction in inflationary pressures.

D

Lower levels of demand for imported goods.

1.22 Which ONE of the following would result from a reduction in interest rates? A

Lower levels of business investment.

B

Increased business costs.

C

Higher wage pressure resulting from lower unemployment.

D

Reduced international competitiveness

1.23 If there is inflation caused by excess aggregate demand, which ONE of the following policies is likely to be most effective in controlling the rise in prices? A

An increase in the level of direct taxation.

B

The imposition of barriers to imports.

C

A reduction in interest rates.

D

A reduction in VAT and excise taxes.

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1.24 A progressive tax is defined as one where A

the amount paid in tax increases as income rises.

B

the amount of tax revenue received by the government rises over time.

C

the proportion of income paid in taxation increases as income rises.

D

high income earners pay more direct tax than do low income earners.

1.25 A multinational company may wish to locate production in an economy to which it currently exports for all of the following reasons EXCEPT which ONE? A

There is little cost for the company to move its capital and management to the other economy.

B

Production costs may be lower in the other economy.

C

There are tariff barriers in the other economy.

D

There are significant transport costs.

1.26 The process of globalisation leads to all of the following EXCEPT which ONE? A

Increasing foreign competition in domestic markets.

B

Decreasing interdependence of national economies.

C

Greater international division of labour.

D

Rising levels of international trade relative to national income.

(Total = 52 Marks)

End of Section A

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SECTION B – 48 MARKS ANSWER ALL THREE QUESTIONS IMPORTANT MARKS ARE AWARDED FOR 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 is that of the kinked demand curve model for company ZZZ producing a consumer good in an oligopolistic market. D MC2

Costs, revenue

P1

MC1

MR1 0

Required:

D

q1

Output

Use your knowledge of economics AND the diagram above to answer the following:

(a)

Do not write in these columns below

Complete the following (maximum of 8 words per gap). Marks available

For use by the first marker

For use by the second marker

(i) The kinked demand curve model shows that if company ZZZ raises its prices from P1, then its competitors

1 and if company ZZZ reduces its prices from P1, its competitors 1

(ii) If company ZZZ is a profit maximiser, it will produce where

1

and its price will only rise if costs rise from MC1 to 1

(iii) Because of the kinked demand curve, firms in oligopoly tend to avoid

and depend heavily on

1 1

to compete. sub-total: May 2003

9

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Question Two continued Use your knowledge of economics AND the diagram opposite to answer the following:

Required:

Do not write in these columns below

(a) Complete the following (maximum of 8 words per gap). Marks available

(iv) In oligopoly markets, companies making decisions on price and output must consider the

For use by the first marker

For use by the second marker

1

of rival companies. This is called 1 in decision making.

(b)

(i) (ii)

(iii)

sub-total: Using no more than 5 words for each, describe the effects of the following on the demand curve (curve DD opposite) for company ZZZ’s product. Event The demand curve would A successful advertising campaign by one of ZZZ’s rival companies. The introduction of a new production technology which significantly reduces production costs for all firms in the industry. A fall in the price of a good which is complementary to ZZZ’s product.

(iv) Significant rises in income tax in

8

1

1

1

1

the country which is ZZZ’s main market.

sub-total:

12

(c) State whether each of the following is TRUE or FALSE. (i) Oligopolies are most likely to occur where there are

1

(ii) Excess profits may persist in oligopolies even in the

1

significant barriers to entry. long run.

(iii) Collusion is rare in oligopoly industries because the dominant company has nothing to gain from cooperating with rivals.

(iv) Price leadership in oligopoly occurs where one firm sets a price for the product and other firms are not allowed to charge more than this.

1

1

Total for Question Two = 16 Marks

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Question Three

Price level

The following diagram represents the aggregate demand curve (AD) and aggregate supply curve (AS) for an economy. AS

P2 P1

AD2

AD1 O

Y1

Y2

National output

Required: Use your knowledge of economics AND the diagram above to answer the following:

Do not write in these columns below

(a) With respect to the aggregate supply curve, Marks available

For use by the first marker

For use by the second marker

(i) identify the effect on national output and on the price level of a negative supply shock (maximum of 5 words each); Effect on output Effect on price

1

(ii) state whether each of the following would produce a negative supply shock for an economy (YES/NO). A steep rise in the price of oil imported into the economy.

1

An increase in labour productivity brought about by the widespread application of information technology.

1

The introduction of strict regulations reducing the length of the working week.

1

Deregulation of the financial system producing a sharp increase in the availability of credit.

1 sub-total:

May 2003

11

5

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Required: Use your knowledge of economics AND the diagram opposite to answer the following:

Do not write in these columns below

(b) Marks available

For use by the first marker

For use by the second marker

(i) With respect to the aggregate demand curve, identify the two missing components of aggregate demand;

(ii)

Private Business consumption investment State whether each of the following could be a reason for the shift in the aggregate demand curve from AD1 to AD2 (YES/NO).

2

A significant fall in the average propensity to save in the economy.

1

An improvement (move towards surplus) in the country’s current account of the balance of payments.

1

An increase in the rate of income tax levied by the country’s government.

1

A large rise in the rate of return expected by the business sector on all new investment.

1 sub-total:

(c) Complete the following (maximum of three words per gap). (i) An effective policy of improving the education and training of unemployed workers would shift the curve to the

and, as a result, both and the price level would fall.

11

1 1 1

(ii) For the business sector as a whole, a shift in the aggregate demand curve to the right would mean higher

1

as a benefit, but higher as a disadvantage.

1

Total for Question Three = 16 Marks

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Question Four Anyland is a small economy with a high per capita income by world standards. It has a high trade ratio with both imports and exports being a high proportion of gross domestic product. The most important exports are textiles, consumer electronics and tourism. Imports are mainly raw materials, oil and engineering and transport equipment. The economy is an open one with low trade barriers and no significant controls on the international movement of capital. The current and capital accounts of the balance of payments are currently in balance. Multinational companies are generally welcomed by Anyland.

Required: Use your knowledge of economics and the information contained above to answer the following:

Do not write in these columns below

(a) State whether, other things being equal, the direct effect on

Anyland’s balance of payments current and capital accounts, of each of the following would be a MOVE TOWARDS SURPLUS, or a MOVE TOWARDS DEFICIT or would have NO EFFECT. Current Capital Economic process account account

Marks available

A significant rise in consumer expenditure in Anyland’s trading partners.

1

A large rise in interest rates in Anyland.

1

Investment by a multinational oil company in an offshore oilfield in Anyland.

1

Increased remittance of profits of foreign companies in Anyland back to their parent companies.

1 sub-total:

For use by the first marker

For use by the second marker

4

(b) Complete the following (maximum of 8 words per gap). (i) Trade theory would suggest that the Anyland economy has 1 in the production of textiles and consumer electronics because it has a

1

in the production of these goods.

(ii) The Anyland economy is vulnerable to changes in world economic activity because it has a

1

(iii) The balance of exports and imports of goods for Anyland is known as its balance of trade, while its terms of trade are the ratio of

1 sub-total:

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Required: Do not write in these columns below

(c) State whether each of the following items would appear in

Anyland’s balance of payments CURRENT ACCOUNT or CAPITAL ACCOUNT and state whether each item would be a CREDIT or a DEBIT. Current or capital account?

Item

Marks available

For use by the first marker

For use by the second marker

Credit or debit?

Interest paid to an Anyland resident on capital held in a bank account in the USA.

1

Expenditure by an Anyland resident on an overseas holiday.

1

A financial gift by the Anyland government to a developing country.

1

The sale of an airliner by the US company Boeing to Anyland International Airways.

1 sub-total:

(d) State whether each of the following are TRUE or FALSE. (i) If Anyland adopted a fixed exchange rate system

12

1

business in Anyland could avoid transaction costs when buying and selling foreign exchange.

(ii) Intra-industry trade is when a country imports and

1

exports the same types of goods and services.

(iii) If a country adopted high trade barriers on the goods produced by companies based overseas, such companies would be discouraged from locating production there.

1

(iv) The imposition of trade barriers normally reduces

1

economic welfare in the importing as well as the exporting country.

Total for Question Four = 16 Marks

End of Question Paper

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