THE UNIVERSITY OF ZAMBIA

DEPARTMENT OF ECONOMICS
ECN 1115 TEST III
DATE: 31ST JULY 2020
INSTRUCTIONS: ANSWER ALL QUESTIONS
The test is for 45 minutes: all answers must be emailed back by 17:20 (no delays)
E-mail to: [email protected] and copy: [email protected] and
[email protected]

SECTION A

1. As long as the principle of diminishing marginal utility is operating, any increase in the
quantity of a good consumed will
a. lower total utility.
b. produce negative total utility.
c. lower marginal utility and, therefore, total utility.
d. lower marginal utility, but may raise total utility.
2. The law of diminishing marginal utility states that
a. Marginal utility from consuming each additional unit of a commodity falls as its
consumption increases, while keeping consumption of other commodities constant.
b. Marginal utility from consuming each additional unit of a commodity declines as its
consumption falls , while keeping consumption of other commodities constant.
c. Marginal utility from consuming each additional unit of a commodity declines as its
consumption increases, while keeping consumption of other commodities constant.
d. Marginal utility from consuming each additional unit of a commodity remains constant
as its consumption increases, while keeping consumption of other commodities
constant.
3. From the graph below, indifference curves that intersect would be illogical constructs
because.

B
A IC2
C
IC1

a. More is better than less

b. Of diminishing marginal utility
c. Of the transitivity property of indifference theory
 d. Of the completeness property of indifference theory
4. Which of the following is not an assumption of ordinal utility analysis?
a. Consumers are consistent in their preference.
b. Consumers can measure the total utility received from any given basket of good.
c. Consumers are non-satiated with respect to the goods they confront.
d. All are necessary.
5. If the prices of two goods increase by the same percent, the budget line will
a. shift parallel to the left.
b. shift parallel to the right.
c. pivot about the x axis.
d. pivot about the y axis.
6. Ordinal utility theory assumes that consumers can
a. determine the number of utils that can be derived from consuming all goods.
b. rank baskets of goods as to their preference.
c. determine the marginal rate of substitution between goods.
d. avoid the law of diminishing marginal utility.
7. Which of the following statement is correct about the income and substitution effect.
a. Both the income and substitution effect move in same direction given a change in the
price of a normal good.
b. Both the income and substitution effect move in the same direction given a change in
the price of a giffen good.
c. The income and substitution effect move in the opposite direction given a change in
the price of normal good.
d. None of the above.

Beef

C
A
B

0 Rice

8. In the graph above, which shows the decrease in the price for rice, which of the following
is true?
a. The total effect is the movement from B to C and the substitution effect is the
movement from A to B.
b. The substitution effect is the movement from C to A and the income effect is the
movement from A to B.
c. The substitution effect is the movement from C to B and the income effect is the
movement from B to A.
 d. The total effect is the movement from A to C and the income effect is the movement
from B to C.
9. In the diagram in question 8, for a decrease in the price of rice, which of the following is
true?
a. The substitution effect of the price change results in increased consumption of rice
and the income effect results in reduced consumption.
b. The substitution effect and the income effect of the price change both result in
increased consumption of rice
c. The substitution effect and the income effect of the price change both result in
reduced consumption of rice.
d. The substitution effect of the price change results in reduced consumption of potatoes
and the income effect results in increased consumption.
10. The marginal product of labour is negative when....
a. the total product curve is at its maximum.
b. the total product curve is falling.
c. average product of labour is increasing.
d. average product of labour must be negative.
11. If all resources used in the production of a product are increased by 20 percent and output
increases by 40 percent, then there must be…
a. diseconomies of scale
b. increasing average total cost
c. constant returns to scale
d. increasing returns to scale.
12. The average product of labour increases when
a. the marginal product of labour exceeds the average product.
b. the marginal product of labour is less than the average product.
c. the marginal product of labour is equal to the average product of labour.
d. the marginal product of labour is zero.
13. The law of diminishing returns only applies in cases where;
a. there is increasing scarcity of factors of production.
b. the price of extra units of a factor is increasing.
c. there is at least one fixed factor of production.
d. capital is a variable input.
14. If the marginal product of labour is equal to the average product of labour. It must be true
that;
a. Marginal product of labour is negative.
b. Marginal product of labour is at maximum.
c. Average product of labour is negative.
d. Average product of labour is at its maximum.
e. None of the above
15. An isoquant is defined by.
a. combinations of inputs required to incur constant cost.
 b. combinations of labour required to maintain a constant quantity of capital.
c. combinations of inputs required to produce a constant quantity of output.
d. combination of inputs required to earn a constant level of profit.
e. All the above
16. A rightward shift in the demand curve is called a (an)
a. Decrease in output
b. Decrease in demand
c. Increase in demand
d. Increase in income
e. all of the above
17. A consumer surplus measures the value between the price consumers are willing to pay
and the:
a. Producer surplus price
b. Deadweight gain price
c. Preference price
d. Actual price paid
e. All of the above
18. If Jay is willing to pay K50 for one good X, K30 for a second, K20 for a third, K8 for a
fourth and the market price is K10. What is Jay’s consumer surplus
a. 10
b. 40
c. 100
d. 70
e. 8
19. Suppose seller X is willing to sell one good X for K5, a second for K10, a third for k16 a
fourth for K25 and the market price is K25. What is seller X’s producer surplus?
a. 29
b. 22
c. 20
d. 15
e. None of the above
20. If a price ceiling is set at K10 and he equilibrium market is K8, which price will
consumers actually pay?
a. K10
b. K8
c. K18
d. K2
e. None of the above
21. Along a segment of the demand curve where the price elasticity of demand is less than 1,
a decrease in price
a. Is impossible
b. Will increase costs
c. Will increase total revenue
d. Will decrease total revenue
 e. Decreases quantity demanded
22. In his calculations of the elasticity of market demand, Mr Chinyau finds that the
elasticity of 7/19. Which of the following will be reasonable for him to increase revenue:
a. Reduce the price of good sold
b. Increase the price of the good sold
c. Leave the market price where ever it is
d. Cannot determine the right action
e. Introduce taxes

SECTION B

Answer the following questions by stating whether they are TRUE/FALSE and briefly
explain your answer
1. Given three different bundles of goods X and Y: Bundle A = (x 1, y1), Bundle B = (x2,
y2) and Bundle C = (x3, y3); Chanda prefers bundle A to bundle B and prefers bundle C
to bundle A. Therefore, Chanda’s utility from goods X and Y can be expressed as:
U (x2, y2) ≥ U (x3, y3)
2. An indifference curve shows the maximum amount that can be spent to purchase a
combination of two different goods given a consumer’s tastes and preferences.
3. When the price of diamonds (a rare commodity) increases, the fall in the demand for
diamonds is explained by the substitution effect but there will be no income effect.
4. In a certain economy, a consumer can only consume rice and beans. Given that the
price elasticity of demand for rice is -0.654 and the price of rice rises, the quantity of
beans consumed will increase (ceteris paribus).
5. At the point where the indifference curve of two goods and the budget line are
tangent, the marginal rate of substitution of the two goods is equal to their price ratio.
6. The demand curve is always downward sloping
7. Producers always wish to maximise profits
8. The indifference curves are based on the cardinal approach to utility
9. Market shortages are the same as scarcity
10. Excess demand means supply is more than what producers wish to produce.