## Thursday, May 31, 2018

### MCQ Review of 9708/31 of Winter 2015

With every dollar, this particular individual is able to purchase 3 units of marginal utility.  Therefore, with \$4, this individual will be able to purchase 12 units of marginal utility. The consumption of third to fourth unit gives the marginal utility of 12 units. So, the maximum quantity would be 4 units which is C
Law of diminishing return is applicable to production in the short run. It explains what will eventually happen to total output when more and more workers are being added to a fixed capital. Initially, there will be 1 capital: 1 worker, then 1 capital: 2 workers, then 1 capital: 3 workers and so forth. As you noticed, the ratio falls from 1 to 0.5 then to 0.33 and so forth. The answer is therefore B

Demand for labour can also be mathematically written as DL = MRPL = MPL x P. In this case, the demand for labour declines. Therefore, either MPL or P or both must have fallen. Answer is D

It is a close call between limit pricing and predatory pricing. Limit pricing is a pricing strategy to deter new entrants. Predatory pricing is a pricing strategy to eliminate big/ small firms from the industry. However, because of the phrase 'to drive out', the answer is therefore B.
The diagram shows that, in an ideal situation, social efficiency (MSB = MSC) has been attained in a free market. Government intervention in this case with an indirect tax will only contribute towards misallocation of resources. Welfare loss is given by the area of (v+w) since there would be underproduction and underconsumption. Bear in mind that market failure/ government failure takes place when the quantity is not settling at the socially desirable level

GDP is reduced since wages earned are lower than it should. Effects on national welfare is uncertain. Those who undertake community service may feel worse-off but those who get the benefit of the service may feel better-off. We do not know which one outweighs which. Answer is B

I felt that this question is simpler to be approached with a numerical example. Recall that GDP = MV = PT. Say, M = \$10,000 and V = 2, PT must be \$20,000. So, if M = \$30,000 and given that V must be constant which is still 2, PT = \$60,000 = GDP. So there is an increase in the money value of GDP/ national income. Answer is D

The diagram shows two savings functions. When S1 becomes S2, it must be noted that the gradient which is mps (marginal propensity to save) has fallen in value. Given that mps + mpc = 1, a fall in mps indicates a rise in mpc. With an increase in mpc, the value of multiplier will also increase. The logic is, as more income is being spent back into the economy rather than leaked away, the income generation process can be extended/ prolonged therefore raising the overall level of national income. Answer is D
Reduction in bank lending means that there will be a fall in the supply of money. More people deciding to hold more money for precautionary purposes indicates that the demand for money will increase. Answer is A

Inheritance tax, property tax and income tax are all progressive taxes. Sales tax such as GST/ VAT hurts poor people the most as a larger percentage of their income is paid out as tax. Answer is C
In most cases, developing economies (imagine Sub Saharan African countries) do not export their agricultural goods/ crops to neighbouring countries given that all/ most of them are largely in primary sector too. Therefore, the most sensible strategy is to exports crops to developed nations given that they are net food importers. However, in practice, there are some obstacles too. For instance, in Europe they have CAP (Common Agricultural Policy) which heavily protects their own local farmers using subsidies. Therefore, to help poor developing countries in exporting themselves out of poverty, such subsidies must be abolished or reduced. Answer is D
B is definitely incorrect as VAT is regressive in nature and it hurts low income people the most. C is not sensible as prices of goods and services will increase. Consumption will fall and less jobs would be created. D is wrong too as that would increase cost-push inflation. The answer is therefore A. VAT in the UK was increased in early 2010s as part of a strategy to overcome ballooning deficit