## Thursday, May 31, 2018

### MCQ Review of 9708/31 Summer 2015

Consumer equilibrium is achieved when all budgeted income is spent and marginal utility per dollar for both bananas and apples is the same (MUb/ Pb = MUa/ Pa). If however, MUb/ Pb > MUa/ Pa, then according to the law of diminishing marginal utility, more bananas would have to be consumed and the consumption of apples would have to be reduced. By contrast, if MUb/ Pb < MUa/ Pa, then the consumer must consume less of bananas and more of apples.

In this case, if you have substituted correctly, you would get 2MUb/ 2.5 = 0.8MUb. For apples, it would be 1MUa. According to what we have discussed, therefore the solution would be to consume less of bananas and more of apples. So A is the answer

Demand for labour is also known as MRPL. Mathematically, it can also be written as DL = MRPL = MPL x P. In this case, P = \$1, and so, MRPL = MPL (the MPL curve automatically represents the demand curve for labour). Also would be KL which is C. JK is too short to represent the demand curve for labour

Since AVC is constant for all the quantities (\$10,\$10,\$10,\$10 etc), therefore TVC must be an upward-sloping linear line that starts from the origin (\$10,\$20,\$30, \$40 etc) (hope you can imagine that!!). It is also stated that TFC is incurred, which is the usual/ typical horizontal line for all the quantities (say \$2,\$2,\$2,\$2 etc). Putting these two together, you will get an upward sloping line which now starts from the vertical cost axis (\$12, \$22, \$32, \$42 etc). ATC or AC would therefore be \$12, \$11, \$10.67, \$10.50 etc. Answer is D

MR = change in TR/ change in output. Initial TR = (v+z). New TR = (z+w). Therefore, MR = {(z+w) - (v+z)} / {(x+1) - x} = (w-v) only. Answer is C

The diagram shows a monopolistically competitive firm operating in the long-run where normal profit is attained. The idea is, any short-run supernormal profits will attract new entrants, and therefore, existing customers will be competed away by new rivals. Monopolistic firms will be left with relatively too many workers and under-utilised capital relative to the level of output by then. Excess capacity is building up. Since it serves fewer customers than before, it can no longer enjoy economies of scale as it used to. Answer is D

Real income = nominal income (or money income) - inflation rate = 5% - 4% = 1%. However, population increases at a faster rate which is 2%. Looking at it, income rises but it will be shared by more people, and so, real income would ideally decrease. Answer is A

Increase in business confidence means that there will be a rise in the demand for loanable funds. Reduction in propensity to save will reduce the supply of loanable funds. Answer is B (not to worry cos this has been recently taken out of syllabus)

JK and FG are both SRPCs. Usually, it shifts upward and to the right as it reflects expectation of higher inflation rate. Workers (supply-side unemployment) who initially took up the job offers suffered from money illusion. Soon, they will realise that they are not better-off in real term. They will start asking for higher pay and this causes some of them to be made redundant. This is why, in the long-run, unemployment will not decrease and national output/ income will always remain the same (I wish I can draw a LRPC/ NAIRU curve here). In this question, it is the exact opposite since it shifts downward and to the left. Answer is B
For financial year 2012/13, there was a budget deficit of US\$ 370, 300. For financial year 2013/14, there was another fiscal deficit of US\$ 40,000. A is incorrect as budget deficit fell. B is incorrect either as both years showed budget deficit. C is incorrect as national debt aka accumulated annual deficit rose. This means answer is D

This question is related to crowding-out effect. There are two ways in which it can happen. First, when the government sells bonds to private sector, private firms would have less money themselves to invest upon lending to the government. Another way is that, rise in government spending would create competition for money which will cause interest rates to increase (interest rate is the price of money). Eventually, costs of borrowing will increase, and in the same way, private firms would cut investment. Either way, a rise in G causes I to fall. AD may or may not increase. Answer is A

Note: I just realised that the diagrams/ some information are 'cut-off' and am not too sure how to edit it. You can counter check with 9708/31 from May June 2015 examination. Thanks