EC1070
1 (Continued overleaf)
UNIVERSITY OF WARWICK
Summer Examinations 2021/22
Economics 1
Time Allowed: 3 Hours
Read all instructions carefully – and read through the entire paper at least once before you
start entering your answers.
There are THREE sections in this paper. Answer ALL questions in Section A using the excel
spreadsheet (40 marks total). Answer TWO questions in Section B (30 marks total); and TWO
questions in Section C (30 marks total).
Approved pocket calculators are allowed.
You should not submit answers to more than the required number of questions. If you do,
we will mark the questions in the order that they appear, up to the required number of
questions in each section.
Section A: Answer ALL questions
1. The following table shows the nominal GDP (in 2015 US dollars) and the population of
Japan in 2013 and 2014. Based on this information, which ONE of the following
statements regarding GDP per capita is CORRECT (2 marks)
(a) Japan’s GDP per capita in 2013 was $36,194.42.
(b) Japan’s GDP per capita fell by 6.74% between 2013 and 2014.
(c) The fall in the population was enough to offset the fall in GDP, for an overall growth
in GDP per capita between 2013 and 2014.
(d) Japan’s GDP per capita fell by 6.31% between 2013 and 2014.
EC1070
2 (Question 3 continued overleaf)
2. In the following diagram, you are given two technologies, A and B, which can produce
100 metres of cloth. Technology A uses 1 worker and 4 tonnes of coal, while technology
B uses 4 workers and 2 tonnes of coal. The diagram also depicts three examples of
isocosts, NM, GF and JH. The wage cost and the price of coal are denoted by w and p,
respectively. Which ONE of the following statements is CORRECT (4 marks)
(a) Isocost JH corresponds to the case where the w = $20 and p = $10.
(b) Isocost NM is the only one of the three isocosts depicted which corresponds to the
case where w = $20 and p = $10.
(c) The cost of using technology B is the same for both isocost JH and isocost GF.
(d) When w = $20 and p = $10, the cost of using technology A is $60.
3. Your current wage rate is ￡W per hour and you work H hours a week. Your total time
available is 168 hours per week. Over the years, your wage rate has increased six-fold to
￡6W. As a result, you have reduced your working hours by a third. Based on this
information, which ONE of the following statements is CORRECT (4 marks)
(a) Your total income has tripled after the wage rate increased.
(b) If your free time including sleeping hours has been reduced by one-fifth, then you
originally worked H= 63 hours a week.
EC1070
3 (Question 5 continued overleaf)
(c) If you originally worked H= 63 hours, then your free time excluding sleeping hours
has increased by 50%.
(d) The proportional increase in free time after the wage rise is smaller when sleeping
hours are excluded from the free time.
4. The government introduces a new policy: bakeries must sell as much bread as
consumers want, at the price of €1.50. Which ONE of the following options is CORRECT
(2 marks)
(a) The consumer and producer surpluses both increase.
(b) The producer surplus increases but the consumer surplus decreases.
(c) The consumer surplus increases but the producer surplus decreases.
(d) The total surplus is lower than at the market equilibrium.
5. There are two firms in the market. The firms are considering undertaking a business
investment that will earn them ￡100 in profit, but they must agree on how to split the
￡100. The two firms agree to simultaneously make a non-negative request. For instance,
firm 1 requests x amount from ￡100 and firm 2 requests y amount from ￡100. If the sum
of their requests is more than ￡100, they fail to agree and don’t undertake the
investment, and each gets nothing. If their demands sum to less than ￡100, they do go
forward with the investment, each gets his demand, and the rest will be donated to a
charity. Donation to the charity gives them 0 utility. Which ONE of the following options
is CORRECT (4 marks)
EC1070
4 (Question 7 continued overleaf)
(a) If firm 1 requests x > 100, then any strategy of firm 2 with a demand of y > 0 will
give both firms 0. Therefore, these are strictly dominated strategies.
(b) Any strategy demanding less than 100 pounds is weakly dominated.
(c) The only pure-strategy Nash equilibrium is described as when firm 1 requests ￡50
and firm 2 requests ￡50.
(d) A pure-strategy Nash equilibrium is described as when firm 1 requests 0 < x ≤ 100
and firm 2 requests 100-x.
6. A monopolist faces a demand function q = 12 - 1/3 p and has cost function c(q) = 6q. Let
TR be the total revenue and TC to be the total cost. Which ONE of the following
statements is CORRECT (4 marks)
(a) The slope of TC is 1/6, and the firm maximises profit at p = 21.
(b) The slope of TR is 1/6, and the firm maximises profit where marginal revenue is
equal to marginal cost.
(c) The slope of TR is -6, and the firm profit is maximized when q = 5.
(d) The slope of TC is -3, and the firm maximises profit where marginal revenue is equal
to marginal cost.
7. Consider the country represented in the diagram below, assuming it has reached its
steady state capital per worker level. Which ONE of the following options best
represents this country (4 marks)
EC1070
5 (Continued overleaf)
(a) The country is a poor country; we can tell as it is difficult to save in poor countries
and the savings rate of 10% is relatively low.
(b) The country is a rich country; we can tell because the marginal product of capital at
equilibrium (mpk*) is 30.9%.
(c) The country is poorer than it could be.
(d) The country saves too much and could increase consumption by saving less.
8. The Figure below shows data on GDP/capita in 1970 against the growth rate in
GDP/capita 1970-2011. Which ONE of the statements below best describes the
implications of this data (2 marks)
(a) Global convergence as implied by the standard Solow model is a clear phenomenon
in the real world.
(b) The average global growth rate was around 2.5% for the 1970-2011 period.
(c) There is evidence of convergence but only within the OECD.
(d) Within the OECD there is evidence of convergence, and developing Asian nations
may be on a
similar path, but this is less clear in the rest of the developing world.
EC1070
6 (Continued overleaf)
9. Imagine an energy rationing scheme increases firms’ demand for labour (to substitute
energy intensive capital), but reduces firms’ productivity (as more workers are using less
capital). Which ONE sentence best describes the outcome in the labour market
(4 marks)
(a) Unemployment unambiguously increases because of the fall in productivity.
(b) Unemployment unambiguously decreases because of the rise in the demand for
labour.
(c) The fall in productivity increases prices therefore PS moves up; the increased
demand for labour shifts WS right; therefore equilibrium unemployment decreases.
(d) Equilibrium unemployment may fall or rise.
10. Which ONE of the following statements best describes the operation of monetary policy
under the Gold Standard during the Great Depression (4 marks)
(a) While it operated the Gold Standard prevented ‘beggar thy neighbour’ currency
devaluations and this helped fight the consequences of a negative demand shock
coming from the collapse of U.S. stock prices.
(b) National monetary policies were dictated by the need to fight deflation and the
Gold Standard was largely irrelevant.
(c) The Gold Standard created pressure to raise interest rates in the face of falling
demand.
(d) By guaranteeing price stability in the long run the Gold Standard helped control
inflation expectations during the crisis.
EC1070
7 (Continued overleaf)
11. Which one best describes the role of inflation expectations during the Great Depression
and the Global Financial Crisis (2 marks)
(a) During the Depression adaptive expectations exacerbated deflation but during the
Global Financial Crisis stable inflation expectations maintained the location of the
Phillips Curve.
(b) Adaptive inflation expectations in the 1930s helped Roosevelt promise higher
inflation, bringing the crisis to an end. In the 2010s anchored expectations helped
real interest rates fall.
(c) Anchored expectations under the Gold Standard in the 1930s helped maintain price
stability, while adaptive expectations under flexible monetary policy in the 2010s
created the possibility of deflation.
(d) Anchored expectations under the Gold Standard in the 1930s helped maintain price
stability, while credible monetary policy in the 2010s did the same.
12. Consider the case of a consumer with current income 10, and future income known with
certainty to be 20. Consuming at their endowment point the Marginal Rates of
Substitution (MRS) between current and future consumption is -2. Consuming equal
amounts in each period lowers the MRS to -1. The gross real interest rate is –0.99.
Which ONE statement best describes the situation (4 marks)
(a) Current consumption is too high, leading to the MRS being more negative than the
slope of the budget constraint.
(b) The expected inflation rate is higher than the nominal interest rate; in this situation
the consumer would like to be a borrower.
(c) With a preference for averages the consumer should try to consume equal amounts
in each period.
(d) The consumer should consume 10 in the first period and 20 in the second as this is
always a safe thing to do.
EC1070
8 (Continued overleaf)
Section B: Answer TWO questions
13. Answer the following questions:
(a) What is the difference between willingness to pay and willingness to accept How
does that relate to the concept of reservation price (3 marks)
(b) Explain with the help of a diagram that in the competitive market equilibrium, all
gains from trade are exploited in equilibrium. (6 marks)
(c) Explain with the help of a diagram the effect on the equilibrium of an increase in
the tax on a product of a perfectly competitive market. (6 marks)
14. When setting price levels, a firms’ objective is to maximise profit and mark-up given their
cost constraint and real wages.
(a) Explain using graphical analysis what is the optimal price level and why it is in the
firms’ best interest to set the price at the profit maiming level. (8 marks)
(b) Explain graphically why the optimal real wage and price level in the economy would
lead to involuntary unemployment. (7 marks)
15. Pick the games that represent a social problem. Explain your choices. What are the
conditions under which the social equilibrium is obtained (15 marks)
EC1070
9 (End)
Section C: Answer TWO questions
16.
(a) Define
(i) Inflation (1 mark)
(ii) Equilibrium Output (1 mark)
(iii) Marginal q (1 mark)
(b) Consider a situation with adaptive expectations and powerful trades unions. With
the aid of an appropriate diagram, discuss how monetary policy should respond to a
temporary demand shock in a society that dislikes both output and inflation
fluctuations. Discuss how and why this response would change following a decline
in trade union power. (12 marks)
17. In 1960 South Korea and Ghana had similar levels of income per capita, close to the
international poverty line, or subsistence income.
(a) Assuming both countries were in a pre-industrial equilibrium what would the
standard Solow model predict for their future growth rates. (2 marks)
(b) What parameter would you have change in the standard Solow model to generate a
prediction of rapid income growth and convergence to U.S. living standards
(3 marks)
(c) Is this a feasible policy recommendation (3 marks)
(d) Discuss what we can learn about the subsequent economic policy of Ghana and S.
Korea in the light of this prediction. (7 marks)
18. Consider an inflation-targetting central bank facing anchored inflation expectations in a
society that dislikes inflation and unemployment fluctuations. Answer the following
questions, explain your reasoning and provide a diagram if helpful.
(a) Faced with a temporary positive price shock, what should the central bank do
(3 marks)
(b) At what point should the central bank worry that a price shock is no longer
‘temporary’ What information should the central bank monitor, and why would
they particularly care about this measure (4 marks)
(c) Discuss policy options for central banks facing persistent price increases which do
not originate in the domestic labour market. (8 marks)