King’s Business School, King’s College London
Open Book limited time release ‘take home’
exam
Indicative answers (Note that contents of this paper might
be different from what you covered this year. Your exam will
only include materials that you have covered)
This paper is part of an examination and counts towards the award of a
degree. Examinations are governed by the College Regulations under the
authority of the Academic Board.
Title of assessment: Period 2 Alternative Assessment –
Take Home Exam
Module code and title: 4QQMB102 Principles of Economics
Examination Period: Period 2, May 2020
Time allowed: 24 HOURS between 10am BST 30/04/20 and 10am
BST 01/05/20
1
SECTION A (50%): Microeconomics
Question 1 (word limit: 750 words)
a. The owner of a local restaurant comes to you for economic advice. He needs to
know whether or not he should increase the price of the meals he serves. In order
to advise the local restaurant owner, you would require more information. Briefly
discuss the kind of information you would like to know. Use diagrams to explain
how this information can impact on the restaurant’s revenue.
This question is likely to generate varied responses. But pertinent is the need to discuss this
along the lines of Price Elasticity of Demand (PED). In the first instance, the owner of the
restaurant would like to know the price elasticity of demand. If PED is inelastic, the owner
could raise prices and get more revenue. If the PED is elastic, lowering prices would raise
revenue.
Very good answers should explain using a diagram.
Note that it is also possible to answer using normal supply and demand analysis, substitutes,
income, business cycles, slope of the curve (elasticity), preferences, expectations, etc.
b. Assume that the government decides to set a maximum (low) price for a good. With
the aid of a diagram, discuss two rationing devices that can be used to resolve the
ensuing shortage.
This is a question on price control. Students are expected to briefly explain price control and
the rationale for controlling prices. Price controls are central to the economic problem.
Maximum prices are set if government thinks prices are too high. They are set below the
equilibrium and have no effect if equilibrium price is below the ceiling.
Most common examples to be used are rent controls and underground market prices. See
lecture slides for examples and diagrams.
In terms of rationing mechanisms:
Sellers’ preferences: Firms might favour some customers (allowing some people to
receive special treatment);
Information – ‘don’t tell people that all services are available’. Will then be available
only to those that need them.
There are issues of equitability around such a measure – Favours well-informed people; Might
exclude those that actually need the service.
Point-based system: the government might issue ration coupons (which entitle a
person to purchase a certain amount of the product during a specified time) – under
this, I suspect some people will use examples from recent covid-19 panic buying.
A key issue of this approach is that it can lead to discrimination
Very good answers would go on to discuss the caveats of some of these rationing mechanisms
2
and use examples.
Question 2 (word limit: 750 words)
a. Discuss why monopolised markets are unlikely to be in the interests of consumers
and society as a whole.
This question is aimed at understanding some of the disadvantages of monopolies but
with focus on how this impacts consumer sovereignty.
Some of the reasons will include:
high prices/low output – mainly because of barriers to entry
lack of incentive to innovate – because they face no competition
But also, there is the possibility of higher cost curves due to lack of competition. This
can lead to inefficiencies.
These should be explained along the lines of how they affect consumer sovereignty. Very
good answers will illustrate with a diagram and where possible discuss the welfare
implications – producer and consumer surplus, DWL, as well as use examples.
b. As firms expand, they tend to enjoy certain benefits. Using a well-labelled diagram,
briefly explain how economies of scale may lea
d to a fall in a firm’s average cost.
This relates to the first diagram below. Brief explanation also shown. See lecture slides.
3
Very good answers will first explain what economies of scale is/types and then discuss how
these lowers firms’ average cost as more is produced.
4
5
SECTION B (50%): Macroeconomics
Question 3 (word limit: 750 words)
a. Nobel laurate Simon Kuznets, who did significant work on national income
accounts in the 1930s, said that the welfare of a nation can scarcely be inferred from a
measurement of national income. Would you agree with him Why or why not
An excellent answer must discuss:
Definition of GDP
Ways of measuring GDP
Problems measuring GDP, such as the underground economy, items not recorded and ignored
externalities
Finally, should consider alternatives to standard measures of GDP (e.g. OECD better life index)
b. Will the following lead to cost-push inflation or demand-pull inflation, or both
Briefly explain your answers:
An excellent answer defines the following concepts: Inflation, Demand-pull inflation and Cost_x005f push inflation. In addition, it will illustrate the effects with graphs (similar to lecture materials).
The Bank of England cuts interest rates and the economy booms.
Demand-pull
As a result of falling unemployment, trade unions become more militant and demand higher
wages.
Both
The government raises the rate of VAT.
Cost-push
Total marks for Question 3 (100)
6
7
Question 4 (word limit: 750 words)
a. To reduce the hardship that the unemployed workers suffer, a government
decides to improve unemployment benefits, such as extending eligibility for
unemployment insurance. Would you say it is a good or a bad policy, and why Explain
your answer with the aid of a graph.
There are several pros and cons. These include:
Pros
By replacing some lost income, unemployment benefits protect unemployed workers from
depleting their assets to maintain consumption.
By augmenting the income of very low-income households, unemployment benefits help keep
them out of poverty.
Unemployment benefit programs encourage workers to accept jobs that are important to the
economy, despite layoff risks.
Unemployment benefits enable workers to maintain consumption while spending more time
searching for a job fitting their skills.
Unemployment benefits provide additional support to workers during recessions, without large
negative side effects.
Cons
Unemployment benefit programs can lengthen unemployment spells excessively, especially
when maximum benefits continue over long periods.
Unemployment benefit programs modestly raise the national unemployment rate—and by less
during recessions.
There is no strong evidence that unemployment benefit programs help people find better paying
jobs or jobs better matched to their skills.
Without official monitoring, unemployed workers might exaggerate their job search activity and
so may stay unemployed longer.
Unemployment benefit systems financed by payroll taxes may vastly increase layoffs in some
industries.
Very good answers will illustrate with a diagram (wages and number of workers) using the
concepts of equilibrium and disequilibrium unemployment.
b. Suppose that the US and Chile are the only two countries in the world, and that
labour is the only productive input. In the US, a worker can produce 15 bushels of corn
or 10 barrels of oil per day. In Chile, a worker can produce 5 bushels of corn or 5 barrels
of oil per day.
i. Which country has the absolute advantage in the production of oil Of corn
Explain.
The US in both cases
ii. Explain in words what comparative advantage means. Which country has the
comparative advantage in the production of oil Of corn
The US in the production of corn, Chile in oil.
iii. If free trade is allowed, which commodity will the US import Which commodity
will Chile import Explain.
Countries specialise according to their comparative advantage.
Very good answers clearly define all the concepts (i.e absolute and comparative advantage,
production possibility frontier, trade, specialisation) and explain why countries specialise. The
use of relevant graphs can be rewarded.
Total marks for Question 4 (100)
8