IFYEC002 Economics

THE NCUK INTERNATIONAL FOUNDATION YEAR

IFYEC002 Economics
End of Semester 1 Test

2020-21

Test Session Time Allowed

Semester One 2 hours 40 minutes

INSTRUCTIONS TO STUDENTS
1

SECTION A Answer ALL questions. This section carries 20 marks.

SECTION B Answer 1 question ONLY. This section carries 30 marks.

The marks for each question are indicated in square brackets [ ].

• Work must be submitted in a single word-processed file.

• You must type your response into a word-processed file. If you wish to include
any hand-drawn diagrams, please photograph/scan these before inserting them
into the relevant section of your word-processed file prior to submission.

• All work must be completed independently. The penalty for collusion is a mark
of zero.

• You may use external sources of information but must ensure you reference
these. Plagiarism is a form of academic misconduct and will be penalised.

• Work must be submitted by the deadline provided. Your Study Centre can be
contacted only for guidance on submission of work and cannot comment on the
contents of the assessment.

V1 2021 © 2021 Northern Consortium UK Ltd Page 1 of 8

 IFYEC002 Economics

Section A
Answer ALL questions.
This section carries 20 marks.
Questions A1 – A10: select either A, B, C or D and write this as your answer.

Question A1

The diagram below shows costs and revenues for a firm. [1]

Cost /
Revenue

AC

MC

AR
A B C D Output
0
MR

A firm making normal profit will produce at output level

A A
B B
C C
D D

Question A2

All other things being equal, which of the following would shift a firm’s demand [1]
curve to the right?

A A rise in supply.
B A rise in wages for workers involved in the production of the good.
C A fall in price.
D A rise in the price of a substitute good.

V1 2021 © 2021 Northern Consortium UK Ltd Page 2 of 8

 IFYEC002 Economics

Question A3

The diagram below shows the production possibility frontier (PPF) for a farmer [1]
with the option of growing two different types of crop – sugar and maize.

Sugar

PPF1 A
B
PPF2

Maize

Over time, following an expansion of resources and improvements in capital,

the PPF for the farmer moves from PPF1 to PPF2, and production also moves
from Point A to Point B.

From the diagram, it can be concluded that

A Point A is productively inefficient when producing on PPF1.

B there is under-utilisation of resources at Point B.
C the production of maize is more profitable than the production of sugar
D The opportunity cost of producing sugar is zero.

Question A4

A firm discovers that there is an income elasticity of demand of -0.8 for its [1]
product. It is most likely that

A it sells inferior goods.

B it also has a positive price elasticity of demand.
C the firm is making losses.
D has a high likelihood of being the subject of a takeover from a rival
firm.

V1 2021 © 2021 Northern Consortium UK Ltd Page 3 of 8

 IFYEC002 Economics

Question A5

In the short-run, diminishing returns occurs when [1]

A the firm is getting smaller.

B marginal revenue is rising
C average revenue is falling.
D output is rising but at a falling rate.

Question A6

Which of the following is NOT a characteristic of oligopolistic competition? [1]

A Independent decision making on prices

B High barriers to entry
C Incentives to collude
D Non-price competition

Question A7

Average fixed costs will always [1]

A remain constant with output.

B fall as prices increase.
C rise when output falls.
D rise in direct proportion to profits.

Question A8

Look at the following two statements [1]

Statement 1: “Last year, inflation was 0.5% which was too low.”

Statement 2: “Last year, unemployment was 6.8% which was too high.”

From the two statements we can conclude that

A statement 1 is positive, and statement 2 is normative.

B both statements are normative.
C both statements are positive.
D statement 1 is normative and statement 2 is positive.

V1 2021 © 2021 Northern Consortium UK Ltd Page 4 of 8

 IFYEC002 Economics

Question A9

The diagram below shows the market demand and supply curves for a good [1]
that creates a negative externality in production.

Price

A B
P2

P1 E
F

P3 C
D

0
Q* Q** Quantity

Due to the negative externalities created, the government wishes to

discourage the production of the good. Therefore, it could

A Impose a maximum price at P2.

B Impose a tax equivalent to the distance AB.
C Give a subsidy equivalent to the distance BC.
D Impose a tax equivalent to the distance AD.

Question A10

Which of the following is most likely to lead to a supermarket manufacturer [1]

benefiting from internal economies of scale?

A An increase in the size of the manufacturing plant.

B Hiring lower skilled labour.
C Sourcing new suppliers that are more expensive but sell more ethically
produced food.
D Relocation to an area where it can take advantage of improved road
and infrastructure networks.

Section A continues on the following page.

V1 2021 © 2021 Northern Consortium UK Ltd Page 5 of 8

 IFYEC002 Economics

Question A11

HP scores $176m win in CD-ROM drive price-fix case

HP have won a six-year court case against suppliers that it accused of price-
fixing, with a jury in Texas awarding $176m to the US computer giant.

Back in October 2013, HP accused seven oligopoly manufacturers of optical

disc drives – Toshiba, Samsung, Sony, NEC, Panasonic, TEAC, and Quanta –
of colluding together in order to get HP to pay more than a fair market rate
for the equipment.

HP had set up an online bidding platform for suppliers of the optical drives –
e.g. CD-ROM, CD-R/RW, Blu-ray, DVD, and similar drives – with the goal of
getting a good price for bulk purchases.

But rather than this causing the companies to compete with one another on
price, they colluded together to force HP to pay more for CD-ROMs. The
case went on for years, and as evidence mounted that HP’s suspicions were
correct, one after another, the suppliers settled for undisclosed amounts.

HP had been concerned for a long time it was the victim of price fixing and
complained about “billions of dollars of purchases of optical disk drives at
artificially inflated prices over several years.”

Source: theregister.co.uk (adapted extract)

(a) Define the term “oligopoly” [1]

(b) As a result of the behaviour of the seven firms involved, HP had [3]
argued that they were effectively acting as a monopoly. Demonstrate
on a diagram the abnormal profit that might have been achieved by
the firms involved.

(c) Using a simple example, briefly explain the concept of game theory. [3]

(d) State THREE possible causes of oligopoly power in the market for [3]
computer components.

Section B begins on the following page.

V1 2021 © 2021 Northern Consortium UK Ltd Page 6 of 8

 IFYEC002 Economics

Section B
Answer ONE question only.
This section carries 30 marks.
• You must answer 1 complete question.
• Each question has two parts, (a) and (b). Both parts must be answered for the
question you choose.
• For all questions, you may use diagrams to help illustrate your answer.

Question B1

(a) Landfill tax was first introduced in the UK in October 1996 to [10]
encourage waste producers and the waste management industry to
switch to more sustainable alternatives for disposing of material. In
2019, the landfill tax rate was increased from £88.95 per tonne to
£91.35 per tonne in the hope this would encourage more firms to
minimise the materials they use that create waste, or switch to using
materials that can be recycled.

With the aid of a diagram, analyse the likely economic impact of such
a tax on the market for waste.

(b) Evaluate the effectiveness of such a tax on combating the negative [20]
externalities caused by the excessive dumping of waste materials.

Question B2

(a) Explain carefully the characteristics of a firm in perfect competition [10]

AND using a diagram explain the long-run equilibrium position of a
firm operating under conditions of perfect competition.

(b) Evaluate the view that perfect competition is always a more desirable [20]
market structure than a monopoly.

Question B3

(a) Analyse, with the use of numerical examples, the concepts of price, [10]
income and cross elasticity of demand AND explain how price
elasticity of demand can affect a firm’s revenue.

(b) Evaluate the view that profit maximisation is always the primary [20]
objective for all firms.

- This is the end of the test –

V1 2021 © 2021 Northern Consortium UK Ltd Page 7 of 8

 IFYEC002 Economics

Blank Page

V1 2021 © 2021 Northern Consortium UK Ltd Page 8 of 8