4021ECN PRINCIPLES OF ECONOMICS

Instructions to candidates
Indicative time to complete: Two hours
You must submit your answers in a single Word or PDF document via the
Assignment Submission link provided on 4021ECN Principles of Economics 2
2122JANMAY Virtual Learning Environment page (i.e. AULA) in the
Assessment folder.
Answer four questions.
You must answer one question from each of the four sections.
Each question in Section A and Section C is worth 30 marks.
Each question in Section B and Section D is worth 70 marks.
The total marks for this paper is 200
IMPORTANT: Please ensure that you save your work regularly. Please
submit your work using Microsoft Word or PDF.
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Section A – Microeconomics
Explain, using a numerical example and a diagram where relevant, one of the
following microeconomic concepts:
A1. Oligopoly (30 marks)
A2. Price discrimination (30 marks)
A3. Marginal rate of substitution (30 marks)
Section B – Microeconomics
You must answer one of the following three questions.
Question B1
A monopolist faces the following market demand function: 𝑄𝐷 = 100 − 2𝑃 .
The total cost (TC) function of the monopolist is given by:
𝑇𝐶 = 1 + 5𝑄𝐷 .
where 𝑄𝐷 denotes the quantity sold and P is the selling price per unit.
(a) Calculate the profit maximising quantity, price and profit of the monopolist.
(20 marks)

(b) Sketch the optimal solutions for your answers in part (a) on a graph
displaying the market demand function, marginal revenue and marginal cost
functions. (10 marks)
(c) Discuss the view that perfect competition is a more desirable market
structure than monopoly. Use a diagram to support your arguments. (40
marks)
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Question B2
Jeffrey divides his income of £20 between hamburgers and wine. Assume the
price of hamburgers is £1 each and the price of wine is £1 per bottle. Given that
his preferences for hamburger and wine can be described by the following utility
function:
𝑈(𝑋, 𝑌) = 𝑋𝑌
where X represents the quantity of hamburger consumed each week and Y
denotes the number of bottles of wine consumed each week.
(a) Write down Jeffrey’s budget equation and illustrate it with a diagram. (10
marks)
(b) What quantities of the two goods will Jeffrey consume per week to maximise
his utility? Show your reasoning carefully. (20 marks)
(c) Suppose the price of hamburger increases to £2 each while the price of wine
remains unchanged at £1 per bottle. Calculate and explain the income and
substitution effects of this price change, using the Hicksian decomposition.
What type of good is hamburger based on your answers for the substitution
and income effects? (40 marks)
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Question B3
It is often suggested that competing firms in an oligopolistic market structure
engage in a prisoners’ dilemma when setting the price for their product.
(a) Draw a pay-off matrix to illustrate a duopolistic market in which the
producers must simultaneously set their prices as either low or high. Put in
payoffs that give this game a prisoner’s dilemma structure, and determine
the Nash equilibrium of the game. (20 marks)
(b)Suppose the players must now make their decisions sequentially, draw the
extensive form of the new game using a game tree. Find the subgame
perfect equilibrium of the game. Provide reasons for your answer. (30
marks)
(c) Using the pay-off matrix from part (a) and your knowledge of economics,
discuss the difficulties involved in implementing a cartel between the two
firms. (20 marks)
Section C – Macroeconomics
You must answer one of the following three questions
C1. Derive and illustrate the LM schedule algebraically and graphically. (30
marks)
C2. Derive and illustrate the IS schedule algebraically and graphically. (30 marks)
C3. Discuss the causes of equilibrium unemployment. (30 marks)
Continued/….
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Section D – Macroeconomics
You must answer one of the following three questions
Question D1
(a) With reference to relevant examples, explain and illustrate the following:
(i) The transactions demand for money (15 marks)
(ii) The precautionary demand for money (15 marks)
(iii) The speculative demand for money (15 marks)
(b) Using the Money market diagram, illustrate and explain the impact on the
demand for money/Liquidity of the following:
(i) Expectation that the pound £ is about to appreciate (12 marks)
(ii) There is a reduction in propensity to invest (13 marks)
Question D2
(a) Explain and illustrate the effect of the following changes on the LM curve:
(i) Consumers become less sensitive to changes in income when
demanding for money (15 marks)
(ii) There is a reduction in the level of inflation (15 marks)
(iii) Due to increase in inflation there is a rise in demand for money
(15 marks)
(iv) There is a reduction in the level of interest rate (15 marks)
(b) Explain the limitations of the ISLM analysis (10 marks)
Continued/….
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Question D3
(a) With relevant diagram, discuss how exchange rate of a currency is
determined (20 marks)
(b) With relevant examples, discuss five factors that may cause the
exchange rate to change (50 marks)

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