MAE 101 Deakin University Economic Principles Questions


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Unit Code: MAE101 Unit Name: Economic Principles, Final Examination T2, 2021
Department of Economics
Unit Code: MAE101
Unit Name: Economic Principles
Estimated Reading Time: 15 minutes
Estimated Working Time: 2 hours
Estimated time for preparing and submitting your final responses to CloudDeakin Dropbox: 45
This is an Open Book Take Home Examination. You must upload your final responses as a
Microsoft Word Doc and a pdf file to CloudDeakin Dropbox within 24 hours from the start
time scheduled in the exam timetable.
This exam consists of four questions. Answer all the questions. This exam paper carries a
total of 50 marks. (This is converted to 50% of your total assessment in this unit).
HURDLE: You must achieve at least 50% of the marks available on the examination to
pass this unit.
Preparing and submitting your answers:
Download the exam answer sheet word document and save it on your computer using the file
name: your-student-ID_unit-code; A hypothetical example: 123456789_MAE101.
Input your answers in that document by typing your response below each question number.
Keep saving your work regularly as you make progress towards completing your exam.
Please also insert appropriate diagrams and calculations if necessary in the answer document.
Legibly draw/hand-write relevant graphs or calculations on a piece of white paper, scan it and
insert it in the document along with your typed response to each question. You are allowed to
use a calculator to aid your work.
For instructions on scanning and inserting images in the word document, please refer to Exam
Preliminary Information Document that was released on the unit site prior to the exam period.
Upload the completed exam answer sheet word document along with a pdf copy of the same in
the CloudDeakin Dropbox prior to cut-off time. Check that you uploaded the correct file.
Late submissions will not be marked.
If you encounter any technical issues with CloudDeakin, please contact the IT Service Desk
online or via phone (1800 463 888; +61 5227 8888 if calling from outside Australia) and record
your ticket number as evidence of technical issues during the examination period.
In the unlikely event that you cannot upload your completed exam paper, email it as an
attachment to your unit chair [] within the submission time.
NOTE: It is important that you work individually on this exam. Your submission will be
reviewed for the purposes of detecting collusion and/or plagiarism.
Answer all the questions below.
Page 1 of 4
Unit Code: MAE101 Unit Name: Economic Principles, Final Examination T2, 2021
Question 1
Most countries today have subsidised the provision of education. Consider an
imaginary country, Gondolin. Gondolin pays a subsidy of $10 000 per year to each
student enrolled in tertiary education.
(a) Depict, with the help of a figure, the initial market for tertiary education in
Gondolin, assume that: 1) education was left to the competitive free market; 2)
the marginal private benefit is equal to the marginal social benefit; 3) the
marginal private cost is equal to the marginal social cost. Now describe, using
the help of the figure, the effect of the government subsidy on the price and
quantity traded of tertiary education, where the X axis of the figure should be
the quantity of students enrolled in tertiary education. You do not need to use
actual numbers – focus on the direction of change in price and quantity traded
caused by the subsidy.
(b) Identify the area of the figure you drew in (a) that depicts the total size of the
subsidy paid by the government to the students enrolled in tertiary education in
Gondolin. Who gains and who loses from such a subsidy?
(c) Subsidies lead to overproduction and overconsumption relative to the
competitive equilibrium. What is the deadweight loss associated with this? Why
is there a deadweight loss? Depict this in your original figure from (a), or draw
a new figure.
(d) The original assumption for Gondolin stated that the marginal private benefit is
equal to the marginal social benefit. Now instead assume that the marginal
social benefit of tertiary education is greater than the marginal private benefit.
That is, assume there is a positive externality associated with having a tertiary
education. Draw this in a new figure. Is the deadweight loss from the subsidy
increased or decreased with the introduction of the positive externality? Why?
(6 + 5 + 5 + 4 marks)
Question 2
The following Table refers to four buyers’ willingness to pay for papadums. Each buyer
is willing to buy at most one papadum and no more.
Table 1
Page 2 of 4
Willingness to pay ($) for one
Unit Code: MAE101 Unit Name: Economic Principles, Final Examination T2, 2021
(a) Let the competitive market price be $4.00: calculate the total consumer surplus
in the market at this price.
(b) Assume now that there is only a single seller of papadums, and she knows each
buyer’s willingness to pay. Assume that this seller incurs a cost of $4.00 per
unit of papadum produced (i.e., the marginal cost is constant). If she intends to
maximise profits, how many papadums would this seller supply to the market,
and what price would she charge? Remember, the price has to be the same for
each unit sold. Hint: start at a price of $17 and calculate what profit would be.
Then lower the price just enough to attract an additional buyer and calculate
what the new profit would be. Repeat this until all four buyers are purchasing
the good and then check which price yields the highest profit. Alternatively, you
can calculate the marginal revenue from lowering the price to attract an
additional buyer and compare it to marginal cost.
(c) Calculate the producer surplus and consumer surplus at the monopoly price and
production level from (b). Are consumers better off or worse off in the
monopoly situation relative to the competitive market? Why?
(6+5+4 marks)
Question 3
Suppose an economy consists of only three goods, as shown in this Table:
Table 2
Fiction Novels
2020 price
2020 quantity
2021 price
2021 quantity
(a) What is the nominal value of GDP in 2020 and 2021?
(b) What is real GDP in 2020 and 2021? How much (in percentage terms) did real
GDP change between 2020 and 2021?
(3+4 marks)
Page 3 of 4
Unit Code: MAE101 Unit Name: Economic Principles, Final Examination T2, 2021
Question 4
Suppose a country’s inflation level is higher than desired, and unemployment levels are
lower than expected – the central bank decides that the economy is ‘overheated’ and
attempts to use the appropriate monetary policy to deal with the situation. Describe,
with the help of the appropriate figure, how a central bank might go about implementing
such monetary policy, the subsequent effects this has on interest rates, the quantity of
money in the market, and the process through which this affects the level of expenditure
in the economy.
(8 marks)
Page 4 of 4
MAE101 Economic Principles T2 2021 Exam Answer Sheet Document
Type your Student ID here:
Insert all your responses to the exam questions in this document electronically and upload
the final version as a Word file and a pdf file to the CloudDeakin Dropbox prior to cut-off
time. For information on how to insert images and hand-calculations, see the Exam
Preliminary Information Document that was uploaded to unit site prior to the examination
Question 1
Question 2
Question 3
Question 4
Page 1 of 1

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Explanation & Answer:
4 Questions

economic principles

tertiary education

education price

deadweight loss

social benefits

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