Economic

BMME5103/NOV2011/F - FA

PART A INSTRUCTIONS: 1. THERE ARE TWO (2) QUESTIONS IN THIS PART. 2. ANSWER BOTH QUESTIONS. Question 1 a. The New York Times (Nov. 30, 1993) reported that ‘the inability of OPEC to agree last week to cut production has sent the oil market into turmoil [leading to] the lowest price for domestic crude oil since June 1990’. i) OPEC is the largest cartel in the world. Explain what is meant by a cartel? [2 marks] ii) Why were the members of OPEC trying to agree to cut production? [3 marks] iii) Why do you suppose OPEC was unable to agree on cutting production? Why did the oil market go into ‘turmoil’ as a result? [5 marks] b. i) Discuss the disadvantages of monopoly. [4 marks] ii) Give an example of a government-related monopoly. Is creating this monopoly necessarily bad public policy? Explain. [6 marks] [TOTAL: 20 MARKS] Question 2 a. What is the difference between the quantity supplied of corn and the supply of corn? What could cause a rise in the quantity supplied of corn, and what could cause a rise in the supply of corn? How would these changes be shown graphically using a supply curve? [5 marks] A person argues that if the prison sentences for all crimes were doubled, this would worsen the problem of overcrowded prisons, all other things being equal. Use the concept of demand to explain why this argument is incorrect. [5 marks] Historically, investors have considered gold commodities to be a good investment to preserve wealth in times of inflation. If investors are no longer worried about inflation and gold demand decreases, what do you expect will happen to gold prices? How would your answer change if you learn that a recent gold mine discovery will increase the supply of gold? [5 marks]

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BMME5103/NOV2011/F - FA

d.

Suppose that due to more stringent environmental regulation it becomes more expensive for steel production firms to operate. Also, recent technological advances in plastics have reduced the demand for steel...