Multiple Choice (TOTAL: 12 marks)

In this section, write the letter (A, B, C, or D) of your choice of the correct answer. No mark will be given for justification or an explanation of your answer so just state the letter in the space provided. Each correct answer is 1 mark.

Question 1A: Microeconomics

Is the study of how individuals and firms make themselves as well off as possible in a world of scarcity.

Is often called price theory to emphasize the important role that prices play in determining market outcomes.

Explains how the actions of all buyers and sellers determine prices and how prices influence the decisions and actions of individual buyers and sellers.

All of the above.

Answer:

Question 1B: Positive hypotheses

Are synonymous with normative hypotheses which are value judgments.

Are constructed by economists and tested by using economic models.

Are used in microeconomics and have to do with positive outcomes, such as increases in utility for consumers and increases in profits to firms.

Are used in macroeconomics and have to do with positive growth rates, low inflation rates and low levels of unemployment.

Answer:

Question 1C: In the basic supply and demand diagram, in equilibrium

The quantity supplied must be equal to the quantity demanded.

Supply curve is upward sloping.

The demand curve is downward sloping.

All of the above.

Answer:

Question 1D: In the basic supply and demand diagram, in the long run

The supply curve has a negative slope because marginal cost increases as production increases.

The demand curve is the Cobb Douglas demand curve but very few people realize that.

The demand curve has a steep slope because of the law of demand.

None of the above.

Answer:

Question 1E: An improvement in technology and an increase in the population would

Shift the supply curve and the demand curve up, so that both intercepts increase on the P-axis.

Shift the supply curve and the demand curve down, so that both intercepts decrease on the P-axis.

Let the supply curve shift down and the demand curve up.

Let the supply curve shift up and the demand curve down.

Answer:

Question 1F: If the supply curve shifts to the left and the perfectly inelastic demand curve stays constant

Equilibrium quantity would always remain constant.

Equilibrium price would always remain constant.

Price would go up and quantity demanded down.

If the supply curve has positive slope, both quantity and price would increase.

Answer:

Question 1G: Comparative statics

Is the percentage change in a variable in response to a given percentage change in another variable.

Is used to compare the national economic statistics of different countries with each other.

Is the method used to analyse how some variables will change when environmental variables such as prices of substitutes and complements, as well as income changes.

All of the above.

Answer:

Question 1H: The supply and demand model should be used when

There are many small buyers and sellers.

Market participants have a reasonable amount of information about prices and product characteristics.

Transaction costs are significant.

All of the above.

Answer:

Question 1I: If a firm increase its labour and capital by 15% and this leads to a 12% increase in output, the firm is experiencing ...

a. Economies of scale

b. Constant returns

c. Economies of size

d. Increasing returns to scale

Answer:

Question 1J: Which of the following statements are correct?

a. If a firm's technology exhibits economies of scale, costs per unit will fall as the firm expands its production.

b. With decreasing returns to scale the cost per unit will rise as the firm produces more output.

c. If a firm double the amount of every input the firm will use none of the output.

d. The cost per unit is irrelevant for large producers.

Answer:

Question 1K: Diseconomies of scale arises primarily because:

a. Firms must be large relative to the market to employ efficient production techniques.

b. It is difficulties to managing a large business

c. Marginal production declines as more units of a variable input are added to a fixed input.

d. The average cost of the firm rises when the marginal cost increases.

Answer:

Question 1L: Economic profit is equal to total revenue minus

a. variable costs.

b. marginal costs.

c. explicit costs.

d. implicit and explicit costs.

Answer:

Short Answer Questions (TOTAL: 33 marks)

In this section, provide BRIEF and CONCISE answers in the space provided. You may use a diagram/graph to illustrate your answer where necessary. If you require more space, you can use the space bar on your computer to create more space. Marks per question are indicated.

Question 2A Demand (14 marks)

You have the following tools available to explain the Law of Demand and to derive the Marshallian demand curve: (i) Indifference curves and (ii) budget constraints.

Define the two tools (2 marks).

Show consumer equilibrium and motivate your answer. What is the equilibrium condition for the consumer? (2 marks)

Let the price of one good change and show how equilibrium change (2 marks).

Derive the Price Consumption Curve and the Marshallian Demand Curve (6marks).

What is the Law of Demand (2mark)?

Answer(s):

Question 2B Supply (14 marks)

You have the following tools available to explain the Law of Supply and to derive the short run supply curve for a perfectly competitive firm: (i) Average and marginal product curves and (ii) average and marginal cost curves.

Explain why each of the four curves has the shape that it has, and all the possible relationships between the four of them (4 marks).

What is the relationship between short run and long run costs? (2 marks)

When the average cost curve is equal to the marginal cost curve, what is the slope of the average cost curve (4 marks)?

Derive the marginal and average cost curves of a given total cost function (4 marks)

Answer (s):

Question 2C Choice Theory (5 marks)

Suppose the consumer's income increases and one of the prices decreases at the same time.

Would you expect the consumer to be better-off or worse-off? (1 mark)

Use microeconomics theory to justify your answer to Question 2C(a). (4 marks)

Answer (s):

Calculation and Derivation Questions (TOTAL: 30 marks)

In this section, provide BRIEF and CONCISE answers showing your working and/or justification. Simply stating an answer without justification/derivation will not be rewarded with any mark. Marks per question are indicated.

Question 3A Supply/Production (14 marks)

A profit maximising firm in a competitive market is currently producing 100 units of output. It has average revenue of R100, average total cost of R80 and fixed costs of R2 000. What is the firm's:

Profit (economic)? (2 marks)

Marginal cost? (2 marks)

Average variable cost? (2 marks)

Is the efficient scale of the firm more than, less than or exactly 100 units? Illustrate your answer (3 marks)

Answer

Question 3B Revenue, Cost and Profit (6 marks)

Let the cost to produce a unit be R3; write the profit function. (2 marks)

If you are given that the profit of the firm is R20000, determine what the prices P are when the following quantities are produced: Q= 1000, 2000, 4000 and 5000. (4 marks)

Answer (a)

Answer (b)

Q 1000 2000 4000 5000

P

Question 3C Indifference Curves (5 marks)

Suppose consumers consider money to be a good and labour to be a bad.

Would you expect the indifference curves between money and labour to have a positive or a negative slope? (1 mark)

Answer:

Justify the slope you identify in Question 3C(a). (4 marks)

Answer:

Question 3D Utility (10 marks)

Consider a utility function given by u(x_1,x_2 )= x_1^0.5 x_2^0.5 where x1 and x2 are commodities.

What name do economists give to the preferences represented by u(x_1,x_2 ). (2 marks)

Answer:

Derive the Marginal Rate of Substitution of u(x_1,x_2 )? Hint: MRS is ratio of marginal utilities. An answer with no substantiation/derivation will not be rewarded. (8 marks)

Answer:

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