Question 2: The price of apples rises from R10.00 per kilogram to R15.00 per kilogram. As a result, the quantity of oranges demanded rises from 8 000 per week to 9 500.

(a) Calculate the cross price elasticity of the two goods (6 marks)

(b) Are the goods complements and substitutes? Why? (8 marks)

Answer:

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.

a. 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).

b. What is the relationship between short run and long run costs? [2 marks]

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

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

Answer:

Question 2C Choice Theory (5 marks)

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

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

Answer:

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

Answer:

3. Calculation and Derivation Questions (TOTAL: 30 marks)

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

Question 3A Comparative Statics (25 marks)

Personal Computer (PC) components are expected to fall by 5-8% over the six months. The owner of a small firm that manufactures PCs approaches you (as an economist) for "economic" advice.Use comparative static analysis to advise the firm on the following:[25 marks]

(a) Impact of decline in component prices on the PC market of PC components (10 marks).

Answer:

(b) Impact of lower PC prices on the software market (15 marks).

Answer:

Question 3B Revenue, Cost and Profit (5 marks)

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

b. 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)

(b) Each price counts half a mark

Q 1000 2000 4000 5000

-------------------------------