nAmIB I A U n IVERS ITY OF SCIEnCE AnD TECHnOLOGY

FACUL TV OF MANAGEMENT SCIENCES

DEPARTMENT OF ACCOUNTING, ECONOMICS AND FINANCE

QUALIFICATION: BACHELOR OF ECONOMICS

QUALIFICATION CODE: 07BECO LEVEL: 7

COURSE CODE: PMI511S COURSE NAME: PRINCIPLES OF MICROECONOMICS

SESSION: JULY 2016 PAPER: THEORY

DURATION: 2 HOURS MARKS: 100

SUPPLEMENTARY/ SECOND OPPORTUNITY EXAMINATION QUESTION PAPER

EXAMINER(S) Kasnath Kavezeri, Eslon Ngeendepi, Eden Shipanga, Elina Mwatondange, Blessing

Musariri, Mekukuje Mbaha, Annemie van Rensburg

MODERATOR: Pinehas Nangula

INSTRUCTIONS 1. Answer ALL the questions.

2. Write clearly and neatly.

3. Number the answers clearly.

PERMISSIBLE MATERIALS

1. Pens/pencils

2. calculator

3. Ruler

THIS QUESTION PAPER CONSISTS OF 9 PAGES {Excluding this front page)

QUESTION 1 [30 Marks] Select the letter that best represents your choice and write it in your examination book.

1. Which one of the following statements is correct? A Wants, needs and demand are essentially simply different terms that have the

same meaning. B. Needs and demand amount to the same thing. C. Wants and demand are essentially the same - people only demand things that they

want. D. Demand differs from wants and needs

2. Which one of the following statements is false? A A truck used to transport goods is a capital good. B. A bus used to transport people is a capital good. C. A mathematics lecture is an example of a service. D. A large loan (ega mortgage bond) is a capital good.

3. The essence of the economic problem is that: A inflation exists in many economies. B. exports seldom pay for imports. C. resources are limited but human wants are unlimited. D. two-thirds of the world's population experience a food shortage

4. An economist decides to give up her job at a commercial bank, where she earns R800 000 per year. She is offered another full-time job for R850 000 per year or can work for herself from home as a private consultant. What is the opportunity cost of working from home?

A Zero B. R800 000 C. R850 000 D. R1 650 000

5. A production possibility curve shows: A the maximum combination of inputs that can be used to produce output in a typical

economy. B. the maximum revenue that can be generated from the sale of output produced by

limited resources in an economy. C. the minimum quantities of commodities that can be produced from limited but fully­

employed resources in an economy. D. the maximum quantities of commodities that can be produced from limited but fully­

employed resources in an economy.

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Use the diagram below, which shows production possibilities for beer and textbooks, to answer this question.

D

B

0 Textbooks

6. The opportunity cost of producing an additional textbook would be greatest at: A. A. B. B. C. C. D. D.

Use the following diagram to answer questions 7 to 1 0:

"C 12 cu Q) m a

4 ,E

0 1 2 3 4 Tractors

7. Refer to the above diagram. This production possibilities curve is constructed so that: A. resources are presumed to be perfectly shiftable between bread and tractors. B. the opportunity cost of bread diminishes as more bread is produced. C. the opportunity cost of tractors diminishes as more bread is produced. D. the opportunity cost of both bread and tractors increases as more of each is

produced.

8. Refer to the above diagram. Which of the following is a normative statement? A. Point C is superior to point 8 because it is important to enhance the future of society. B. If society is initially at point C, it must sacrifice 6 units of bread to obtain one more

unit of tractors. C. If society produces 2 units of tractors and 12 units of bread, it is not using its

available resources with maximum efficiency. D. Other things equal, the combination of outputs represented by point 0 will result in

more rapid economic growth than will the combination represented by point C.

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9. Refer to the above diagram. Which of the following is a positive statement? A. A point inside the production possibilities curve is superior to a point on the curve

because the former requires less work effort. B. Because any society should stress economic growth as its major goal, point 0 is

superior to point C. C. Point B is preferable to point C because the ultimate goal of economic activity is to

maximize consumption. D. Given its resources and technology, this society is incapable of simultaneously

producing 3 units of tractors and 15 units of bread.

10. Refer to the above diagram. Starting at point A, the opportunity cost of producing each successive unit of tractors is:

A. a constant 2 units of bread. B. 2, 4, 6, and 8 units of bread. C. 8, 6, 4, and 2 units of bread. D. the reciprocal of the output of tractors.

11 . Which of the following would be most likely to shift the production possibilities curve to the right?

A. a sudden and substantial expansion of consumer wants B. an improvement in the literacy level and general level of education C. a decline in the size of the population and labor force D. shifting resources from the production of capital goods to the production of consumer

goods.

12. The law of increasing opportunity costs is reflected in a production possibilities curve that is:

A. an upsloping straight line. B. a downsloping straight line. C. concave to the origin. D. convex to the origin.

13. Which question is an illustration of a microeconomic question? A. Is the quantity of wine purchased in one year dependent upon the price of wine? B. Does government spending influence the total level of employment in the economy? C. Is the purchasing power of the rand higher or lower today than it was in 2000? D. Is capitalism superior to socialism?

14. Which is the correct match of an economic resource and payment for that resource? A. land and profit B. labor and rental income C. capital and interest income D. entrepreneurial ability and wages

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15. When discussing the relationship between the price of a stock and the quantity of a

stock purchased in a graph, it is usually the case that: A. price is placed on the horizontal axis of the graph.

B. quantity is on the vertical axis of the graph.

C. other variables are assumed to be held constant. D. other variables are assumed to vary.

16. If two variables are inversely related, then as the value of one variable: A. increases, the value of the other may either increase or decrease.

B. decreases, the value of the other decreases. C. increases, the value of the other decreases. D. increases, the value of the other increases.

17. Which shows a positive relationship between x and y? A. a change in y = 2 and a change in x = 4

B. a change in y = 2 and a change in x = 0

C. a change in y = -1 and a change in x = 4

D. a change in y = 6 and a change in x = -11

18. Suppose that when the price of milk rises 10%, the quantity demanded of milk falls 2%. Based on this information, what is the approximate absolute price elasticity of

demand for milk? A. 5.0 B. 0.2

C. 0.5 D. 2.0

19. If the price elasticity of demand for good A is -1, then a 1% increase in

A. consumer income will result in a 1% decrease in the demand for good A.

B. consumer income will result in a 1% increase in the demand for good A.

C. the market price of good A will result in a 1% increase in the quantity demanded of

good A. D. the market price of good A will result in a 1% decrease in the quantity demanded of

good A

20. In economics, the pleasure, happiness, or satisfaction received from a product is called:

A. marginal cost. B. rational outcome.

C. status fulfillment. D. utility.

21 . Which of the following most closely relates to the idea of opportunity costs?

A. tradeoffs.

B. economic growth. C. technological change.

D. capitalism.

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22. To the economist, total cost includes: A. explicit and implicit costs, including a normal profit. B. neither implicit nor explicit costs. C. implicit, but not explicit, costs. D. explicit, but not implicit, costs.

23. Which of the following is a short-run adjustment? A. A local bakery hires two additional bakers. B. Six new firms enter the plastics industry. C. The number of farms in the United States declines by 5 percent. D. BMW constructs a new assembly plant in South Carolina.

24. The law of diminishing returns indicates that: A. as extra units of a variable resource are added to a fixed resource, marginal product will decline beyond some point. B. because of economies and diseconomies of scale a competitive firm's long-run average total cost curve will be U-shaped. C. the demand for goods produced by purely competitive industries is downsloping D. none of the above

Use the diagram below to answer question 25.

$

0 Output

MC, ATC, AVC and AFC Curves 25. 14. In the above figure, curves 1, 2, 3, and 4 represent the: A. ATC, MC, AFC, and AVC curves respectively. B. MC, AFC, AVC, and ATC curves respectively. C. MC, ATC, AVC, and AFC curves respectively. D. ATC, AVC, AFC, and MC curves respectively.

26. 15. In the long run: A. all costs are variable costs. B. all costs are fixed costs. C. variable costs equal fixed costs. D. fixed costs are greater than variable costs.

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Answer the question on the basis of the following cost data for a firm that is selling in a purely competitive market:

Average Average Average Total Fhx.ed Variable Total Marginal

Product Cost Cost Cost Cost 1 $100.00 $17.00 $117.00 $17 z 50.00 1&.00· 66.00 15 3 33.33 15.00 48.33 13 4 25 .. 00 14.25 39.25 112 5 20.00 14.00 34.00 u 6 16.67 14.00 30.67 1·4 7 14.29 15.71 30.00 26 a 12.50 17.50 30.00 30 9 11 .11 19.44 30.55 35

10 10.00 21.60· 31.60 41 11 9.09 24.00 33.09 48 12 8.33 26-.67 35.00 56

27. Refer to the above data. If the market price for the firm's product is $32, the competitive firm will produce:

A. 8 units at an economic profit of $16. B. 6 units at an economic profit of $7.98. C. 10 units at an economic profit of $4. D. 7 units at an economic profit of $41.50.

Use the diagram below to answer questions 28 and 29.

p , ! I I

MC

' P,,- ----":--------1----.r

28. Refer to the above diagram. At P2, this firm will: A. produce 44 units and realize an economic profit. B. produce 44 units and earn only a normal profit. C. produce 68 units and earn only a normal profit. D. shut down in the short run.

29. Refer to the above diagram. At P1, this firm will produce: A. 47 units and break even. B. 47 units and realize an economic profit. C. 66 units and earn only a normal profit. D. 24 units and earn only a normal profit.

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Use the diagram below to answer Question 30.

P i

I MC

0 Q

30. Refer to the above diagram for a purely competitive producer. The lowest price at which the firm should produce (as opposed to shutting down) is:

A. P1. B. P2. C. P3. D. P4.

QUESTION 2 [1 0 Marks] State whether each of the following statements is True or False and write your answer in the examination book.

1. There are two sets of markets in the economy, goods markets and factor markets.

2. A legally imposed upper limit on a price is called a price floor.

3. An increase in supply, ceteris paribus, raises the equilibrium price.

4. The supply curve for houses would probably shift leftward if the wages of construction workers were increased.

5. If an increase in the price of sugar leaves the total revenue unchanged, then the price elasticity of demand for sugar is equal to one.

6. The law of diminishing returns indicates that because of economies and diseconomies of scale a firm's long run average cost curve will be U-shaped.

7. Marginal cost is the rate of change in the total fixed cost that results from producing one more unit of output.

8. The short run supply curve of a perfectly competitive firm is the segment of the marginal cost curve lying above the average variable cost curve.

9. Under perfect competition the market price also represents the marginal revenue and average revenue of the firm .

10. In the short run, a perfectly competitive firm can earn normal profit only.

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QUESTION 3 [20 marks]

Refer to Table 1. Consider the information for the utility (measured in utils) corresponding to the total

number of pies and burgers consumed. The consumer's total budget is N$28, the price of a pie is

N$8 each and the price of a burger is N$4 each.

Table 1 Utility Schedule

Pies (P=N$8 each) I Burgers (P=N$4 each)

TU MU MU/P Quantity TU MU MU/P

0 0 0

80 1 116

56 2 184

176 3 28

12 4 220

1. Copy Table 1 into your answer book and complete the columns for total utility (TU), marginal utility (MU) and MU/P. You may use the appropriate abbreviations for column headings (e.g. Q, MU, etc.) (16)

2. How many pies and burgers should the consumer buy in order to maximize utility? (2)

3. What is meant by a consumer surplus? (2)

QUESTION 4 [15 marks]

1. Suppose you are the managing director of a firm that produces three goods: K, L and M. The

price elasticity of demand for K is 2.5, for L it is 1.00 and for M it is 0.50. The firm is

experiencing serious cash flow problems and you have to increase total revenue as soon as

possible. If you were in a position to set the prices for these goods, what would be your

pricing strategy for each product? Provide reasons for your answers. (6)

2. Suppose the price of Coke falls from N$8 to N$6 per bottle and the quantity demanded rises

from 100 to 150 bottles a day. Calculate the price elasticity of demand using the arc

elasticity (midpoint).formula (4)

3. Consider the market for bicycles. Suppose there is an increase in the price of steel used in

the production of bicycles. Demonstrate graphically and explain the effect this will have on

the equilibrium price and quantity of bicycles. (5)

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QUESTION 5 [25 marks]

A firm produces a product which it sells in a perfectly competitive market. The price of the product is

N$120 per unit and the firm 's cost structure is given in Table 2.

Table 2 Cost Schedule

Units produced Total Cost Marginal Cost Total Revenue Average Fixed

Q N$ N$ N$ Cost

N$

0 96 - -

2 160

4 296

6 432

8 640

10 880

1. Copy Table 2 into your answer book and complete the columns for the marginal cost, total revenue and, average fixed cost. Where applicable, show 2 decimal places. (16)

2. How many units should this firm produce to maximise its profits? Provide a reason for your answer. (3)

3. Calculate this firm 's total profit or total loss at the profit maximising output level. (3)

4. State the three conditions necessary for price discrimination. (3)

TOTAL MARKS FOR PAPER: 100

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