Mr. Nangula Mr. Shipanga Ms. Kazeveri

Transcription

1 POLYTECHNIC OF NAMIBIA SCHOOL OF MANAGEMENT SCIENCES DEPARTMENT OF ACCOUNTIONG, ECONOMICS AND FINANCE COURSE NAI\1E: COURSE CODE: Intennediate Micro-Economics IMI611 S DATE: June 2015 MARKS: 100 DURATION: 3 Hours F1RST OPPORTUNITY EXAMINATION: QUESTION PAPER Examiners: Mr. Nangula Mr. Shipanga Ms. Kazeveri Moderator: Dr. J. P. S. Sheefeni I. Candidates must answer all questions in this paper. 2. Number your answers in accordance with the question paper. 3. Start each answer on a new page 4. \\Tite clearly and legibly This paper consists of 5 pages! including this front page.

2 Section A Multiple Choices (20 marks] Question One I. l11e price elasticity of demand wih increase with the length of the period to which the demand curve pertains because a) consumers' incomes will increase. b) the demand curve will shift outward. c) all prices will increase over time. d) consumers \Vill be better able to find substitutes. e) finns wm be better able to produce the good for ]ess. 2. If the demand for emeralds is elastic, then a) emeralds will have a high price. b) a reduction in price wiij lead to an increase in the expenditure on emeralds. c) the slope of the demand curve for emeralds must be greater than one. d) a price reduction will not appreciably affect sales. e) the sjope of the price consumption curve for emeralds must be greater than one. ゥョヲッイュ 3. In a frost in Brazil killed over 500 million coffee trees and damaged many more. A civil war in Angola, a major supplier of coffee, cut back its crop. And, an earthquake in Guatemala disrupted the flo\v of coffee. In spite of these calamities, these three producers reported an increase in export earnings. On the basis of this which of the following must be true? a) The demand for coffee is price elastic. b) The supply of coffee is price elastic. c) n1e demand for coffee is price inelastic. d) The supply of coffee is price inelastic. e). The demand for coffee is unit elastic. 4. The substitution effect of a price decrease for a good with a normal indifference curve pattern a) is always inversely related to the price change. b) measures the change in consumption of the good that is due to the consumer's feeling of being richer. c) is measured by the horizontal distance between the original and the new indifference curves. d) Is sutlicient information to plot an ordinary demand curve for the commodity being considered. 5. A normal good can be defined as one which consumers purchase more of as a) prices fall b) prices rise. c) incomes tall. d) incomes increase. e) the prices of other producl-; increase.

3 6. Some goods are not closely related to each other and are neither substitutes nor complements. For such goods, the cross-price elasticity of demand would be a) positive. b) negative. c) zero. d) Cannot tell without more information. 7. The substitution effect refers to a) the change in quantity demanded when the price of a substitute changes. b) the change in quantity demanded resulting from a change in total satisfaction. holding relative prices constant. c) the change in quantity demanded resulting from a change in relative prices, holding the level of satisfaction constant. d) the percentage change in quantity demanded resulting from a one percent change in all prices. e) a movement from one indifference curve to another. 8. An elasticity coefficient of -I means that a) the demand curve is perfectly inelastic. b) the demand curve is perfectly elastic. c) the relative changes in price and quantity are equal. d) expenditures on the good \vou1d increase if prices \Nere reduced. e) expenditures on the good \vould decrease if prices were reduced. 9. At any point on an indifference curve, the absolute value of the slope equals a) unity otherwise there would be no indifference b) the marginal rate of substitution c) the consumer's marginal utility d) none of the above I 0. The most important determinant of price elasticity is a) the slope of the demand curve. b) the availability of substitutes. c). the price of other goods. d) the income of the consumer.

4 Section B Question One [80 marks) [14 marks] Demand for a finn has been reliably measured by: Q = P, where P is price in Namibia dollars and Q is output. T'otaJ cost is in the table below. OUTPUT Price COST PROFIT ! ""' ""' セMLM Q@ ] ᄆセ [ f _ , ' -- Complete the table above and indicate the price and level of output that a profit-maximizing firm would choose. Question Two flo mnrksj The demand function for a good is Q =a- bp, and the supply function is Q = c + ep, where a, b, c, and c are positive constants. a) Calculate the equilibrium price and equilibrium quantity in terms of these constants and simplify your answers.. [4 marks] b) Calculate elasticity of demand at equilibrium in terms of these constants and simplify your answer [ 4 marks] c) If a =20, c = 10, b =0.5 and e = 1.5, con1ment on the elasticity of demand {2 marks J Question Three [12 marks] a) What is the effect of a Namibia quota on chicken of Q on the cqui1ibrium price and quantity in the Namibia chicken market? [6 marks] b) What would be the effect of AN\VR production on the world equilibrium price and quantity of oil given that f = -0.4t]l = 0.3, the pre AN\v'R daily world production of oil is Q 1 = 84 millions barrels per day, the pre-an\vr world price is P 1 = 70 and daily ANWR production would be 0.8 million barrels per day? [6 marks]

5 Question Four [13 marks) The demand for pork is Qa = 100- P and supply for pork is Os = 60 + P. Suppose that the government collects a specific tax of r = N$2.50 per kg of processed pork from pork producers and elasticity of supply is J1 = 0.5. a) CaJcuJate the new equilibrium price after govemment imposes this tax. b) Calculate the incidence of a tax on consumer. [ 10 marks] [3 marksl Question Five (17 marks] a) Does revenue increase or decrease if the demand curve is inelastic at initial price? [ l marks] b) Given the demand function for beef (in kilograms) in Namibia as Qa = 10- P) where and the suppjy function for beef (in kilograms) in Namibia as Qs = 4 + P. 1. Calculate total revenue at equilibrium [3 marks) ii. Calculate the price elasticity of demand at equilibrium. [ l marks] iii. If the equilibrium price increases by N$1.5, calculate new total revenue at equilibrium. [8 marks] iv. Use the answer in part i) and iii) to comment on the elasticity of demand [4 marks} Question Six (14 marksl John loves buying beer and wine. His utility function ft)f gallons of beer per year, B, and gallons of wine per year, \V, is U(B, W) = 2BW. It costs John N$15.00 to buy a gallon of beer and it costs John N$35.00 to buy a gallon of wine. Assume that he has n$ to spend on beer and wine. ョ セ@ a) What is the equation for his budget line? Draw it (with B on the horizontal axis). [2 marks} b) Calculate marginal utility of beer and marginal utility of wine [2 marks] c) What is John's marginal rate of substitution? Explain. {2 marks] d) Calculate John's optimal bundle. [2 rnarksj e) If the price of beer decreases from N$15 to N$10.00 the price of wine and income remain the same, calculate John's new optimal bundle. f3 marks) f) Use the answers in part d) and e) to derive John's demand curve for beer. [3 marksj All the hest