CHAPTERS COVERED : 1, 2, 7, 8 AND 9 DUE DATE : 3:00 p.m. 21 AUGUST 2012 TOTAL MARKS : 100 MATERIAL REQUIRED : ANSWER SHEET PAGE 8

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1 Page 1 of 8 ASSIGNMENT 2 ND SEMESTER : MICROECONOMICS (MIC) ECONOMICS 2 (ECO201) CHAPTERS COVERED : 1, 2, 7, 8 AND 9 DUE DATE : 3:00 p.m. 21 AUGUST 2012 TOTAL MARKS : 100 MATERIAL REQUIRED : ANSWER SHEET PAGE 8 INSTRUCTIONS TO CANDIDATES FOR COMPLETING AND SUBMITTING ASSIGNMENTS The complete Instructions to Students for Completing and Submitting Assignments must be collected from any IMM GSM office, the relevant Student Support Centre or can be downloaded from the IMM GSM website. It is essential that the complete instructions be studied prior to commencing your assignment. The following points highlight only a few important notes. 1. You are required to submit ONE assignment per subject. 2. The assignment will contribute 20% towards the final examination mark, and the other 80% will be contributed by the examination, however, the examination papers will count out of 100%. 3. Although your assignment will contribute towards your final examination mark, you do not have to earn credits for admission to the examinations; you are automatically accepted on registering for the exam. 4. Number all the pages of your assignment (e.g. page 1 of 4) and write your name and surname, student number and subject at the top of each page. 5. The IMM GSM requires assignments to be presented in a typed format, on plain A4 paper. Unless otherwise specified, this assignment must be completed within a limit of 1500 words, excluding the bibliography. Students who exceed the word limit may find that only part of the submitted assignment will be marked. 6. A separate assignment cover, which is provided by the IMM GSM, must be attached to the front of each assignment. 7. Retain a copy of each assignment before submitting, in case the original does not reach the IMM GSM. 8. The assignment due date refers to the day up to which assignments will be accepted for marking purposes. The deadline is 3:00 p.m. on 21 August Late assignments will be accepted, but 25 marks will be deducted from the maximum mark, if received after 3:00 p.m. on 21 August 2012 and up to 5:00 p.m. the following day, after which no assignments will be accepted. 9. If you fail to follow these instructions carefully, the IMM Graduate School of Marketing cannot accept responsibility for the return of the assignment. It may even result in your assignment not being marked. Results will be available on the IMM GSM website, on Friday, 5 October 2012.

2 Page 2 of 8 Answer ALL the questions QUESTION 1 [50] Falling solar prices good for climate, bad for firms The fall in prices for photovoltaic components, pushed down by fierce competition from China, have made solar energy nearly as cheap as conventional sources of power in Germany's electricity grid. The boom in Germany, the world's biggest solar energy market with 24,000 megawatts of installed capacity, has also helped to drive down costs worldwide, making solar energy a more viable and accessible alternative to fossil fuels in places ranging from India and the Middle East to Africa and North America. The unexpectedly rapid drop in global solar energy prices has nevertheless hit some equipment makers hard - producers like Solyndra in the United States and Solon in Germany failed to keep pace and ended up in bankruptcy protection. "Everyone's missing the real story and it's amazing how brain dead some people are," said Jeremy Rifkin, an economist and an adviser to the German government and European Union on climate change and energy security. "It is absolutely a positive thing that solar prices are dropping faster than anyone thought they could. Tom Mayer, chief economist of Deutsche Bank, said that even if some firms perish, leading producers on the world market can cope with the lower prices. Reference: Kirschbaum, E Falling solar prices good for the climate, bad for firms. [Online] Available at: [Accessed 15 May 2012] Answer the following question QUESTION 1 [50] The title of the article above claims that the falling price of solar energy is good for the climate, bad for firms. Based on the economic theory you have covered so far in this course, state whether you agree or disagree with this statement. Your answer must have an introduction section (+/- 50 words); an economic theory section (+/-150) words; an analysis section (+/-150 words); and a conclusion section (+/- 50 words). Your answer for Question 1 should be between 400 and 450 words long. Each section must have a heading. Your answer must include the following:

3 Page 3 of 8 In the economic theory section: Briefly state the laws of demand and supply as discussed in your textbook, and describe (in words) why a change in the number of suppliers will lead to a change in supply (30% of your question mark). Draw a diagram showing the laws of demand and supply for the solar energy market your diagram should be about half a page in size; it must have a title; functions must be clearly labelled; and each axis must be clearly labelled (10% of your question mark). In the analysis section: Based on the economic theory you have presented, explain how increased competition from China will affect the solar energy market (you must include the price adjustment mechanism when providing your explanation) (15% of your question mark). Illustrate on your diagram how increased competition from China will affect the solar energy market (10% of your question mark). With reference to your diagram state what will happen to the equilibrium price and quantity in the solar energy market given the increased competition from China (10% of your question mark). With reference to how the equilibrium price and quantity will change in the market, state whether or not you agree that the falling price of solar energy is good for the climate and bad for firms (15% of your question mark). Your introduction and conclusion together count 10% towards your question mark. Your answer will be marked according to the following marking matrix: Section Excellent Above average Average Fail Weight Introduction has a heading for the section. The student identifies the correct issue to be discussed, clearly states it and then focuses on it throughout the paper. identifies the correct issue to be discussed and clearly states it. has a vague sense of the issue to be discussed. provides no clear problem statement. 5% Economic Theory Analysis has a heading for the section. The student provides a thorough explanation of the appropriate economic theory needed to discuss the issue at hand and makes use of clearly labelled diagrams. has a heading for the section. The student makes relevant reference to the economic theory presented to provide an opinion/answer to the issue at hand. provides an explanation of the appropriate economic theory needed to discuss the issue at hand and makes use of diagrams. makes reference to the economic theory presented to provide an opinion/answer to the issue at hand. provides an explanation of the appropriate theory needed to discuss the issue at hand. provides an opinion/answer with little reference to the theory presented. is unaware of the appropriate theory needed. There is no application or there is incorrect application of the theory to analyse the problem. 40% 50%

4 Page 4 of 8 Conclusion has a heading for the section. The conclusions must follow clearly from the analysis. The student demonstrates critical thought by suggesting further implications of the conclusions presented. The conclusions follow clearly from the analysis. The conclusions follow weakly from the analysis. FINAL MARK (90% +) (67-90%) (50-66%) (< 50%) There are no conclusions or the conclusions contradict the results of analysis. 5% QUESTION 2 [10] True/False Questions: Please write the number in your answer book and indicate True or False e.g. 2.1 False 2.1 A point of unitary price elasticity is found at the midpoint of every negativelysloped linear demand curve. 2.2 All demand curves possess an elastic range, an inelastic range, and a unitarily elastic range. 2.3 Total revenue varies directly with price in the inelastic range of a demand curve. 2.4 Total revenue varies inversely with price in the elastic range of a demand curve. 2.5 Negative price elasticities of demand are conventionally treated as absolute (positive) coefficients. 2.6 The price elasticity of supply is a measure of the slope of a supply curve. 2.7 Substitutes have positive price cross elasticities of demand. 2.8 If the price elasticity of demand for good X is greater than one, then a reduction in the price of good X will result in a decrease in consumer spending on the good. 2.9 If the demand curve for a good is vertical, then an increase in the price of the good results in a reduction in the quantity demanded; demand is perfectly inelastic If the supply curve for good X is linear and passes through the origin, then the price elasticity of supply for the good changes at every point on the curve. (1 mark each = 10) QUESTION 3 [30] Multiple-choice Questions Indicate your answers to each of the following questions on the answer sheet provided. Each answer is worth two (2) marks. For each section below select the MOST APPROPRIATE answer from the choices given. Mark your answers with an X in the correct block on the ANSWER SHEET on page 8. There is a uniquely best answer to each of these questions!

5 Page 5 of Price elasticities of demand tend to be larger a. for necessities than for luxuries. b. when producers have good alternatives available. c. the higher are the opportunity costs of production. d. the larger are the number of uses for a good. e. None of these. 3.2 Cuts in a good s supply tend to cause increases in the a. demand for a complementary good. b. industry revenues if its demand is price elastic. c. industry revenues if its demand is income inelastic. d. demand for the good itself. e. demand for a substitute good. 3.3 As price falls and quantity rises along a negatively-sloped linear demand curve a. total revenue falls up to the point where elasticity equals zero; thereafter it rises. b. the price elasticity of demand decreases. c. there is a contradiction to the law of supply. d. the incentive for substituting away from the good rises. e. a constant negative slope ensures a fixed elasticity. 3.4 Cross-price elasticities of demand are probably most positive for a. shoe repairs and new shoes. b. syrup and waffles. c. fuel and limousines. d. college tuitions and textbooks. e. coal and iron. 3.5 From which of the following data might you estimate a price elasticity of supply? a. A price hike from R7 to R13 causes shirt sales to fall from 16,000 to 8,000 monthly. b. Farmers increase soybean plantings 15 percent when the price increases 5 percent. c. Ford s production increases because GM raises Chevette prices. d. The output of tennis balls slumps 8 percent when the prices of racquets go up 12 percent. e. Steel production and sales rise 18 percent when national income grows 13 percent.

6 Page 6 of Which of the following suggest that supply is most price elastic? a. A pay hike from R400 to R800 monthly for new recruits raises new army enlistments from to monthly. b. A 20 percent increase in goats milk production follows a 40 percent rise in the price of cows milk. c. When wheat prices fall from R8 to R5 per bushel, world output drops from 460 million tons down to 340 million tons. d. Per capita income rises from R2500 to R3500 and motor car sales rise from 6 million to 18 million units annually. e. New DVD releases climb from 1800 annually to 2400 annually when the average price rises from R12 to R18 each. 3.7 Pairs of substitute goods include a. butter and margarine. b. synthetic fabrics and cotton cloth. c. ipod downloads and DVDs. d. jogging shoes and bicycles. e. All of these. 3.8 Sets of complementary goods include a. car repairs and new cars. b. petrol and diesel. c. diving boards and swimming pools. d. saunas and steam baths. e. pipes, chewing tobacco, and snuff. 3.9 If each 1-percent price hike causes the amounts sold to fall 2 percent, the price elasticity of demand for bacon is roughly a b c..02. d. unitary. e If attendance at basketball games falls from 10,000 per game to 8,000 when ticket prices are raised from R6 to R8, the price elasticity of demand is roughly: a b c d e National income booms from R3.75 trillion to R4.25 trillion and new car sales flourish, rising from 3 million to 5 million annually. The income elasticity of demand for new cars is: a b. 1.0 c d e. 4.0.

7 Page 7 of The average jail term for being convicted of driving while intoxicated rises from 1 month to 3 months, and traffic fatalities decline from to per year. The imprisonment elasticity of traffic fatalities is roughly a b c d e New competition causes exercise machines to be slashed from R650 to a rock bottom R350 and sales rise from to annually. The price elasticity of demand is roughly a b c d e Soaring demand causes the price of sole-sucker beach sandals to rise from R10 to R14 a pair. An influx of new producers raises the total amount available from 3 million to 13 million annually. The price elasticity of supply is a b c d e Suppose that an increase in weekly consumer income from R160 to R170 causes the consumption of good K to fall from 10 to 7 units per week. The income elasticity of demand is roughly a b. -5. c. -6. d. 8. e. 5. PRESENTATION [10] ASSIGNMENT TOTAL: 100

8 Page 8 of 8 ANSWER SHEET (DETACH THE ANSWER SHEET AND INCLUDE IT WITH YOUR ASSIGNMENT) ASSIGNMENT: MICROECONOMICS (MIC) ECONOMICS 2 (ECO201) DATE: 21 AUGUST 2012 QUESTION: ONE (1) STUDENT NUMBER: S QUESTION NO. SELECTED ANSWER 3.1 a b c d e 3.2 a b c d e 3.3 a b c d e 3.4 a b c d e 3.5 a b c d e 3.6 a b c d e 3.7 a b c d e 3.8 a b c d e 3.9 a b c d e 3.10 a b c d e 3.11 a b c d e 3.12 a b c d e 3.13 a b c d e 3.14 a b c d e 3.15 a b c d e