ASSIGNMENT 1 ST SEMESTER: MICROECONOMICS (MIC) ECONOMICS 2 (ECO201)

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1 Page 1 of 12 ASSIGNMENT 1 ST SEMESTER: MICROECONOMICS (MIC) ECONOMICS 2 (ECO201) CHAPTERS COVERED : STUDY UNIT 1: CHAPTERS 1AND 2 STUDY UNIT 2: CHAPTERS 7, 8 AND 9 DUE DATE : 3:00 p.m. 19 MARCH 2013 TOTAL MARKS : 100 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 cover 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 19 March Late assignments will be accepted, but 25 marks will be deducted from the maximum mark, if received after 3:00 p.m. on 19 March 2013 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, 3 May 2013.

2 Page 2 of 12 Answer ALL questions QUESTION 1 [50] 1 mark each (50 x 1 = 50 marks) 1.1 Opportunity cost is best defined as a. the out-of-pocket money costs incurred when a decision is made. b. the value of the best alternative sacrificed when a choice is made. c. the value of all the alternatives given up when a choice is made. d. the value of time lost when a choice is made. e. Both b and c above. 1.2 After being caught allegedly smoking dagga in his hotel room in the West Indies, a cricketer receives a fine of R and a three-match suspension from international cricket. For each match, he receives a match fee of R and a further R per match from his sponsors. He also pays R5 000 per match for insurance against injury. In opportunity cost terms, the cost of this incident to him can be estimated as a. R b. R c. R d. R e. R An economics lecturer decides to give up her job at the IMM Graduate School of Business, where she earns R per year. She is offered another fulltime job for R 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. R c. R d. R e. R in addition to the cost of her monthly home loan repayments 1.4 Micro-economics is a branch of economics that studies a. the determination of national income. b. the behaviour of individual decision-making units in the economy. c. the impact of unemployment in South Africa. d. the effects and consequences of the aggregate behaviour of all decisionmaking units. e. Both b and d above. 1.5 Macroeconomics is a branch of economics that studies a. the determination of total economic activity. b. the behaviour of individual decision-making units in the economy. c. decisions by firms regarding the most efficient use of resources. d. the effects and consequences of the aggregate behaviour of all decisionmaking units. e. Both a and d above

3 Page 3 of A production possibility frontier 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. e. the quantities of factors of production available to produce goods and services in an economy. 1.7 The diagram below shows an economy s production possibilities for two goods, submarines and hospitals. Use this diagram to answer Question 1.7. Submarines c d f b g 0 e a Hospitals With reference to the above production possibilities frontier, we can say that a. the opportunity cost of producing 0a hospitals is 0b submarines. b. the production of both submarines and hospitals appears to require similar resources in similar proportions. c. the opportunity cost of producing one more hospital is higher at f than at g. d. the opportunity cost of producing one more submarine is higher at g than at f. e. the opportunity cost of producing 0a hospitals is cb submarines. 1.8 If the production possibility curve for a two-good economy is a straight line, then a. opportunity costs increase as production of one good rises. b. opportunity costs fall as production of one good rises. c. the goods must make use of inputs in similar proportions. d. the economy must be producing at a point where there is inefficient use of resources. e. the economy must be experiencing economic growth.

4 Page 4 of Read the following statements and then answer the question that follows. i. The pass rate in the June 2000 Economics 1 examination was 72%. ii. The IQs of economics students are higher on average than the IQs of students of sociology. iii. Most disagreements between economists are found in the normative area of policy recommendations. iv. The salaries of university professors should be increased. Which of the above statements are normative statements? a. All of them. b. Only statements i, ii and iv c. Only statements i and ii d. Only statements iii and iv e. Only statement iv 1.10 Which of the following is a normative statement? a. An increase in government spending on policing will reduce crime. b. An increase in the excise tax on beer will reduce its consumption. c. The failure rate on the November 1999 Economics 1 paper was 35%. d. A tax cut will cause higher inflation. e. Alcohol consumption should be taxed more heavily than smoking Read the following statements carefully, and then answer the question that follows. i. Only 40% of the students in the 2013 Economics 1 class will buy the fourth edition of the prescribed textbook by Mohr and Fourie. ii. The national government should introduce a coherent programme of affirmative action to benefit those most historically disadvantaged by the policies of apartheid. iii. Napoleon suffered from severe nightmares. iv. When economists make policy recommendations, they are making normative statements. Which of these are positive (as opposed to normative) statements? a. All of them b. Only i and iii c. Only i and ii d. All except ii e. None of them A normative statement is a statement regarding a. what is usually the case. b. the assumptions of an economic model. c. what ought to be. d. the predictions of an economic model. e. what is.

5 Page 5 of Which of the following statements is positive? a. The new South Africa is better than the old South Africa. b. Unemployment is a greater problem than inflation. c. The South African government ought to introduce policies to reduce the unemployment rate, not the inflation rate. d. Poor countries have 58% of the world s population, but receive only 4% of the world income. e. The world distribution of income is inequitable, because the poor countries are denied their fair share of income and resources In economics, the how or production question refers to a. the problem of allocating scarce resources among competing users. b. the ways in which factors of production may be combined to produce output. c. the way in which a firm decides on its profit-maximising rate of output. d. the problem of how output is distributed among individuals and groups in society. e. the way in which the state sets output targets in a command economy In a pure market economy, the for whom or distribution question is largely answered a. by existing patterns of income and wealth. b. by democratic vote. c. by the preferences of central planners. d. according to the needs of individuals and groups in society. e. by the extent to which government decides to redistribute purchasing power The basic questions of what to produce and for whom to produce are essentially interdependent because a. a particular level of output may be produced by many different combinations of inputs. b. different patterns of factor use generate different patterns of income distribution. c. income and wealth are concentrated in the hands of the economically powerful. d. markets cannot be relied upon to allocate resources efficiently. e. different patterns of distribution generate different patterns of demand and therefore different patterns of resource allocation Which of the following would not be viewed by economists as part of the factor of production, capital? a. The lecture theatres at the University of Natal b. The subsidy income received by the University of Pretoria from the National Department of Education c. The Volkswagen motor vehicle assembly plant in Uitenhage d. The unsold stocks of motor vehicles held by the Toyota factory in Durban e. The N3 national road between Durban and Johannesburg

6 Page 6 of Which of the following would not be viewed by economists as a factor of production? a. The chemistry laboratories at Stellenbosch University b. A skilled bricklayer c. An unskilled labourer d. The wages earned by a skilled bricklayer e. A sugar-cane plantation in northern KwaZulu-Natal 1.19 A commercial forest planted to provide raw material inputs into a wood pulp mill would be viewed by economists as a. part of the factor of production, land. b. part of the factor of production, labour, since labour has to be used to create and maintain the commercial forest. c. part of the capital stock of the economy. d. an unproductive use of land, and therefore not a factor of production. e. an unproductive asset, since it may take several years before the forest is ready for harvesting In economics, the four main factors of production are a. land, human capital, physical capital and finance capital. b. natural resources, man-made resources, labour and money. c. land, capital, labour and notes and coins in circulation. d. human capital, physical capital, financial capital and entrepreneurship. e. land, labour, capital and entrepreneurship Which of the following could best be described as a private good? a. A toll road b. The shark nets off Durban s beaches c. A free public lecture at the University of Natal d. A fireworks display at the Waterfront in Cape Town e. Street lights in a residential area 1.22 Which of the following characteristics cannot be associated with a public good? a. The benefits of use are widely dispersed in the community. b. Signs of willingness to pay on the part of consumers are difficult to establish. c. It is difficult to exclude non-paying consumers from using the good. d. Provision by the public sector is usually necessary. e. Profitable provision by the private sector is relatively easy Which of the following is most likely to be an example of a public good? a. A litre of milk b. Meals on wheels for the elderly c. The provision of open parks and recreation belts within a city d. A television broadcast of a rugby match on M-Net e. Low-priced textbooks provided by the campus bookshop

7 Page 7 of 12 Use the diagram below, which indicates maximum combinations of good X and good Y that can be produced with available resources, to answer Questions 24 and 25. Good Y B A D E F 1.24 On production possibility frontier AC a. output combinations D and E represent full and efficient use of resources, but A, C and F represent inefficient resource use. b. output combination D represents the most efficient use of resources. c. output combinations A, D, E and C all represent full and efficient resource use. d. output combination A and C represents less efficient resource use than either D or E. e. the production of goods X and Y require similar factor inputs in similar proportions The outward shift of the frontier from AC to BC could arise from a. a decrease in the level of unemployment. b. technological progress that affects good X production and good Y production equally. c. an improvement in labour productivity only in the industry producing good X. d. an improvement in labour productivity only in the industry producing good Y. e. a reallocation of resources from X production to Y production Which of the following will not cause a shift in the demand curve for tea? a. A decrease in the price of milk, a complement b. An increase in the price of tea c. An increase in the price of coffee, a substitute d. An increase in the number of people drinking tea e. An increase in the income of households C Good X 1.27 When an individual s income rises ceteris paribus, his/her demand for beans, an inferior good, a. rises. b. falls. c. remains unchanged. d. becomes more positive. e. can be affected in different ways we need additional information to provide an answer.

8 Page 8 of If milk is a normal good, then a decrease in consumers income will definitely cause a. a decrease in the demand for milk. b. an increase in the demand for milk. c. an increase in the supply of milk. d. a decrease in the supply of milk. e. an increase in the demand and supply of milk If there is a successful advertising campaign promoting the health benefits of drinking milk, then, ceteris paribus a. the demand for milk will increase. b. the demand for milk will decrease. c. the supply of milk will increase. d. the supply of milk will decrease. e. the demand and supply of milk will increase In the market for cream, which of the following events would increase demand, ceteris paribus? a. Increased health fears regarding the consumption of too much fat (cream contains fat) b. A fall in the income of consumers c. An increase in the price of scones, a complement d. A drop in the price of yoghurt, a substitute e. A decrease in the price of waffles, a complement 1.31 In the market for bicycles, which of the following variables would decrease demand, ceteris paribus? a. An increase in the price of bicycles b. A decrease in the price of bicycles c. A fall in the income of consumers d. A decrease in the price of bicycle pumps, a complement e. An increase in the price of motorbikes, a substitute 1.32 If there is an increase in the price of DVDs, a substitute in production for CDs, then a. the supply of CDs will increase. b. the demand for CDs will fall. c. the supply of CDs will decrease. d. there will be a movement along the supply curve for CDs. e. None of the above will result A decrease in the cost of flour used to bake bread, is most likely to a. decrease the demand for bread. b. increase the supply of bread. c. decrease the equilibrium quantity of bread traded. d. decrease the quantity of bread demanded. e. decrease the supply of bread.

9 Page 9 of A rise in the price of butter, an input into the manufacture of shortbread biscuits, is likely to a. increase the demand for shortbread biscuits. b. put downward pressure on the price of shortbread biscuits. c. increase the quantity of shortbread biscuits demanded. d. increase the supply of shortbread biscuits. e. put upward pressure on the price of shortbread biscuits If there is a relative rise in the price of broccoli, a substitute in agricultural production for beans, then a. the supply curve for broccoli will shift to the left. b. the supply of beans will increase. c. the demand for broccoli will increase. d. the supply curve for beans will shift to the left. e. there will be no effect on the production of beans If there is a technological breakthrough in the beer-manufacturing process then, ceteris paribus a. the supply of beer will increase. b. the supply of beer will decrease. c. the demand for beer will increase. d. the demand for beer will decrease. e. there will be no effect on the supply or demand of beer In the market for diamonds, assuming everything else remains unchanged, the equilibrium price of diamonds will decrease if a. there is a shortage of diamonds. b. the price of gold, a complement, decreases. c. the supply of diamonds decreases. d. the price of cubic zirconia, a substitute, increases. e. there is a technological improvement in mining equipment There is an increase in the number of adverts highlighting the dangers of consuming artificial sweeteners (as opposed to sugar). Which of the following is likely to occur in the market for sugar, as a result of this? a. An increase in both price and equilibrium quantity traded b. A decrease in price and an increase in equilibrium quantity traded c. A decrease in both price and equilibrium quantity traded d. An increase in price and a fall in equilibrium quantity traded e. None of the above is likely to result In the market for first year economics textbooks, assuming everything else remains unchanged, the equilibrium price of textbooks will increase if a. there is a surplus of textbooks. b. the price of university education, a complement, increases. c. the supply of textbooks increases. d. the cost of the publication of textbooks increases. e. there is a drop in the cost of paper necessary to produce textbooks.

10 Page 10 of If the price and the quantity of curtains exchanged falls, it is likely that a. demand for curtains has increased. b. demand for curtains has decreased. c. supply of curtains has decreased. d. supply of curtains has increased. e. supply and demand for curtains have both increased If the price of powdered milk, a substitute for fresh milk, falls then a. the supply curve of fresh milk will shift to the right. b. the demand curve for fresh milk will shift to the right. c. the equilibrium quantity and price of fresh milk will not change. d. the quantity of fresh milk demanded will increase. e. the demand curve for fresh milk will shift to the left The equilibrium price of wine will increase if, ceteris paribus, a. consumers are more aware of the risks of alcohol abuse. b. there is a surplus of wine. c. the supply of wine decreases. d. wine is a normal good and income decreases. e. all wine adverts are banned Which of the following will definitely cause an increase in the equilibrium price? a. An increase in both demand and supply b. A decrease in both demand and supply c. An increase in demand combined with a decrease in supply d. A decrease in demand combined with an increase in supply e. Any of the above, depending on the circumstances 1.44 Which of the following will definitely result in a fall in equilibrium price? a. An increase in both demand and supply b. A decrease in both demand and supply c. An increase in demand together with a decrease in supply d. A decrease in demand together with an increase in supply e. A decrease in supply only When the price of hot dogs rises from R5 to R8, the quantity demanded decreases from 200 to 100 hot dogs per day. Use this information to answer Questions 45 and What is the price elasticity of demand for hot dogs (using the arc formula)? a. (+) 1 b. ( ) 13/9 c. ( ) 9/13 d. (+) 3/5 e. ( ) 5/3

11 Page 11 of How would you classify the demand for hot dogs, as calculated above? a. Price inelastic b. Unitary price elastic c. Price elastic d. Perfectly price elastic e. Perfectly price inelastic 1.47 You are told that when the price of beef fell by 50%, the quantity demanded rose by 100%. The elasticity of demand for beef would thus be a. price elastic. b. unitary price elastic. c. price inelastic. d. income elastic. e. income inelastic When the price of brandy increases from R10 to R15 a bottle, the quantity demanded falls from to 800 bottles per week. Using the arc elasticity formula, the price elasticity of demand will be a. ( ) 5/9. b. ( ) 4/9. c. (+) 9/5. d. ( ) 9/5. e. ( ) The demand for cooldrink is price elastic if a. an increase in price results in an increase in total revenue. b. a decrease in price results in an increase in total revenue. c. the good is a necessity. d. a decrease in price results in a decrease in total revenue. e. the quantity of cooldrink demanded is not sensitive to changes in price Total revenue from the sale of biltong will increase if a. income decreases and biltong is a normal good. b. its price rises and demand is unitary price elastic. c. income increases and biltong is viewed as an inferior good. d. its price falls and demand is price elastic. e. its price rises and demand is price elastic. QUESTION 2 [12] Illustrate and explain what is meant by consumer surplus and producer surplus at market equilibrium. QUESTION 3 [16] Illustrate and explain what will happen, ceteris paribus, in the market for printer ink cartridges if the cost of producing printers increases as a result of increased wages.

12 Page 12 of 12 QUESTION 4 [12] Consider the following values for price elasticity of demand and supply for newspapers: Price elasticity of demand Price elasticity of supply 0,5 +2,0 4.1 Briefly define and interpret the value given for the price elasticity of demand for newspapers. State some of the most important factors influencing this value. 4.2 Given the above price elasticity information, and if you were concerned with maximising total revenue from newspaper sales, what pricing strategy would you recommend for newspapers and why? 4.3 Briefly state what we can imply about the price elasticity of supply for newspapers. PRESENTATION [10] ASSIGNMENT TOTAL: 100