namib I A U n IVERS ITY

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1 namb A U n VERS TY OF SCEnCE AnD TECHnOLOGY FACULTY OF MANAGEMENT SCENCES DEPARTMENT OF ACCOUNTNG, ECONOMCS AND FNANCE QUALFCATON: BACHELOR OF ECONOMCS QUALFCATON CODE: 07BECO LEVEL: 7 COURSE CODE: PM511S COURSE NAME: PRNCPLES OF MCROECONOMCS SESSON: JUNE 2016 PAPER: THEORY DURATON: 2 HOURS MARKS: 100 FRST OPPORTUNTY EXAMNATON QUESTON PAPER EXAMNER(S) Kasnath Kavezeri, Eslon Ngeendepi, Eden Shipanga, Elina Mwatondange, Blessing Musariri, Mekukuje Mbaha, Annemie van Rensburg MODERATOR: Pinehas Nangula NSTRUCTONS 1. Answer ALL the questions. 2. Write clearly and neatly. 3. Number the answers clearly. PERMSSBLE MATERALS 1. Pens/pencils 2. Ruler 3. Calculator THS QUESTON PAPER CONSSTS OF 9 PAGES (ncluding this front page)

2 QUESTON 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 incorrect? A. Rich people do not experience scarcity. B. Because resources are scarce, everyone has to make choices. C. Every time a choice is made, opportunity cost is incurred. D. The opportunity cost of a particular choice is the value of the best opportunity forgone (sacrificed) as a result of the choice. 2. Which one of the following is a microeconomic issue? A. The rate of economic growth in Japan. B. The South African inflation rate. C. The price of maize in Lesotho. D. The unemployment rate in Zimbabwe. 3. The economic problem arises from the coexistence of A. unlimited wants and unlimited resources. B. limited wants and limited resources. C. unlimited wants and limited money in circulation. D. unlimited wants and limited resources. 4. Economic resources are also called: A. free gifts of nature. B. consumption goods. C. units of money capital. D. factors of production. 5. Which one of the following statements is incorrect? A. Money is the most important factor of production. Without money, nothing can be produced. B. Both the quality and the quantity of factors of production are important. C. Capital as a factor of production refers to tangible things that are used to produce other things. D. Although the quantity of labour is important, the quality of labour is usually more important. 6. Which one of the following is not a capital good? A. A wrist-watch. B. A power saw. C. A truck. D. A business computer. 7. Microeconomics is a branch of economics that studies: A. the determination of the gross domestic product. B. the behaviour of individual decision-making units in the economy. C. the impact of inflation in Namibia D. the effects and consequences of the aggregate behaviour of all decision-making units. 2

3 8. Economists would classify all of the following as land except: A. two thousand acres of virgin forest B. a hydroelectric dam C. crude oil reserves D. iron ore deposits The diagram below shows an economy's production possibilities for two goods: aeroplanes and motor vehicles. Use this diagram to answer the question below. c rn Q) c ro a. e ~ d b ~ e Motor vehicles a 9. With reference to the above production possibilities curve, we can say that: A. the production of both motor vehicles and aeroplanes appears to require similar resources in similar proportions. B. the opportunity cost of producing one more motor vehicle is higher at f than at g. C. the opportunity cost of producing one more aeroplane is higher at g than at f. D. the opportunity cost of producing Oa motor vehicles is cb aeroplanes. 10. Which of the following will shift the production possibilities curve to the right? A. an increase in the unemployment rate from 6 to 8 percent B. a decline in the efficiency with which the present labor force is allocated C. a decrease in the rate of school dropouts from 8 to 6 percent D. a technological advance that allows farmers to produce more output from given inputs 11. Which is a correct match of an economic resource and payment for that resource? A. capital and profit B. land and rental income C. labor and interest income D. entrepreneurial ability and wages 3

4 12. n a supply and demand graph, the convention that economists tend to follow is to place quantity on the: A. vertical axis because it is the dependent variable. B. horizontal axis even though it is the dependent variable. C. horizontal axis because it is the independent variable. D. vertical axis even though it is the independent variable. 13. Which shows a negative relationship between x and y? A. a change in y = 5 and a change in x = 5 B. a change in y = 2 and a change in x = 0 C. a change in y = 0 and a change in x = 3 D. a change in y = 4 and a change in x = The term "other things equal" means that: A. the associated statement is normative. B. many variables affect the variable under consideration. C. a number of relevant variables are assumed to be constant. D. when variable X increases so does related variable Y. 15. For economists, the word "utility" means: A. versatility and flexibility. B. rationality. C. pleasure and satisfaction. D. purposefulness. 16. A person should consume more of something when its marginal: A. benefit exceeds its marginal cost. B. cost exceeds its marginal benefit. C. cost equals its marginal benefit. D. benefit is still positive. 17. Economics involves marginal analysis because: A. most decisions involve changes from the present situation. B. marginal benefits always exceed marginal costs. C. marginal costs always exceed marginal benefits. D. much economic behavior is irrational. 18. Which of the following is most likely to be an implicit cost for Company X? A. forgone rent from the building owned and used by Company X B. rental payments on BM equipment C. payments for raw materials purchased from Company Y D. transportation costs paid to a nearby trucking firm 19. Suppose that a business incurred implicit costs of $200,000 and explicit costs of $1 million in a specific year. f the firm sold 4,000 units of its output at $300 per unit, its accounting profits were: 4

5 A $100,000 and its economic profits were zero. B. $200,000 and its economic profits were zero. C. $100,000 and its economic profits were $100,000. D. zero and its economic loss was $200, The short run is characterized by: A. plenty of time for firms to either enter or leave the industry. B. increasing, but not diminishing returns. C. fixed plant capacity. D. zero fixed costs. Use the diagram below to answer the question that follows. 21. n the above diagram curves 1, 2, and 3 represent the: A average, marginal, and total product curves respectively. B. marginal, average, and total product curves respectively. C. total, average, and marginal product curves respectively. D. total, marginal, and average product curves respectively. Use the diagram below to answer the question that follows. MC 0 Q Quantity 22. Refer to the above diagram. At output level Q total variable cost is: A OBEQ. B. BCDE. C. OCDQ. D. OAFQ. 5

6 Answer questions 23 to 25 on the basis of the following cost data: Output Total Cost 0 $ S4 5 &1 6 6'9 23. Refer to the above data. The total variable cost of producing 5 units is: A $61. B. $48. C. $37. D. $ Refer to the above data. The average total cost of producing 3 units of output is: A $14 B. $12 C. $13.50 D. $ Refer to the above data. The marginal cost of producing the sixth unit of output is: A $24. B. $12. C. $16. D. $ Which of the following industries most closely approximates perfect competition? A agriculture B. farm implements C. clothing D. steel 27. A perfectly competitive seller is: A both a "price maker" and a "price taker." B. neither a "price maker'' nor a "price taker." C. a "price taker." D. a "price maker." 28. The MR = MC rule applies: A to firms in all types of industries. B. only when the firm is a "price taker." C. only to monopolies. D. only to purely competitive firms. 6

7 29. Assume the XYZ Corporation is producing 20 units of output. t is selling this output in a purely competitive market at $10 per unit. ts total fixed costs are $100 and its average variable cost is $3 at 20 units of output. This corporation: A. should close down in the short run. B. is maximizing its profits. C. is realizing a loss of $60. D. is realizing an economic profit of $40. Use this diagram to answer the question below. ATC MR 0 K 0 E Qu:.ntlty 30. Refer to the above diagram. To maximize profit or minimize losses this firm will produce: A. K units at price C. B. D units at price J. C. E units at price A. D. E units at price B. QUESTON 2 [10 Marks] State whether each of the following statements is True or False and write your answer in the examination book. 1. Marginal analysis means that decision-makers compare the extra benefits with the extra costs of a specific choice. 2. Certain inherently desirable products such as education and health care should be produced so long as resources are available. 3. Rational individuals may make different choices because their preferences and circumstances differ. 4. Choices entail marginal costs because resources are scarce. 5. The process by which capital goods are accumulated is known as investment. 6. Ceteris paribus means all other things are assumed not to change. 7. Examining the economy as a whole is the subject of macroeconomics. 8. The goal of a seller is primarily to maximize profits. 7

8 9. The price elasticity of demand is a measure of the demand for a product holding prices constant. 10. A monopolist is defined as a large firm, making substantial profits, that is able to make other firms do what it wants. QUESTON 3 [20 marks] Refer to Table 1. Consider the information for the utility (measured in utils) corresponding to the total number of apples and pears consumed. The consumer's total budget is N$34, the price of an apple is N$6 each and the price of a pear is N$4 each. Table 1 Utility Schedule Apples (P=N$6 each) Pears (P=N$4 each) TU MU MUP Quantity TU MU MU/P 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 apples and pears should the consumer buy in order to maximize utility? (2) 3. State the law of diminishing marginal utility. (2) QUESTON 4 [15 marks] 1. Consider the market for "Guess" handbags. Suppose there is a change in taste that makes "Guess" handbags more popular. Demonstrate graphically and explain the effect this will have on the equilibrium price and quantity of "Guess" handbags. (7) 8

9 2. An increase in the price of tennis rackets from N$400 to N$500 results in a decrease in the quantity demanded from 13 to 10 units per day. (a) Calculate the price elasticity of demand for tennis rackets using the arc elasticity (midpoint) formula. (5) (b) Based on your calculation in (a) above, is the demand for tennis rackets relatively inelastic, unit elastic or relatively elastic? What will happen to the total revenue of the supplier of tennis rackets in this case? Provide a reason for your answer. (3) QUESTON 5 [25 marks] A firm produces a product which it sells in a perfectly competitive market. The price of the product is N$12.50 per unit and the firm's cost structure is given in Table 2. Table 2 Units Total fixed Total Total cost Average Marginal produced cost variable (total) cost cost Q N$ cost N$ N$ N$ N$ Copy Table 2 into your answer book and complete the columns for the total fixed cost, total variable cost, average (total) cost and marginal cost. Where applicable, show 2 decimal places. (22) 2. How many units should this firm produce to maximise its profits? Provide a reason for youranswe~ (2) 3. Calculate this firm's total profit or total loss at the profit maximising output level. (1) TOTAL MARKS FOR PAPER: 100 9