Page 1 of 9 ASSIGNMENT 2 ND SEMESTER : MICROECONOMICS (MIC) ECONOMICS 2 (ECO201) STUDY UNITS COVERED : STUDY UNIT 1: Chapters 1, 2 STUDY UNIT 2: Chapters 7, 8, 9, 10 DUE DATE : 3:00 p.m. 20 AUGUST 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 Additional Tuition 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. 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 20 August 2013. Late assignments will be accepted, but 25 marks will be deducted from the maximum mark, if received after 3:00 p.m. on 20 August 2013 and up to 17:00 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, www.immgsm.ac.za, on Friday 4 October 2013.
Page 2 of 9 Answer ALL the questions QUESTION 1 [40] Indicate your answers to each of the following questions on the answer sheet provided. Each answer is worth two (2) marks. For each question below, select the MOST APPROPRIATE answer from the choices given. Mark your answer with an X in the correct block on the ANSWER SHEET on page 9. 1.1 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. 1.2 An economics lecturer decides to give up her job at the University of South Africa, where she earns R70 000 per year. She is offered another full-time job for R75 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. R70 000 c. R75 000 d. R145 000 e. R70 000 in addition to the cost of her monthly home loan repayments 1.3 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. 1.4 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.
Page 3 of 9 1.5 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. 1.6 If the production possibility boundary for a two-good economy is a negatively sloped straight line, one can conclude that a. opportunity costs are increasing as production of one good rises. b. opportunity costs are falling as production of one good rises. c. an increase in the production of one good will involve no sacrifice of the other good. d. resources are able to produce either product equally well. e. resources are not perfect substitutes in alternative uses. 1.7 Consider a production possibility frontier showing maximum combinations of guns and roses that could be produced from a given set of resources. If this frontier has a conventional concave shape, then the opportunity cost of producing one more ton of roses could be zero only if a. the maximum feasible output of roses is already being produced. b. the maximum feasible output of guns is already being produced. c. we are operating at a point inside the frontier. d. we are operating at a point above and to the right of the frontier. e. we are producing equal quantities of guns and roses. 1.8 If households have a greater desire to purchase fresh pasta, more resources will ultimately be allocated to the production of fresh pasta in a market economy because a. fresh pasta has a good nutritional content. b. consumer groups will inform pasta manufacturers of the change in demand. c. the price of fresh pasta will be driven up, thereby making fresh pasta production more profitable. d. economic planners will respond to the change in demand by raising the output quotas of fresh pasta producers. e. the prices paid for factors of production used in the fresh pasta industry will tend to fall.
Page 4 of 9 1.9 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 1.10 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 1.11 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. 1.12 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. 1.13 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.
Page 5 of 9 1.14 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. 1.15 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 Use the diagram below, that shows the demand and supply of labour in the sugar industry, to answer Question 1.16 Price of labour (rands/week) S D Quantity of labour 1.16 If there is a minimum wage in this industry (above equilibrium wage/price), then the effect of removing this minimum wage would be to a. increase the equilibrium price and increase the quantity of labour demanded. b. decrease the equilibrium price and remove the shortage of labour. c. decrease the equilibrium price and remove the surplus of labour. d. increase the equilibrium price and cause a shortage of labour. e. None of the above.
Page 6 of 9 Use the figure below to answer Question 1.17 Price per unit P 1 A B C D 1 D 2 D 3 1.17 Rank the absolute value of the coefficient of the price elasticity of demand, from highest to lowest, across points A, B and C. The correct ordering is a. A, B and C. b. A, C and B. c. C, B and A. d. B, A and C. e. The coefficients are the same at A, B and C. Quantity/week 1.18 Ceteris paribus, every time the price of cashew nuts falls by R1/kg, the quantity of cashew nuts demanded increases by 10kg per day. From this we can infer that a. the demand curve for cashews is not linear. b. the higher the price of cashews, the more price inelastic the demand curve becomes. c. the price elasticity of demand for cashews is constant. d. as price rises, demand at first becomes more price elastic and then later becomes less price elastic. e. as price falls, demand becomes less price elastic. 1.19 If an individual s income rises by 10%, ceteris paribus, his/her demand for a luxury good a. increases by more than 10%. b. decreases by more than 10%. c. remains unchanged. d. increases, but by less than 10%. e. cannot be predicted without additional information.
Page 7 of 9 1.20 Ceteris paribus, if a 10% increase in income has caused a 20% decrease in the quantity of paraffin demanded (at the current price), then from this we can conclude that paraffin is a. price elastic. b. a necessity. c. a luxury good. d. an inferior good. e. price inelastic. QUESTION 2 [12] The following table represents the total utility for bread, butter and milk consumed by John. Derive John s consumer equilibrium position for the three goods where the price of butter is R5 per unit, the price of bread is R1 per unit and milk is R4 per unit. John s available income is R37. You must show all your workings. Butter Bread Milk 1 21 7 23 2 41 13 40 3 59 18 52 4 74 22 60 5 85 25 65 6 91 27 68 7 91 28,2 70 QUESTION 3 [30] 3.1 Draw typically shaped supply and demand curves for hot dogs and indicate the equilibrium price and quantity. Use the graph to illustrate what will happen to the equilibrium price and quantity of hot dogs if there is an increase in income in the economy and explain. (14) 3.2 Suppose that the profitability of growing corn to produce ethanol rises sharply. Use supply and demand to illustrate the impact of this on the market for wheat. Label your diagram clearly and explain. (7) 3.3 Suppose that both consumers and producers expect prices of plywood to be much higher in three months. Use supply and demand to illustrate the impact of this on the current market for plywood. Label your diagram clearly and explain. (9)
Page 8 of 9 QUESTION 4 [8] Use a diagram to explain how and why rent control introduced by the government results in a shortage of rented accommodation. In your answer you also need to refer to the consequences of rent control. PRESENTATION [10] ASSIGNMENT TOTAL: 100
Page 9 of 9 ANSWER SHEET (DETACH THE ANSWER SHEET AND INCLUDE IT WITH YOUR ASSIGNMENT) ASSIGNMENT: MICROECONOMICS (MIC) ECONOMICS 2 (ECO201) DATE: 20 AUGUST 2013 QUESTION: STUDENT NUMBER: ONE (1) S QUESTION NO. SELECTED ANSWER 1.1 a b c d e 1.2 a b c d e 1.3 a b c d e 1.4 a b c d e 1.5 a b c d e 1.6 a b c d e 1.7 a b c d e 1.8 a b c d e 1.9 a b c d e 1.10 a b c d e 1.11 a b c d e 1.12 a b c d e 1.13 a b c d e 1.14 a b c d e 1.15 a b c d e 1.16 a b c d e 1.17 a b c d e 1.18 a b c d e 1.19 a b c d e 1.20 a b c d e