I IFIITIIBIH UI'IIVERSITY OF SCIENCE HI ID TECHNOLOGY FACULTY OF MANAGEMENT SCIENCES DEPARTMENT OF ACCOUNTING, ECONOMICS AND FINANCE QUALIFICATION: BACHELOR OF ECONOMICS QUALIFICATION CODE: 07BECO LEVEL: 7 COURSE CODE: PMI511$ COURSE NAME: PRINCIPLES OF MICROECONOMICS SESSION: AUGUST 2017 PAPER: THEORY DURATION: 2 HOURS MARKS: 100 SECOND OPPORTUNITY EXAMINATION QUESTION PAPER EXAMINER(S) Mr Eslon Ngeendepi Mr Eden Shipanga Dr Tafirenyika Sunde Miss Elina Mwatondange Mr Mekukuye Mbaha MODERATOR: Mr. Imanuel Nashivela INSTRUCTIONS Answer ALL the questions. PPJNI" Write clearly and neatly. Number the answers clearly. Answer Section A and B on the attached answer sheet. THIS QUESTION PAPER CONSISTS OF 12 PAGES (Including this front page)
SECTION A 20 Marks Instructions: Answer all the questions All answers should be on the answer sheet on page 11. Tear the page offand place it inside your examination script. QUESTION 1 1.1 Macroeconomics can best be described as the study of the large aggregates of the economy, or the economy as a whole. study of how supply and demand determine prices in individual markets. analysis of how firms try to maximise profits. study of how a consumer tries to spend his income. 1.2 In a command economy the government uses prices as a principal means of directing resources government does not usually allow private property markets are the main mechanism of matching wants and resources money does not exist. 1.3 Which of the following is not a resource as the term is used by economist? land money capital building 1.4 The production possibilities curve (PPC) shows combinations of goods that can be produced at full employment can be consumed for a given income are available for trade can be produced by a firm using different processes. 1.5 lf Michelle consumes more and more chocolates and each additional chocolate provides less satisfaction than the previous one, we are seeing the working of the law of demand decreasing economies of scale diminishing marginal utility increasing opportunity coast. 1.6 Andre consumes only jeans and shirts. Suppose that he maximises total utility within his budget constraint and the price of jeans is NSZSO, where the last pair yielded 300 units of extra satisfaction. If the price of a shirt is N590, then the extra satisfaction received from the last shirt must be 450 units 108 units 72 units impossible to calculate with the information provided. 2
1.7 Which one of the following statements is correct? A consumer is in equilibrium when his or her marginal utility is at the maximum level. A consumer aims to maximise profits. To determine consumer equilibrium only prices of products should be considered. A consumer is in equilibrium ifthe marginal utility per NS is equal forthe products that he or she buys, and his or her available income has been spent. 1.8 If quantity demanded for good B increases as the price of good A increases, deduce that A and B are: complementary goods. Normal good. Luxury good. Substitute good. one can 1.9 Suppose the supply of cotton increases in Namibia due an improved variety. As a result: Prices of cotton will decline, ceteris paribus. Quantity demanded for cotton will increase, ceteris paribus. The prices of the input used in the production of cotton will rise, ceteris paribus. All of the above. 1.10 A commodity will tend to have a price elastic demand if: It has many close substitutes. The market is defined more narrowly. It is a luxury good. The time horizon is long. 1.11 If the price elasticity of supply is zero, then the supply curve is horizontal a small decrease in the price will result in suppliers producing nothing if the price rises, suppliers will still produce the same amount there is a shortage of the good on the market. 1.12 In the long run All inputs are fixed All inputs are variable At least one input is variable and one is fixed Output is fixed at the maximum. 1.13 Total production cost = N$1000; fixed cost = N$375. Total variable cost and total fixed of producing the 5th unit N5625 and N31825 N$625 and NSZSS N5625 and NSlOOO none of the above
1.14 is the cost of producing an extra unit of output. explicit cost implicit cost (c) fixed cost variable cost 1.15 Suppose that a 6 per cent reduction in the price of computer games results in a 4 per cent increase in the quantity of computer games demanded. This implies that demand is: relatively inelastic. perfectly inelastic. (c) relatively elastic. unit elastic. Use the diagram in Figure 2 to answer questions 1.16 and 1.17 Figure 1 Perfect competitor Price MC 8 \ / /AC Price \/ o 20 40 66 8b 100 12 0 1.16 Refer to the diagram in Figure 1 above. Given a price of N58, in the short run the perfect competitor will maximise profits when it produces: 100 units 60 units (c) 40 units 20 units 1.17 Refer to the diagram in Figure 1 above. Given a price of N58, the perfect competitor s total economic profits in the short run are equal to: zero N$180 (c) N580 NSZOO
Figure 2 Monopolist +3 "4 1: :1 5-: U D: 17: \ 8 15 ----- C 13 \ I ATC E 9 \ Lu 1:. 5 o 6 10 \ MR 16 20 Quantity 1.18 Refer to the diagram in Figure 2 above. The monopolist s equilibrium output is: 6 units 10 units 16 units 20 units 1.19 Refer to the diagram in Figure 2 above. The monopolist s equilibrium price is: N$15 N513 N39 N55 1.20 Which of the following conditions must be met in order for price discrimination to be profitable for a firm? 1 Different markets must have different price elasticity of demand for the product. 2 The firm must be a natural monopoly. 3 The firm must be able to keep different market segments separately. Only condition 3 is required. All the above mentioned conditions are required. Conditions 2 and 3 are required, 1 is not. Conditions 1 and 3 are required, 2 is not.
SECTION B 20 Marks Instructions: Read all the questions carefully Answer all the questions. All answers should be on the answer sheet provided on page 12. Tear the page off and place it inside your examination script. 1.1 Economic growth means that there is an increase in the quantity of goods and services a country produces over time. 1.2 Economics could be defined as a study of the allocation of scarce resources among alternative uses. [W] 1.3 The downward slope of the demand curve shows that as price increases, more people will want to purchase this item. 1.4 A change in the price of apples will result in a change in the demand for apples, that is, the demand curve will shift. 1.5 An increase in the price of apples will cause an increase in the quantity of apples supplied, ceteris paribus. 1.6 When a price is above the market equilibrium price, there is a shortage and quantity demanded exceeds quantity supplied. 1.7 To be effective price floors should be set above equilibrium prices and price ceilings should be set below equilibrium prices. 1.8 An increase in the wages of workers at the Toyota factory will result in a movement along the supply curve for Toyotas, ceteris paribus. 1.9 The longer the time period under consideration, the lower the price elasticity of supply tends to be. 1.10 if the price elasticity of demand for chocolates is greater than one the manufacturers of chocolates can increase their total revenue by raising the price of chocolates. 1.11 One of the reasons why petrol has a low price elasticity of demand is that it has no close substitutes. lt/f] 1.12 A consumer is in equilibrium when the marginal utilities per dollar are equal for all the goods that he or she can afford to purchase. lt/f]
1.13 The amount that you pay less for the product than you are willing to pay is known as the consumer's surplus. [T/Fl 1.14 A firm obtains a total revenue of N$50 by selling 4 units and a total revenue of N560 by selling 5 units. The marginal revenue of the 5 unit is thus N$10. 1.15 If all units produced by a firm are sold at the same price, the firm s average revenue is equal to 1.16 the price of the product. Total fixed cost is a negatively sloped line. 1.17 The supply curve of a firm in a perfectly competitive market is the rising part of the marginal cost curve above the average (total) cost curve. 1.18 If all firms in a perfectly competitive market earn economic profits, new firms will be attracted to the market. The supply ofthe good will increase, thus lowering its price. Eventually all firms will be earning normal profit only. lt/fl 1.19 In a competitive market a firm has a negatively sloped demand curve and in a monopolistic market it has a horizontal demand curve. 1.20 In a competitive market a firm cannot control the price of the product and in a monopolistic market it can. lt/fl
SECTION C 40 Marks QUESTION 1 [8 marks] Use a production possibilities curves to illustrate each of the following (putting goods on the vertical axis and services on the horizontal axis): A shift in production from services towards goods. (2) An increase in the potential output of the economy clue to a greater availability of factors of production. (2) An increase in productivity in the services sector. (2) A decrease in productivity in the goods sector. (2) QUESTION 2 [12 marks] 2.1 Consider the market for chocolate chip cookies. Suppose there is an increase in the price of cake flour used in the production of chocolate chip cookies. Demonstrate graphically the effect this will have on the equilibrium price and quantity of chocolate chip cookies. (4) 2.2 Suppose you are the manager of a soccer stadium where all the tickets always have to be sold at the same price. A match between Brave Warriors and Bafana Bafana is scheduled to be played next month. Market research indicates that you can sell 10 000 tickets @ N$50 each and 8 000 tickets @ NSlOO each. Which price would you choose? Motivate your answer by calculating the total revenue. (3) Calculate the price elasticity of demand for this game using the arc elasticity (midpoint) formula and the figures given in 2.2 above. (5)
- 0 - QUESTION 3 [20 marks] Trevor is a Lego maniac, but also likes Super Soaker squirt guns. The following table shows Trevor s total utility, marginal utility and the weighted marginal utility from Legos and squirt guns measured in utils. Table 1: Utility schedule Quantity of TU MU MU/P Quantity of TU MU MU/P Legos Squirts Guns 0 O - O - 1 20 1 50 2 37 3.4 2 75 3.125 3 13 3 15 4 60 2 4 100 1.25 5 5 5 2 a) Copy Table 1 into your answer book and complete the missing columns. (16) b) What is the price of Legos per set and the price of Squirt gun? (2) c) How many sets of Legos and how many squirt guns will Trevor buy if he has N526 to spend? Carefully explain how you arrive at your answer. (2)
SECTION D 20 Marks QUESTION 1 [20 marks] Assume the following firm operates in a perfectly competitive market and the firms cost structure is given below in Table 2. Table 2: Cost Structure Output Total Fixed Total Variable Cost Total Cost Marginal Revenue Total Revenue Cost 0 25 20 1 10 20 2 4O 20 3 25 20 4 70 20 a) Copy Table 2 into your answer book and complete the missing columns. (1'5) b) How many units should this firm produce and sell to maximise its profits? Provide a reason for your answer. (3) c) Define the term short run. (2) TOTAL MARKS FOR PAPER: 100 10
Student number:... ANSWER SHEET FOR SECTION A Mark the correct answer with an X. A B C 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18 1.19 1.20
Student number:... ANSWER SHEET FOR SECTION B Mark the correct answer with an X. True False 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 1.12 1.13 1.14 1.15 1.16 1.17 1.18 1.19 1.20