Page 1 of 7 EXAMINATION : MICROECONOMICS (MIC) ECONOMICS 2 (ECO201) DATE : 12 MAY 2014 TIME ALLOWED : 3 HOURS TOTAL MARKS : 100 MATERIAL SUPPLIED : ANSWER BOOK INSTRUCTIONS TO CANDIDATES 1. Please refer to the examination rules and regulations as found in the examination answer book. 2. SECTION A is COMPULSORY. This section is worth 40 MARKS. 3. Answer ANY THREE (3) questions from SECTION B. This section is worth 60 MARKS. 4. Read each question carefully to determine exactly what is required before attempting the answer. 5. Set your answers out in a systematic way under appropriate headings and sub-headings. 6. Number your answers clearly. 7. IMPORTANT: Indicate the questions attempted by drawing a circle around the question number on the front cover of the answer book. NOTE: Examination answer books are the property of the IMM GSM and may not be removed from the examination hall. Answers to examination questions should not include appendices in the form of personal notes to the examining panel.
Page 2 of 7 SECTION A (40 MARKS) COMPULSORY QUESTION 1 (MULTIPLE CHOICE) [40] Indicate your answers to each of the following questions in the answer book provided. Each question 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 in your ANSWER BOOK. 1.1 If the principal concern of economics is the question of how best to use society s resources, then economics would be irrelevant if A. we had unlimited wants. B. economies were organised around command rather than market principles. C. economies were organised around market rather than command principles. D. resources were available in unlimited quantities. E. incomes were distributed more equally. 1.2 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 s income. E. The world distribution of income is inequitable, because the poor countries are denied their fair share of income and resources. 1.3 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.
Page 3 of 7 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. 1.5 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. 1.6 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. 1.7 If we were to add up the value of output of all firms in the economy, we would A. obtain GDP at factor cost. B. obtain GDP at market prices. C. obtain GDP using the income method. D. overestimate the value of production taking place in the economy. E. underestimate the value of production taking place in the economy. 1.8 The area between the Lorenz curve of a country and the diagonal of perfect equality represents A. the area of equality. B. the area of inequality. C. the Gini coefficient. D. the quantile ratio. E. the cumulative percentage of the population.
Page 4 of 7 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 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. 1.11 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. 1.12 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 1.13 Market demand A. shows how much an individual is willing and able to consume at each and every price. B. is the horizontal summation of all the individual demand curves in a market. C. is the vertical summation of all the individual demand curves in a market. D. is a positive slope. E. shows how much individuals are willing to supply at each and every price.
Page 5 of 7 1.14 In the market for air travel, which of the following variables would decrease demand, ceteris paribus? A. An increase in rental rates for hired cars, a substitute B. A rise in income of tourists C. A rise in the price of air travel D. A rise in the price of hotel accommodation, a complement E. A drop in the price of air travel 1.15 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. Use the diagram below to answer Question 1.16 S 0 Price of wine E 0 D 1 D 0 0 Quantity of wine 1.16 The diagram depicts an increase in the demand for red wine, following research reports highlighting the benefits of its consumption to one s health. If at the same time there was a strike by workers on wine farms, then in comparison with the original equilibrium E 0, there would be A. an increase in equilibrium price and quantity. B. an increase in equilibrium quantity but a decrease in price. C. a decrease in equilibrium quantity but an increase in price. D. a decrease in equilibrium quantity but an indeterminate effect on price. E. an increase in equilibrium price but an indeterminate effect on quantity.
Page 6 of 7 1.17 There are 10 000 seats available at Centre Court for the Wimbledon Tennis Championships. The price per ticket is fixed by the organisers. The supply of seats is thus A. completely elastic. B. Elastic. C. unitary elastic. D. Inelastic. E. completely inelastic. 1.18 If the price of the seats in the question above is fixed below the equilibrium price, there will be A. an excess demand for seats. B. an excess supply of seats. C. no scope for the development of a black market. D. no need to ration the tickets. E. a lot of empty seats. 1.19 If the price of the seats is fixed above the equilibrium price, there will be A. an excess demand for seats. B. an excess supply of seats. C. scope for the development of a black market. D. a need to ration the tickets. E. no empty seats. 1.20 As more and more units of a good are consumed by a household, the total utility gained from that good will: A. diminish. B. increase, but by successively smaller amounts. C. rise steeply. D. remain unchanged. E. diminish steeply SECTION B (60 MARKS) ANSWER ANY THREE (3) QUESTIONS QUESTION 2 [20] 2.1 What does elasticity mean? Why are economists interested in measures of elasticity? (6) 2.2 Describe in words what each of the following means: (10) (a) Perfectly inelastic demand (b) Unitary elastic demand (c) Elastic demand 2.3 Explain why economics is classified as a social science. (4)
Page 7 of 7 QUESTION 3 [20] 3.1 What are the three (3) central economic questions that have to be answered in each society? (6) 3.2 What is meant by the supply of a good? (4) 3.3 Paul Mabaso s average utility from the consumption of 8 chocolates is 25 utils per slab. If the marginal utility of the 9 th slab is 20 utils, will his average utility increase, decrease or stay constant if he consumes 9 slabs? Show all calculations and explain. What will happen to his total utility? (10) QUESTION 4 [20] Use diagrams to illustrate what will happen to the equilibrium price and quantity of a product in each of the following cases (clearly indicate instances where the impact cannot be predicted: Diagrams need not be drawn to scale. (a) A simultaneous increase in demand and supply (5) (b) A simultaneous decrease in demand and supply (5) (c) An increase in demand along with a decrease in supply (5) (d) A decrease in demand along with an increase in supply (5) QUESTION 5 [20] 5.1 Explain and construct a diagram to illustrate the relationship between average product and marginal product. (10) 5.2 List six (6) requirements for perfect competition to exist. (6) 5.3 What is the point of studying perfect competition if it does not exist, or exists only very rarely, in the real world? (4) EXAM TOTAL: 100