DURATION: 3 HOURS TOTAL MARKS: 100 External Examiner: MR MAG Darroch Internal Examiners: Dr E Wale and Prof GF Ortmann NOTE: THIS PAPER CONSISTS OF 9 PAGES. PLEASE SEE THAT YOU HAVE THEM ALL. ANSWER SECTIONS A AND B IN SEPARATE BOOKS SECTION A: MICRO-ECONOMIC THEORY Answer ALL questions from this section. QUESTION 1 Indicate whether the following statements are TRUE or FALSE and briefly motivate your answer. Each question carries ONE mark. 1.1. If a good is a luxury good, it will remain so irrespective of the poverty status of the consumer. 1.2. Ceteris paribus, goods have more price elastic demand in the short-run than in the longrun. 1.3. In general, the marginal rate of product transformation is negative. 1.4. If the price of both inputs doubles, the optimum two-input combination will change. 1.5. Average variable cost (AVC) is falling when marginal cost is below AVC. 1.6. Luxury goods have less price elastic demand than necessity goods. 1.7. When there are complementary, supplementary and competitive product-product relationships, the rational producer would operate in the competitive region. 1.8. For perfect substitute inputs, the optimum input combination is determined based on a priori prescribed proportion. 1.9. For a farm operating in a competitive market, marginal revenue equals average product. 1.10. In stage II of the production function, marginal product is decreasing but positive. 1.11. When the demand for a commodity is perfectly elastic at a given price, consumers will demand nothing if price increases. 1
1.12. For a farm producing two competing agricultural commodities, the optimum combination occurs where the marginal rate of product transformation is equal to the inverse price ratio. 1.13. If products are competitive and have increasing marginal rate of product substitution, there will be specialization. 1.14. When supply is more price elastic than demand, consumers face much of the burden of a tax. 1.15. Economics is the study of how society allocates its unlimited resources to meet its unlimited wants. [15] QUESTION 2 Choose the best answer and write the letter (s) of your choice in the space provided. Each question carries ONE mark. 2.1. Price and tax policies work better if a commodity has a. price inelastic demand d. price inelastic supply b. price elastic demand e. b and c c. price elastic supply f. a and d 2.2. Based on the table below, what is the marginal cost of the third unit? Quantity Variable cost (R) 1 100 2 200 3 350 4 450 a. R 150 b. R 240 c. R 100 d. R 350 e. none of the above 2.3. A producer maximizes profit when a. marginal cost equals marginal revenue b. marginal input cost equals marginal value product c. marginal rate of input substitution equals the slope of the iso-cost line d. marginal rate of product transformation equals the slope of the iso-revenue line e. all of the above f. none of the above 2
2.4. If your demand for wine increases by 15% when your real income increases by 25%, your income elasticity of demand for wine is: a. 1.7 b. -1.7 c. -0.6 d. 0.6 e. none of the above 2.5. For the demand equation Q = 75-5*P, the arc price elasticity of demand when price increases from R10 to R15 is a. -2.5 b. -1 c. -2 d. -10 e. -5 f. none of the above 2.6. On a given iso-quant, as firms keep on increasing the use of X 1 and saving X 2, after the law of diminishing marginal returns sets-in, a. more and more quantities of X 1 must be used for each unit of X 2 saved b. less and less quantities of X 1 must be used for each unit of X 2 saved c. equal quantities of X 1 must be used for each unit of X 2 saved d. the quantities of X 1 sacrificed remain unpredictable e. all of the above f. none of the above 2.7. If consumers nominal income declines, a. the demand for luxury goods drops by more than proportionately b. the demand for inferior goods decreases c. the demand for necessities (such as food) increases by less than proportionately d. the demand for normal goods stays the same e. the demand for all goods declines f. none of the above could be true 2.8. According to the table below, the fixed cost is: Quantity Total cost 0 250 1 350 2 450 3 600 4 700 a. R200 b. R250 c. R 450 d. R 150 e. none of the above 2.9. The cross-price elasticity of supply for goods A and B is -2. Then, one can deduce that the two goods are: a. joint products d. luxury products b. competing products e. necessity products c. un-related products f. none of the above 3
2.10. If output price is more than average total cost in the long-run, the firm is advised to a. stay in business to make profit b. shut-down to save the variable cost c. exit the market to avoid loss d. exit the market to save the fixed cost e. exit the market to save the variable cost 2.11. If both the price of sugar and the marginal productivity of sugar cane used in sugar production rise, the equilibrium price of sugar cane will a. rise b. fall c. remain fixed d. remain unpredictable 2.12. If a producer increases all inputs proportionately by 10 percent and total output increases by less than 10 percent, there is a. economies of scale d. diseconomies of scope b. economies of size e. diseconomies of scale c. economies of scope f. none of the above 2.13. Agricultural assets often have less alternative uses outside farming. This is mainly because of: a. Input substitution d. Change in supply b. Market supply e. Perverse supply response c. Law of supply f. Asset fixity 2.14. One of the following statements is correct: a. As the budget allocable to inputs increases, the iso-cost line shifts to the left. b. Marginal rate of input substitution is positive in stage III. c. If the marginal product of input X 1 is zero, a change in X 1 reduces the quantity of output. d. For perfect complements, the economics of input substitution is a relevant concept. e. none of the above 2.15. If government sets the wage rate for unskilled labour higher than what the market would determine, the result is a. Unemployment d. competition b. labour shortage e. tax incidence c. equilibrium f. comparative statics [15] 4
QUESTION 3 The following questions require some calculations. Please show the necessary steps which lead to your final answer: 3.1. The following partial table is for a firm operating in a perfectly competitive market. a. Please complete the table and answer the following questions based on the information in the table: (6) Input Output MP AP TR MR TVC TC MC ATC Profit use (in units 60 5 750 20 15 1200 30 3-1250 b. What is the marginal input cost? (1) c. What is the total fixed cost? (1) d. What is the output price? (1) e. Why are some of the cells in the table shaded? (1) f. In the short run, the competitive firm s supply curve is its marginal cost curve above average variable cost. Why? (2) 3.2. Consider the following production possibility curve for two products: Tomato (in units) 80 70 A 60 B 50 C 40 D 30 E 20 F 39 45 49 52 54 55 Potato (in units) a. What is the marginal rate of product transformation between points B and C? (2) 5
b. If potato and totato sell at R100/unit and R30/unit, respectively, what is the optimum combination of tomato and potato? (2) c. What would happen to the optimum output combination if both the prices of potato and tomato double, ceteris paribus? (2) d. What would be the new optimum output combination if only the price of tomato doubles, with the price of potato held constant? (2) e. As we move from point A to F, does the marginal rate of product transformation increase or decrease? Why? (2) f. Does this production possibility curve depict competitive, supplementary or complementary products? (2) 3.3. Suppose the price of irrigation water is R250/unit and the price of drought resistant improved seed that can be grown rain-fed is R1500/unit. Based on the following isoquant to produce 20 tons of maize, please answer the following questions: Improved seeds (units) Irrigation water (units) 75 20 70 30 65 45 60 65 55 90 50 120 45 155 40 195 a. Draw the iso-cost line based on a budget of R6000. (2) b. What is the least-cost quantity of seed and irrigation water this farm business should utilize to produce 20 tons of maize? (2) c. What would be the new optimum input combination if only the price of seed increases with the price of irrigation water held constant? (2) [30] 6
SECTION B: FARM ACCOUNTING Answer ALL questions from this section. QUESTION 4 4.1. Show the Journal entries for the following transactions: (a) Twenty sheep were sold at an auction for R30 000; the auctioneer s commission is 5 per cent of the sale price. The net proceeds were banked. (3) (b) A farmer gave a beef cow worth R4000 to his workers in part payment of their endof-year bonus. (2) (c) A tractor was purchased for R300 000. At the end of the year its value is depreciated by 20% of its purchase price. (2) 4.2. Given the following information, prepare the Cattle Ledger Account and compute the livestock trading profit (loss) for the cattle enterprise: (5) Opening stock: R160 000 Purchases: R40 000 Sales: R60 000 Closing stock: R190 000 4.3. Briefly explain the purpose and procedure of writing off a bad debt. Provide a suitable example to assist your answer. (3) QUESTION 5 5.1. Define VAT (Value-Added Tax) and explain the terms Input VAT and Output VAT. (4) 5.2. For VAT purposes, explain the difference between zero-rated supplies and exempt supplies. Give examples of each. (4) 5.3. How is VAT accounted for in the Ledger? Explain briefly. (2) [15] [10] 7
QUESTION 6 Ms O Draft has provided you with the following extracts from her Cash Book (bank columns only) and her Bank Statement for April 2012. She asks you to prepare Bank Reconciliation Statements for 31 March and 30 April 2012. (Note: Assume that the figures recorded in the Bank Statement are correct.) CASH BOOK - APRIL 2012 Date Particulars Amount (R) Date Particulars Amount (R) April 1 Deposit 1 624.60 March 31 Balance b/d 1 984.50 4 Deposit 1 000.00 April 1 Cheque No. 82 400.00 20 Deposit 561.60 1 Cheque No. 83 100.00 29 Deposit 2 000.00 2 Cheque No. 84 155.00 30 Deposit 850.00 2 Cheque No. 85 145.00 8 Cheque No. 86 129.10 25 Cheque No. 87 121.90 30 Cheque No. 88 2 750.00 30 Balance c/f 250.70 6 036.20 6 036.20 May 1 Balance b/d 250.70 8
BANK STATEMENT - APRIL 2012 Date Particulars Amount (R) Deposit (R) Balance (R) March 31 (2 084.50) April 1 Cheque No. 83 100.00 (2 184.50) 1 Cheque No. 79 150.00 (2 334.50) 1 Deposit 250.00 (2 084.50) 2 Deposit 1 624.60 (459.90) 2 Interest on overdraft 13.00 (472.90) 3 Cheque No. 85 154.00 (626.90) 3 Cheque No. 82 400.00 (1 026.90) 4 Stop Order 145.00 (1 171.90) 15 Cheque No. 86 129.10 (1 301.00) 21 Deposit 561.60 (739.40) 22 Bank charges 23.10 (762.50) 30 Deposit 2 000.00 1 237.50 30 Cheque dishonoured 561.60 675.90 30 Cheque fees 27.20 648.70 Note: Figures in parentheses show overdraft amounts. [15] 9