Professional Documents
Culture Documents
May 2009
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SECTION B: PROBLEM SET
TIME: 3 hours
The duration of this examination paper includes appropriate reading time.
D)
E)
>0
In relation to the two scenarios shown in A) and B) above, which of the following statements apply:
(i)
(ii)
(iii)
(iv)
(v)
A)
B)
C)
D)
E)
3. The solution to a Lagrangian optimisation problem yields the following demand equation for
Good X: = where m is income, p1 is the price of Good X and p2 is the price of Good Y.
1 2
Which of the following statements accord with the preceding demand equation?
(i)
(ii)
(iii)
(iv)
(v)
A)
B)
C)
D)
E)
4 . Which of the graphs below match the same type of good as Good X in the preceding question?
A)
B)
C)
D)
E)
Graph A
Graph B
Graph C
Graph D
None of the above
5. If the initial budget constraint is CL in the preceding decomposition, which of the following
statements apply
(i)
(ii)
(iii)
(iv)
(v)
7. If goods X & Y
(i)
(ii)
(iii)
(iv)
(v)
8. Regarding Giffen and inferior goods, which of the following statements hold
(i)
(ii)
(iii)
(iv)
(v)
A)
B)
C)
D)
E)
With inferior goods if price increases the quantity demanded of that good increases
With Giffen goods if price increases the quantity demanded of that good increases
With both inferior goods and Giffen goods the income effect increases demand for that good
if the price rises
If a good is an inferior good but not a Giffen good the substitution effect is always smaller
than the income effect
If a good is an inferior good but not a Giffen good the substitution effect is always larger
than the income effect
It is possible that a consumer will pick the same market basket when faced with a choice
of a cash grant or a single product subsidy of equal value
Cash grants shift part of the budget line to the right but single product cash subsidies shift
the entire budget line to the right
A cash grant always allows the consumer fewer choices than a subsidized price of equal
value for one commodity
A cash grant always allows the consumer more choices than a subsidized price of equal
value for one commodity
The government should not provide cash grants because the consumption of food does not
rise as people make poor decisions about how they should spend unconditional grants
10. Which of the following statements apply in relation to the bias in typical CPI calculations?
(i)
(ii)
(iii)
(iv)
(v)
A)
B)
C)
D)
E)
(i)
(ii), (iii) and (iv)
(iii) and (iv)
(iv)
(i) and (iv)
16. Suppose that at a firm's current level of production the marginal product of capital is equal to
10 units, while the marginal rate of technical substitution between capital and labour is 2. Given
this, the marginal product of labour must be
A)
B)
C)
D)
E)
5
20
0.2
0.05
cannot be determined
17. Which of the following production functions exhibits increasing returns to scale?
A)
B)
C)
D)
E)
Q = K1/2L1/2
Q = K1/2L2/3
Q = K1/4L1/3
Q = K/L
None of the above
18. Output for a simple production process is given by Q = 2KL, where K denotes capital, and L
denotes labour. The price of capital is R25 per unit and capital is fixed at 8 units in the short run.
The price of labour is R5 per unit. What is the variable cost of producing 80 units of output?
A)
B)
C)
D)
E)
R200
R33
R25
R40
None of the above
19. Joe is self-employed in a shop that has a rental value of R500 a month which he pays. His
other expenses are R100 a month for maintenance. He makes R25,000 a year on net sales (total
revenue minus the wholesale cost of the product). If he quit his job and worked the same number
of hours elsewhere at a job he liked equally well, he estimates that he could make R20,000 a year.
No one else can be hired to work in the store. Suppose that Joe had a long term lease which
requires him to pay the rent even if he doesn't operate the store. What should Joe do?
A)
B)
C)
D)
E)
20. Suppose an island has 1000 adults living on it. All are of working age (16-64). 600 people are
working. 200 people actively searched for work in the last week. 100 would like to work, but have
given up hope of ever finding a job so no longer bother to search. Which of the following
statements is/are correct?
(i)
(ii)
(iii)
(iv)
A)
B)
C)
D)
E)
The narrow (ILO) unemployment rate is 25% and the narrow (ILO) labour force
participation rate is 80%
The narrow (ILO) unemployment rate is 25% and the narrow (ILO) labour force
participation rate is 89%
The narrow (ILO) unemployment rate is 20%
The broad/expanded unemployment rate is 30%
22. The prediction that a player (say, player 1 in a two-player game) will not choose a strictly
dominated strategy requires that:
A)
B)
C)
D)
E)
Player 1 is rational
Both players are rational
Player 1 is irrational
Both players are rational and each players knows the other is rational
Both players are rational; each players knows the other is rational; and each player knows that
the other knows that he/she is rational
23. Nash equilibrium as prediction of choices requires in a two-player game requires that:
A)
B)
C)
D)
E)
Player 1 is rational
Both players are rational
Player 1 is irrational
Both players are rational and each players knows the other is rational
Both players are rational; each players knows the other is rational; and each player knows that
the other knows that he/she is rational, etc i.e. rationality and common knowledge of
rationality
24. In an Edgeworth box of the production sector, the contract curve in the interior of the box
shows:
A) Where marginal rates of technical substitution of the two producers are equal
B) The fair allocation of output
C) The unique allocation of output that is best for the economy
D) The initial endowment of inputs in the economy
E) The allocation where producers outputs are equal
25. In a two-person, two-good economy, mutual beneficial exchange will occur so long as:
A) the initial allocation of goods results in an uneven division of the two goods between the two
consumers
B) one person can be made off better than before
C) the two consumers are free to trade
D) one consumer has the total amount of one good and the other consumer has the total amount
of the second good
E) the marginal rates of substitution are not the same for both consumers
26. Use the following diagram of an Edgeworth exchange box to answer the following question:
OB
ICA
X
Apples
ICB
Y
V
Z
OA
Hot-Dogs
Which of the following are Pareto improving equilibrium positions given initial allocations Z?
A)
B)
C)
D)
E)
27. The diagram below presents a production possibility frontier, various relative price curves and
various community indifference curves for an open economy. Use the diagram to answer the
following question:
Cars
E
B
C
A
Cloth
Assume initial equilibrium is given by point A. Assume there is an increase in world demand for
cloth. The new consumer equilibrium is given by:
A)
B)
C)
D)
E)
A
B
C
D
E
Y
A
B
IC
An economy finds itself at point A where the relative price (Px/Py) equals 5, the Marginal rate of
Transformation (slope of the Production possibility frontier) equals 1 and consumer equilibrium is
at B. Which of the following are correct?
(i)
The opportunity cost of producing X at A is lower than the relative price of X
(ii)
Production of X will decrease and production of Y will increase
(iii) At given relative prices (Px/Py = 5) and production at A, consumers will consume more
X and less Y
(iv) Production of X will increase and production of Y will decrease
A)
B)
C)
D)
E)
Wine
Cloth
Country A
1hr/bottle
2hr/metre
Country B
6hr/bottle
3hr/metre
29. The price of wine (Pw) relative to the price of cloth (Pc) in autarky is:
A)
B)
C)
D)
E)
Pw / Pc = in country A
Pw / Pc = 1 in country A
Pw / Pc = 1/6 in country A and B
Pw / Pc = 2/3 in country A and B
Pw / Pc = 1/2 in country B.
(i) Please describe the type of policy (oppq) being employed in (i)
(5 marks)
(ii) Please describe the type of policy (opr) being employed in (ii)
(5 marks)
(iii) Please relate the final consumption of education in (i) to (ii). Do you always expect to see
this pattern? How does the level of funding and individual preferences matter?
(10 marks)
Part B
(i) Please describe the type of policy being employed in (i) (uvvw)
(ii) Please describe the type of policy being employed in (ii) (uvw)
(4 marks)
(4 marks)
Part C
Please note (i)-(iv) require concise (one or two line) answers!
(i)
(ii)
(iii)
(iv)
If you consider both A) & B) to how would the size of voucher/fixed quantity subsidy/tax
rebate on educational expenditure affect the amount of schooling obtained?
(3 marks)
According to Hoxby, which conditions are necessary if a school choice programme is to
produce general improvements in educational quality?
(3 marks)
Why does the difference between transferable vouchers and forfeitable fixed-quantity
subsidies/rebates arise?
(4 marks)
Do transferable vouchers paid to students always result in the same or more education
being consumed than the provision of fixed quantity subsidies paid to schools? (2 marks)
(5 marks)
(3 marks)
(5 marks)
(iv) Explain in words why the AVC reaches its minimum before the ATC reaches its minimum.
(2 marks)
Part B
Sketch a perfectly competitive firm operating in short-run equilibrium but making economic
losses. Put in all the functions necessary to show that the firm should stay in business in the shortrun despite the losses. Shade in the area of loss.
(12 marks)
Part C
(i)
(ii)
(iii)
(i)
Briefly discuss the consumption, production and product mix conditions required for the
economy to be in general equilibrium under free trade.
(10 marks)
(ii) Use the production possibility frontier diagram to show the effect on production,
consumption, trade flows and national welfare in the Home country if Foreign country
growth is biased towards machinery.
(10 marks)
L
A (4,6)
B (5,1)
C (6,0)
R
(5,2)
(8,3)
(6,3)
A (1,10) (5,3)
B (2,7) (8,6)
(iii) Indicate whether the statement is true or false; and very briefly (one concise sentence,
maximum) explain why, or why not. In the basic Bertrand model (of price competition)
with an homogeneous good and no capacity constraints, the unique Nash equilibrium has
each firm setting price equal to marginal cost even if there are only two firms in the
market.
(iii) Indicate whether the following statement is true or false; and very briefly (one concise
sentence, maximum) explain why, or why not: An action (or strategy) ai is a best response for
player i to her opponents strategies a i if ui (ai , ai ) ui (ai ' , ai ) for all ai ' in Ai .
OR
QUESTION 4B (20 marks; 4 marks each)
Suppose the demand function faced by firm 1, in a two-firm industry, is given by
q1 160 2 p1 p2 . Its marginal cost is constant, and equal to 4.
(i) Write the firms profit function.
(ii) Write the marginal profit function for firm 1
(iii)Show that pricing decisions are strategic complements
(iv) Is the strategic effect of commitment positive or negative in this case? Comment.